00:01 Good morning. My name is Brent, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Tennant Company's Twenty Twenty One Third Quarter Earnings Conference call. This call is being recorded. [Operator Instructions] Thank you for participating in Tennant Company's twenty twenty one third quarter earnings conference call. 00:44 Beginning today's meeting is Mr. William Prate, Senior Director of Global Financing Planning and Analysis and Investor Relations for Tennant Company. Mr. Prate, you may begin your conference.

01:00 Thank you. Good morning, everyone, and welcome to Tennant Company's third quarter twenty twenty one earnings conference call. I'm William Prate, Senior Director of Global Financial Planning and Analysis and Investor Relations. Joining me today are Dave Huml, Tennant's President and CEO and Fay West, our Senior Vice President and CFO. 01:19 On today's call, we will update you regarding our third quarter performance and guidance for twenty twenty-one. Dave will brief you on our operations and enterprise strategy, and Fay 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. 01:46 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. The risks and uncertainties are described in today's news release and the documents we filed with the Securities and Exchange Commission. We encourage you to review those, particularly our Safe Harbor statement, for a description of the risks and uncertainties that may affect our results. 2:22 Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude certain items. Our twenty twenty one 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. 02:47 I will now turn the call over to Dave.

02:50 Thanks, William, and thank you everyone for joining us today. Our third quarter results reflect the returns of pre-pandemic demand across the majority of our geographic markets and verticals. Our comprehensive and innovative product offerings are resonating with customers during this broad-based market recovery, and we expect this demand environment to continue for the foreseeable future. 3:13 While we are certainly encouraged by these positive trends, our financial performance continued to be impacted by the unexpected and prolonged global supply disruptions, inflation and labor constraints that have affected virtually every industry and geographic markets. The increased demand for our products combined with the effect of macro level constraints on our production capabilities contributed to a record order backlog that varies by product category or region and is now three to five our historical averages. 03:45 In response, we've taken actions wherever possible to minimize the impact on our operations. Our plants continue to remain open and operate due to the significant efforts by our global teams to maximize output and to safeguard our customers' experience. While we expect that these macro headwinds will continue well into twenty twenty two, we remain confident in our ability to drive long-term sustainable growth and improve our operational efficiencies to generate long-term value for our shareholders. 4:19 We are doing so not only through short-term mitigation actions, but also to the changes we've made and continue to make as part of our enterprise strategy. To minimize the impact of higher freight costs and related supply disruptions, we continue to prioritize local-for-local and region-for-region manufacturing and sourcing to allow us to manufacture our products closer to our customers. As an example, we are making the necessary investments to add production of our T16 line to our China plants mid next year. 04:51 The T16…

10:51 Thank you, Dave, and good morning, everyone. For the third quarter of twenty twenty one, Tennant reported net sales of two seventy two million dollars an increase of three point nine percent over the prior year, which included a favorable foreign currency effect of one point two percent and a divestiture impact of negative two percent related to the sale of our coatings business in the first quarter of twenty twenty one. 11:17 Organic sales, which exclude the impact of these currency effects and divestitures increased four point seven percent. As Dave mentioned, our revenue results were tempered the continued global supply chain disruptions and labor constraints with North America being the most affected. Tennant groups of sales into three geographies, the Americas, which include all of North America and Latin America, EMEA, which cover Europe, the Middle East and Africa and Asia Pacific, which includes China, Japan, Australia and other Asian markets. 11:56 In the third quarter, sales in the Americas decreased zero point six percent year-over-year, which included a negative divestiture impact of three point one percent organic growth of two percent in a favorable foreign exchange effect of zero point five percent. Strong customer demand in Brazil and Mexico drove a year-over-year increase in sales in Latin America. 12:21 North America delivered modest organic growth as compared to the prior year, due to the previously mentioned supply chain and labor challenges as well as the lapping of a significant AMR order in the prior year. Additionally, the current year period benefited from an increase in our service parts and consumables businesses. Sales in EMEA increased fifteen point one percent or fourteen percent organically, including a favorable foreign exchange effect of two point one percent. The results which were impacted by global supply chain challenges reflected growth…

19:29 Thanks, Fay. The challenges we're facing with global supply chain and labor shortages are not unique to Tennant and are likely to remain for the foreseeable future. These challenges did have a direct impact on our Q3 results and our ability to meet our full potential in twenty twenty-one. However, we are encouraged by the strong response to our innovative suite of products and the market recovery that is now at pre-pandemic levels of demand. Our continued execution of our enterprise strategy has enabled us to better navigate to continued macro challenges facing the overall economy. But more importantly, the strategic actions we've taken over the past couple of years will ultimately drive long-term growth and profitability and enhance shareholder value. 20:17 We will now open the call to questions. Operator, please go ahead.

20:22 [Operator Instructions] Your first question comes from the line of Chris Moore with CJS Securities. Your line is open.

20:42 Hey good morning, guys. Thanks for taking a few questions.

20:45 Good morning.

20:46 Good morning, Chris.

20:47 Good morning. Record backlog, a lot of that relates to the parts availability. Beyond that, are you seeing much pre-buying accelerated buying by customers as they factor in the supply chain challenges?

21:02 Yeah, Thanks for the question, Chris. We mentioned our backlog is about three to five times normal rates. That was at about a two percent to three time rate coming out of the prior quarter. Driven entirely by our supply chain challenges, our demand has largely returned to pre-pandemic levels, and we're really encouraged by that. We're putting orders at a rate similar to twenty nineteen. And the constraints on our plant output are driven by our -- driven primarily by our supply chain challenges. The customer orders are seem to be driven primarily by demand in the period. We have a few instances of customers buying ahead to get in the queue, because they recognize that our long lead times are real and they want to get their spot in line for production, but those are the exception rather than rule. We've had a few instances of customers and/or distributors buying ahead of the price increase as well. But on whole, order demands are driven by demand in the period for the period not customers buying ahead. So we're really encouraged by that as we look forward to Q4 in twenty twenty two.

22:14 Got it. That's helpful. Obviously, supply chain, labor, freight not unique to Tennant, almost all the industries we cover are in that boat. But you operate in a market with a few dominant players. And kind of the unique part here is, Tennant is really the only U.S. player out of that group of bigger competitor. So just trying to understand how that impacts your competitive positioning, both in U.S. and Europe? I mean, for example, supply chain challenges in North America, are they impacting you more or less than say Nilfisk in North America? Just kind of trying to see how that big picture looks given the fact that you're the kind of the lone U.S. player

23:05 Yeah. Let me try and dimensionalize that for you, Chris. So less important as to where we're headquartered, what's a bigger determinant on a competitor or our ability to react to the supply chain challenges, a couple other facets of our business. And one would be, how well platformed our product is, two would be how local-for-local our supply chain is. And so when you look at us and our competitors, those are bigger determinants of our ability to respond and react within this environment than kind of where we're headquartered or where our predominant end market is from a sales perspective. Having said that, these supply chain challenges are really global in nature and macro in nature as well as across all facets of supply chain from parts availability all the way through freight and labor. 23:54 The impact of these challenges does vary by region. And so some of these are what I would call more notable in North America when you think about some of the dynamics in our labor force, for example. What we've seen in our infrastructure and our system and we have plants in every one of our regions which we are expanding capabilities in our local-for-local strategy, what we've seen is a variance in ability to react based on again on the platform of the product, the local-for-local supply chain and then some of the regional differences relative to the supply chain challenges. So I think it's difficult to draw conclusions at this point about the extent to which the global supply chain challenges would affect a U.S. based competitor versus a European-based competitor. 24:41 I will tell you what we're hearing from customers as we're out booking orders at a very robust rate. They're telling us that we are right in line from a lead time perspective with our competitors. And that's not to say that on a given product line and a given situation one competitor or us may have an advantage. But largely speaking, we believe based on what our customers are telling us is that we are on par with competition. So time will tell as this wears on and as recovery comes. I think our success will largely be marked by how quickly we can respond as the macro market recovers.

25:18 Got it. Extremely helpful. I will jump back in line. Appreciate, guys.

25:21 Thanks, Chris.

25:30 [Operator Instructions] Your next question comes from the line of Steve Ferazani with Sidoti. Your line is open.

25:38 Good morning, Dave. Good morning, Fay. Why ask on your change to EBITDA guidance? Is that entirely supply chain related. Even as the quarter was good, have you seen it yet significantly worse and what were you thinking is timing not improvements?

25:58 Yeah. It's a great question. One that we've obviously wrestled with as we moved through the quarter. And really our decision to lower guidance and tighten the range reflects where we're at in the year and the trending we've seen in the business, the signals we're getting from the supply chain over the last five months. When we spoke after Q2 results, if you recall, we really only had a couple of months, about 60 days of kind of impact, the impact on our business from supply chain challenges. We've now entered kind of five and six months impact as we move through the third quarter. We have seen the situation deteriorate from a macro perspective, and we are working hard to overcome those challenges. But we felt it was appropriate given that the trend we saw from quarter-to-quarter to reflect that in our full year guidance. 26:45 I think it's worth noting though. If you think back to the original guidance we issued, we were at one thirty million dollars to one hundred forty million dollars in EBITDA. We raised to one hundred forty to one fifty on the strength of our Q1 results and now we provide to one hundred and thirty seven to one hundred and forty two kind of split the difference between the original and raise guidance. And when you look at the guidance that we've given across the P&L, we're really within strike from distance of delivering our fantastic year Tennant. And so, despite the supply chain challenges that we're facing and all of the team's efforts to mitigate those impacts and that’s revise the guidance, we're still very proud of the results we're communicating, and we'll deliver for the year.

27:28 And then in terms of -- I guess, your EPS was stronger too. I think our estimates on SG&A in terms of not sort of year-over-year, but what changed sequentially with SG&A and how you're thinking about that four quarter. Has the shift been entirely on incentive?

27:47 So it's two part. But I think a big driver here is a change in guidance and the change in management incentives. And so we had accumulative adjustment here that benefited the quarter. But it's also reflective of all cost savings initiatives as well.

28:07 Can you give a sense how you thinking about SG&A in Q4?

28:12 I think that we're not going to see that same kind of benefit come through that we saw in Q3. And when I look at Q4, I think it will probably be more in line with kind of our normal run rate of about eighty five million dollars a quarter.

28:33 Okay. Great. That's helpful.

28:34 And if we think about what's happening in the business, Steve, we're returning to work, returning to the office, business travel is picking back up. And so from an S&A perspective, we expect to continue to support our customers and drive the demand we're seeing and set ourselves up for twenty twenty two that we'll be spending on S&A. I think it's also worth noting that we're not cutting our way through S&A to deliver these full year results. These results are a direct reflection of the organization's ability to execute against our GPS strategy and drive the structural changes in our business that provide referring benefit in outyears.

29:08 If I could get one more in, in terms of -- balance sheet continues to improve. You raised the dividend actually more than we were expecting, small buyback. When you're thinking about the balance sheet and debt repayments versus potential additional buyback given that you typically raised once a year, how you're thinking about those three pockets?

29:33 So, our capital allocation priorities really have not changes, this is our first goal is owing into investment in the business where we think the largest return exists and has least amount of risk and to manage our leverage and our leverage is really below our targeted range right now one point five to two point five times. So, I think the balance sheet as you say is very well positioned. We had generated approximately fifty million dollars of free cash flow through the first nine months of the year, which is very, very strong. So, on the basis of strong balance sheet and strong free cash flows, it really did allow us to increase our dividends and to execute against share repurchase in an effort to return excess cash to our shareholders without compromising growth.

30:24 How would you think about that over the next three or four quarters?

30:27 As far as share repurchases?

30:30 Yep.

30:31 Yes, it's going to be an integrated component of our capital allocation priorities and it is at the discretion of management, but it will be part of a capital deployment strategy.

30:46 Got it. Thanks much, Dave. Thanks, Fay. A - Dave Huml 30:47 Thanks, Steve.

30:50 There are no further questions at this time. I would like to turn the call over to management for their closing remarks.

30:59 Thank you. And before we close, please note that we will soon be posting on our IR website the first in a series of videos to offer a deeper look into our business and growth strategy. You can be notified of each video by signing up for email alerts at investors.tennantco.com. I also want to take this moment to thank our global Tennant teams for all their hard work and dedication. From our sales and service teams who are supporting our customers directly to our operations and supply team who continue to find creative solutions in today's challenging environment and to our engineers, back office and everyone else across our enterprise help and support our customers and our business, a sincere thank you. 31:41 This concludes our earnings call. Have a good day.

31:45 Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.