Tennant Company (TNC) Q2 FY26 earnings call: guidance and Q&A

Tennant's robotics business continued its strong performance, with AMR sales reaching $31 million in Q2, a 37% year-over-year increase, and $58 million for the first half, up 56%. The company aims to grow robotics revenue from $85 million in 2025 to $250 million by 2028, requiring approximately 50% annual growth. This acceleration is driven by new product launches like the X2 ROVR scrubber and X16 industrial sweeper, and a robust opportunity pipeline. The TNC Robotics venture, with 120 dedicated employees and over 40 commercial team members, focuses on accelerating product innovation, building a differentiated go-to-market model, and creating a comprehensive automation ecosystem, leveraging its partnership with Brain Corp.

The stabilization of the ERP system achieved in Q1 has held, but the pace of optimization has been slower than expected, impacting operating efficiency and profitability. Elevated operating costs, labor inefficiencies, premium freight, and material shortages due to master data and planning challenges contributed to production disruptions in North America. Management emphasizes these are execution, not structural, issues. The full recovery to normal operations in North America is now anticipated in the first half of 2027, delayed from the original H2 2026 target. EMEA ERP deployment is deferred beyond 2026 to focus resources on North America.

Profitability was below expectations, with gross margin at 39.5% (down 260 bps YoY) and adjusted EBITDA at 10.9% (down from 16.0% YoY). Gross margin pressure in EMEA stemmed from increased discounting, higher freight/material costs due to the Middle East conflict, and lower volumes. In North America, ERP optimization costs were the primary driver. Higher S&A and R&D expenses also contributed. The company is implementing pricing actions and discount discipline in EMEA, improving commercial execution, and focusing on supply chain recovery and ERP efficiency gains in North America. Gross margin is expected to be comparable in Q3 and improve to around 41% in Q4.

Consolidated net sales grew 1.7% YoY to $324 million, with organic sales declining 0.5% due to lower volumes offsetting favorable pricing. Americas sales grew 1.4% organically, driven by strong 21% growth in Latin America, while North America was flat. EMEA declined 2.8% organically due to market softness^🌐 and Middle East conflict impacts, despite double-digit growth in Central and Eastern Europe. APAC organic sales declined 10.6% due to softer economic conditions and elevated distributor inventory, partially offset by growth in India. Orders strengthened throughout the quarter, totaling $339 million, up 6.6% YoY, with June orders up 11%.

Cash flow from operations returned to positive territory at approximately $5 million in Q2, an improvement from a $31 million use of cash in Q1. For the first half, operating activities used $26.2 million, reflecting lower net income and working capital impacts. Receivables remained elevated, and inventory increased due to material shortages. The company ended the quarter with $76.9 million in cash and $289 million of unused borrowing capacity. Net leverage was 2x trailing 12 months adjusted EBITDA, at the upper end of the target range. $71.3 million was returned to shareholders year-to-date through dividends and share repurchases.