TNC

Hello, everyone. Good morning. My name is Samantha, and I will be your conference operator today. At this time, I would like to welcome everyone to Tennant Company's 2026 second quarter earnings conference call. This call is being recorded. There will be time for Q&A at the end of the call. Please press star one if you would like to ask a question. After the Q&A, please stay on the line for closing remarks from management. If you have joined our call today via telephone and logged into the conference call presentation on your computer, please mute the audio on your computer to avoid potential quality issues during the call. Thank you for participating in Tennant Company's 2026 second quarter earnings conference call. Beginning today's meeting is Mr. Lorenzo Bassi, Vice President of Finance and Investor Relations for Tennant Company. Mr. Bassi, you may begin.

Good morning, everyone, and welcome to Tennant Company's second quarter 2026 earnings conference call. I'm Lorenzo Bassi, Vice President, Finance and Investor Relations. Joining me on the call today are Dave Huml, President and CEO; Fay West, Senior Vice President and CFO; and Pat Schottler, Senior Vice President, Tennant Robotics. Today, we will review our second quarter performance for 2026. Dave will discuss our results and enterprise strategy. Pat will provide an update on our robotics business and the TNC Robotics venture. Fay will cover our financials. After our prepared remarks, we will open the call to questions. Our earnings press release and slide presentation that accompany this conference call are available on our investor relations website. 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. 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 filed 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 2026 second quarter earnings release and presentation include the comparable GAAP measures. Our reconciliations of these non-GAAP measures to our GAAP results. I'll now turn the call over to Dave.

Thank you, Lorenzo, and good morning, everyone. Thank you for joining our Q2 2026 earnings call. I'd characterize our second quarter performance as one of strong underlying demand, coupled with gross margin and adjusted EBITDA that improved sequentially from the first quarter. Those margin improvements fell short of our expectations. The quarter reflected demand strength and continued progress against our long-term growth strategy, particularly in robotics, while also highlighting execution and cost challenges that we are actively addressing. Demand for our products and solutions remained strong throughout the quarter. Net sales were in line with expectations. Orders strengthened as the quarter progressed. Backlog continued to build. Our robotics business delivered another outstanding quarter. These indicators reinforce our confidence in the fundamental health of the business, our strategic direction, and the durability of our growth initiatives. The demand trends strengthened throughout the quarter.

Our orders totaled $339 million, up 6.6% year-over-year, despite lapping the strongest order quarter of the prior year. June orders increased 11% year-over-year, representing our second strongest order month of the year. Order growth was broad-based across most regions, led by North America, industrial machines, and robotics. Double-digit industrial growth was supported by select rental partners expanding their fleet to meet data center construction demand. First half orders increased 8.4% versus prior year. Backlog increased in the quarter to $127 million, up $18 million from the end of the first quarter and up $50 million since year-end. Taken together, these provide growth momentum for the second half of the year. Net sales totaled $324 million, up 1.7% year-over-year and in line with our expectations.

Parts shortages in North America limited our ability to fully ramp production output and convert demand into shipments, resulting in higher backlog levels as we exited the quarter. Importantly, this was a fulfillment challenge rather than a demand challenge. Our robotics business continued to perform exceptionally well. AMR sales, inclusive of equipment and autonomy service fees, were approximately $31 million in the quarter, growing 37% year-over-year. This momentum reinforces our confidence in our robotics strategy and in the opportunity ahead. I'm excited to have Pat Schottler join the call today, and in a few minutes, he'll provide more detail on our second quarter robotics performance and our outlook for the remainder of the year. Profitability was below our expectations. While order demand was stronger than forecasted and revenue largely as anticipated, our earnings performance fell short of expectations.

Approximately half of the variance to our internal EBITDA expectations came from gross margin performance, while the other half came from higher-than-expected operating expenses. Looking first at gross margin, the most significant pressure came from EMEA, where a more competitive market environment squeezed us from both sides. Increased discounting held back price realization at the same time that costs moved higher, including freight and material costs associated with the conflict in the Middle East. Lower volumes added manufacturing deleverage on top of that. In North America, we experienced a longer than anticipated tail of ERP optimization costs as we progressed through the phase following stabilization of the system. Strong price realization in the region partially offset these costs, the pace of improvement was slower than we anticipated. Lower volumes in APAC, where demand softened across most markets, were a further headwind in the quarter.

On operating expenses, S&A was above plan. The primary drivers were the delayed realization of productivity and efficiency gains associated with our ERP implementation, and broad inflationary pressure across the cost base, including higher travel, fuel, and vehicle costs, supporting our global sales and service organization. Together with continued investment in R&D, these pressures offset the operating leverage we expected to realize during the quarter. Importantly, these drivers are understood, we are taking decisive actions to improve performance. In EMEA, we are implementing pricing and reinforcing discount discipline, improving commercial execution, and taking actions to reduce costs across the business. We expect pricing to normalize in the second half as a result, although cost pressures and softer volumes will continue to weigh on the region.

In North America, we continue to focus on supply chain recovery, increasing production output, and capturing the efficiency gains associated with our ERP optimization efforts. We expect North America to be a source of improvement in the second half, supported by pricing and by higher volume as we convert backlog and better serve customer demand. Given our first half performance and our current expectations for the remainder of the year, we are raising our full-year net sales outlook and lowering our full-year adjusted EBITDA outlook. Next, I'll provide an update on our ERP optimization efforts, then Pat will discuss the continued momentum in our AMR business and TNC Robotics venture before Fay walks through our financial results, updated guidance, and outlook for the balance of the year. Let me provide an update on our ERP optimization efforts. The stabilization we achieved in the first quarter has held.

Core workflows, including order management, production scheduling, and fulfillment, remain stable and continue to operate at scale. Most importantly, we are serving customers, shipping product, and successfully running the business on our new platform. That foundation remains firmly in place. As we shared on our last call, our focus this quarter shifted from stabilization to optimization. While we've made progress, the pace of that progress has been slower than we expected. The productivity gains and cost improvements we anticipated during the second quarter did not materialize as quickly as planned, and that impacted both our operating efficiency and profitability. The underlying drivers are well understood. In North America, we continue to experience elevated operating costs, including overtime, labor inefficiencies, overhead deleverage, and premium freight. In addition, master data and planning challenges contributed to material and component shortages, resulting in production disruptions, rework activity, and additional expedited freight costs.

Some of the remaining manual processes are taking longer to fully eliminate than we anticipated earlier in the year. While we're not satisfied with that pace of improvement, I want to emphasize that these are execution issues, not structural issues with the system itself. We have clear visibility to the drivers and a focused plan to address them. We have dedicated resources across the organization to improve system performance, eliminate remaining inefficiencies, and capture the productivity benefits we expected from the implementation. While progress is occurring more gradually than we initially anticipated, we continue to move in the right direction. This experience has also informed our outlook. As we look to the second half of the year, our assumptions now include continued ERP-related costs, albeit at lower levels than we experienced in the first half.

We believe this is the right way to plan the business and reflects a more measured view of the recovery trajectory. The EMEA phases of our ERP implementation remain deferred beyond 2026. That decision allows us to keep our resources and management attention focused on completing the North American optimization work and ensuring we capture the long-term benefits of this investment. We will provide updates on timing and expected costs as our EMEA plans are developed. The important takeaway is that the foundation is stable. The challenges are understood, and we are making progress every quarter. We remain confident that this investment will deliver the operational scalability, efficiency, and customer experience improvements we originally envisioned. At the same time, we continue to make meaningful progress advancing our long-term growth strategy, particularly in robotics and autonomous solutions.

With that, I'd like to turn the call over to Pat Schottler, who will provide an update on our AMR business and the momentum we're seeing across our robotics portfolio. Pat?

Thanks, Dave, and good morning, everyone. To begin, I'll briefly recap why we believe robotics is such a compelling opportunity for Tennant. First and foremost, robotic cleaning addresses our customers' biggest challenge, which is labor. In commercial cleaning, labor often represents more than 80% of the total cost of cleaning. Cleaning labor is hard to find, difficult to retain, and increasingly expensive. Those trends, combined with advances in technology that have improved automation capability while lowering costs, have brought our industry to an important inflection point. Customers are no longer just experimenting with robotic cleaning. They're deploying cleaning robots at scale because it helps them reduce labor costs, reallocate employees to more complex tasks, and achieve more consistent cleaning outcomes. We believe Tennant is uniquely positioned to help customers make that transition.

We have a strong and well-recognized brand in professional floor care, deep relationships with the world's largest cleaning customers, and a global support infrastructure that is built to support commercial cleaning environments. Importantly, we've been helping customers deploy cleaning robots for more than eight years. In that time, we've deployed more than 13,000 robots across approximately 600 customers, giving us significant operating experience across a wide range of industries, applications, and geographies. We believe robotics is positioned to become an increasingly important driver of Tennant's long-term growth and value creation. Robots command a higher value than traditional equipment, with average selling prices approximately three times higher than conventional machines. We estimate that the robotic cleaning category is growing more than five times faster than the historical floor care market while expanding our addressable market beyond equipment and into the much larger labor spend associated with commercial cleaning.

How are we positioning Tennant to capture this opportunity? At the start of 2026, we established the TNC Robotics venture as a dedicated organization focused on building the capabilities required to lead the transition to robotic cleaning. Recognizing the need to move with differentiated speed, Dave decided to invest in dedicated executive leadership for robotics, and I eagerly accepted that challenge to lead the robotics venture, which has allowed me to channel my passion for the growth potential of robotics and commit my full energy to aggressively growing this part of the business. My objective with TNC Robotics is straightforward: to operate with the speed and agility of a startup while leveraging the talent, scale, customer relationships, and infrastructure of global Tennant Company. I believe that combination creates a competitive advantage that is difficult to replicate, and I'm encouraged by the early results.

Since establishing the venture, we've increased our allocation of investment in dedicated robotics talent and capability. Today, approximately 120 employees are dedicated to robotics across product development, sales, marketing, customer success, operations, and support functions. We expect to continue growing robotics investment while leveraging the scale, infrastructure, and expertise of the more than 4,000 talented employees across the broader Tennant organization. Our strategy to accelerate robotics growth is centered around three key priorities. First, we're accelerating product innovation. We're responding to customer demand and increasing our R&D investment in robotics to rapidly expand our product portfolio across new applications, increase levels of autonomy, and broaden our offering across additional value and price points. We're committed to launching 10 new robotic products over a two-year period, and we're executing against that accelerated roadmap.

Recent examples include the launch of the X2 ROVR robotic scrubber, the X16 industrial robotic sweeper, and our new Clean 2.0 navigation technology featuring Self-Path AI. We expect to maintain an elevated pace of product introduction through 2027 and beyond. Our second strategic priority is to build a differentiated go-to-market model. Selling robotics is different from selling traditional equipment. Success requires specialized expertise to identify automation opportunities, deploy solutions effectively, and drive customer adoption. To support that effort, we now have more than 40 commercial team members dedicated to selling, deploying, and supporting robotic solutions. This specialized commercial organization complements Tennant's broader commercial infrastructure and leverages Tennant's more than 500 sales reps and extensive global distribution network, enabling the scale and capability to guide all customers, large and small, through every stage of their automation journey.

At the same time, we're continuing to reposition the Tennant brand as a leader in robotics in addition to being a leading floor care brand. Our third strategic priority is to build a comprehensive automation ecosystem. In robotics, success isn't measured by the machine sale alone. Success is measured by customer outcomes. Our global service network, our customer success capabilities, and our growing data platform allow us to monitor utilization, optimize performance, and help customers achieve the ROI that they expect from automation. We believe our ability to support customers throughout the entire automation life cycle is a meaningful competitive differentiator and an important enabler of enterprise-scale adoption. A key enabler across each of these three strategic priorities is our partnership with Brain Corp. We partnered with Brain since 2018 and have progressively deepened that relationship over time.

We've invested in the company, secured exclusive access to their floor care technology, and we've aligned our organizations around an aggressive roadmap for product and technology innovation. We believe that partnership leverages the unique strengths of both firms. Tennant contributes global customer access, industrial operational capability, commercial scale, service infrastructure, and life cycle support capabilities while Brain Corp provides industry-leading and AI-powered autonomy. Together, this partnership accelerates innovation strengthens our competitive position and helps customers deploy robotic cleaning solutions with confidence. Collectively, these investments support our objective of growing robotics revenue from approximately $85 million in 2025 to $250 million in 2028. Achieving that target requires approximately 50% annual growth and reflects both the size of the opportunity and our confidence in Tennant's ability to scale.

Importantly, we are making the investments today in talent, in technology, in product innovation, in customer success, and in partnerships to support that growth trajectory. While we're early in the execution of this strategic pivot, we're encouraged by our progress. During the second quarter, as Dave highlighted, robotics revenue was $31 million, representing 37% growth compared to the prior year. For the first half of the year, robotics revenue totaled $58 million, up 56% year-over-year. Growth in robotics was primarily driven by the North America and European geographies, with particular strength in the building service contractor, retail, and industrial verticals. Our X4 ROVR and X6 ROVR robotics scrubbers were the primary product contributors to first half growth.

Looking ahead, we expect robotics revenue generation to accelerate during the second half of the year as we begin shipments of newly launched products, including the X2 and the X16, while continuing to convert a strong and growing opportunity pipeline. As a result, we expect full year robotics revenue to be between $130 million and $145 million. These results are consistent with our strategic objectives and increase our confidence in the trajectory of this business. Before I conclude, I'd like to share an example of how we're partnering with customers to scale robotic cleaning. Recently, Tennant was selected to deploy 250 cleaning robots across the Savers and Value Village retail network in North America. Savers is pursuing robotic cleaning to realize its operational benefits and to ensure a clean, safe, and welcoming environment for their customers and their team members.

The Savers application is particularly challenging because every store layout is different and store configurations change daily. Despite that complexity, we partnered with the customer to successfully expand from a small-scale pilot program to a large-scale deployment after demonstrating reliable autonomous performance, rapid store-level adoption, and strong operational support from Tennant. This deployment demonstrates something important. When they do that, they're choosing the partners that can provide not only the technology, but also the service, the data, the customer success, and the operational support required to deliver results at scale.

As Savers noted, I quote, "Without Tennant's robust support infrastructure, it would not have been possible to deploy such a large number of machines within an accelerated timeframe while maintaining operational stability." That feedback from the customer reinforces what we believe is our unique position in the market, combining proven robotic technology with the service, the support, and the customer success capabilities required to effectively scale automation across large enterprises. We're excited about the opportunities ahead, encouraged by our momentum, and confident that we're building a differentiated platform for long-term growth and value creation at Tennant. With that, I'll turn it back to Dave.

Thank you, Pat. The progress you and the entire TNC Robotics team are driving is one of the clearest proof points that our long-term strategy is working. Robotics is where the labor challenge our customers face every day meets the technology, scale, and service capability we can bring as the solve, and that combination is what gives us conviction in the opportunity ahead. It's an exciting time for this part of our business, and we are still early in the journey. With that, I'll turn the call over to Fay for a deeper discussion of the financials.

Thank you, Dave. Good morning, everyone. In the second quarter of 2026, Tennant reported GAAP net income of $7.6 million compared to $20.2 million in the prior year period. The year-over-year decline was primarily driven by cost inflation associated with tariffs and the Middle East conflict, which was only partially offset by pricing actions. It also reflected ERP-related operational inefficiencies that continued to pressure gross margins along with higher S&A and R&D investment, which I will discuss in more detail shortly. Interest expense net was $4.3 million compared to $2.2 million in the prior year period. The increase was primarily driven by higher average debt balances, reflecting increased borrowings in the fourth quarter of 2025 and the first quarter of 2026, including borrowings used to fund share repurchases in the first quarter.

Income tax expense was $2.7 million compared to $7.1 million in the prior year period, reflecting lower pre-tax income. Our reported effective tax rate for the quarter was 26.3%, and our adjusted effective tax rate was 25.7%, both consistent with our full year guidance range of 24%-29%. Adjusted diluted EPS was $0.83 for the quarter, compared to $1.49 in the prior year period. The decline reflected the lower operating performance I just outlined, as well as higher interest expense. With that context, let's now look at the quarter in more detail. Consolidated net sales totaled $324 million, up 1.7% year-over-year. On an organic basis, which excludes the effects of currency and acquisitions, sales declined 0.5% as favorable pricing of approximately 3% was more than offset by lower volumes of approximately 3.5%. Foreign currency contributed approximately 1.6% to growth, and recent acquisitions added approximately 0.6%.

As a reminder, we group our net sales into the following categories: equipment, parts and consumables, and service and other. In the second quarter, equipment sales decreased 1.6%, parts and consumables decreased 2%, and service and other sales, which includes autonomy subscription revenue, increased 19.2%. Equipment sales declined as pricing realization and continued momentum in our AMR portfolio were more than offset by lower volumes. The volume decline was driven primarily by softer demand across several EMEA and APAC markets and shipment constraints in North America, where part shortages and production limitations restricted our ability to convert demand into revenue and contributed to backlog growth during the quarter. Parts and consumable sales declined despite pricing realization, reflecting the same North America parts availability constraints that affected equipment shipments. Service and other sales increased 19.2%, supported by pricing realization and strong growth in recurring revenue streams.

Autonomy subscription revenue associated with our AMR products more than doubled year-over-year, due in part to changes in revenue recognition associated with our new enterprise license agreement with Brain Corp. Our core service business also continued to grow. Together, these recurring revenue streams are expanding alongside our growing installed base. Shifting to regional performance. On an organic basis, performance across the regions was mixed. In the Americas, sales grew 1.4%. North America was essentially flat, declining 0.2% against a strong prior-year comparison, as robust pricing realization was offset by lower volumes due primarily to part shortages and production constraints that limited shipments during the quarter. Latin America delivered another outstanding quarter with organic sales up 21%, driven by strategic accounts, equipment as a service momentum, and continued strong commercial execution in Brazil and Mexico. EMEA declined 2.8%, reflecting lower equipment volumes across much of the region.

The decline was driven by a combination of market softness and impacts associated with the Middle East conflict. Despite those headwinds, we saw encouraging pockets of strength. Central and Eastern Europe delivered double-digit growth, supported by contributions from our 2024 acquisition. We secured several notable competitive wins during the quarter, including a significant X4 ROVR order in the U.K. France and Germany also delivered solid performance. In APAC, organic sales declined 10.6%, driven primarily by lower equipment volumes across most countries. Regional demand was impacted by a more cautious operating environment as customer capital spending decisions reflected softer economic conditions, weakening business sentiment, and slower growth across several key markets. Distributor inventory levels remained elevated in certain countries, further weighing on equipment demand. These pressures were partially offset by price realization and continued volume growth in India. Gross margin in the second quarter was 39.5%.

That was down 260 basis points from the prior-year period, up 140 basis points sequentially from the first quarter. The year-over-year decline reflected different margin pressures in North America and EMEA, which I'll walk through separately. In North America, the primary driver was continued ERP-related operational efficiencies, as Dave discussed earlier. External cost pressures also remained a headwind, including higher fuel, transportation, and tariff-related costs, some of which were amplified by the Middle East conflict. Pricing actions largely offset those external inflationary pressures. ERP-related inefficiencies remained the main source of year-over-year margin pressure in the region. In EMEA, gross margin pressure was driven by lower volumes and the resulting deleverage and under-absorption in our plants. Freight and material cost inflation associated with the Middle East conflict also weighed on our margins, along with unfavorable product mix.

In contrast to North America, pricing did not offset inflationary pressures in the region. Increased discounting resulted in negative net pricing, which created an additional headwind to gross margin. Adjusted S&A expense was $94.3 million in the second quarter, compared to $86.9 million in the prior-year period. The increase was driven primarily by higher software subscription and license fees, unfavorable foreign currency, continued investment in TNC Robotics capabilities, and go-to-market resources, as well as costs related to our recent EMEA acquisition. The balance of the increase reflected normal inflationary cost growth across the business, as well as some incremental costs associated with the ERP implementation. As a percentage of net sales, adjusted S&A was 29.1% compared to 27.3% in the prior-year period. R&D expense was $12.5 million, or 3.9% of net sales, compared to $9.8 million, or 3.1% of net sales, in the prior-year period.

The year-over-year increase reflects deliberate investment in TNC Robotics, including additional engineering resources, prototype development, and new product initiatives that support our AMR innovation roadmap and planned launch cadence. Taken together, the factors I just described resulted in adjusted EBITDA of $35.3 million, or 10.9% of net sales, compared to $51 million, or 16% of net sales, in the prior year period. Turning now to capital deployment. In the second quarter, cash flow from operations returned to positive territory at approximately $5 million, an important sequential improvement from the $31 million use of cash in the first quarter. For the first half, we used $26.2 million of cash for operating activities, compared to $22.1 million of cash generated in the prior year period. The year-over-year decline reflects lower net income coupled with working capital impact.

Receivables remained elevated as shipment timing and collection processes were affected by ERP-related inefficiencies, while inventory increased as we worked through material shortages and positioned the business to support demand and backlog conversion. We expect operating cash flow to improve through the second half as receivables convert, inventory levels rebalance, and operating performance strengthens sequentially. We ended the quarter with $76.9 million in cash and cash equivalents and approximately $289 million of unused borrowing capacity under our revolving credit facility. We ended the quarter with a net leverage ratio of 2 times trailing 12 months adjusted EBITDA within our target range of 1 to 2 times, though at the upper end of that range.

Given the lower trailing EBITDA base, we expect leverage to remain near current levels in the near term, and we are managing capital deployment accordingly, inclusive of $71.3 million returned to shareholders through dividends and share repurchases year to date. Moving now to our 2026 guidance. We are raising net sales outlook based on our first half performance and our current outlook for the second half. We are updating our full year 2026 guidance. We are raising net sales outlook and lowering our profitability outlook. We now expect net sales in the range of $1.27 billion-$1.31 billion, reflecting growth of 5.5%-9% and organic sales growth of 3.5%-7%. Adjusted EBITDA in the range of $155 million-$170 million, representing an adjusted EBITDA margin between 12.2% and 13%.

GAAP diluted EPS of $2.15-$2.80, and adjusted diluted EPS of $3.80-$4.45, which excludes ERP modernization costs and amortization expense. This compares with our prior guidance of net sales of $1.24 billion-$1.28 billion, adjusted EBITDA of $175 million-$190 million, and adjusted diluted EPS of $4.70 per share-$5.30 per share. The increase in our net sales outlook reflects several positive drivers: the strength of our order book and backlog, the accelerating contribution from robotics, continued pricing realization, and favorable foreign currency. The new updated range also includes incremental revenue associated with our new enterprise agreement with Brain Corp. At the same time, we are lowering our profitability outlook to reflect our Q2 results.

The costs incurred in the second quarter across gross margin and S&A are not expected to be fully offset in the second half, even as we take actions to improve execution and drive sequential margin improvement. Additionally, we anticipate continued volume pressure in EMEA and APAC, cost headwinds associated with the Middle East conflict, and a more gradual realization of ERP-related productivity and efficiency benefits than originally anticipated, as well as a higher level of R&D investment, particularly in robotics. Let me also frame how we are thinking about the second half building on this revised outlook. Our second half revenue outlook is supported by several tangible factors. Order momentum that strengthened through the second quarter, the continued ramp of our AMR portfolio and upcoming product launches, and the expected backlog conversion as production constraints continue to ease in North America.

We also anticipate incremental pricing actions in EMEA to help offset inflation and the impacts of the Middle East conflict. In S&A, we expect continued inflationary pressure and the ongoing delay in ERP-related savings to weigh on the cost base. Taken together, these assumptions support sequential margin improvement in the second half, but at a more gradual pace than contemplated in our original guidance. We believe this is the appropriate planning posture given our experience over the past two quarters. With that, I'll turn it back to Dave.

Thank you, Fay. Before we move into the Q&A section, I want to close with a few key points. We are not satisfied with our second quarter profitability. The drivers of the margin compression are identified and are being actively managed, including ERP optimization, pricing and discounting, and operating costs. We are making progress and will continue to make progress sequentially, although at a slower pace than we originally expected. At the same time, the underlying fundamentals of the business remain strong. Orders grew 6.6% in the quarter and 8.4% year to date, reflecting the execution of our growth strategies, including the accelerating contribution from robotics. This momentum, combined with our backlog and improving ability to convert demand into shipments, positions us for a breakthrough top-line result this year. Robotics is driving significant growth for our business, and we are leading a disruption across our industry.

TNC Robotics is serving as the catalyst and accelerant for this transformation, while the broader company is contributing the capabilities, scale, and execution required to capture the opportunity. This is a team effort that spans our entire organization. Before we open the call to questions, I want to address one more item. As we announced recently, Fay has decided to retire as our Chief Financial Officer. This is her individual personal decision and is not related to any concerns regarding Tennant's business or financial performance. Fay has been a trusted partner and an important leader throughout a period of significant transformation and growth for Tennant. Since joining Tennant in 2021, she has strengthened our financial discipline, helped shape and execute our enterprise growth strategy, developed our planning and capital allocation framework, advanced our M&A capabilities, and increased our engagement with the investment community.

Her leadership has helped position Tennant for long-term growth and value creation. We're grateful for her many contributions, for providing us with advance notice, and for her commitment to ensuring a smooth transition. We have begun a search for her successor and expect to name a new Chief Financial Officer by the first quarter of 2027. With that, I'll open the call up to questions. Operator, please go ahead.

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Your first question comes from the line of Tom Hayes with ROTH Capital Partners. Tom, your line is open. Please go ahead.

Thanks, Dave. Good morning, Fay and Dave.

Morning, Tom.

Dave, I think both you and Fay in your prepared remarks talked about part shortages impacting both from a cost perspective as well as an ability to get products out the door. I was just wondering, can you unpack that a little bit? First, is that resolved? Secondly, is that all on the vendor, or does that kind of also have an impact from the ERP program?

Yeah, thanks for your question, Tom. It's really relevant to our performance in the quarter and relevant also to the revised guidance we've given. Focusing on part shortage, I want to dimensionalize it appropriately. This is North America, primarily a North American issue. The drivers of the part shortage are twofold. Mainly driven by an ERP challenge we identified and are in the process of rectifying. We put a manual workaround in place to serve the business while we're working on the permanent structural fix, but also by our forecasts and how the demand came in versus our forecasts. Let me unpack each of those causals or drivers kind of at a little more granular level. Coming through the second quarter, we identified an issue where our system was not giving the correct demand signals to suppliers.

We have been managing these incorrect signals kind of as ad hoc situations prior to this. We identified it as a more systemic issue across the entire supply base, we immediately reverted to a manual oversight, manual POs, more similar to how we operated in the past to make sure that we were giving suppliers full visibility into what we thought we needed from a parts perspective. Parallel path, when you are testing the system-driven solution, and we'll make sure that it's solid and performing as intended before we put it into the live environment, obviously. Given that we were operating with that issue coming through into mid-second quarter, there's a residual impact that it created in our supply chain because of the signals we're putting or not putting on our supply base. The shortages were in part driven by the ERP issue.

The other issue is you see our order rates and our demand are much higher than our revenue. We can't get the parts, or we couldn't get the parts to ramp production to service the demand, and the demand has come in stronger than we anticipated in our original forecast. Two points I would make within our forecasting, I'm going to call it forecasting accuracy. Our industrial business in North America has snapped back very strongly from a growth perspective. We had planned for that business to be slightly down, and it's strong, double digits up at a very compressed timeframe. Our ability to react to that increase in demand, is exacerbating our challenges from a parts shortage perspective. The other issue that we've encountered, Pat touched on the strength in robotics. Our mix of robotics was different than we forecasted when we started the year.

In particular, our X6 and the X platform in general, but our X6 is being really well received by the marketplace. We've increased the forecast on that particular product and the entire X platform. That puts additional strain on the supply chain. You think about coming through just kind of the first four or five months of the year, we had a system issue where we weren't putting the proper signal on suppliers for what we intended for demand, exacerbated by a demand pattern that came in very different, both in volume and mix from what we forecasted. That's what created the parts shortages.

Okay. No, I appreciate the color. Maybe one more kind of digging into that a little bit further. Obviously, you need to focus on satisfying the customer's needs and timing and delivery. I was just wondering, how do you balance that without offsetting increased, what could be fixed costs if you're, like you said, you're going back to manual POs, you're probably putting more headcount towards addressing the problem. How do you kind of balance that equation, kind of longer term?

Yeah. I'll comment on parts shortages and overcoming parts shortages. Parts shortages are the unlock to get production increased. Production increased drives the revenue and the margin to cover whatever incremental cost we have to move towards recovery. Much of the supply chain challenges and the recovery of supply chain challenges is driven by our internal team, where that's their full-time job. We've got a really talented group of people that work very closely with our supply base and bring full force of Tennant Company to bear on the issue. It's job number one, and it's a key to unlocking not only production output, but it's delivering on our second half.

Let me talk about kind of what's changed and how we're approaching it, Tom, because I think that might get at the kind of root of your question of how we're balancing the cost of recovery with what needs to happen and what's changing, what actions we're taking. First of all, the team is dedicated and focused. This is a cross-functional effort. Unfortunately, we have a muscle in this area because we've lived through post-pandemic snapback in demand. We've lived through supply chain challenges. We have a playbook for how to do this, and the team has activated the playbook, has been actively working it since the issue started to affect our ability to ramp production.

Yes.

In particular, we have some suppliers that can react very quickly. In some cases we're dual sourced where we can flex our demand. We have good, what I would call concentration around the issue. What I mean by that is a large percentage of the gap in supply of parts is concentrated in a handful of parts and a handful of suppliers. The benefit in that is we can go in and get very deep and close with those customers and exert what leverage we have to make sure that we're getting preferential treatment and aligning what they give us in terms of parts with what we have in backlog and what we expect in orders. That touches on another point that we have that's a benefit as we drive recovery.

Given the backlog we have, we built $18 million of backlog in the second quarter. We're up $15 million in backlog since the start of the year. We have visibility into exactly what we need to build. That gives the supply chain and our suppliers clarity on what the priority parts are to get in the door. Gives me a level of confidence that we're focused on the right areas, the right parts. We've been working this for the better part of 60 days. We have seen progress and points of positivity. I would say we have line of sight, when we revised guidance and implied in our second half performance is an improvement in parts availability so that we can ramp production, fill orders, and take down backlog. I would say we have line of sight to beginning that recovery here in the middle of Q3.

There is a tail of this parts shortages that bleed into Q3 and will still impact the business. You asked specifically about investments to recover from the parts shortage. Much of it is internal focus of people that are already working on this. We will incur extra costs in terms of expediting, whether it's expedited freight or gaining allocation in suppliers production slots, et cetera. As we recover, we're going to incur overtime, because we are going to run the plants at full capacity. We are lining up the production capacity along with assuming that we will get the parts unlocked, and that will incur a bit of an extra cost.

Again, ramping production, taking down backlog, filling the increased order rate we see coming in the door, that's our unlock to deliver on the second half and overcome whatever incremental costs we incur in driving the closure of the parts shortage.

Tom, I would just add, that's why I made the comments that when we look at third quarter gross margin performance, it's going to be comparable to second quarter, roughly at 39.5%. We won't really see an increase in gross margin performance until the fourth quarter where we anticipated it will be roughly around 41%.

Okay.

That's why this is relatively flat quarter-over-quarter.

Okay. Maybe just shifting gears a little bit more positive note on the AMR business and nice overview from Pat. I was just wondering, certainly it kind of implies a meaningful ramp up in the back half going from, what, $58 million for the first half to a full year.

$130 million-$145 million. Just maybe a little bit more color on what's driving that acceleration. Is it enabled by orders and backlog moving from proof of concept to multi-unit orders? All the above? Just anything, you'd help. Appreciate that.

Good morning. This is Pat. Thanks for the question. Appreciate the opportunity to talk it through. First, I'll say that where we are through the first half of the year in robotics is where we expect it to be. We are executing the strategy. The strategy is reading out the way that we intended. It is still early, and so we intend to continue to accelerate revenue growth, and so this is where we expect it to be through the first half of the year and into the second year. Now, specifically on the drivers that are driving the accelerated revenue generation in the second half. First, you covered it.

Our demand exceeded our shipments in the first half of the year. We enter the second half of the year in robotics with a elevated backlog. As we shift towards increasing shipments coming out of the plants, alleviate some of the supply constraints, that will serve as a tailwind as we accelerate growth in the back half. We're executing our strategy to accelerate the development of new products. We've mentioned we launched the X2 ROVR SCRUB and the X16 SWEEP. Those were not shipping in the first half of the year. The X16 has now commenced shipments here in Q3. The X2 will be a meaningful component of our Q4, and so we see a ramp-up from that perspective. The third element of our delivery on the second half in robotics is continuing to convert large customers and small customers.

We've had some nice wins in the first half of the year. We've got a robust pipeline. We like our position in that pipeline. We think we're well positioned to win, so now we need to continue to convert those opportunities here in the second half of the year. That's our formula for delivering on our full-year range.

Great. Appreciate the color. I'll jump back in the queue.

Thanks, Tom.

Your next question comes from the line of Aaron Reed with Northcoast Research. Aaron, your line is open. Please go ahead.

Great. Thank you much. One thing I wanted a little more color around is when we're looking at EMEA, and you're seeing increased competition in there, what categories are you seeing that pricing pressure in? Is it more the premium products, more the value-oriented? Can you give a little more color about what that landscape looks like?

Thanks, Aaron. Talking about competitive pressure in EMEA, I would focus our attention on a couple of product categories. On the low end of floor care, and low end is kind of commercial product, walk-behind, price point units sold to customers that are interested in building service contractors who are buying equipment for the life of their cleaning contract, being two or three years, or sort of price conscious customers where cleaning is less critical or good enough is good enough. What we're seeing there is an influx of price competition, an influx of Chinese manufactured, Asian manufactured competitors that are coming in with very simple machines, very simple to operate, good enough cleaning at a very competitive price point. They're gaining some traction primarily through distribution, in volume, and again, through kind of building service contractors and very price conscious, price focused customers.

We've seen continued competition across the higher end of commercial products as well as industrial products. You know this, our two major global competitors are playing on their home turf in EMEA. They're very formidable competitors. We have a solid position, but a weaker starting position than certainly we have in North America. Those factors exacerbate the inherent competition in the marketplace in those categories. I would point at robotics, and Pat can elaborate, but we're seeing, and we talked about this in prior calls, we are seeing a churn and proliferation of Asian-based robotics only competitors who typically are grounded in navigation software, autonomy software, and coming to market with cleaning solutions. Several of those have gained traction in EMEA and in North America and are in the consideration set of customers as they look at robotic alternatives.

Pat, anything you would add from robotics competition in EMEA?

I would just add that the competition is real. The opportunity in robotic cleaning is attracting a new set of competition. We take it seriously, we seek to understand it, but I will say that we believe we're well positioned with our strategy. Combining the speed and agility of TNC Robotics with the scale of Tennant Company does position us uniquely in the market. We're building out the product portfolio that makes us even more competitive. A good example of that is the X2. The X2 goes directly at the heart of competition that we've seen from this new entrant set. The X16 builds on our legacy experience, our legacy strength in industrial. Our product strategy is targeted at that set of competition.

I would say what really makes us unique relative to this competitive set is our go-to-market exposure and our automation ecosystem that we're building. As I mentioned, we've got more than 40 dedicated commercial individuals that are bringing specialized expertise to robotics right now at Tennant Company, and they're unlocking the potential of our more than 500 sales reps globally. That, we think, makes us really unique amongst this competitive set. Similarly on the automation ecosystem front, we've got a dedicated group of folks that are focused on ensuring that our customers realize the return on investment in automation. To do that, we partner with our more than 1,000 service techs globally at Tennant Company. That combination, I think, is really unique, difficult to replicate, and I think that positions us well against that new entering competition.

Thank you, Pat.

That's super helpful. Just one follow-up question to that is, with the cheaper Chinese new entrants into the EMEA area, is there any risk that that increased competition could also spill over into the U.S. market as well too? Or do you expect that to kind of develop further in EMEA first, so you have a little bit of time before it comes over, if at all?

Yeah. This is Pat. I'll take it from a robotics perspective. It is happening. The new entering competition is attempting to gain traction in the U.S. and North America market. What I mentioned in terms of our position relative to those competitors, it is the strongest and most mature in North America. Our starting position with go-to-market, with our ecosystem is strongest here. We've been able to hold a formidable position here and then expect to be able to continue to do that. That competition is here in North America, and we are seeing success against it.

Super helpful. Thank you.

Your final question comes from the line of Steve Ferazani with Sidoti. Steve, your line is open. Please go ahead.

This is Aashi in place of Steve today. Thank you for taking my question. My question is relating to the robotics. How has the next-gen robotics contributed to the growth you reported this quarter? Have you seen any recent product launches that met your expectations?

I'll take that one. Thank you so much for the question. This is Pat. From a growth contribution in robotics, as we mentioned in Q2, we saw a meaningful growth competition or contribution from robotics. The number was 37% year-over-year growth. Through the first half of the year, we've seen growth contribute materially as well at the enterprise level with, I think, 56% growth year-over-year from a revenue perspective. It has been impactful. As Dave mentioned, as our backlog has grown at the enterprise level, robotics is a meaningful part of that backlog growth as well. We expect to be able to ship some of that backlog in the second half of the year. The second part of your question, I think, was pertaining to new products.

In the first half of the year, as I mentioned in the prepared remarks, our growth was really driven by our X4 ROVR and X6 ROVR product platforms. Those are still relatively new. We launched the X4 in 2024. We launched the X6 just last year, and we've seen really robust adoption of those products, and they're really the ones that drove growth in here in the first half of the year, and are really pleased to see that traction on those new product investments. Moving forward, we're excited in the second half of the year. We've launched the X2 ROVR SCRUB, the smaller form factor product relative to the X4 and X6, attacking large store count retail spaces, kind of smaller format retail spaces. We've launched now the X16 SWEEP. We didn't gain the benefit of those launches in our first half results.

We expect to start seeing those results read out in the second half of the year, and we're encouraged so far by the demand that we're seeing for those new products.

Thank you. I have a follow-up question. What is the reasonable timetable for the resolution to the ERP issues, and what can still go wrong? Are there any chances you will have to scratch this system and start over from the beginning?

I'll take that question. I think that scratching the system and starting over is very low probability. We have a level of conviction that the system is the right system, the right direction for the company, provides us the right underlying digital backbone to scale this business profitably, and we're committed to deploying the system and realizing the efficiency savings that we committed to when we started the project and made the investment. The pace of recovery, the pace of optimization, in North America and APAC, is slower than we had anticipated. We still anticipate getting there, just on a slower timetable. If you look at our margin profile, I would point out that's kind of the tangible P&L impact of where we're at on a host of issues within the company, but embedded in that is kind of our ERP recovery.

Recovery back to normal in North America, which is the major geography, APAC and North America, are on the new system, is really out in the first half of 2027. Originally, we had contemplated that in the second half of 2026, so it's delayed by, call it one to two quarters. We will get there, and we're committed to getting there. We've taken a number of actions now to accelerate, maintain our progress, and accelerate our recovery in North America. I can highlight some of those just at a high level. We can go deeper if you'd like on this call, or we can certainly have a follow-up call if you'd like. The entire IT function and our partners and the business are focused on recovery in North America, so this is job number one.

We pushed our EMEA deployment of ERP out into 2027 to provide that incremental focus and attention and make sure that North America gets the full benefit of our internal organization and partners' efforts. We are focused on the highest impact areas first, I think it's important to note although when I was talking about the parts shortages, I referenced kind of putting in a manual workaround as our short-term fix. This work we're doing to drive optimization of our ERP, we are focused on driving structural improvements, not just band-aid approach. We want to make sure that we're building a system that we can scale and leverage and rely on well into the future so that it's a benefit to how we operate, not an encumbrance to how we operate. We have made some structural changes in our approach to ERP.

We are in the process of changing our system integrator. I think I announced earlier that we have made a change in our CIO. We brought in someone that is well seasoned in ERP transformations to help us lead not only North America optimization, but also the remainder of the deployment in EMEA in APAC in the coming quarters and years outlook. We're investing in the recovery. Some of our S&A impact in the quarter that you saw was two things. It was higher than expected spend on IT recovery to support ERP optimization and a lack of realization of the efficiency benefits we had forecasted. As we improve, we'll reverse those two trends. We'll have to spend less on recovery. We are not going to pinch a penny around funding the recovery in ERP in North America.

Lastly, I'd be remiss if I didn't remind the audience that we are committed to not only deploying the ERP, we're committed to realizing the benefits, optimizing so we get the efficiency in how we operate, and also the efficiency savings that we've committed to prior publicly. Yeah, listen, the pace of progress is not where we would like it to be. We're taking action and continue to take action to overcome those challenges, and I'm confident we'll get there, just on a different trajectory than we had originally anticipated.

Thank you.

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

I think I made all my closing remarks already, so I'll just thank everyone for attending the call, and hope you have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.