TENNANT COMPANY 2026 Q2 Earnings Call

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. Faye 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.