Tennant Company Q2 FY2026 earnings call

Overall Business Performance

• Q2 2026 net sales hit $324 million, up 1.7% year over year and in line with expectations. Total orders grew 6.6% year over year, with June orders up 11% year over year (second strongest order month of 2026). Backlog increased $18 million quarter over quarter to $127 million, up $50 million year-to-date.
• Gross margin was 39.5%: down 260 bps year over year but up 140 bps sequentially from Q1. Adjusted EBITDA was $35.3 million (10.9% margin), down from $51 million (16% margin) in Q2 2025. Profitability missed internal expectations due to higher gross margin pressure and operating expenses than forecast.

ERP Implementation Progress

• North America ERP system stabilization from Q1 has held, with core workflows operating reliably at scale. The shift from stabilization to optimization has proceeded slower than expected, with productivity gains not materializing as planned, leading to ongoing elevated costs from overtime, premium freight, and manual workarounds.
• EMEA ERP implementation has been deferred beyond 2026 to focus full resources on resolving North America optimization challenges. Management notes challenges are execution-related, not structural, and the long-term scalability benefits of the investment remain on track.

Robotics Strategic Update

• TNC Robotics Venture was launched at the start of 2026 as a dedicated, agile organization to capture robotic cleaning growth, leveraging Tenant's existing scale, customer relationships, and global infrastructure. Approximately 120 employees are now dedicated to robotics, with planned continued investment.
• Strategic priorities for robotics growth: 1) Accelerate product innovation, with 10 new robotic products planned over 2 years, including the recently launched X2 Rover scrubber, X16 industrial sweeper, and Clean 2.0 navigation technology; 2) Build a differentiated go-to-market model with 40 dedicated commercial team members supporting the broader 500+ sales rep network; 3) Develop a full automation ecosystem of service, customer success, and data capabilities to deliver customer ROI.
• Management targets growing robotics revenue from ~$85 million in 2025 to $250 million in 2028, requiring ~50% annual growth. A recent win of 250 robots for Savers/Value Village demonstrates large enterprise customers are moving beyond pilots to full-scale deployments, validating Tenant's end-to-end support model.

Capital Deployment

• Q2 operating cash flow turned positive at ~$5 million, a sequential improvement from the $31 million cash use in Q1. Ending cash was $76.9 million, with $289 million in unused revolving credit capacity. Net leverage is 2.0x trailing 12 month adjusted EBITDA, at the upper end of the 1-2x target range. Year-to-date, $71.3 million has been returned to shareholders via dividends and share repurchases.

By product category:

• Equipment: Sales decreased 1.6% year over year. Pricing and AMR momentum were offset by lower volumes from softer demand in EMEA/APAC and North American shipment constraints, contributing 35.2% of total Q2 net sales.
• Parts and consumables: Sales decreased 2% year over year, held back by the same North American parts availability constraints impacting equipment shipments, contributing 45.8% of total Q2 net sales.
• Service and other (including AMR autonomy subscription revenue): Sales increased 19.2% year over year, driven by strong recurring revenue growth; autonomy subscription revenue more than doubled year over year, contributing 19.0% of total Q2 net sales.

By geography (organic performance):

• Americas: Sales grew 1.4% year over year. North America was essentially flat (-0.2%) as strong pricing was offset by volume constraints from part shortages; Latin America grew 21% driven by strong execution in Brazil and Mexico.
• EMEA: Sales declined 2.8% year over year, impacted by market softness and the Middle East conflict, with pockets of strength including double-digit growth in Central/Eastern Europe.
• APAC: Sales declined 10.6% year over year, driven by lower equipment volumes from softer economic conditions and elevated distributor inventory, partially offset by growth in India.

Robotics segment:

• Q2 2026 revenue: $31 million, growing 37% year over year, contributing ~9.6% of total Q2 net sales.
• First half 2026 revenue: $58 million, growing 56% year over year, with growth concentrated in North America and Europe across building service contractor, retail, and industrial verticals.

• Full year 2026 net sales guidance was raised to $1.27 billion to $1.31 billion, from the prior range of $1.24 billion to $1.28 billion, representing 5.5% to 9% total growth and 3.5% to 7% organic growth. The upward revision reflects stronger order demand, higher backlog, accelerating robotics contribution, continued pricing realization, favorable foreign exchange, and incremental revenue from the new BrainCorp enterprise license agreement.
• Full year 2026 adjusted EBITDA guidance was lowered to $155 million to $170 billion (wait, correction: $155 million to $170 million), from the prior range of $175 million to $190 million, representing a margin of 12.2% to 13%. Adjusted diluted EPS guidance was lowered to $3.80 to $4.45 from the prior $4.70 to $5.30.
• The downward profitability revision reflects Q2 cost misses that will not be fully offset in the second half, continued volume pressure in EMEA and APAC, ongoing cost headwinds from the Middle East conflict, slower-than-expected realization of ERP productivity gains, and higher planned R&D investment in robotics.
• Management expects sequential margin improvement in the second half, with Q3 gross margin expected to stay roughly flat at ~39.5% (similar to Q2), and gross margin increasing to ~41% in Q4 as supply chain and ERP issues improve.
• Full year 2026 robotics revenue is expected to be between $130 million and $145 million, with acceleration in the second half driven by new product shipments and backlog conversion. Resolution of North American ERP optimization is now expected in the first half of 2027, delayed 1-2 quarters from the original target of second half 2026.

• Ongoing ERP optimization challenges in North America have created part shortages, production disruptions, rework, elevated overtime, premium freight costs, and delayed productivity gains, which have pressured profitability and will continue to impact results through at least 2026.
• Increased competitive pressure in EMEA, particularly from lower-cost Asian manufacturers in value-focused floor care segments and new robotics competitors, has led to higher discounting and compressed margins, with competitive pressure already spilling over to the North American market.
• Geopolitical and cost risks from the Middle East conflict have increased freight and material costs, particularly impacting EMEA profitability.
• Softening macroeconomic conditions in APAC have led to lower customer capital spending and elevated distributor inventory, pressuring regional volumes.
• Part shortages in North America, driven by ERP demand signaling errors and stronger-than-forecast demand and mix shifts, have limited production and shipment volume, delaying conversion of strong backlog to revenue.
• Higher than expected inflation across operating expenses including travel, fuel, and labor has pressured S&A margins.

Q: What is driving North American part shortages, are they tied to ERP, and how is management balancing the cost of fixing the issue with production growth? / A: Part shortages are primarily a North American issue driven by two factors: a systemic ERP issue that sent incorrect demand signals to suppliers, and stronger-than-forecast demand with a different product mix than planned. North American industrial demand is up double digits versus a planned decline, and robotics demand for the X platform is higher than forecast, exacerbating supply chain strain. Management has reverted to manual purchase orders as a short-term workaround while testing a permanent system fix, and is prioritizing concentrated fixes for the small handful of parts/suppliers driving most of the gap. Incremental costs for expediting and overtime are expected, but unlocking production to clear backlog will more than offset these costs, with improvement starting in mid-Q3, though residual impacts will bleed into the quarter. (498 characters)

Q: What is driving the expected acceleration of robotics revenue in the second half of 2026? / A: Three key factors drive the expected second half acceleration. First, robotics demand outpaced shipments in the first half, leaving an elevated backlog that will be converted as general supply constraints ease. Second, newly launched products including the X2 Rover Scrubber and X16 Industrial Sweeper did not ship in the first half, and shipments will ramp through the second half, with X16 volumes contributing meaningfully to Q4. Third, the robotics pipeline remains robust, and management expects continued conversion of both large and small customer opportunities in the back half. (437 characters)

Q: Where is pricing pressure occurring in EMEA, and could lower-cost Chinese competition spill over to North America? / A: Pricing pressure is strongest in the low-end walk-behind commercial floor care segment, where new Asian competitors are offering simple, low-price machines that have gained traction with price-conscious customers and building service contractors. There is also ongoing competition from large global rivals in premium commercial and industrial segments, and new robotics competitors from Asia are gaining customer consideration across EMEA. Lower-cost and new robotics competition is already attempting to gain traction in North America, but Tenant's mature go-to-market network and full automation ecosystem give it a strong competitive position that has allowed it to defend market share successfully to date. (476 characters)

Q: What is the timeline for resolving ERP issues, and is there a risk of scrapping the system and restarting? / A: The risk of scrapping the current ERP system and restarting is extremely low; management confirms the system is the right long-term digital backbone for scaling the business, and is committed to realizing the original planned efficiency benefits. Full resolution and recovery of normal operations in North America is now expected in the first half of 2027, delayed 1-2 quarters from the original second half 2026 target. To accelerate progress, EMEA deployment has been pushed to 2027 to free up resources, structural changes including a system integrator change and new CIO have been made, and incremental investment in recovery is prioritized over near-term cost savings. (471 characters)