Good morning. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tennant Company's 2021 Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] Thank you for participating in Tennant Company's 2021 Fourth Quarter and Full Year Earnings Conference Call. Beginning today's meeting is Ms. Fay West, Senior Vice President and Chief Financial Officer for Tennant Company. Ms. West, you may begin.

Good morning, everyone, and welcome to Tennant Company's Fourth Quarter and Full Year 2021 Earnings Conference Call. I am Fay West, Senior Vice President and CFO. Joining me on the call today is Dave Huml, Tennant's President and CEO. Today, we will update you regarding our fourth quarter and full year performance and our guidance for 2022. Dave will brief you on our operations and enterprise strategy, and I will cover the financials. After our prepared 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 2021 fourth 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 Dave.

Thanks, Fay, and thank you, everyone, for joining us today. As we look back on 2021, the way in which global teams responded to an extremely challenging operating environment, which included unexpected and prolonged global supply disruptions, inflation and labor constraints, allowed Tennant to deliver record earnings performance. While we expect macroeconomic headwinds to persist throughout the year, our 2021 performance demonstrates our ability to execute in this environment and positions us to deliver on our full year target for 2022. We are encouraged by current demand trends. Tennant's strong full year performance was driven by prepandemic levels of order rates across our global markets. In 2021, our sales grew by 9.1% on an organic basis, which excludes the effects of foreign currency exchange and divestitures. Our comprehensive and innovative product and solution-oriented offerings are resonating with customers, and we expect this demand environment to continue for the foreseeable future. While we face ongoing industry-wide supply chain disruptions and inflation, our 2021 results were in line with our revised guidance, and we delivered adjusted EBITDA of $140.2 million and a 100 basis point improvement in adjusted EBITDA margin. Moreover, our record open order position and strength in 2021 have provided momentum into 2022. Supported by current demand trends, our commitment to innovation and our disciplined focus on cost reductions and manufacturing efficiencies, we remain confident in our ability to drive long-term sustainable growth and operational efficiency to generate value for our shareholders. We generated cash flow from operations of close to $70 million, and after investing $19 million in capital expenditures, we returned over 60% of net cash flows to our shareholders in 2021 through dividends and share repurchases. In 2021, we increased our quarterly dividend by 9%, marking the 50th consecutive year that Tennant has increased its annual cash…

Thank you, Dave. Fourth quarter net income was $7.9 million, up $5.2 million from the prior year. SG&A was lower in Q4 2021, due in part to strong cost containment efforts as well as the absence of nonrecurring strategic investments made in the prior year. Additionally, current year results benefited from lower interest expense due to the refinancing of debt. For the full year, we delivered record net income of $64.9 million compared to $33.7 million in the year ago period. Strong sales, coupled with solid operating performance and lower interest expense, contributed to the year-over-year increase. Fourth quarter adjusted earnings per diluted share was $0.71 compared to $0.48 per diluted share in the prior year period. Full year 2021 adjusted earnings per diluted share was $4.39 compared to $2.91 in 2020, an increase of $1.48 per diluted share. Adjusted earnings per share numbers exclude amortization and restructuring charges as well as the gain on sale from the Coatings business and debt extinguishment costs. For the full year 2021, Tennant reported net sales of $1.09 billion compared to $1 billion for 2020, up 9.1% on an organic sales basis. Foreign currency was a favorable driver year-over-year and comparisons between periods were also impacted by the sale of the Coatings business in the first quarter of 2021. The increase in net sales was primarily driven by strong demand in our end market and in part to increased price realization. All regions demonstrated positive organic growth on a year-over-year basis. Moreover, growth was fairly consistent throughout the year, which is a testament to the efforts of our global team in addressing record demand in the wake of significant supply chain disruptions. As you may know, Tennant grouped its sales into 3 geographies: the Americas, which includes all of North America and Latin…

Thank you, Fay. To sum up, I am very proud of the global Tennant team's dedication and agility that delivered record earnings in 2021. And we are prepared to build on that success as we deliver another strong year in 2022. With that, we will open the call to questions. Operator, please go ahead.

[Operator Instructions] The first question is from Chris Moore of CJS Securities.

Maybe we could start with the revenue guidance, 4.5% to 8.5% organic growth. Can you just kind of give your sense from where you're sitting today in terms of how that breaks down between volume priced, and is the higher end of that more kind of price driven?

So Chris, I think when we look at guidance and the growth that we're anticipating in 2021 -- or 2022, there is both price and volume impact. And I would say that it's heavily weighted -- well, it's more weighted towards price than volume, but not that much of a difference.

Got you. And is the higher end that would -- if you get it closer to the 8.5%, that's going to be driven by price as opposed to volume at the higher end of the guide?

Yes, it will be both, right? I think it's going to be both. I think you're going to see volume increase on the higher end and price contributing to that. But in the -- at the midpoint of the range, I think it's fair to say it's majority price, but it's pretty close with volume contribution.

Yes, Chris, I would just add, our pricing is being dictated to us by the inflation we're taking on. And so we're compelled to move on price commensurate with what we're seeing and forecasting from an inflation perspective. Our demand -- the demand for our product remains robust, and we have a significant backlog available to us to monetize over the coming year to the extent we can given the supply chain constraints. So we've guided appropriately given what we can see today with the mix of a volume, a modest volume increase as well as the pricing we've announced, and want to manage it as we move through the year.

Got it. That's helpful. So on the quarterly cadence, Fay's talked about driven more by ability to produce than perhaps kind of the typical Tennant patterns. From -- so that means second half is -- I know you said EBITDA margin is going to increase. From a revenue standpoint, we should expect kind of sequential quarterly growth on revenue or just what kind of visibility do you have at this stage?

So What we're planning for is we anticipate seeing growth in revenue sequentially throughout the year, Q1 through Q4. We also think that we'll see margin improvement Q1 through Q4 from a gross margin perspective and also EBITDA margin improvement in Q1 through Q4. So it's straight down the P&L, Chris, sales, gross margin and EBITDA.

Yes, Chris, I would just add, our view -- we had to plan something on a quarterly basis. But really, generally speaking, we think the second half will be stronger for us than the first half. And so while we make it an individual quarter on as we move through it, that's our general outlook, although we don't have any better data points in the rest of the world as they try to figure out what the supply chain recovery looks like.

Understood. Makes sense. Just any -- in terms of the Russia-Ukraine situation at this point, any specific impact that you can see on Tennant?

Yes, let me first say it's a pretty remarkable time for living in, and I'm sure -- I ask the thoughts of everyone, it's pretty shocking to see what has occurred despite the fact that there were telegraphic warnings of this. So our hearts go out to the people in Ukraine as they work through what this means to them and their lives and their country. While we don't have any direct assets or employees in the affected regions, we do have channel partners who operate in those regions who represent Tennant. So we are reaching out to them to see how they're doing and personally and then any potential how we'll weather this from a business standpoint. So while we don't have a direct presence, like other employees or manufacturing footprint in the affected regions, we do expect that this will have some ripple effects through the macro economy that we'll have to deal with.

I suspect energy costs will probably increase as a result of that. And you might see some disruption -- further disruption in kind of freight and supply chain. But it's early days to tell.

Got it. I have a last one for me. Just on the M&A front, certainly part of your capital allocation strategy. Just are you spending much time looking at opportunities at this point? Is there -- kind of how would you characterize the pipeline?

We're always exploring opportunities on how to best grow Tennant and how to provide value to our shareholders. And that -- and [indiscernible] in to that is M&A. And the pipeline is something that we are working and we'll evaluate opportunities that make sense and would be accretive to the shareholders and to Tennant.

Yes, Chris, I might just add, when you look at our capital allocation priorities, protecting the core and funding our core business, both for growth and recovery from supply chain challenges is our first priority. With what's going on in the macro environment, we identified significant opportunities to reinvest back in the business aligned with our long-term strategy, but in items that can help us overcome the short-term challenges, whether that be localizing production or overcoming labor constraints by automating factories, et cetera. So we're -- as Fay said, we're open-minded and looking for the greatest value creation opportunities on all fronts. But from a priority allocation perspective, protecting the core is job one.

[Operator Instructions] Your next question is from Steve Ferazani of Sidoti.

I appreciate the information on the call. I do want to dive back into the top line guidance to think about that's still significantly better than the 2% to 3% long-term growth and certainly pricing is a factor. But given the way you ended the year and given the geopolitical risks that are out there, I'm just trying to kind of put it all together in terms of thinking about that's still pretty good guidance. And given the risks that are out there, is that supported by -- are you thinking about your backlog or what you're hearing from customers? How do you get to that number? And is it really supported in actuality by pricing?

So Steve, thank you for the question. So I think we ended the year with really strong organic growth, 9% organic growth from a consolidated perspective and growth across all regions. So very, very good. And we also ended the year with a pretty significant backlog with 3x to 5x what normal ranges. What that does for us is it gives us insight into what demand will look like in 2022, and we feel demand will be strong in 2022. And therefore, when we compiled our guidance of top line growth, there's an element of it that's demand, there's an element of it that's price. They're fairly equally weighted in 2022. But we feel that the demand is strong, and it really is supported by the backlog that we see and the conversations that we're having with our customers.

This translates into cash flow in 2022. And so just a modest increase in CapEx. I'm trying to think about how you're thinking about working capital and how we might be looking at cash flow in '22.

Yes. So we did make a significant investment in working capital at the end of the year, primarily in inventory, as we were building up safety stock and ensuring that we were positioned in order to meet the growing demand that we're seeing. And so there was an investment in working capital. We suspect that that will unwind in 2022 as we progress throughout the year. And so when I look -- we did not give specific free cash flow guidance, but it will be higher than what we delivered here in 2021 for 2 reasons. One, we're anticipating an increase in EBITDA. So the midpoint of that range is about $15 million of increase in EBITDA. And then we also anticipate kind of a return to normal from a working capital perspective. And so a decrease in inventory and other working capital items. So I think net-net, you're going to see a free cash flow increase in 2022 for those reasons.

[indiscernible] detail on autonomous, but since we haven't heard a lot about larger contract wins, I'm just -- beyond generalizations, can you give us some sense of how the Autonomous market has been developing over the last few months and how you're thinking about '22?

Yes. So when we spend time talking about Autonomous which we call AMR, over the last several calls, the market is developing about how we expected it to, and we were blessed to have a very large customer win early in our launch of our Autonomous portfolio, which is fantastic. It was Walmart, and landing Walmart is a fantastic flagship customer to earn and generates significant volume in the year. But it didn't really represent -- there's only one Walmart in the world, but it didn't really represent the way other customers are approaching adoption of new technologies. Walmarts have a strong balance sheet against a differentiated way of investing in technology. So it's a great win right out of the gate. It helped us improve our -- I'll say, our deployment methodologies and gave us confidence that once we deployed it, that this can actually work in a real-world application and deliver an ROI for the customer that's compelling. Since then, what we've seen of the marketplace from an adoption perspective is high interest levels across the broad array of verticals that we can serve, no longer questioning as much about the technology, but more questioning about what would it take to achieve the ROI driven by the labor shortages primarily where customers are looking for solutions where they can't keep labor or they can't find labor to do the cleaning test within their locations. And as customers get over the hump of moving towards a purchase, they're tending to want to pilot in a few stores, in a few locations with a few units to prove out the concept before they go with the wholesale deployment, which is a logical approach. This is a significant CapEx and customers want to be convinced that they're going to get the…

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

Thank you. Before we close, please note that we will be posting to Tennant's IR website the second on our series of quarterly videos that offer a deeper look into our business and growth strategy. You can be notified of each new video by signing up for e-mail alerts at investors.tennantco.com. This concludes our call. Stay safe, and have a nice day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.