TENNANT CO Q3 FY2026 earnings call

• ERP Recovery & Optimization:
  • ERP-related inefficiencies and cost of sales have dropped significantly from ~$10 million in H1 to ~$2 million in Q3.
  • The company has insulated the customer experience from direct system challenges; remaining issues are residual impacts from Q1/Q2.
  • Focus has shifted from stabilization to value realization, including improving productivity and unlocking working capital benefits.
  • Decision made to halt planned ERP deployment in EMEA to concentrate resources on optimizing North America and strengthening IT capabilities.
• Robotics Business Acceleration:
  • Robotics revenue grew 71% in Q3 ($37 million), with YTD revenue of $95.3 million already exceeding full-year 2025 totals.
  • Launched X-Series (premium) and P-Series (value/performance) robots. P1 Vac launched in October, expanding into soft floor cleaning via distribution channels.
  • Partnership with BrainCorp extended for next-gen robotic floor care; aiming for 10 new products within 24 months.
• Operational Execution:
  • Orders grew 9.5% overall, led by North America (+18%). Backlog remains elevated at $118 million.
  • Adjusted EBITDA was $48.8 million (15.1% margin). Excluding tariff refunds, adjusted EBITDA margin improved to 13.2% from 10.9% in Q2.
  • Operating cash flow improved to $11.9 million, up from $5 million in Q2, though still below prior year levels due to working capital increases.

• Net Sales: $322.3 million (Record high), up 6.2% year-over-year. Organic growth was 5.7%. Contribution breakdown by region: Americas (8.1% organic growth, driven by North America's 8.6%), EMEA (2.3% organic growth), and APAC (-4.8% organic decline).
• Robotics Revenue: $37 million in Q3, representing a 71% year-over-year increase. This segment is growing rapidly but constitutes a small portion of total net sales.
• Gross Margin: Reported at 42.3%, including approximately $6 million in tariff refunds. Excluding these one-time refunds, normalized gross margin was 40.4%, an improvement of 90 basis points from Q2.

• Full Year 2026 Guidance Reaffirmed:
  • Net Sales: $1.27 billion to $1.31 billion (Organic growth 3.5% to 7%).
  • Adjusted EBITDA: $155 million to $170 million (Margin 12.2% to 13%).
  • GAAP Diluted EPS: $2.15 to $2.80.
  • Adjusted Diluted EPS: $3.80 to $4.45.
• Fourth Quarter Implied Outlook:
  • Net Sales: Approximately $346 million.
  • Adjusted EBITDA: Approximately $49 million (~14% margin).
  • Management expects backlog conversion to account for roughly half of the sequential sales increase.
  • Gross margins expected to face continued pressure from material inflation and freight costs, which are not fully offsettable.

• Supply Chain & Parts Availability: Continued part availability constraints are causing production inefficiencies, underabsorption of fixed costs, and expedited freight costs. While easing, management notes they are "not completely out of the woods yet," particularly for robotics components.
• Inflationary Pressures: Material and logistics inflation, largely driven by the Middle East conflict, continues to pressure gross margins. These costs are expected to remain higher than previously anticipated.
• Regional Demand Softness: APAC performance remains below expectations due to soft demand in China and Southeast Asia, leading to elevated distributor inventories. EMEA orders softened in August, requiring renewed focus on rebuilding momentum.
• ERP Residual Impacts: While major disruptions are behind them, residual issues in invoicing, collections, and warehouse management continue to create operational friction and financial drag, albeit at a declining rate.

Q: Erin Reed asked about the drivers behind the gross margin beat and the timeline for recovery as parts availability improves. She also sought clarity on how much of the underabsorption/inefficiency drag is ERP-related versus supplier shortages, and when North American manufacturing will return to normal run rates.

A: CFO Fay West attributed the margin beat primarily to price realization in North America and EMEA, noting that normalized gross margin was 40.4% excluding tariff refunds. CEO Dave Huml clarified that ERP-related inefficiencies have dropped to ~$2 million in Q3 (from $10 million in H1) and will likely be $2 million or less in Q4. He explained that most current margin impact is residual from Q1/Q2 ERP failures (incorrect supply signals causing part scrambles and invoicing errors causing AR delays). He stated that while specific attribution is becoming difficult, the vast majority of systemic ERP issues are behind them, and the focus is now on closing gaps in warehouse management, invoicing, and data integrity.

Q: Steve Ferrazani asked about the unexpectedly low S&A expenses, questioning if lower LTI accruals drove the result. He also requested more color on component availability risks for 2026 targets and details on the new P1 Vac product strategy, specifically its market expansion potential and delivery cadence compared to previous launches.

A: Fay West confirmed that lower LTI accrual adjustments contributed to the lower-than-expected S&A line. Regarding components, Dave Huml noted that robotics is facing shortages beyond standard sensors/compute parts, but visibility is improving. On the P1 Vac, Huml explained it is a value-oriented robot sold through distribution, designed to capture new customers and applications (soft floors) with lower capital intensity via contract manufacturing. It complements the premium X-Series. He outlined the launch cadence: X2 shipped in Q3, while X16 and P1 Vac begin shipping in Q4, demonstrating the speed of their new robotics venture structure.