Tennant Company Aktie

Good morning. My name is Sarah, and I will be your conference moderator today.

At this time, I would like to welcome everyone to Tennant Company's 2026 Third Quarter Earnings Conference Call. This call is being recorded.

[Operator Instructions]

Beginning today's meeting is Mr. Lorenzo Bassi, Vice President, Finance and Investor Relations for Tennant Company. Mr. Bassi, you may begin.

Good morning, everyone, and welcome to Tennant Company's Third 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, and Fay West, Senior Vice President and CFO. Dave will discuss our third-quarter results, our ERP progress in our robotics business, and Fay will cover our financials and our outlook for the fourth quarter and full year.

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, and 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 file 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 third quarter earnings release and presentation include the comparable GAAP measures and a reconciliation 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. Our third quarter showed clear progress. Order demand continues to be robust. We are rapidly growing our robotics business.

Our ERP recovery efforts are reading out, and our operational performance continues to improve. Last quarter, we said that we expected order momentum and our elevated backlog would support the second half performance.

The third quarter gross margins would be comparable to the second quarter, and the backlog conversion would begin in the fourth quarter as parts availability constraints eased, and that is largely how our third quarter played out.

Our order momentum continued. Orders grew 9.5%, led by North America at 18%. Orders have now grown in every quarter this year, and orders grew 9% year-to-date.

Net sales were $322 million, a third-quarter record, up 6.2% with organic growth of 5.7%, driven by 4.1 percentage points of volume growth and 1.6 percentage points on price.

We delivered robust organic revenue growth of 9% in North America, 3% in Latin America, and 2% in EMEA, and a 5% decline in APAC. We exited Q3 with elevated backlog at $118 million, a reduction of $9 million from the end of the second quarter.

Importantly, strong order trends and an elevated backlog give us good visibility into the fourth quarter and reinforce our confidence in the underlying demand environment.

Turning now to the region's performance. In the Americas, momentum remained strong throughout the quarter. Orders grew double digits compared to the prior year, and organic sales increased 8.1%.

Growth was broad-based across both our industrial and commercial portfolios, led by robotics and supported by strong equipment demand across vertical markets and channels.

We also delivered continued growth in service and other categories. Demand indicators remain healthy. Our opportunity funnel continues to expand.

Customer engagement remains strong, and we saw encouraging order activity from recently launched new products, including the X2 and X16.

While we remain focused on improving conversion, throughput, and fulfillment performance, we believe the strength of our order trends, pipeline, and new product activity positions us well heading into the fourth quarter.

In EMEA, our pricing actions are beginning to gain traction. Price turned positive and organic sales grew 2.3%, marking the region's strongest quarter of the year.

Orders began softening in August and declined 9% in the quarter. We're focused on rebuilding order momentum and expanding our opportunity funnel while maintaining pricing discipline.

We believe these actions position us for sequential improvement in orders in the fourth quarter. In APAC, organic sales declined 4.8%, an improvement from the second quarter, and orders grew 7%.

Still, performance is below where we expected it to be. Soft demand in China, Australia, and parts of Southeast Asia is keeping distributor inventories elevated and slowing our deal conversion.

We are reassessing our domestic China commercial strategy to reflect current market and operating conditions.

Adjusted EBITDA was $48.8 million or 15.1% of net sales, including approximately $6.1 million of tariff refunds paid in prior periods related to changes in IEPA tariff regulations.

Excluding this one-time benefit, adjusted EBITDA margin improved approximately 235 basis points from the second quarter.

Normalized gross margin was 40.4%, up 90 basis points from 39.5% in the second quarter and ahead of our expectations, reflecting continued progress in operational execution and production output.

Margins remained below last year. While we executed solid pricing realization, the primary drivers were inflationary freight and material costs associated with the Middle East conflict and continued part availability constraints that created production inefficiencies and under-absorption.

Approximately 2/3 of the year-over-year pressure came from North America and 1/3 from EMEA. Given our Q3 performance and our visibility into the fourth quarter, we are reaffirming our full-year guidance, and Fay will walk you through what it implies for the fourth quarter.

First, an update on ERP. We continue to make solid progress in our ERP recovery efforts in North America.

We have effectively insulated the customer experience from direct system challenges, and we are managing through the residual impacts from system challenges earlier in the year and the remaining inefficiencies in our operation driven by system challenges, process adoption, and change management.

ERP-related inefficiencies and cost of sales fell from roughly $10 million in the first half to approximately $2 million in the third quarter, while support ticket activity continues to decline as our focus has shifted to overcoming inefficiencies to drive productivity.

The remaining work is concentrated in a handful of well-understood areas, including extended warehouse management, invoicing and collections, customer master data, and the transition to our long-term system support model.

We have taken steps to mitigate future risks, strengthen our governance, and better integrate IT support with our business functions as the organization moves into a more steady-state operating model.

The most significant disruptions are behind us, and we expect any future issues to be isolated rather than systemic.

As a result, our focus is increasingly shifting from stabilization and recovery to value realization, improving productivity, capturing operating efficiencies, and unlocking working capital benefits.

That focus on value realization also shaped our decision not to move forward with the planned ERP deployment in EMEA. By concentrating our efforts on optimizing North America and strengthening our business process and IT capabilities, we can deliver greater value with greatly lower risk.

In EMEA, we will carefully pursue smaller, targeted system and data quality improvements and incremental continuous improvement enhancements while leveraging our existing systems.

We believe this approach allows us to focus resources where they can have the greatest impact on operational and financial performance.

Shifting focus to our robotics business. We accelerated our growth again in Q3 through targeted investments and execution of our growth strategies in our TMC Robotics venture.

Robotics revenue in Q3 was $37 million, up 71% and ahead of plan compared with 37% growth in the second quarter. Year-to-date robotics revenue of $95.3 million already exceeds our full-year 2025 total.

Our investments in our robotics support ecosystem are enabling growth and delivering a more consistent customer experience as we profitably scale.

The X4 and X6 robots led our growth, driving significant demand from both new customers and existing customers transitioning from our earlier Gen 2 platform robots.

Let me touch briefly on our evolving robotics product strategy. At the premium end of the market, our strategy is to expand our portfolio of X-Series robots, leveraging our expanded collaboration with BrainCorp.

Tennant brings cleaning equipment expertise, customer relationships, equipment design, solution integration, and a global sales, service, and life cycle support network.

BrainCorp advances the autonomy platform, including AI, spatial intelligence, and software. The companies have extended exclusivity for next-generation robotic floor care for 3 years, and we are on pace to introduce 10 new products within 24 months.

We believe this partnership, combined with Tennant's customer and service ecosystem, positions us to advance differentiated robotic solutions and support customers seeking performance, reliability, uptime, safety, data privacy, and a strong return on their investment.

Our latest X-Series robots, the X2 Rover and X16 suite, have launched and have robust order books developing. The new Performance Series, or P-Series, strategy addresses a different need: customers and channels seeking a more accessible entry point into robotic cleaning.

The economics and expectations of these customers are different, with greater price sensitivity and more moderate expectations for performance, reliability, and useful life.

We are targeting this market segment with an intentionally designed value-oriented robot supplied via a contract manufacturing partnership rather than relying on the same product and investment model used for premium offerings.

This approach provides us with the right product at the right price and feature set, and speed to market with lower capital intensity.

The P-Series will expand our TAM, broaden our market coverage, and deliver incremental profitable growth while preserving a clear and differentiated premium value proposition for the X Series.

We launched the P1 VAC, the first model in our Performance Series and Tennant's first autonomous robotic vacuum. It expands our robotics portfolio into soft floor cleaning, combining autonomous vacuuming and dust mopping with a side brush designed to direct debris from woven edges into the cleaning path.

The P1 VAC is designed for routine cleaning and commercial environments, giving customers another way to automate everyday tasks while complementing Tennant's existing robotic offerings.

Our approach is focused on offering the right robotic solution for the right application. The X Rover series combines Tennant's equipment, customer success and service capabilities with BrainCorp's autonomy technology for applications requiring the most advanced functionality and premium performance.

The Performance series will provide a differentiated tenant offering for customers prioritizing simple, easy-to-use, application-specific performance and a more accessible price point, with distribution serving as the primary route to market.

Together, the 2 series position us to compete across a broader range of the market and customer needs as we profitably scale our robotics business.

For the full year 2026, we expect robotics revenue of $130 million to $145 million, in line with our goal of $250 million in robotics revenue by 2028.

With that, I'll turn the call over to Fay.

Thank you, Dave. Third quarter GAAP net income increased to $19.5 million or $1.12 per diluted share from $14.9 million or $0.80 per diluted share last year, benefiting from lower ERP project costs and the absence of prior-year legal contingency costs.

Adjusted diluted earnings per share were $1.40 compared to $1.46 in the prior year period.

Our non-GAAP adjustments are detailed in the supplementary schedules. Higher sales and tariff refunds partially offset higher operating costs and interest expense.

Operating cost pressures included material and logistics inflation, driven in part by the Middle East conflict, production inefficiencies related to parts availability and residual ERP issues, and higher S&A and R&D spending, including investments in robotics.

Net interest expense was $5 million compared to $2.4 million in the prior year period. The increase reflects higher average borrowings, including borrowings to fund share repurchases, partially offset by a lower average interest rate.

Our reported effective tax rate was 24.7%, and our adjusted tax rate was 25.4% within our full-year adjusted tax rate guidance range of 24% to 29%.

Net sales were $322.3 million, up 6.2% over the prior year. Organic sales grew 5.7%, with volume up 4.1 percentage points and price up 1.6 percentage points.

Acquisitions added 0.4%, and currency added 0.1%. By category, equipment sales increased 7.8% on higher North America machine volume and robotics growth.

Parts and consumables decreased 6.3% as pricing was more than offset by lower volume. In North America, the decline was in consumables as we lapped prior-year incentive programs in direct customer sales, while parts sales grew slightly.

In EMEA, delivery delays at our third-party logistics provider held back parts and consumables shipments, and we are working to resolve them.

Service and other increased 17.3% on higher Autonomy revenue and the service business. Autonomy revenue was responsible for approximately 60% of the year-over-year growth in this category.

By region, organic sales grew 8.1% in the Americas, with North America up 8.6%, driven primarily by volume growth, with pricing realization contributing approximately 1/4 of the increase despite continued production and fulfillment constraints.

Latin America was up 2.8% on higher volume after an exceptional first half with orders up 16%. EMEA grew 2.3%, primarily on price realization and higher volume across most European markets, partially offset by lower sales in Southern Europe.

APAC declined 4.8% on lower equipment volume and unfavorable pricing in certain markets, reflecting softer demand and distributor overstock in Southeast Asia, partially offset by growth in India.

Gross margin was 42.3% compared to 42.7% in the prior-year period and improved 280 basis points from the second quarter. Results included approximately $6 million in tariff refunds, which contributed about 190 basis points to gross margin.

Excluding this benefit, gross margin was approximately 40.4%, above the 39.5% we anticipated last quarter. Excluding the tariff refunds, roughly 2/3 of the year-over-year decline in the gross margin came from North America and 1/3 from EMEA.

The decline reflects inflationary pressures largely associated with the Middle East conflict and other macroeconomic headwinds.

Parts availability constraints also contributed to production inefficiencies and under-absorption, while residual ERP inefficiencies added labor and freight costs of approximately $2 million.

Favorable pricing partially offset these pressures. The tariff refunds recovered a portion of the costs absorbed in prior periods. Any additional claims will be subject to legal, administrative, and governmental processes, and our outlook assumes no further refunds.

We continue to manage ongoing tariff-related cost pressures through pricing, sourcing and productivity initiatives. Adjusted S&A was $89.5 million or 27.8% of net sales compared to $83.3 million or 27.5% of net sales in the prior year.

The increase reflects a combination of factors, including continued investment in our robotics business, the addition of recurring software licensing costs associated with our ERP platform, and the normal inflationary pressures we're seeing across labor and other operating costs.

R&D expense was $12.4 million or 3.8% of net sales, up from $10.5 million from the prior year, reflecting continued investment in innovation, including robotics and autonomous solutions.

Adjusted EBITDA was $48.8 million or 15.1% of net sales compared to $49.8 million or 16.4% last year. The year-over-year decline reflects the impact of the gross margin and operating expense drivers I outlined earlier.

Excluding the tariff refunds, adjusted EBITDA was approximately $42.7 million or 13.2% of net sales, up from 10.9% in the second quarter.

Operating cash flow improved for the second consecutive quarter to $11.9 million from $5 million in the second quarter and a $31 million use of cash in the first quarter.

Compared to the prior-year quarter, operating cash flow was $16.8 million lower. And on a year-to-date basis, we have used $14.3 million of operating cash.

This reflects overall lower operating performance and higher working capital, including higher receivables and inventory balances.

Receivables were $291.7 million, up $35 million from year-end, mainly due to collection timing as we optimize invoicing and collections in North America following the ERP implementation.

Past due balances improved meaningfully in September, and accelerating collections is a top priority for the fourth quarter. Inventory was $213.2 million, up $15 million from year-end, mainly in EMEA.

The increase reflects X2 robotics components and finished goods built to support the production ramp, stock position with our third-party logistics provider, additional robotics parts to improve availability for key customers, and higher material costs.

We invested $6.7 million in capital expenditures and returned $5.2 million to shareholders through dividends in the quarter, bringing capital return this year to $76.6 million.

We ended the quarter with $75.3 million in cash, approximately $289.4 million of unused revolver capacity, and net leverage of 2x EBITDA at the upper end of our target range of 1 to 2x.

Our capital allocation priorities remain unchanged. Reflecting confidence in the business and our cash flow outlook, the Board recently approved a 5% increase in our quarterly dividend to $0.325 per share, continuing our long-standing commitment to returning capital to shareholders.

Turning to our outlook. With 3 quarters behind us, we are reaffirming our full-year 2026 guidance. We continue to expect these ranges.

Net sales in the range of $1.27 billion to $1.31 billion, reflecting reported growth of 5.5% to 9% and organic sales growth of 3.5% to 7%.

Adjusted EBITDA in the range of $155 million to $170 million, representing an adjusted EBITDA margin between 12.2% and 13%; GAAP diluted EPS of $2.15 to $2.80 and adjusted diluted EPS of $3.80 to $4.45, which excludes ERP modernization costs and amortization expense.

At the midpoint, our guidance implies fourth quarter net sales of approximately $346 million and adjusted EBITDA of approximately $49 million, or about 14% of net sales.

We see a clear path to achieving our fourth quarter sales outlook. Converting existing backlog is expected to account for roughly half of the sequential sales increase.

The balance is supported by new order volume consistent with strong activity we've seen throughout the year, along with expected improvement in EMEA in what is typically a seasonally strong quarter.

We expect adjusted EBITDA to benefit from higher volumes, backlog conversion, and lower operating costs. At the same time, gross margins will continue to face pressure from material inflation and elevated freight costs.

While we are actively managing part availability constraints and executing cost-out initiatives across the business, we now expect inflationary pressures to remain higher than previously anticipated and not be fully offset.

These factors continue to impact plant efficiency and fixed cost absorption. Despite these headwinds, we believe we can manage through them with minimal impact to our fourth quarter performance.

Our outlook also includes contingency. The key variables to achieving Q4 are the pace of backlog conversion as parts availability improves and the recovery in EMEA orders.

Even with a moderate shortfall in both, we would expect to remain within our guidance range. With that, I'll turn it back to Dave.

Thanks, Fay. Before we take questions, let me close with 3 key points. First, the third quarter delivered the progress we committed to: strong orders, record third-quarter sales, a return to organic growth, and meaningfully better margins.

Second, ERP has moved from recovery to optimization, and our focus is now on capturing the benefits of that investment.

And third, robotics is accelerating with revenue up 71% and a portfolio that now reaches new applications and price points. We also recognize that not everything is where we expect it to be yet, Asia Pacific, EMEA orders and operating leverage.

We have actions underway in each area. As we look to 2027, our priorities are converting our order momentum into growth, capturing ERP efficiencies to drive operating leverage, and scaling robotics. We'll share our 2027 outlook when we report fourth quarter results.

With that, we'll open the call to questions. Operator, please go ahead.

[Operator Instructions]

Your first question comes from the line of Aaron Reed with Northcoast Research.

Great quarter. I was happy to see it. My question for you is that the gross margin recovery seemed to have come ahead of expectations.

I was wondering if you could just review that beat? And how much of that underlying 230 bps decline do you expect to recover in Q4 as parts availability improves?

So when you look at third-quarter margin, there's a big impact in the quarter from tariffs and the refunds from tariffs. And so on a more normalized basis, it's roughly 40.4% gross margin, which is a little bit higher than what we had initially anticipated.

When we look at the drivers for that, it's primarily price realization coming through differentially in both North America and EMEA. So that's the biggest driver of the beat here in the quarter.

And then the other question I had is: of the under-absorption and product inefficiency drag, how much of that is ERP-related versus supplier part shortages?

And when do you expect North America manufacturing to return to a normal run rate?

Yes. Thanks for the question, Aaron. Let me expand a bit and talk a little bit about ERP more broadly. We've given ERP a lot of airtime over the last several quarters, understandably so given the impact it's had on our ability to operate.

When we think about the ERP-related inefficiencies in Q3, they're much lower than they were in prior quarters, lower than Q2. And I would point to the gross margin impact.

In the first half, it was around $10 million. In Q3, it was around $2 million, and we expect Q4 to be $2 million or less. So we're clearly driving greater throughput at better margins as it relates to ERP efficiencies.

It's becoming increasingly difficult to assign our challenges specifically to ERP-related issues versus forecasting issues. Our incoming order demand is very robust, and we've got some forecasting challenges.

We didn't see it coming in all instances, and the mix of our business is coming differently than we expected. So when I think about ERP specifically in your question, how much of the -- I'm going to call it margin impact was assigned to ERP.

The majority of what we saw in the quarter and what we're dealing with is the residual impacts of challenges we had in the ERP in Q1 and Q2. And we talked about these in prior calls.

We had 2 major issues I would point out. One is around the demand signals that we put on our supply base were either incorrect, short or 0, which results in us having to scramble and expedite to get parts in to meet our incoming demand.

So you're seeing that come through in terms of expedited freight and inefficiency through lost production time where we didn't have parts to run the plant.

The other residual impact we're dealing with is around invoicing issues that we had in the first half of the year that created AR collection issues. With our customers, invoices either didn't go out, weren't received by our customer, and turned into a dispute or a situation to be resolved from a collections perspective.

Both of those issues have been corrected, but the residual impact of the part shortages and the AR issues are still being managed and showing up in our financials as we came through the quarter.

We expect those to continue to reduce in terms of impact, and we're working hard to make sure that we're closing those gaps.

Looking forward, I think you're asking how we should think about ERP-related issues as we move through Q4 and into 2027.

We're really focused on 4 key areas. Around ERP-related productivity or inefficiency issues. One is in our extended warehouse management, and this is the part of the system that allows us to manage incoming parts, plan for parts, receive parts, and move parts from the warehouse to the line.

So there's a body of work going around adopting the new system and process around extended warehouse management. I mentioned earlier our invoicing and the collections challenge.

We've got some work going on there to improve our invoicing practices to reduce the collections challenges downstream. Our customer master data: we're operating at an elevated expectation for the integrity of our data and stronger governance around our customer master data, and more work to be done there.

And then we're transitioning our long-term support model from an IT perspective with closer linkage to the business to make sure that the priorities that we're addressing are the ones most urgently required by the business to serve the customer and deliver on our financial commitments.

So we're focused on the right areas. I've said it before; I said in the script, we've largely insulated the customer from the direct impact of our ERP challenges and inefficiencies.

We're working through the residual impacts in Q3. We expect those to be lower in Q4 and eventually be very difficult to describe a specific impact to. And so we expect to be candidly, as we move through Q4 and 2027, I don't expect to be talking much about ERP in terms of either the cost impact on the COGS line or the project cost impact to the business.

So it sounds like the short version is almost -- The vast majority of it is behind you, and this is probably one of the best times you have a really good, clear visibility into the future. Is that an accurate but wildly oversimplified version of that?

Wildly oversimplified, but accurate. We've got our arms around where we want to continue to drive efficiency and productivity.

We see the P&L financial impact continuing to reduce quarter-over-quarter. And so we're getting to work to right the ship fully. And actually, it's worth noting the target is not just to get back to pre-go-live efficiency and productivity.

It's to capture the full efficiency we envisioned when we made the investment. And so we'll continue to focus on that as our ultimate goal as we work through the residual impact and the remaining challenges relative to the ERP system, our processes, and change management.

Your next question comes from the line of Steve Ferazani with Sidoti.

I appreciate all the detail on the call; a lot of numbers. I did want to ask because your EBITDA margin, even with some of the numbers you walked through, is still massively ahead of what we were thinking.

And I'm looking at the S&A line. I know we've talked about carrying some extra contracted IT professionals to manage through this. But that number is even lower.

I'm just trying to think: are there some lower LTI accruals in this quarter that drove that, because that's way lower than we were thinking.

Yes. I think when we talked last quarter, we had said that second half S&A would look pretty comparable to first half S&A. There is some LTI accrual adjustment coming through in the quarter that is impacting this quarter's results.

In terms of component availability, you walked through some of the risks to hitting the full-year targets.

Can you give us a little more color on component availability and the potential impact on the robotics rollout given that you have a lot of products coming out? It looks like really strong demand drives the growth.

How much you're managing and the challenges around component availability?

Yes. Broadly speaking, our parts shortages are easing. They're not completely recovered, but they're easing.

We saw a significant impact in Q3 from parts shortages driven by the factors we've talked about in the past. And robotics has not been immune to those challenges, not only in the components you would expect, but also beyond the sensing and the compute components that enable robotics and autonomous navigation.

So we're actively managing part shortages across the entire network. We've seen easing and an extended line of sight to having the parts to meet our production demand, but we're not completely out of the woods yet.

Turning to robotics. I've got to say I didn't have the P1 back on my bingo card for product rollouts. I actually had to go back to your website because I didn't even realize you sold vacuums.

To be honest, I've covered you for so many years. How did this end up in the product lineup? Does this grow your addressable market? Because it seems like it's going to serve a lot of markets that maybe weren't bigger for you previously.

Yes. So we don't fully disclose our new product roadmap for obvious reasons, but this space has always been on our roadmap to evaluate and address.

The team has been working over the past kind of year to 15 months to begin by understanding the market, the customer application, the expectations. And then I think what's really interesting and compelling about the P1 back, a, it's our first vacuum.

But b, when we fully scoped the market opportunity and what position we wanted to occupy in that space, we then did a really robust evaluation around how we would bring that product to market.

We're rather open-minded about having to build it ourselves, borrowing it, or buying it. And we landed in a really good place. We've got a product that meets the customers' expectations for the application as well as the value proposition that allows us to compete profitably.

Importantly, this class of product is primarily sold or largely sold through distribution channels. So we had to build a product that was capable of being reliably sold and profitably sold through that channel, and one that we could support with our ecosystem support.

So we're excited about it. I think that the opportunity has always existed. We chose to focus elsewhere with our more recent product introductions that we've talked about.

This one was always on the roadmap, and the team found, I think, a really innovative, creative way to bring it to market. We're excited to get it out and launched.

Early returns are really good. And this plays at the lower end of the market. If you think about vacuuming as less sophisticated than scrubbing. It's more of a value price point and a differentiated expectation for performance and reliability and life and ease of use; as I mentioned, it goes through distribution as well.

I think the best way to learn the market is to actually be participating in it. So we were able to get to market with a product that meets the customers' needs in a less capital-intensive way and very quickly.

We're out in the market now after kind of a highly accelerated development time. So we're excited to get it in the market and see what feedback we get from customers around the world.

When you're thinking about a product like this, how much of this is additional selling to customers that you've served with hard floors, now you're trying to serve soft floors versus brand-new customers that you've never serviced before?

Yes. Great question. Time will tell. Obviously, we're going to start with customers we already have a relationship with who have chosen the Tennant value prop, whether that be in non-robotic or robotic equipment.

We do think there's significant opportunity in vacuuming with new customers, especially in this form factor and at these price points. And these are markets and floor types and floor spaces that are typically served by distribution.

So by bringing the product to market through distribution channels, we think we can reach new applications, new customers.

Excellent. Last one, if you can just remind us of the cadence of initial deliveries with the last 3 products, when we should start seeing them in your P&L, I guess, the X2, X16, and now the P1 back.

Yes. So we've done a good job of launching the product to market before and taking orders before we actually ship. So let me see if that makes sense.

We announced the X2 and X16 in Q3; X2 started shipping in Q3, and X16 started shipping here now in Q4. P1 was on the October launch and started shipping in Q4.

So, the quarter we're in?

Correct.

Excellent. So that's real fast.

Yes. That, I think, is a proof point of why we stood up the robotics center in terms of bringing new products to market at the speed of the market. I think P1, X2, and X16 are all important proof points.

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

Thank you, operator. Thank you all for your time and attention today, and I hope you have a great day.

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

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 Q2 Earnings Conference Call. This call is being recorded. [Operator Instructions]

Thank you for participating in Tennant Company's 2026 Q2 Earnings Conference Call. Beginning today's meeting is Mr. Lorenzo Bassi, Vice President, Finance and Investor Relations for Tennant Company. Mr. Bassi, you may begin.

Good morning everyone and welcome to Tennant Company's Q2 2026 earnings conference call. I'm Lorenzo Bassi, Vice President, Finance and Investor Relations. Joining me on the call today are David Huml, President and CEO; Fay West, Senior Vice President and CFO; and Pat Schottler, Senior Vice President, Tennant Robotics.

Today we will review our Q2 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 and 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 and 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 and 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. However, 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 and 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 and 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, but 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, and 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. Finally, 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. Finally, 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.

And importantly, we've been helping customers deploy cleaning robots for more than 8 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 3x higher than conventional machines. We estimate that the robotic cleaning category is growing more than 5x 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.

So 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 3 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 2-year period and we're executing against that accelerated road map. 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 SelfPath 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 sales 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 3 strategic priorities is our partnership with Brain Corp. We've 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 road map for product and technology innovation. We believe the 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 contractors, retail and industrial verticals. Our X4 and X6 ROVR robotic 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: enterprise customers are increasingly moving beyond pilot and into scale deployments. And 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 and 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 time frame 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 us to 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, and 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 pretax 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% to 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 and 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 and 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, but 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, but 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 in 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 margins.

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 acquisitions. 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 road map 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 $51.0 million, or 16.0% 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 2x trailing 12 months adjusted EBITDA, within our target range of 1x to 2x, 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 to $1.31 billion, reflecting growth of 5.5% to 9% and organic sales growth of 3.5% to 7 %. Adjusted EBITDA in the range of $155 million to $170 million, representing an adjusted EBITDA margin between 12.2% and 13.0%. GAAP diluted EPS of $2.15 to $2.80 and adjusted diluted EPS of $3.80 to $4.45, which excludes ERP modernization costs and amortization expense. This compares with our prior guidance of net sales of $1.24 billion to $1.28 billion, adjusted EBITDA of $175 million to $190 million, and adjusted diluted EPS of $4.70 per share to $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 2 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 we'll 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.

[Operator Instructions] Your first question comes from the line of Tom Hayes with ROTH Capital Partners.

Dave, I think both you and Fay in your prepared remarks talked about parts shortages impacting both from a cost perspective as well as the ability to get products out the door. I was just wondering, can you unpack that a little bit? Is that entirely -- I guess, first, is that resolved? And then secondly, is that all on the vendor? Or does that also have an impact from the ERP program?

Yes. Thanks for your question, Tom, and it's really relevant to our performance in the quarter and relevant also to the revised guidance we've given. Focusing on parts shortage, I want to dimensionalize it appropriately. This is primarily a North American issue. The drivers of the parts 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. So let me unpack each of those causals or drivers 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 as ad hoc situations prior to this. We identified it as a more systemic issue across the entire supply base. And so 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 to what we thought we needed from a parts perspective.

Parallel path, we 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. But given that we were operating with that issue coming through into the mid-second quarter, there's a residual impact that it created in our supply chain because of these signals we were putting or not putting on our supply base. So 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. So 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. And 2 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 in a very a compressed time frame. So our ability to react to that increase in demand is exacerbating our challenges from a parts shortage perspective.

And 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. And in particular, our X6 and the X platform in general, but our X6 is being really well received by the marketplace. And so, we've increased the forecast on that particular product and the entire X platform. That puts additional strain on the supply chain. So you think about coming through just the first 4 or 5 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. And that's what created the parts shortages.

Maybe one more digging into that a little bit further. Obviously, you need to focus on satisfying the customers' needs and timing and delivery. I was just wondering, how do you balance that without offsetting increased what could be fixed costs? If like you said, you're going back to manual POs, you're probably putting more head count towards addressing the problem. How do you balance that equation longer term?

Yes. So I'll comment on parts shortages and overcoming parts shortages. Parts shortages are the unlock to get production increased. Production increase drives the revenue and the margin to cover whatever incremental costs we have to convert 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 #1. And it's a key to unlocking not only production output, but delivering on our second half.

So let me talk about what's changed and how we're approaching it, Tom, because I think that might get at the 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. So 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 postpandemic 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 at it since the issue started to affect our ability to ramp production.

In particular, we have some suppliers that can react very quickly. And 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. And 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. And 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, roughly $50 million in backlog since the start of the year. We have visibility into exactly what we need to build. And that gives the supply chain and our suppliers clarity on what the priority parts are to get in the door. It 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. And I would say we have line of sight to beginning that recovery here in the middle of Q3. But there is a tail of this parts shortages that bleeds 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. And as we recover, we're going to incur over time because we are going to run the plants at full capacity. So 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. But 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.

And 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 the second quarter, roughly at 39.5%. And we won't really see an increase in gross margin performance until the fourth quarter, where we anticipated it will be roughly around 41%. So that's why it's 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 implies a meaningful ramp-up in the back half, going from, what, $58 million for the first half to full year $130 million to $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 multiunit orders, all of the above? Just anything you'd help, appreciate that.

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 in 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. So we enter the second half of the year in robotics with an elevated backlog. And 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 scrubber and the X16 sweeper. Those were not shipping in the first half of the year. And so, the X16 has now commenced shipments here in Q3. The X2 will be a large -- a meaningful component of our Q4. And so we see a ramp-up from that perspective. And then 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. And that's our formula for delivering on our full year range.

Your next question comes from the line of Aaron Reed with Northcoast Research.

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?

Yes. 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 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 contractor, being 2 or 3 years, or price-conscious customers where cleaning is less critical or good enough is good enough What we're seeing there is an influx -- price competition and 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 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. And you know this, our 2 major global competitors are playing on their home turf in EMEA. And so they're very formidable competitors. We have a solid position, but a weaker starting position than certainly we have in North America. And so those factors exacerbate the inherent competition in the marketplace in those categories. And then 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?

Yes. I would just add that the competition is real. The opportunity in robotic cleaning is attracting a new set of competition. And 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 entrants set. And then the X16 builds on our legacy experience, our legacy strength in industrial.

So our product strategy is targeted at that set of competition. And 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. And that, we think, makes us really unique amongst this competitive set. And then 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. And 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 entrant competition.

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

Yes. This is Pat. I'll take it from a robotics perspective. It is happening. The new entrant competition is attempting to gain traction in the U.S. and the 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. So our starting position with go-to-market, with our ecosystem is strongest here. And so we've been able to hold a formidable position here and expect to be able to continue to do that. But that competition is here in North America and we are seeing success against it.

Your final question comes from the line of Steve Ferazani with Sidoti.

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

Yes. So 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 contribution from robotics. The number was 37% year-over-year growth. And then 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. So it has been impactful. And as Dave mentioned, as our backlog has grown at the enterprise level, robotics is a meaningful part of that backlog growth as well. And so 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 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 here in the first half of the year. And I'm really pleased to see that traction on those new product investments. Then moving forward, we're excited in the second half of the year. We've launched the X2 ROVR scrubber, the smaller form factor product relative to the X4 and X6, attacking large store count retail spaces, smaller format retail spaces. And then we've launched now the X16 industrial sweeper. And so 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.

And I have a follow-up question. What is the reasonable time line -- 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, 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. And so we still anticipate getting there, just on a slower timetable. If you look at our margin profile, I would point out that's the tangible P&L impact of where we're at on a host of issues within the company, but embedded in that is 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, 1 or 2 quarters. But 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. And 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. And so this is job #1. 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. And I think it's important to note, although I referenced -- when I was talking about the part shortages, I referenced 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 the coming quarters and years outlook. And we're investing in the recovery.

Some of our S&A impact in the quarter that you saw was 2 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. And so as we improve, we'll reverse those 2 trends, we'll have to spend less on recovery. But we are not going to pinch a penny around funding the recovery in ERP in North America.

And 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. So yes, 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.

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.

Good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to Tennant Company's 2026 First Quarter Earnings Conference Call. This call is being recorded. [Operator Instructions]

Thank you for participating in Tennant Company's 2026 First Quarter Earnings Conference Call. Beginning today's meeting is Mr. Lorenzo Bassi, Vice President, Finance and Investor Relations for Tennant Company. Mr. Bassi, you may begin.

Good morning, everyone, and welcome to Tennant Company's First 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; and Fay West, Senior Vice President and CFO.

Today, we will review our first quarter performance for 2026. Dave will discuss our results and enterprise strategy, and Fay will cover our financial. 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, and 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 file 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 first quarter earnings release and presentation include the comparable GAAP measures and a reconciliation 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 Q1 2026 earnings call. This morning, I will begin with an overview of our first quarter performance, highlighting the key takeaways from the quarter. I will also provide an update on our North America ERP recovery, discuss progress in our AMR business and TNC robotics venture, share our outlook for the year and outline how we think about capital allocation more broadly. Fay will then walk through the quarter's financial results in greater detail and cover our full-year guidance.

With that, let me start with our performance in the first quarter of 2026. Orders totaled $327 million, an increase of 10% year-over-year, demonstrating demand momentum. Growth was broad-based and driven by increased customer demand, execution of our enterprise growth strategies, and continued strength in robotics.

Backlog increased approximately $32 million from year-end to $109 million. This growth provides clear evidence that our customer relationships remain strong and end market demand is healthy. Overall, our performance underscores the strength of our foundation and reinforces that our portfolio, service model and growth strategies are resonating as execution has stabilized.

Net sales increased almost 3% year-over-year with pricing realization and favorable currency largely offsetting North America volume declines. As operations stabilized in North America, customer activity and fulfillment improved meaningfully in February and March, consistent with our expectations following the January inventory shutdown.

As anticipated, gross margins were pressured in the first quarter, driven by incremental labor, freight and expediting costs associated with ERP recovery efforts earlier in the period. Importantly, margins improved sequentially each month as execution and throughput strengthened.

The gross margin exit rate on an enterprise level was approximately 40%, and this supports our confidence for continued gross margin recovery as the year progresses. The gross margin improvement flowed through to EBITDA and reflects improving operational momentum. Fay will further walk through the details and outlook in her remarks.

Next, let me spend a few minutes on our ERP recovery, which was the central operational focus of the quarter in North America. Our top priority entering 2026 was to stabilize our North America operations, restore reliability for our customers and reestablish a solid operating foundation following the ERP go-live disruption. The actions we took in the first quarter were deliberate and aligned with that goal and are reflected in the operating performance I just highlighted. By the end of the quarter, core workflows, including order management, production scheduling and fulfillment, were stable and operating at scale.

Stabilization was the first phase, not the end state. With the system operating reliably at scale, our focus has shifted from fixing functionality to driving efficiency and optimization. The work underway today is centered on addressing the friction points identified during the stabilization phase, phasing out remaining manual workarounds and strengthening end-to-end execution across the business.

As we move through the second quarter, the emphasis is on improving throughput, labor productivity and system-enabled performance. These efforts are already underway and the steady improvement we saw through the first quarter, including a stronger exit rate in March, supports our confidence in continued efficiency gains and gross margin recovery in the second half of the year.

The lessons learned from our North America ERP implementation are informing how we approach the remaining phases in EMEA, which were originally scheduled for early 2026. We have intentionally pushed the EMEA implementation beyond 2026, allowing the organization to remain fully focused on recovering North America execution before advancing to the next phase.

As our plans continue to evolve, we will keep you updated on timing and expected costs as we gain greater clarity.

I want to thank our customers for their continued partnership and patience as we work through this transition. I also want to recognize the extraordinary effort of our employees across the entire organization. This was truly a company-wide effort with teams working together every day to support our customers and restore reliable execution. The dedication of our people and the strength of our customer relationships are 2 of the reasons I remain confident in the path ahead.

I now want to provide an update on the exciting progress we are driving in our robotics business. Since 2018, we have earned the trust of the largest, most forward-looking flagship customers globally. We have shipped over 11,500 robots cumulatively. We have built a growing and profitable U.S.-based robotics business and established ourselves as a world leader, driving the robotic cleaning disruption. I'm proud of what we've built, but I also believe we're just getting started.

The signals from the market today are clear. We are seeing double-digit market growth rates and increasing demand from customers across vertical markets around the world who are serious about adopting robotics. In Q1, our AMR sales, inclusive of equipment and autonomy service fees, were approximately $27 million, representing 9% of total net sales in the quarter and 85% year-over-year robotics growth.

We see the inflection point in customer interest, and we are acting decisively to capture near-term growth and drive this market towards the tipping point in adoption. More specifically, I would like to highlight 5 key activities this quarter.

First, we are ramping our TNC robotics venture by hiring and onboarding new roles and activating our growth strategies. We're operating with the speed and urgency of an entrepreneurial start-up to accelerate AMR growth by leveraging the full power of our $1.2 billion global core business. Our proven product portfolio, preferred brands, extensive channel reach, 4,000-plus employees, including 1,000 field service technicians, position us to drive a winning disruption of our own core industry over the long term.

Second, we delivered another defining milestone by extending our exclusivity arrangement with Brain Corp until 2029 with an evergreen notice period. This preserves Tennant's exclusive access to the BrainOS autonomy platform in our category, strengthens our partnership alignment and reinforces our clear division of responsibilities.

Leveraging the strengths of each partner, Tennant owns the customer relationship, equipment design, direct sales, service and life cycle support, while Brain Corp advances the foundational AI, spatial intelligence and software that power our portfolio. With exclusivity secured, we have the conviction to invest aggressively, and we plan to bring 10 new AMR products to market over the next 24 months. This is the power of 2 global leaders joining forces to aggressively drive tangible results.

Third, the strength of this partnership was demonstrated with the launch of BrainOS Clean 2.0 and SelfPath AI. SelfPath enables advanced autonomous navigation, allowing machines to independently generate and continuously adapt cleaning routes in real time, eliminating the need for manual route training and retraining. This increases customer adoption, improves deployment efficiency and optimizes performance in the real-world applications. Together, these capabilities represent platform-level innovation and a compelling example of physical AI delivering measurable value in dynamic commercial environments.

Fourth, we significantly expanded our addressable market with 2 strategic product launches. The X16 SWEEP, our first robotic sweeper, is an industrial-grade machine built for rugged, reliable performance in demanding warehousing, logistics and manufacturing environments. This launch is another growth catalyst.

Sweeping is a broad-based need across nearly every industrial vertical. And because pre-sweeping is required before scrubbing in most cases, the X16 expands our robotics portfolio from best-in-class scrubbing to adjacent sweeping use cases. Our customers made an industrial robotic sweeper a clear priority. The X16 SWEEP meets their needs and early demand signals are very strong.

We also introduced the X2 ROVR, our small format scrubber that brings superior cleaning performance, ease of use, competitive value proposition and unmatched maneuverability through robotic cleaning of small shared spaces in retail, grocery, schools, convenience stores, and the tight spaces inside larger facilities that bigger machines simply cannot reach. This positions us to further expand our addressable market and capture share in this high-growth segment.

Together, the X16 SWEEP and X2 ROVR extend our robotic cleaning benefits to more customers, more verticals and more applications, accelerating our growth trajectory and reinforcing our leadership position in robotics.

Fifth, we are aggressively expanding our channels to market for Tennant robotics. We are launching new products, programs and compelling offerings specifically designed to accelerate adoption with building service contractors and grow with our distributor partners worldwide, making it simpler and more rewarding for them to promote our robotic solutions.

Our new X2 ROVR is tailor-made for these channels and their end customers in vertical markets like retail, grocery, schools and convenience stores, customers they already support every day. And we're not building this from scratch. Tennant already has deep established relationships with BSCs and distributors across the globe.

One thing that truly differentiates us and is highly valued by building service contractors is our unmatched support ecosystem, over 1,000 factory direct service technicians worldwide who can service and support our robots like no competitor can. That is a significant competitive advantage that gives our partners and their customers total confidence to adopt and scale with Tennant robotic cleaning.

The global robotic cleaning market is dynamic, and we remain closely attuned to the competitive landscape. Our focus is on what we can control, the proven strength of our business, the entrepreneurial agility of our T&C venture and a robotic product portfolio that continues to expand.

Our market coverage is broadening. Our partnership with Brain Corp is stronger than ever and the demand trajectory we are seeing reinforces our conviction. Taken together, these advantages give me real confidence and genuine excitement in delivering our target of $250 million in AMR revenue by 2028.

Turning to the remainder of 2026. Our first quarter performance, strong order momentum and continued ERP progress support our confidence in the full year plan, and we are reaffirming our 2026 guidance.

Before I turn the call over to Fay, I want to briefly frame how we think about capital allocation more broadly because it is a core part of how we create long-term value. Our capital allocation framework is straightforward. We invest first in the business to drive durable, profitable growth. We maintain a strong balance sheet and ample liquidity. We pursue strategic M&A opportunities that enhance our portfolio, and we return excess capital to shareholders.

Strong execution and disciplined working capital management have supported solid free cash flow and the flexibility to advance our priorities. While operating cash flow has been temporarily impacted by the ERP disruption, we expect that impact to be transitory, and our overall free cash flow profile continues to support both growth and shareholder returns.

We prioritize organic growth investments, particularly in R&D and operational improvements that strengthen our competitive position and enhance long-term returns. On average, we invest around 3% to 3.5% of sales in R&D and spend between $20 million and $25 million annually on CapEx, and we expect these levels to continue in the near term.

We also manage liquidity and leverage with discipline so we can navigate market conditions and act decisively when opportunities arise. We remain within our stated leverage target of 1 to 2x adjusted EBITDA, and we intend to keep our balance sheet position to support both shareholder returns and strategic growth, including M&A.

Returning capital to shareholders remains central to our capital allocation strategy. We intend to continue our long record of disciplined competitive dividend growth, and we also repurchase shares opportunistically when we believe the return profile is compelling. In the first quarter of 2026, we accelerated buybacks amid an event-driven dislocation in our share price that we believe was tied to the ERP implementation and not reflective of our core performance.

We deployed $60 million to repurchase approximately 950,000 shares or 5% of beginning of year shares outstanding at an average price of $63 per share, an intentional high conviction decision we believe represents an attractive return for shareholders and is fully aligned with our stated capital allocation priorities.

To execute this opportunity, we utilized a portion of our borrowing capacity, which increased leverage, but we remain within our targeted leverage range of 1 to 2x adjusted EBITDA. Importantly, we expect leverage to trend back toward the lower end of that range by the end of 2026, and this action does not preclude us from continuing to invest in organic growth or pursuing other strategic initiatives, including M&A as opportunities arise.

As a result of our share repurchasing activities, we expect an approximately $0.15 net positive impact on EPS on a full-year basis. Reflecting our continued confidence in Tennant's strategic direction and commitment to disciplined capital return, our Board recently authorized a new 2 million share repurchase program.

Together with shares remaining under our existing authorization, this brings total repurchase capacity to approximately 2.56 million shares or roughly 15% of basic shares outstanding, providing meaningful flexibility to continue returning capital opportunistically.

M&A remains an important lever within our framework. Recent tuck-in acquisitions of distributors in EMEA have strengthened our portfolio and expanded capabilities, and we continue to evaluate opportunities that meet our strategic and financial criteria.

Taken together, these actions reflect a disciplined and balanced approach to capital allocation, investing to drive long-term growth, maintaining financial resilience, pursuing strategic opportunities and returning capital when we see an attractive risk-adjusted return. We believe this approach positions us well to create long-term value for shareholders.

With that, I will turn the call over to Fay for a deeper discussion of the financials.

Thank you, Dave, and good morning, everyone. Before walking through the quarter, I want to briefly address the impact of the North America ERP implementation on our first quarter financial results.

As Dave noted, operational performance improved meaningfully as the quarter progressed. However, we estimate that the ERP disruption reduced first quarter net sales by approximately $23 million and gross margin by approximately $17 million.

Of the lost sales, roughly 1/3 relates to parts and consumables and service, which we do not expect to recover. The remaining 2/3 relates to equipment, which we believe we can recover within the year.

The net sales impact was driven primarily by a 2-week manufacturing and distribution shutdown in January to complete a full physical inventory count. The gross margin impact is comprised of approximately $11 million due to the lost volume from the shutdown, and approximately $6 million from elevated labor, freight and expediting costs during the post-implementation ramp-up.

With that context, I'll now turn to our first quarter financial performance. In the first quarter of 2026, Tennant reported GAAP net income of $0.2 million compared to $13.1 million in the prior year period. The year-over-year decline was driven by gross margin compression associated with ERP recovery efforts and shifting customer mix, coupled with higher operating and interest expense.

Operating expenses increased year-over-year, driven by unfavorable foreign currency, legal and financial advisory costs, higher compensation and benefits, and increased software subscription fees. Interest expense net was $3.4 million compared to $2.3 million in the prior year period, reflecting higher average debt balances, including borrowings to fund share repurchases, partially offset by lower average interest rates.

Income tax expense declined year-over-year, reflecting lower operating income. For the quarter, our effective tax rate increased to 80.5%, primarily driven by discrete tax costs related to share-based compensation as a percentage of pretax book income. This elevated rate in Q1 is largely due to timing, and we continue to expect our full year effective tax rate to be within our guidance range of 24% to 29%.

Adjusted diluted EPS was $0.58 for the quarter, down from $1.12 in the prior year period, reflecting lower operating performance as just outlined.

I'll now provide some additional color on our non-GAAP items for the quarter. ERP project spend totaled $8.8 million in the first quarter. This included $5.6 million of implementation expense that were reflected in S&A and $0.6 million of ERP amortization. The remaining $2.6 million of costs were capitalized.

We also recorded $2.9 million of legal and financial advisory costs related to the cooperation agreement with Vision One and $0.8 million related to restructuring, legal contingency and acquisition integration costs.

Let's now look at the quarter in more detail. Consolidated net sales totaled $297.9 million, up 2.7% year-over-year. On an organic and constant currency basis, sales declined 1.9%, driven primarily by lower North America volumes early in the quarter related to the 2-week plant shutdown in connection with the physical inventory count.

As a reminder, we group our net sales into the following categories: equipment, parts and consumables, and service and other. In the first quarter, equipment sales increased by 3.1%, parts and consumables decreased by 4%, and service and other sales increased by 10.6%.

Equipment growth reflected continued momentum in our commercial product portfolio, including strong contributions from recently launched models and our growing AMR product portfolio, along with continued strength in our distributor and strategic account channels. This was partially offset by lower industrial equipment volumes in North America tied to the ERP-related plant shutdown earlier in the quarter.

Parts and consumables declined year-over-year with the shortfall driven primarily by North America, where the 2-week plant shutdown delayed parts shipments in the quarter. Outside of North America, underlying parts and consumables demand was resilient, benefiting from disciplined pricing realization and continued strength in our distributor channel.

Service and other growth was driven primarily by increased autonomy subscription revenue associated with our AMR products. The core service business experienced growth in EMEA and Latin America as we continue to make progress filling open service routes, gaining productivity across our field service organization and benefiting from prior year pricing actions.

The strength of service and other, reflects the durable recurring nature of these revenue streams and the underlying growth of our installed base, including our expanding AMR fleet.

Shifting to regional performance. On an organic basis, performance across the regions was mixed. In the Americas, sales declined 3%, driven primarily by lower volumes in North America due to ERP impacts earlier in the quarter. This was partially offset by continued pricing realization, reflecting the benefit of tariff-related pricing actions implemented last May.

Latin America delivered a strong quarter with net sales up 9% organically, driven by volume growth and favorable mix. We continue to see strong commercial execution in Brazil and Mexico, including the rollout of the T260 and the expansion of our rental and strategic account programs.

EMEA grew 1% organically, reflecting our second consecutive quarter of volume growth in the region. Growth was supported by disciplined price realization and strong equipment sales in France and Germany, where volumes increased at a double-digit rate, highlighting the strength of our commercial execution and the resonance of our products.

In APAC, organic sales declined 2%. Growth in India and Korea continued and Japan returned to modest growth, but these gains were more than offset by ongoing softness in China due to excess manufacturing capacity and pricing pressure in mid-tier product categories as well as softer demand and project timing in Australia and parts of Southeast Asia.

Gross margin in the first quarter was 38.1%, a 330 basis point decline compared to the first quarter of 2025. Sequentially, margin improved 350 basis points from the fourth quarter of 2025.

Approximately 3/4 of the year-over-year decline was driven by incremental labor, freight and expediting costs associated with our ERP recovery efforts. The remaining 1/4 came from a shift in customer mix towards strategic accounts, which carry a different margin profile. Tariff and other inflationary pressures were fully offset by price realization and cost-out initiatives.

Adjusted S&A expense for the first quarter was $88.2 million compared to $83.2 million in the prior year period. The increase was driven primarily by unfavorable foreign currency of approximately $3.4 million, higher compensation and benefits and higher software subscription and license fees. As a percentage of net sales, adjusted S&A was 29.6% compared with 28.7% in the prior year period, reflecting deleverage from these cost increases.

Adjusted EBITDA for the first quarter of 2026 was $29.1 million or 9.8% of net sales compared to $41 million or 14.1% in the prior year period. The year-over-year decline primarily reflects gross margin compression, coupled with deleverage in S&A expense.

Turning now to capital deployment. In the first quarter of 2026, Tennant used $31.2 million of cash for operating activities compared to $0.4 million of cash in the prior year period. The year-over-year decline in operating cash flow reflects 3 primary factors. First, lower operating performance in the quarter. Second, an increase in accounts receivable, driven in part by the timing of collections as receivables built in the first quarter from the strong shipment activity in March, while collections in the period reflected the lower shipment volumes from the fourth quarter of 2025. And third, a build in inventory and other working capital movements as we ramped production to serve demand.

We expect operating cash flow to improve meaningfully through the balance of the year as receivables normalize, inventory levels rebalance and operating performance strengthens in line with the sequential improvement we are guiding to. We continue to view the first quarter dynamic as transitory and remain confident in our underlying free cash flow profile for the year.

Liquidity remains strong. We ended the quarter with $82.6 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 1.78x trailing 12-month adjusted EBITDA, maintaining a strong balance sheet and financial flexibility.

Moving now to our 2026 guidance. Based on our first quarter performance and the momentum exiting the quarter, we are reaffirming our full year 2026 guidance. Specifically, we continue to expect net sales in the range of $1.24 billion to $1.28 billion, reflecting organic sales growth of 3% to 6.5%.

Adjusted EBITDA in the range of $175 million to $190 million, representing an adjusted EBITDA margin between 14.1% and 14.8%. GAAP diluted EPS of $4.05 to $4.65, and adjusted diluted EPS of $4.70 to $5.30, which excludes ERP modernization costs and amortization expense.

Capital expenditures of approximately $25 million and an adjusted effective tax rate between 24% and 29% also excluding ERP modernization costs and amortization expense.

As we indicated on our last call, we continue to expect results to be weighted towards the second half of the year with sequential improvement in each quarter. The first quarter results are consistent with that framework.

Gross margin is expected to expand progressively as we complete our ERP activities, realize the carryover benefits of our pricing actions and drive productivity and cost-out initiatives across our supply chain. We continue to actively manage the evolving tariff landscape and believe our pricing and cost-out actions position us well to navigate that environment within the guidance ranges we have provided.

We are also monitoring the situation in the Middle East and its potential effects on freight and input costs. While we do not anticipate a material impact on demand, we have factored the potential cost implications into our outlook and believe our current guidance range appropriately reflects that risk.

Our confidence in the full-year outlook is further supported by the strong order momentum and expanded backlog entering the second quarter, along with the continued acceleration of our AMR and robotics portfolio. While we recognize there is still work ahead, we are appropriately positioned to deliver on our full year commitments.

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 simple messages. Our first quarter results reflect meaningful progress on the issues we discussed on our last call.

We entered the year focused on stabilizing our North America operations, restoring service to our customers and delivering on the commitments we made to our shareholders. We are executing against all 3.

At the same time, the underlying fundamentals of our business remain strong. Order momentum is robust and broad-based. Our international regions continue to execute well, and the momentum in our autonomous and robotics portfolio continues to build. Our balance sheet is healthy. Our capital allocation priorities are clear, and our teams are focused.

I want to once again thank our employees for their resilience and dedication through a demanding period and our customers for their continued partnership. We remain confident in our path forward and in our ability to deliver on our 2026 outlook.

With that, we'll open the call to questions. Operator, please go ahead.

[Operator Instructions] And our first question comes from the line of Tom Hayes with ROTH Capital Partners.

Dave, maybe starting with a multipart question on the order environment, real solid results in the quarter. I was just wondering, one, was there maybe some catch-up on the order growth from Q4 when you guys sort of had some challenges? And then maybe could you talk about the order growth momentum for robotics within that order growth?

Yes. I'd be happy to, Tom. So your first question about was there any catch-up from Q4? We talked about growing some backlog as we exited Q4 in the $15 million range. And obviously, we serviced that in the quarter and added additional backlog as we came through Q1.

So I don't think we can attribute much of the order volume in Q1 based to -- based on sort of carryover or catch-up from Q4. We have been working very closely with our customers, especially those that have been impacted in North America by the ERP transition, to make sure that we are servicing their demands and meeting their requirements as we strove to drive system stability, but then also support them through this period of ERP disruption.

Robotics did contribute materially to our order demand. And I think it's worth noting that our robotics demand in Q1 is in large part due to the efforts of the entire company over the last 6 months to a year as we've been developing a very robust funnel of opportunity for robotics.

Strong orders from robotics in the quarter. We referenced in the script, $27 million in robotic equipment sales, inclusive of the ARR from autonomy subscriptions, represents an 85% year-over-year increase, and robotics represented 9% of our enterprise sales in the quarter.

And I think that we had a strong pipeline. I think we began to capitalize on that pipeline. We articulated in the script really 4 to 5 really key actions we've taken in the quarter in standing up our TNC robotics venture, launching 2 new exciting products in the X16 SWEEP, which starts shipping in Q2 and the X2 ROVR, which starts shipping in Q3.

We solidified our exclusivity agreement with Brain Corp through 2029, which really allows us to focus on those areas that we are both strongest at, and aligns us towards the singular goal of driving unit volume growth and tipping -- driving towards a tipping point of adoption in robotic cleaning equipment.

So I think we've got a number of specific actions that we've taken in the quarter to help drive demand not only in the quarter, but also as we proceed through the year.

I appreciate the color. Maybe a little bit on Brain Corp. And then I think one of the things that I thought was interesting was I'd like to get your thoughts on how it kind of continues to differentiate you from the competitors. Just the new release of the BrainOS, that seemed to be kind of a big deal. I just want to get your thoughts on that.

Yes. It's a really big deal, and it's really the next evolution of our partnership with Brain and the operating system that is embedded in our market-leading robots. We released Clean 2.0, which is really the next-generation navigation autonomy software. And within that Clean 2.0 platform, we specifically introduced SelfPath AI.

And when you think about the SelfPath AI feature, software, what allows the robots to do is really self-train themselves, self-train the cleaning paths within their environment. So it has dynamic self-training of the cleaning paths within an environment. So as opposed to teach and repeat where we showed the robot where to go and it would reliably repeat that specific path.

These robots with SelfPath AI embedded on the machine actually learn the entire store, the entire environment and optimize the cleaning paths within that environment. It's a big difference. And the customers notice the difference in the performance on the ground.

Another benefit of SelfPath AI is faster deployment, because we don't have to trace every square inch of the facility to show the robot where to clean, we can just go through the major pockets of floor, it can learn the space. We can greatly reduce the deployment time that it takes to deploy a new robot. I'm talking about like a greater than 50% reduction in time, which makes it easier and faster for us to deploy robots at scale as well as for our customer, if they change their store layout or if they want to train it themselves, retrain it themselves, they can do it much more quickly than they could before.

I think the other key point I would talk about on SelfPath AI is around obstacle detection. Our older operating system was great at obstacle detection. With SelfPath AI, we moved from detection to identification. So now we don't -- the robot knows not only is the path blocked, but what is -- what the path is blocked by, whether it's a human or its box of inventory or it's a forklift in industrial applications. And then it makes real-time decisions on the floor in front of the object depending on what gets identified, whether it should slow down, it should pause, it should wait or should just leave and return later to that path. So it's much smarter about not just detecting obstacles, but identifying what the obstacle is and responding accordingly.

So we think all in, this Clean 2.0 is really the next generation sets us apart from competition and especially those that have had any exposure to our robots in the past are going to see a marked difference in performance in real-world applications. And really sets us up to continue to drive not only our existing X4, X6 Series product, but now the new X16, X2 and more new products to come.

All in, the SelfPath AI and Clean 2.0, the new product launches, the TNC robotics, the new amendment with Brain really gives me confidence that we can deliver the $250 million in AMR revenue by 2028.

I appreciate the color. And maybe just one last one on the margin outlook. And maybe I missed the details. Did you indicate you put in pricing actions so far? And if so, when? And can you quantify the size of those price actions?

Yes. Let me dimensionalize price as a contributor to our margins. And then Fay, you can put some color on sort of the margin trending in the quarter, if you'd like.

We did an annual list price increase like we normally do at the beginning of a calendar year. And though we sell those in, we did great realization on that. That was a global effort. I think the -- in addition to that, what you're seeing bleed through in North America is an incremental impact from pricing action we took in May of 2025, which was tariff-driven. If you recall what was going on in the market back then, tariffs were layering post-Liberation Day. So now we're lapping a quarter that did not have that tariff-driven price increase benefit in 2025, and we're bleeding that through in our Q1 2026 results.

Yes. And if you just look at Q1, Q1 gross margin was 38.1%, which was 350 basis points better sequentially than Q4 of 2025. We exited March at approximately 40% at the enterprise level. And so we expect gross margin to expand as we go throughout the year and we complete our optimization in the second quarter, and continue to realize those pricing benefits that Dave just recognized as well as continue to capture cost-out activities and productivity initiatives.

So this implies that the second half gross margin embedded in our full-year guidance will be in the low 40s, which is consistent with our long-term framework with Q2 stepping up sequentially from Q1 as the optimization work progresses and as some of those period expenses that I identified in our -- in my prepared remarks no longer carry through to Q2.

And our next question comes from the line of Steve Ferazani with Sidoti.

Appreciate all the detail on the call. Certainly, a lot of numbers and I just want to make sure I'm thinking about this right. And I do want to follow up with the final responses to the last question, just in terms of your expense and gross margin. So you said you exited the quarter, which is [Technical Difficulty].

We did [Technical Difficulty] related to just decreases. And so we saw improvement in margin from January, February to March. And on the enterprise level, we exited at roughly 40%.

But when you look at margin year-over-year and the 350 basis point increase that we outlined, approximately 3/4 of that decline was related to, I'll just say, ERP recovery efforts that I just highlighted. The remaining 1/4 is really a shift in customer mix towards strategic accounts, as you mentioned, and also just a mix between -- mix away from industrial, when we look year-over-year.

We do believe that tariff and other inflationary pressures that we recognized in the quarter were really offset by price realization and cost-out activities.

Got it. And so when I think about what you believe the long-term gross margin should look like because over the last couple of years, obviously you had the backlog pick up and then that normalized. So it's harder to kind of figure out what do you think a normalized Tennant gross margin on an annual basis should look like, and that may change over the years. But how do you think of that right now?

Yes. I think it's going to change within quarters, mix and other things do impact that. But I would say roughly 42% is kind of a gross margin target. And we've been there, Steve. I mean when you look at how we exited Q3 of last year and performance in other quarters, we think that that's a good range.

Certainly, we'll strive to make that higher as we look to expand our margins, and we do believe that we are investing in our business to differentially take cost out, and to optimize our operations and still remain price disciplined. So I think 43% is a good level, but we will always look to see how we could improve upon that.

Of course. As we've gotten into earnings season, we've had a lot of companies raise top line, but not raise EPS primarily because of incoming inflationary pressures, which some expect may get worse. How are you thinking about that?

So when we -- so there's certainly a couple of macro headwinds that we are facing along with all other companies, and that is including kind of increased costs related to what's happening in the Middle East, if you think about potential kind of increase in freight charges and other costs.

We've baked that in and think that it's not going to be very material at this point. We'll see how the landscape evolves. But we think that we're covered within our guidance range, certainly from an EBITDA margin perspective, to absorb those costs. And so I think that we've got enough flexibility that we could absorb that within our guidance range.

Got it. And when I think about your guidance range, given the significant share repurchase, which I'm guessing wasn't in there to begin the year. I mean, if I looked at it, if you hit the midpoint of all your other guidance that went unchanged, that puts your EPS at the upper level.

Correct. Yes, that's fair. I think we mentioned during the prepared remarks, Steve, that we expect roughly $0.15 coming from the net impact of share repurchase. Remember, we do some debt. So there's a positive accretive effect of share repurchase based on additional interest expenses, but that $0.15 gets covered within the range.

Got it. That's helpful. If I could get one more in. Dave, when you talked about the new Brain agreement, the extension of 3 years, you mentioned an evergreen notice. Can you explain that?

Yes. So typical in arrangements like this, rather than having to redraft an entire agreement every 2 or 3 years, we built in an evergreen -- I'll call an evergreen clause, and I'm not a lawyer, but I'll just tell you how it works. We kind of mutually agreed that if this is still working for both parties, then we would continue as is without having to redraft and renegotiate an entire agreement.

And there's a notice period. The notice period really just gives us each an opportunity, if we were to assess this arrangement and decide that we wanted to exit in some period, it gives us each a lead time to prepare for that exit. So nobody can sort of -- neither party can kind of leave in the dark of night without letting the other one know about it.

Where we would then align around ongoing support going forward. It's a lengthy notice period that gives us each plenty of time to adjust our business accordingly. So I think it's pretty standard in agreements of this type, and it really just reduces or eliminates the need to renegotiate entire agreement or contract over time.

I think the fact that we got to this exclusivity extension to 2029, and an evergreen clause with the notice period, these are signals that the partnership is really strong, that we're both aligned and committed and motivated to go out and drive this disruption in this cleaning robotics business.

And where are you now with -- I think you noted when you formed the robotics group, the importance of channel expansion. Can you talk about your progress there?

Yes. We're making great progress. And so I think if you look back at our history, we've done really well integrating robotics in with our strategic accounts, for example, channels and direct channels as well where we sell on direct basis, whether it be strategic account commercial customers or industrial customers.

Where we're starting to lean in more heavily is, and I mentioned it on the prepared remarks in the script, we're leaning in more heavily to building service contractors and our distribution channels. Let me put a little color on that. Building service contractors, their business is largely based on labor, right, and cleaning labor. And so it's been challenging for them to consider how to integrate robotics into their offering to their end customer in a profitable way, in a meaningful way, and adopt it in a way that delivers real value to their end-use customers.

And so we've been -- we've had some success with building service contractors, some of them more forward-thinking and progressive, but they've kind of had to figure it out along the way. We think that the demand for robotics and building service contractors is accelerating. And we think with some of our new product launches and the feature sets of our new products as well as our support ecosystem, we are better positioned than ever to go help building service contractors adopt robotics.

At the same token, our distribution channel, we have sold robots through our distributor partners. And we have a vast distribution network around the globe, 35% of our revenue goes through distributor partners. We just haven't fully cracked the code on how to leverage that channel to grow robotics differentially. And so one of the actions that the TNC robotics venture leads into was working with our distributor partners to understand what would it take to accelerate robotics adoption through a distribution channel.

It's partially a product solution. You got to have the right product that fits that channel, the ease of moving the product and setting the product up, to successfully deploying, as well as a price point and a value proposition that's going to meet the type of customer that most distributors call on, because they want to sell something as a complementary product to customers that already service and support. There's also a pricing component. Any time you're 2-stepping product to market, you've got to build in room for your channel partner to participate and drive some acceptable profitability.

And there's an aftermarket service component. If our distributors offer direct service themselves, we've got to be able to train and equip them to service the robots. And if they don't offer direct service, they need to rely on Tennant service. We need to have the ability for the distributor to sell the service contract that we then honor with the end-use customers. So there's some interesting opportunities that we had to design our products and our programs and our value proposition to make sure that we have a winning pitch when we more fully engage our distribution channel.

When you look at the products we're launching, the work we've done around our value prop, the aftermarket support, I think we are going to make meaningful progress in 2026, penetrating that existing channel and maybe earning some new distribution partners as well with our robotics platform.

[Operator Instructions] And our next question comes from the line of Aaron Reed with Northcoast Research.

Just a couple of questions here. So on demand, so orders grew 10% in the first quarter with backlog building at $32 million. Help me think about this, how much of that order strength is underlying demand versus customers placing orders earlier because of the earlier lead times? And just a quick little follow-on to that. How should we think about the conversion of the backlog through the balance of the year?

Yes. So really proud of the results we delivered. I'm going to stick on orders for a minute. 10% order growth is really a great way to start the year. That's our highest quarter since Q1 -- first quarter since Q1 of 2022. And so for this business, it's a really strong start to the year, $327 million enterprise-wide.

There is some of that order book, and some of the backlog is future orders out of the period. I'm estimating around 1/3 -- 1/3 of it is customers that gave us an order because they know they want the product in Q2 or Q3 of this year. It's large strategic accounts who are planning for large store deployments across multiple stores, and they want to make sure that they've got the production slot paced to their rollout schedule.

So that's really just the customer planning their business. It's not induced by our performance, our output from the plants, our ERP challenges or anything that we're doing. The rest of the order volume that we saw is really customer demands turned on for our products and our services. And so I think it's real and it's durable. And then we can point at the specific growth strategies we've invested in to drive that order volume in the quarter.

Super helpful. And then the second follow-up question here is switching gears on capital allocation. So you repurchased about 5% of shares outstanding in the first quarter. So at an average price, I think I thought it was at $63 or around there. And the Board just authorized an additional $2 million for additional or 2 million share repurchase. Where are you on leverage in the ERP recovery? And how should we think about the appetite for any further share buyback versus M&A through the rest of the year?

So Aaron, I think when you think about the Q1 activity and the buyback, we really view that as an opportunistic really high conviction decision that was in response to what we think was an event-driven dislocation in our share price, following the ERP disruption. It was not reflective, we believe, of the underlying value of Tennant. Going forward, repurchases will continue to be opportunistic. As you mentioned, we have ample authorization, including the $2 million increase that was just provided by the Board, share authorization. And we will continue to deploy capital where we think that there is an attractive return.

We continue to invest in our business. We'll continue to pay dividends and we'll continue to pursue M&A, and that's all in line with our capital allocation framework that Dave spent time discussing earlier in the call. We did end the quarter with net leverage of about 1.78x trailing 12-month adjusted EBITDA, which is within our targeted range of 1 to 2x. And so we're comfortable at that level.

We have strong liquidity with about $290 million of unused borrowing capacity under our revolver and cash of roughly $83 million on the balance sheet, which gives us meaningful liquidity and flexibility. And so we do have room for additional opportunistic activity, but our framework prioritizes maintaining flexibility and also looking at other options within our framework as we've outlined.

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

Okay. Thank you for your time today and your continued interest in Tennant Company. This concludes our Q1 earnings call. Hope you have a great day.

Ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.

Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to Tennant Company's 2025 Fourth Quarter and Full Year Results Earnings Conference Call. This call is being recorded. [Operator Instructions] Thank you for participating in Tennant Company's 2025 Fourth Quarter and Full Year Results Earnings Conference Call.

Beginning today's meeting is Mr. Lorenzo Bassi, Vice President, Finance and Investor Relations for Tennant Company. Mr. Bassi, you may begin.

Good morning, everyone, and welcome to Tennant Company's Fourth Quarter and Full Year 2025 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; and Fay West, Senior Vice President and CFO. Today, we will review our fourth quarter and full year performance for 2025. Dave will discuss our results and enterprise strategy, and 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, and 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 file 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 2025 fourth quarter and full year earnings release and presentation include the comparable GAAP measures and 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, and thank you for joining our Q4 and full year 2025 earnings call. As we reported today, our Q4 and full year 2025 results were materially impacted by the North America go-live of our new ERP system during the first week of November of 2025. I will be devoting a significant portion of my overall remarks to the North America ERP go-live. I want to address upfront the impacts, including operationally, financially and for our customers, where we stand today and the path forward.

Let's talk about what happened. Despite a successful go-live in the APAC region in September and extensive preparation in North America, the cutover of the ERP system in the first week of November introduced severe system functionality issues that limited our ability to enter orders, ship products and service our customers.

Core functionality required for processing orders, particularly for our highly configurable machines did not perform as intended. As these issues emerged, our teams, together with our implementation partners, mobilized extensive stopgap procedures to offset system limitations that prevented normal order entry, production sequencing and shipping. These actions allowed us to process limited activity, but they were highly labor-intensive, inefficient and not an adequate substitute for fully functioning workflows.

Despite these sustained efforts to diagnose, remediate and recover, the underlying problems proved far more complex and persistent than we anticipated based on our stress tests. We expected a short-lived productivity dip similar to APAC, where operations normalized within a week. Instead, in North America, we lost 3 full weeks of machine order entry and parts shipping capability. In essence, the system could not be stabilized as quickly as anticipated, prolonging the disruption and amplifying the operational impact, irrespective of the significant investment we made in recovery actions.

So what do we have planned? And why did it not operate as expected? We moved into the go-live based on the results of our testing and the confidence we had in the readiness of the environment, including sign-off from both the business readiness team and our implementation partners. We also had clear mitigation plans that included safety stock and manual contingencies. These were designed to offset anticipated potential inefficiencies, not an unexpected fundamental inability to transact for a prolonged period.

We also relied heavily on our APAC implementation experience as a proxy for North America. While we believe that experience would guide our North America transition, the complexity and scale of the North American business created unique challenges. Let's talk about the operational and customer impacts. Our operations were significantly disrupted, particularly from the cutover date through November across all 3 U.S. production and distribution facilities. To keep plants running, we incurred additional overtime, freight and other direct operating costs from the cutover date and into December as we worked to maintain production and distribution.

The customer impact was equally severe. During November, starting on the cutover date, we were unable to fulfill many orders and could not provide reliable visibility into shipment timing. Our parts and consumables and service businesses were especially affected as we were unable to ship parts for most of the month. Our inability to operate at scale drove an extended backlog and limited our ability to provide reliable shipment dates. We take great pride in our customer relationships and recognize how much trust our partners place in us. Our teams communicated frequently throughout the disruption and many of our customers showed patience in the early days. We are appreciative of that, and we sincerely apologize for the strain this has caused.

Let's shift to the financial impact. The operational constraints had clear implications for both fourth quarter and full year performance. Orders were reduced by approximately $15 million as the challenges we experienced in parts and consumables and in equipment directly affected demand. These dynamics, combined with our limited ability to operate plants at normal capacity, resulted in an estimated $30 million impact on net sales. Roughly half of this shortfall reflects the lower order intake and the other half represents activity that moved into backlog.

Gross margin was also pressured. Roughly $13.5 million of the impact came from the sales shortfall and another $8.5 million was tied to operational inefficiencies and higher labor and freight costs, along with deleverage. As a result of this gross margin impact, adjusted EBITDA was negatively affected. The ERP implementation challenges reduced fourth quarter adjusted EBITDA by an estimated $22 million. In addition to the operational effect, I would like to update you on how our ERP project costs are tracking relative to expectations.

To date, since 2023, we have invested approximately $98 million in the program. For 2025, our spending remained broadly in line with plan. However, the fourth quarter challenges required incremental stabilization and support resources that were not originally contemplated. As a result, we now expect ERP-related spending in 2026 to exceed the roughly $5 million initially planned and likely reach more than $20 million as we complete remediation, maintain hypercare support and advance the next stages of our ERP modernization program. We believe these investments are appropriate to achieve the long-term benefits of our ERP modernization.

So where are we now? The short answer is that we have solved the critical issues we faced starting on the cutover date in the first week of November. We remain in hypercare in North America. And while teams are identifying and fixing issues daily, the system is becoming more reliable and improving each week. In fact, core workflows, including order management, production scheduling and fulfillment have improved. We are working toward achieving system stability by the end of Q1 2026, with efficiency improvements continuing into Q2.

How are we planning for the last regional go-live in EMEA? The experience in North America is reshaping our approach to the remaining ERP phases in EMEA, which initially was supposed to begin and complete in Q1 2026. We have paused the EMEA time line, not to set a new date, but to focus the entire organization on North America recovery as our 100% priority. Despite the disruption, our strategic direction remains intact. At the end of the day, everything we are working through now reinforces the long-term value of our ERP transformation, including better data, greater scalability and ultimately, a more efficient and capable enterprise, all with the goal of serving our customers that much more efficiently and effectively.

Despite these challenges in the second half of the fourth quarter, the fundamentals of the business remained strong. Our international teams delivered solid execution throughout the year and the momentum we saw outside North America in the fourth quarter highlights the breadth and durability of our global footprint. EMEA grew 5.1% year-over-year, supported by price realization, foreign exchange and steady commercial execution across multiple markets. APAC returned to improved performance late in the year as growth in Australia and India offset softer demands in parts of East Asia.

These results reinforce the strength of our global portfolio and our team's ability to perform in dynamic market conditions. From an innovation and growth standpoint, 2025 marked important progress on several of our strategic fronts. We launched 4 major new products during the year and continue to see increased customer adoption of our robotics portfolio, which delivered roughly $85 million in AMR sales, inclusive of recurring autonomy fees. We also maintained disciplined capital allocation throughout the year.

In 2025, we repurchased approximately 1.1 million shares for $88 million, reducing outstanding shares by about 6%. This was an intentional and meaningful deployment of capital, consistent with our long-standing strategy. We were able to do this while continuing our commitment to returning capital through dividends, including the company's 54th consecutive annual dividend increase. Our balance sheet remains strong and with low leverage and solid liquidity, we have the capacity to invest in innovation, operations and strategic priorities while still returning capital to shareholders.

The actions we took in 2025 reflect our stated capital allocation priorities, and that is how we will continue to approach capital allocation in 2026. We remain committed to growing our business, investing organically and pursuing strategic acquisition opportunities. We will also continue to use our share repurchase authorization when it represents the best use of capital. That discipline, combined with the strength of our balance sheet positions us well as we move into next year.

Let me shift and talk about the launch of our dedicated TNC Robotics group. A major milestone in the quarter was the launch of a dedicated organization focused on accelerating the adoption and scaling of our autonomous robotic cleaning solutions. This new structure brings together expertise spanning product design and engineering, production, commercial strategy, marketing, business development and customer support. The intent is to create a unified and focused team responsible for advancing our autonomous product road map, expanding production capacity and supporting customers throughout the deployment and operational life cycle of these solutions.

The formation of this group directly aligns with our enterprise growth pillars. The team will accelerate our product road map, strengthen our commercial focus and enhance customer engagement throughout the adoption journey. By unifying these capabilities, we are better positioned to drive awareness, increase demand, build the right channels and deliver a consistent customer experience as autonomous solutions scale globally. The AMR market continues to expand, driven by persistent labor shortages, rapidly advancing technologies and declining costs.

At the same time, the landscape is becoming more competitive as new entrants move into the space. Establishing a dedicated AMR organization positions us to move faster, innovate more efficiently and provide the support needed for consistent in-field performance. This is a meaningful step forward in advancing our enterprise strategy and capturing the significant opportunity emerging in autonomous cleaning. With this renewed focus and increased investment, we are elevating our long-term ambition. We expect our AMR revenue to reach approximately $250 million by 2028, reflecting our confidence in the technology, the strength of our portfolio and our ability to lead the ongoing transformation of this industry.

Looking ahead to 2026, our primary focus is on restoring full operating capability in North America and driving steady improvement in efficiency as our system performance strengthens. We expect the challenges associated with the ERP transition to ease through the first half of the year as we expect reliability improvements, phase out of manual workarounds and teams to transition from stabilization to a focus on productivity.

At the same time, we are encouraged by the momentum in our autonomous and robotic solutions. The dedicated cross-functional organization we established is positioned to accelerate both development and commercialization, and we expect to build on the strong demand we generated in 2025. We will continue to scale our autonomous portfolio through new product introductions to serve a broader array of vertical market and customer applications. Our efforts also include strategies designed to help customers adopt autonomous solutions more quickly and with greater confidence, which we believe will support higher value mix and improved margin contribution as adoption grows.

We expect resilient demand across our markets to support performance. Our backlog remains healthy and commercial activity across global regions continues to show stability. With this foundation, we believe we are well positioned to capture demand and drive growth through new product innovations, strategic pricing and go-to-market sales and service actions. Based on these drivers, we expect to deliver our 2026 full year guidance with results weighted toward the back half of the year as we expect efficiency and throughput to steadily recover. Fay will provide detailed guidance and the full financial outlook in her remarks.

So with that, I'll turn the call over to Fay.

Thank you, Dave, and good morning, everyone. I'll begin by addressing the North American ERP transition. We estimate that the ERP disruption reduced fourth quarter net sales by approximately $30 million. This impact was distributed with roughly 1/3 affecting service and parts and consumables and 2/3 impacting equipment sales. We project that half of these sales are unrecoverable, while the remaining portion represents unfulfilled orders that have been added to our backlog.

Furthermore, the disruption decreased adjusted EBITDA by approximately $22 million. Incremental costs due to the recovery actions Dave mentioned earlier, combined with reduced operating leverage disproportionately affected our cost of goods sold and adjusted EBITDA, resulting in the $22 million impact on adjusted EBITDA. The corresponding impact on EPS was approximately $0.91.

With that context, I'll now turn to our fourth quarter and full year financial performance. In the fourth quarter of 2025, Tennant reported a GAAP net loss of $4.4 million compared to $6.6 million of net income in the prior year period. Full year 2025 GAAP net income was $43.8 million, down from $83.7 million in 2024. For the full year, net income was primarily impacted by a 6.5% decrease in net sales and a contraction in gross margin. These results reflect a combination of factors, including a decrease in volumes, partly attributable to the comparison against the prior year's significant backlog reduction benefit as well as margin pressures stemming from product mix, higher material costs and unanticipated challenges associated with our ERP transition that outpaced our pricing and cost reduction initiatives and lower operating expenses.

Operating expenses decreased year-over-year due to lower compensation-related costs and reductions in certain legal, integration and restructuring expenses. This was partially offset by higher ERP spending and an increase in bad debt expense. On a full year basis, interest expense and our average interest rates, net of hedging were comparable year-over-year. Interest expense was higher in the fourth quarter due to higher average debt balances. Our effective tax rate for the full year was 24.3%, up from 20.1% in 2024. This increase was primarily due to the nonrecurrence of certain noncash discrete items from 2024.

Looking at adjusted EPS, excluding non-GAAP costs, adjusted EPS for the fourth quarter was $0.48 per diluted share, down from $1.52 per diluted share in 2024. For the full year 2025, adjusted EPS was $4.57 per diluted share, down from $6.57 in 2024. I'll provide more detail on these non-GAAP costs. Our ERP modernization program in 2025 involved both planned investment and unforeseen operational impact. We invested a total of $59.1 million, comprising of $30.6 million capitalized and $28.5 million expense as we advanced our new ERP platform.

As we shared, the North American go-live in the first week of November led to unexpected stabilization costs. These costs are distinct from our ongoing ERP modernization investment and contributed to the fourth quarter margin pressure. Separately, we recorded $6.4 million of restructuring charges associated with our global workforce reorganization and expect approximately $10 million of annual savings benefits beginning in 2026.

Our 2025 results also reflect an updated legal contingency for the OWT intellectual property dispute. In September of 2025, a post-trial ruling increased damages by 30%, raising the total judgment to approximately $20.2 million. Consequently, we recorded an incremental accrued expense of $6 million in 2025. We have appealed aspects of this ruling, and this development does not impact our ability to sell any of our products and is not expected to affect our long-term financial performance.

Let's now look at our quarterly results in more detail. For the fourth quarter of 2025, consolidated net sales totaled $291.6 million, an 11.3% decrease compared to $328.9 million in the fourth quarter of 2024. On a constant currency basis, organic sales declined 13.9%. This decrease was primarily driven by a 22.3% organic sales decline in the Americas, mainly due to the North America ERP implementation impact of $30 million on net sales as well as volume declines in Latin America across equipment, parts and consumables.

These North American challenges were compounded by softer underlying demand in the industrial and aftermarket businesses. Despite these pressures in the Americas, the decline was partially offset by a 3% increase in organic sales in EMEA, driven by equipment volume growth in France, the U.K. and Spain and an 11% increase in organic sales in APAC, fueled by volume growth in Australia, China, South Korea and India across both industrial and commercial equipment.

Continued price realization in the Americas also provided a partial offset. Although December showed improvement as recovery efforts took hold, we were unable to fully recover the impact of the November disruptions. Adjusted EBITDA for the fourth quarter of 2025 was $25.6 million, a decrease of $21.8 million from the prior year period and includes the approximately $22 million negative impact from the ERP implementation. Gross margin in the fourth quarter came under pressure from several key areas. The most significant factor was the ERP transition, which resulted in an estimated $13.5 million volume impact and approximately $8.5 million in incremental cost and deleverage.

We also faced additional headwinds from higher material costs due to unmitigated tariff costs and other inflationary pressures, particularly affecting our LIFO reserve. This was further compounded by roughly $4.5 million in other charges for the quarter, including inventory write-downs. These pressures were partially mitigated by positive contributions from price realization and favorable foreign exchange.

Adjusted SG&A expense was $10.4 million lower in the quarter, primarily due to lower compensation-related costs. As a percentage of net sales, adjusted SG&A improved slightly to 27.3% from 27.4% in the prior year period. Moving on to full year results. For the full year 2025, consolidated net sales were $1,203.5 billion, a 6.5% decrease compared to the $1,286.7 billion in 2024. On a constant currency basis, organic sales declined 7.3% -- this decline was primarily driven by lower North American volumes, influenced by the lapping of the prior year's significant backlog reduction and softer industrial demand in the second half, alongside the late year impact of the ERP transition.

Net sales in the Americas consequently decreased 10.9% or 10.5% on an organic basis. In contrast, net sales in EMEA increased 5.1%, benefiting from a favorable foreign currency exchange impact and modest organic growth of 0.5%, driven by price realization. The Asia Pacific region experienced a 3.5% decrease in net sales or 2.2% on an organic basis, predominantly due to pricing actions and softer underlying demand in China, Japan and South Korea, though partially offset by volume growth in Australia and India. Across all revenue components, service grew 4.7%. Parts and consumables were modestly higher, while equipment sales declined 11.6% year-over-year. These factors were partially offset by continued price realization, particularly in the Americas and EMEA.

Adjusted EBITDA for the full year 2025 was $167.4 million, a decrease of $41.4 million from the prior year, primarily due to decreased operating performance in the fourth quarter. Adjusted EBITDA margin was 13.9% in 2025, a 230 basis point decrease from the prior year period. Full year 2025 gross margin decreased to 40.2%, a 250 basis point decline compared to 2024. The decline was primarily driven by lower volume and unfavorable mix. It also reflects the cumulative impact of the fourth quarter factors that I just discussed. Collectively, these significant headwinds more than offset the benefits derived from our pricing actions and our cost-out initiatives.

Adjusted S&A expense of $330 million decreased $22.1 million from 2024, primarily due to lower compensation-related costs and by the impact of the cost reduction initiatives implemented at the beginning of the year, partially offset by the effect of foreign currency and increased bad debt expense. Adjusted S&A expense as a percentage of net sales increased 30 basis points to 27.7% in 2025, which was primarily due to net sales deleverage. Turning now to capital deployment. In 2025, Tennant generated $65 million in cash flow from operations compared to $89.7 million in 2024. The decrease was primarily driven by lower operating performance, increased ERP expenditures and higher working capital consumption.

Despite these factors, we delivered $43.3 million in free cash flow, including the $59.1 million investment in the ERP project. Excluding these ERP-related cash flows, our performance translated into a 157% conversion of net income to free cash flow in 2025. Our liquidity remains strong with $106.4 million in cash and cash equivalents at the end of 2025, complemented by $374.3 million of unused borrowing capacity under our revolving credit facility. We remain committed to our disciplined capital allocation strategy, which balances strategic investments in our business with a strong focus on returning capital to shareholders.

In 2025, we invested $21.7 million in capital expenditures to support our operational needs. Most notably, we returned a substantial $110.4 million to our shareholders. This includes $21.9 million in dividends and a significant $88.5 million in share repurchases, representing approximately 6% of our outstanding stock. This aggressive share repurchase program underscores our commitment to enhancing shareholder value. Our net leverage ratio stands at 1x adjusted EBITDA, which is within our targeted range of 1 to 2x.

We continue to evaluate and pursue M&A opportunities to enhance shareholder value. However, if there are no significant and imminent M&A opportunities, our priority is to return capital to shareholders through ongoing share repurchases and dividends. Moving to guidance. As we look ahead to 2026, we expect the overall macroeconomic backdrop and demand environment to remain broadly consistent with the conditions experienced in 2025. That being said, our guidance was formulated prior to last week's news regarding the Supreme Court's ruling on tariffs.

As a result, we will need time to digest how the news may impact our contemplated guidance. We are confident in our ability to manage near-term uncertainties while also capitalizing on the opportunities ahead. As we have additional updates here to share, we will do so in due course. In North America, ERP-related operational challenges that arose in the fourth quarter of 2025 are expected to continue early in the year. As part of our recovery efforts, we conducted a comprehensive physical inventory that required a 2-week shutdown of our manufacturing and distribution facilities in early January, which will significantly affect first quarter sales and costs.

Furthermore, we expect to operate below optimal efficiency as the new system stabilizes, leading to elevated costs and compressed margins, most notably in the first quarter. We project a return to a more normalized and efficient operating rhythm by midyear, underpinned by ongoing process refinement and productivity initiatives. At the same time, we expect continued gross margin pressure from the tariffs implemented during the second half of 2025. We have implemented targeted cost-out initiatives across both our supply chain and commercial pricing processes to help mitigate these impacts.

Against this backdrop, we expect margin performance to improve gradually through the year, beginning with a first quarter that is generally aligned with the run rate levels we saw in the fourth quarter of 2025, followed by progressive expansion as operational momentum builds. For 2026, Tennant provides the following guidance. We project net sales to be in the range of $1.24 billion to $1.28 billion, reflecting organic sales growth of 3% to 6.5%.

At the midpoint of this range, we anticipate sales growth will be driven by approximately 25% pricing actions and approximately 75% by volume increases. Notably, our volume forecast accounts for the first quarter impact from lost sales due to the physical inventory shutdown, which we expect to be partially offset by a drawdown of our existing backlog. We anticipate an increase in sales performance from the first half to the second half of the year, and we expect to see mid-single-digit growth in each of our geographies. We also expect our robotics and autonomous solutions to remain a source of momentum.

For 2026, we project adjusted EBITDA in the range of $175 million to $190 million, with an adjusted EBITDA margin between 14.1% and 14.8%. This outlook is based on a year-over-year increase in net sales and an anticipated improvement in gross margin. The gross margin expansion is expected to result from a more normalized return to our favorable product mix, balancing industrial and commercial products with parts and consumables as well as an optimized customer mix.

These factors, coupled with ongoing cost savings initiatives and strategic pricing actions are expected to drive profitability. Our guidance also reflects the full year impact of known tariffs at this time. Our guidance does include an increase in absolute spending for S&A and R&D and include flowing incremental resources towards accelerating our robotics growth and advancing other critical strategic initiatives. We anticipate that S&A and R&D as a percentage of sales will be comparable to 2025 percentages.

Additionally, we are guiding to an adjusted EPS of $4.70 to $5.30 per diluted share, excluding ERP project costs and amortization expense. This projected year-over-year increase reflects improved operating performance, which we anticipate will be partially offset by higher interest costs and an increase in our effective tax rate. We expect our adjusted effective tax rate to be between 24% and 29%, also excluding ERP project costs and amortization expense.

With that, I will turn the call back to Dave.

Thank you, Fay. Before we move into Q&A, I want to close with a simple message. This quarter clearly reflected the impact of the North America ERP transition, but our teams responded with urgency, discipline and a clear commitment to our customers. Because of this, we've stabilized the most critical issues, and we believe we have a defined path back to normal operating rhythm as we move through the first half of 2026.

At the same time, the underlying fundamentals of our business remain strong. Our global teams delivered solid execution throughout 2025. Our balance sheet is healthy and the momentum in our autonomous and robotics portfolio continues to build. These strengths, combined with the disciplined capital deployment and focused operational recovery, give us confidence in delivering our 2026 outlook. We are fully committed to strengthening our operational foundation and advancing the strategic initiatives that support growth and shareholder value creation. I'm proud of the resilience of our team, grateful for the continued partnership of our customers and confident in the opportunities ahead.

With that, we'll open the call to questions. Operator, please go ahead.

[Operator Instructions] And our first question comes from the line of Tom Hayes with ROTH Capital.

Dave, I just want to -- I guess, first, I appreciate all the color on the ERP system implementation. Maybe I just wanted to circle back on 2 questions. One, you didn't want to put words in your mouth, but would you call the system stable these days as we're kind of moving into the end of February, March time period?

I appreciate the question, and we did strive for transparency in our comments to make sure that everyone was well informed about what we've been through in Q4 and probably put a bit more color on Q1 than we normally would, given the impact of the ERP transition. We're stable in terms of our big 5 processes. As a manufacturing business, we've got to be able to book orders, build, ship, invoice and collect. And we are capable of transacting across that range of capabilities.

What we are working through now is, I would call, the remnants of stability and efficiency, being able to operate at efficiency and our people getting used to using the new system. So in comparison to what we experienced in the first 3 weeks of November, where we were unable to enter orders in the system, yes, Tom, I would say we are far more stable.

Okay. And then, Fay, I think you mentioned of the $30 million impact to sales in the November time frame or fourth quarter time frame, roughly half of that you guys view as unrecoverable?

Yes. We -- and these are estimates and what we consider. So we've got about $15 million of that in backlog. And the other $15 million, we -- it was roughly 1/3 of that $30 million was parts, consumables and service. And so we think that, that is a difficult business to regain and to recover. So we think that, that's the primary driver of lost revenue in Q4.

Okay. Maybe shifting gears a little bit. I think it's really pretty interesting, Dave, I was hoping to get a little bit more color on the Robotics group and maybe what are some of the FY '26 objectives for that group? Because I think like you said at your closing remarks, there's a lot of momentum in that area right now.

Yes. Thanks, Tom. We're really excited about it. Obviously, it's a difficult time for us from an ERP perspective, but we have continued attention and focus on growing the business and specifically in robotics, not everyone in the company is tied up, although everyone is impacted in some way, not everyone is tied up trying to solve for the ERP challenges. Really excited about the TNC Robotics venture that we've stood up. We think there's a moment in time now. I should preface my remarks, we're really proud, and I'm proud of the business that the team has built in robotics to date. So this is not a replacement, frankly, we've been doing. This is an acceleration of our efforts.

Since we started this business, 2019, 2020, we've sold to hundreds of customers globally, 10,000 units deployed. We've spent a lot of airtime on these earnings calls talking about our new products, our Gen 3 software technology, our relationship with Brain and exclusivity agreement. So I won't rehash those here, but I think we've got a really great foundation to build upon. And so when we looked at the outlook for robotics, we finished the year in '25 at $85 million in profitable robotics business as a company. And we looked at the market, which is growing. The underpinnings of that growth, the persistent labor challenges, cost of labor and availability of labor, we thought that continues to provide a tailwind for us on a global basis.

We're getting really strong demand signals for robotics from an interest and demand generation perspective. And as we assess the market, we see that there's a number of new entrants that are robotics-only players from Asia and elsewhere. And these players are very fast. They're very agile. They're only selling robotics. They're gaining some positions in some distribution, and we're starting to see them be in the consideration set of our customers. And so we saw this as both an opportunity and maybe a potential threat from these upstart competitors.

So we talked about it kind of early part of last year, midpoint in the year, we decided in concert with our Board to make a bold move to make a step change investment and face off differentially to accelerate our growth in robotics. So the TNC Robotics group is stood up to accelerate the efforts of our core business. And when I think about having a group of dedicated people across product management, R&D engineering, marketing, demand generation, sales and deployment specialists, coupled with the core legacy Tennant strength in sales, decades-long customer relationships, the industry's largest factory direct service organization, I think it makes a really formidable combination.

And so -- what the group will be focused on over the 2026 and in pursuit of our aspiration of $250 million in sales in 2028. We'll be focused on accelerating our NPD road map. We had a 4- or 5-year road map of what we wanted for products in the robotic space. This team through additional resourcing as well as investment is going to bring those products in and get those products to market faster. That will allow us to reach more customers in more distinct vertical markets with our robotic solutions in a broader range of applications.

We're also going to work on improving our adoption efficiency so that we can get to -- so we can spend less time deploying robots and have our customers self-deploy to the extent possible and still have a fantastic experience. The quicker we can get the robots adopted at scale, the quicker the customers can start to realize our ROI and the quicker we can redeploy our sales and deployment resources onto the next customer. So working on demonstration efficiency, onboarding and adoption efficiency, both through software and also through our processes.

And we'll also work on making sure we can demonstrate an ROI to our end-use customers through the data we can pull off the machines and demonstrate that we're hitting on the KPIs that are most important to our end-use customer. And last but not least, capturing and generating demand, just getting in front of more customers with our solution. We've been -- we've done a good job penetrating sort of large-scale customers that we sell on a strategic account and direct basis. We've got more opportunity through distribution channels and smaller customers in each of the vertical markets we serve as well as some adjacent vertical markets.

So demand generation is one of the near-term goals for the TNC Robotics venture as well. Really excited about it. We think it can be a significant growth contributor for us. And I look at it as an opportunity to disrupt our own business. And so the fact that we already have a fantastic embedded business in non-robotics equipment, we are the rightful company to come out and disrupt this industry.

Okay. I appreciate the color. Maybe if I could sneak one follow-up question in. Fay, on your commentary on the guidance, I appreciate all the color. I'm still kind of going through my notes. But I was just wondering your comment on the gross margin for Q1, you said it's going to be roughly equal to the Q4 gross margin. I was just wondering how you're kind of thinking about that progressing through the year? And do you expect -- I haven't gone through the numbers, but do you expect overall gross margin growth year-over-year in '26?

We do. So we think that there's going to be kind of gross margin performance in Q1 of 2026 comparable to what we saw in Q4 of 2025. And that's mostly due to the physical inventory and the shutdown in the plant and the distribution centers were offline. And so the ramp-up time and the cost required to get to full production is really going to put pressure on the first quarter gross margin. We do anticipate seeing gross margin growth in sequentially. And overall, we think we're going to see kind of year-over-year gross margin expansion, which will drive the EBITDA margin expansion year-over-year as well.

And our next question comes from the line of Aaron Reed with Northcoast Research.

So I just kind of wanted to follow up a little bit more about the AMR because, again, that's the part that is always, at least for us, the exciting part of things. So you mentioned that AMR costs are starting to fall. And previously, the margin on AMR units was the same as traditional units. So how much have AMR margins improved versus the traditional units?

Thanks for the question, Aaron. So when we talk about costs in robotics, it's really more of a broad statement about the technologies that enable robotics. So when you think about LiDAR and high-def cameras, because those technologies are being more broadly adopted across other applications outside of cleaning, over time, we're able to take advantage of lower cost of components, us and our competitors, which makes -- which allows us to offer robots at a more competitive price.

And let's be clear, in this robotics space, our charter, our objective is to go gain unit share. And so we need to watch margins. We need to be cognizant of margins because we -- especially if we're cannibalizing ourselves. But given the rapid growth in this marketplace, we need to be outgrowing unit share right now and making sure that we're competitively priced in the marketplace. So my comment on cost really has to do more with the unique componentry that goes into enabling robotics, and we see those continue to come down the cost curve. It's not by leaps and bounds. And candidly, at our volumes, we're not a major player yet where we can leverage our volumes, but there are some volume breaks that as we grow our business, we can take advantage of. The benefit to us will be being able to offer robots to more customers at more competitive prices, which gives them the ability to get an even better ROI on the investment.

Are you seeing any pricing pressure then from some of those newer competitors coming in at all then?

Yes. Great question. We are seeing pricing pressure from our competitors, all of our competitors, but I would say, especially the upstart entrance robotics-only competitors. These are brand-new upstart companies. They don't have an embedded business they're trying to protect. They're trying to go out and grow unit volumes so they can presumably get to profitability. So they're in a very different starting position than us.

Given that pricing pressure, that's another one of the reasons we decided to stand up the TNC Robotics venture, so that we have a group of people inside the company that are thinking, planning, acting more entrepreneurially and going after the market as it exists today, acknowledging the reality of those robotics-only competitors and making sure that our value proposition is at a commandable premium to them. We do think that our value prop product and our ecosystem support can command a premium, but there's a limit to that premium. And so one of the first things that the robotics group is working on is making sure that we're competitively priced in the marketplace as well as have a competitive offering of solutions as well as product.

That makes sense. And then one more question here, and then I'll pass it off. Just switching back to your guidance. So your guidance on '26 reflects like a mid-single-digit growth and an EBITDA margin expansion in line with that of your long-term goals. So taking a step back, how should we think about the first part of '26, especially in the first quarter?

Yes. So I think we'll see -- it's almost going to be like a tale of 2 halves. And I think I mentioned just previously and in the prepared remarks that Q1 will be impacted by the shutdown of the facilities for the physical inventory and the ramp-up. And so we're going to see an impact on sales, and impact on margin. The margin is not recoverable long term, but the sales will be recoverable within the year. So that's really just kind of from a timing perspective. We are going to slowly see kind of a ramp-up in Q2. And I think when you look at the first half versus the second half, we'll see significant improvement in the second half as we work through the kinks and stabilize the system and increase our efficiency and have the physical inventory and the impacts of that behind us. So we'll see improvement throughout Q2, but really a ramp-up in Q3 and Q4.

[Operator Instructions] And our next question comes from the line of Steve Ferazani with Sidoti.

Appreciate all the detail on the call. I got to ask a couple of difficult questions. As you had imagine, Dave, I apologize for it ahead of time. But in terms of disclosing what were clearly issues that were going to be material to your results. Obviously, you knew probably within by early December. It's now late February. What was the decision process in terms of not disclosing some of these issues earlier to shareholders?

Thanks for the question, Steve. We knew we had challenges. We were still in triage mode to understand what the magnitude of the challenges were and whether or not we're going to be in a position to recover some or all of it as we came through the year and ultimately, as we closed the books, which included our physical inventory in the first 2 weeks of January. You can imagine when you are unable to -- when we were unable to book orders for 3 weeks in November, when you can't book orders, you can't build, ship, invoice, collect, -- you also can't supply dates to customers on when they can expect to get their product.

And so as we unlocked the challenge in getting orders into the system, we dumped not only the cutover orders from pre-go-live, but also 3 weeks' worth of orders that had come in. We dumped those into the system and had to reconcile who was going to get the limited production we were going to have in December and allocate the output across the customer base. So it was anything -- it was not like turning on a light switch and getting -- kind of getting back to business as usual. We really didn't have any sense for if we could recover, how much could we recover, what it would look like as we were scrambling to satisfy customers coming through December.

Having said that, from Thanksgiving through the end of the year, we threw every lever forward we could. And I think you see that reflected in our cost of the revenue we generated in December in the quarter. We were inefficient. We had overtime. We ran multiple shifts and overtime. We're expediting freight. We were doing everything we could to -- with the goal of satisfying customers and reducing the customer frustration level that we had created with our challenge in the first 3 weeks of November. So yes, we knew we were having challenges, being able to estimate and quantify what the impact of those challenges would be and what the implications. We really didn't know that until we got through with the close. And so by that point, we were very close to our earnings release date. And so as soon as we knew you knew.

Okay. Fair enough. Obviously, you're not the first company that has had these ERP implementation issues. The concern becomes when you couldn't book orders for 3 weeks, permanent customer loss because you're still guiding for 3% to 6.5% revenue growth next year. Do you have a sense, and I'm sure it's too early about the potential for permanent customer loss that might damage that growth rate? And more specifically, obviously, I'm thinking about your larger direct customers. Have you been able to survey, get any feedback? -- have any sense on that, right? Because that would seem to me to be the downside risk.

Yes, it's a great question. It's one top of mind for me and us. Obviously, as we come through this experience over Q4 and now starting Q1, throughout this journey, our customers showed an amazing amount of patience with us. We communicated the original go-live early. They knew it was coming. I think they showed us a tremendous amount of patience and grace coming through kind of the first week. By second week, they had concerns. And by third week, we frustrated them, not only with our lack of ability to deliver, but our lack of ability to provide dates.

So in response to that, in addition to everything we did internally to try to right the ship and get the system stable and get the orders in and build and produce. In addition to that, we've drawn very close to our customers. We've been very transparent and open with them, large customers and small customers to make sure that we understand their priorities and needs. They understand not only that we regret that happened, but what can we do to try to get them through this period and back on track.

Largely speaking, we're still in contact with all of our customers where we've lost business, it's customers and distributors that told us we were going to lose it. It was a customer needed a machine and we just couldn't physically get it produced or there were some parts we couldn't get parts out and they had an alternative source for them. So I think we're aware of where we took the -- where we lost the sales in Q4. Similarly, as we came through kind of our Q1 January experience, we're close to customers, and I think we understand where that leakage has been.

We have work to do. And I'm -- the customers are still talking to us and telling us what their needs are and maybe expressing frustration by working with us as we dig out of the hole. I'm very concerned about them. I'm less concerned about them than -- than a customer that just walked, right, and just said, "Hey, I'm frustrated and I'm moving on." The vast majority of our customers are certainly the largest are in that first camp, where they're frustrated. We're working with them. In some cases, we're on a daily reporting of their orders and their orders in process and their shipments to let them know how we're getting back on track. We have made significant progress coming through December. And then another -- we took another step back, I'll say, with the physical inventory from a customer perspective, and we made progress since that physical inventory.

When I look at just the raw output at a macro level, we're trending positively since the physical inventory. We're projecting to be above water kind of back at output rates as we exit the quarter, mostly in February. We also have to work down the backlog. And so even though we're operating and the output is at target, we still have to work down the backlog. And my sense is -- our customers are not going to be ready to listen to us about recovery until they can feel it and they've got their back order product in hand. Then we will make a concerted effort to get back with our customers, understand how we begin to rebuild trust. But the biggest thing we can do is start performing so that they can rely on us to predictably deliver the way they have for the past years and in some cases, decades.

So having said that, I think Fay commented earlier, there are some of these sales that we think are just gone. Certainly, some of the sales we couldn't recover in 2025 from the November experience. But if you open the aperture and look at a 2-year period, the lost sales are reflected in our guidance. So you can see that we still think we can gain back and claw back our rightful share of the market and rebuild the trust that we lost with customers.

That's really helpful, Dave. I appreciate that.

I'm sorry, just another point I make...

Go ahead...

When you think about customer frustration, it's not directly correlated to the size of the revenue in a particular order. What I mean by that is if a customer is going to order a $40,000 or $50,000 or $60,000 piece of equipment from us, an industrial piece of equipment, that has a 4- to 8-week lead time. So when they put the order in November and we gave them a 4 that became a 6 or a 4 that became an 8, they're not happy with it, and I get that, but they buy a piece of equipment every 4, 5, 6 years. That is a bit easier conversation than a customer that has a machine down and needs a repair part today.

So in the first case, we're dealing with a $50,000, $60,000 piece of equipment and that revenue. In the second case, we may be dealing with a $100 parts order, but the machine is down and they need it today because they get the machine running. It's a different sense of urgency and frustration. So the customer frustration doesn't correlate exactly to revenue, is my point.

That's fair. That's helpful. Looking at your balance sheet, you noted net leverage is still despite the operational issues, you still came out of the year 1x net leverage. You talked about -- you've used the buyback a little bit. But in terms of looking at the stock price today, it seems like if you're going to work through these issues and you seem to have confidence based on your guidance, it seems like there's an obvious best return of investment case here. How are you thinking about the buyback?

Yes. Well, I think we exercised our authorization quite aggressively last year. We took down 1.1 million shares for $88 million, 6% of shares outstanding at the time. So although our leverage remained low, I think we exercised the authorization, and I'm pleased with how we action share buybacks. And we bought back shares last year because, one, the price was attractive at the time versus our view of value of the intrinsic value of the company and the stock in line with our capital allocation priorities. And so we -- as we've said before on publicly, as we look out next quarter, 2 quarters, if we don't have a strategic M&A opportunity upsize that's imminent and the stock is at an attractive price, then we're going to participate in buybacks.

We'll continue that stance. We are staged to continue that stance into 2026, and we'll be equally as aggressive. We've stated that we want to keep our leverage within that 1x to 2x. So don't be surprised if we start flexing that here, especially if the stock reacts negatively to our ERP challenges, and that presents a greater buying opportunity for us. We think it's a great value creation opportunity for us. We're not really in the business of timing the market. But consistent with our capital allocation prioritization, we'll have a plan in place.

Great. That's helpful. I get one more in, there were some filings recently around the change to your Board structure composition. Can you comment about those filings?

Yes, I'd be happy to. I think we reinforced, we -- as a Board and the management team and I, we are really very open-minded about value creation opportunities for this business. So we engage -- we routinely engage investors and analysts alike on their ideas for value creation from our business, and we thoughtfully consider those as they are opposed and we discuss them and we digest them as a leadership team and a Board and decide which ones make sense and analyze the pros and cons and move forward.

We have been engaged with Vision One since they moved into -- took a position of our stock late in 2024. We've had a series -- more recently, we had a series of very constructive conversations with the principles of Vision One, myself and our Chairman of the Board and some of our Board members as well. The Vision One constructive conversation really centered primarily around Board topics, Board composition, Board governance. And so in addition to our robust existing Board governance processes, including Board refreshments and our skills assessments and our director assessments, in addition to that, we entertained their comments and thoughts about composition and governance in a very thoughtful manner.

And the output of that conversation is we've landed 2 new great directors on our Board, one of which was nominated by Tennant Company, that's Jim Glerum. Patrick Allen was nominated by Vision One and vetted by the company. We think we've added a significant skill sets to our Board, and we're pleased to have Jim and Patrick on board. You probably saw a cooperation agreement that has some fairly customary clauses in it, including a standstill, some Board assignments for the new -- or excuse me, some committee assignments for the new directors, and we've committed to move away from a staggered Board starting in 2027 or at least make the proposal to move away from a staggered Board.

So I would say these 2 new Board directors, welcome to Jim and Patrick. I'm sure they're on the line. I talked to them just last night, and they're excited to be part of the Tennant organization and Board of Directors. And we're moving forward. It was a constructive set of conversations, and we're really focused on creating maximum value for the business in any way possible as we go forward.

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

Thank you. If you'd like to learn more about Tennant, we will be participating in the following conferences, the Sidoti Virtual Small Cap Conference on March 19 and the 38th Annual ROTH Conference in California on March 23. Thank you all for your continued interest in our company. This concludes our earnings call. Hope you have a great day.

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.

Good morning. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to Tennant Company's Third Quarter 2025 Earnings Conference Call. This call is being recorded. [Operator Instructions] Thank you for participating in Tennant Company's Third Quarter 2025 Earnings Conference Call.

Beginning today's meeting is Mr. Lorenzo Bassi, Vice President, Finance and Investor Relations for Tennant Company. Mr. Bassi, you may begin.

Good morning, everyone, and welcome to Tennant Company's Third Quarter 2025 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; and Fay West, Senior Vice President and CFO.

Today, we will review our third quarter performance for 2025. Dave will discuss our results and enterprise strategy, and 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 and 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 2025 third quarter earnings release and presentation include the comparable GAAP measures and a reconciliation of these non-GAAP measures to our GAAP results.

I will now turn the call over to Dave.

Thank you, Lorenzo. Good morning, everyone, and thank you for joining our Q3 2025 earnings call. I'm pleased to share our third quarter results, strategic progress and outlook as we navigate an increasingly dynamic operating environment. Our Q3 results demonstrate both the resilience of our business model and our team's ability to execute in a challenging environment.

We delivered net sales of $303 million with an organic decline of 5.4%. It is important to note that we're comparing against a prior year quarter that benefited from a $33 million backlog reduction, primarily in our North American Industrial business. Our order rates reflect steady underlying demand. We achieved 2% growth compared to Q3 2024, extending our track record of 6 consecutive quarters with order growth.

Let me address the tariff situation head on because I know it is top of mind for all of us. We are clearly operating in a more complex trade environment with the continuing tariff volatility creating cost challenges and heightened uncertainty. This creates both direct cost pressures for us and indirect effects on customer purchasing behavior.

Regarding our input costs, we're confident in our ability to address a significant portion of direct tariff impacts through targeted supply chain adjustments and pricing actions in 2025. What's new this quarter is the customer demand impact, where we're seeing some industrial customers in North America specifically citing tariff uncertainty as a reason for delaying planned purchases. We're staying close to these customers, understanding their concerns as they navigate the current economic environment, and we remain committed to serving them when they're ready to move forward.

Despite these external pressures, I'm proud of what our team has accomplished this quarter. We expanded gross margin 30 basis points through disciplined pricing that more than offset higher freight and tariff costs. We delivered 120 basis points of adjusted EBITDA margin improvement, driven by both margin expansion and disciplined expense management, including the realization of structural actions we implemented earlier this year. We also returned $28 million to shareholders through dividends and share repurchases, demonstrating our commitment to disciplined capital allocation and value creation.

Our regional performance reflects both challenges and opportunities. In the Americas, orders grew 1% in the quarter compared to the prior year. Adjusting for the prior year backlog benefit, net sales would have grown 9% versus Q3 2024, a solid performance in this environment. EMEA shows encouraging momentum from our strategic initiatives with new product launches gaining traction and go-to-market optimization delivering results in key geographies. Orders increased 8% year-over-year in the region with accelerating momentum heading into the fourth quarter. APAC remains challenging, particularly in China, where competitive pressures continue on both price and volume. However, Australia and India continue performing well, delivering sales growth in the quarter.

Our enterprise strategy continues advancing on multiple fronts. We launched our latest new product innovation, the T360 midsized walk-behind scrubber, which delivers solid performance at an economical price point, perfect for budget-conscious customers and first-time users. We are growing our AMR robotics business year-to-date with sales increased 9% and unit volumes increased 25%, driven by our new X4 and X6 ROVR products and key strategic customer wins around the world. We've had a major new product launch in each quarter in 2025, demonstrating our strengthened innovation pipeline.

Our pricing initiatives delivered 280 basis points of growth through strong realization of beginning of year actions plus additional tariff-related increase. Our go-to-market initiatives are progressing well with particular strength in expanding industrial sales coverage and acquiring new strategic accounts, especially in EMEA.

One of our key enterprise initiatives is our ERP modernization project. I'm particularly proud to announce the successful go-live in APAC, the first of 3 major regional milestones in our global digital transformation. While any transformation of this scale presents complexities, our teams prioritized customer needs, mitigated disruptions and stabilized operations according to plan.

This new digital infrastructure will enable faster decision-making, deliver better customer experiences, enhance cybersecurity and position us to deploy AI capabilities moving forward. We remain appropriately cautious as our teams continue stabilizing the Americas' Q4 deployment and prepare for the EMEA go-live in Q1 2026. I'm confident in both our approach and our team's execution capability.

Looking ahead, we're seeing mixed market dynamics that require both strategic focus and tactical agility. Industrial sectors show some demand softening in tariff-sensitive industries, but demand remains robust in core commercial end markets, including retail, health care and education. Our aftermarket demand, both service and consumables, remains strong. We're addressing tariff exposure through pricing actions and supply chain adjustments and expect to mitigate most of the impact within the year. Our targeted initiatives, supplier negotiations, dual sourcing and logistics optimization, position us well to navigate these challenges. Our year-over-year order growth confirms underlying business health.

We remain focused on operational efficiency and prudent capital allocation while carefully monitoring customer buying behavior, the tariff landscape and macroeconomic trends. Based on our year-to-date Q3 performance and current outlook, we remain well positioned to achieve our overall net sales, EBITDA and EPS targets. Accounting for the outsized impact of the euro exchange rate on our EMEA results, we now anticipate that organic growth at the enterprise level will be slightly below our initial guidance range of negative 1% to negative 4%.

In closing, I'm confident in our strategy, proud of our team's execution and optimistic about our ability to navigate this environment while continuing to deliver value for all stakeholders.

Now I'll turn the call over to Fay for a deeper explanation of the financials.

Thank you, Dave, and good morning, everyone. In the third quarter of 2025, Tennant delivered GAAP net income of $14.9 million compared to $20.8 million in the prior year period. Net income for the quarter was impacted by lower net sales, primarily driven by volume declines across all geographies, particularly in North America, where we are comparing against a prior year that benefited from a significant backlog reduction. Also impacting net income performance were increased costs associated with our ERP project, legal contingency costs and restructuring charges. These non-GAAP charges totaled $13.3 million during the quarter.

Beyond operating income, interest expense in the third quarter was comparable to the prior year period. Income tax expense in the third quarter was $2.2 million lower compared to the third quarter of 2024, primarily due to lower operating income. Our effective tax rate was 23.2% in the third quarter of 2025 compared to 24.4% in the prior year. The decrease in rate was primarily due to the recognition of discrete tax benefits from additional research credits recognized in the third quarter of 2025. We anticipate that our full year effective tax rate will be within our guided range of 23% to 27%.

Excluding ERP implementation costs and other non-GAAP costs, adjusted net income in the third quarter of 2025 was $27.3 million compared to $26.6 million in the prior year period, a 2.6% year-over-year increase.

The adjusted net income growth was primarily driven by gross margin expansion and operating leverage on S&A despite lower quarterly volumes. Adjusted EPS for the third quarter of 2025 increased 5% compared to the prior year period to $1.46 per diluted share. The increase was driven equally by operational improvements and the accretive effect of our share repurchase program.

Looking a little more closely at our quarterly results, for the third quarter of 2025, consolidated net sales were $303.3 million, down 4% from the $315.8 million in the same quarter last year. Foreign exchange had a positive 1.4% impact, primarily reflecting euro strength against the dollar. Excluding this benefit, net sales declined 5.4% on a constant currency basis. This decline was largely driven by an 8.2% reduction in sales volumes across all geographies, which more than offset a 2.8% benefit from strategic pricing actions and additional tariff-related pricing adjustments.

As a reminder, we group our net sales into the following categories: equipment, parts and consumables and service and other. In the third quarter, overall equipment net sales decreased 8.7%. Service sales increased 5.9%, and parts and consumables grew by 2.5% compared to the prior year period.

Shifting to regional performance. In the Americas, organic sales were down 7% compared to the same period last year. The decline was primarily driven by lower sales of industrial equipment as we lapped a significant backlog contribution in the third quarter of 2024. These headwinds were partially offset by continued price realization during the quarter.

Outside the Americas, organic sales in EMEA were down 0.4%, primarily reflecting lower volumes across most of the region. These declines were partially offset by stronger volumes in the U.K. and Southern Europe, along with continued benefits from price realization. Organic sales in APAC decreased 6.4%, primarily driven by lower commercial equipment volumes in China and reduced industrial equipment volumes in South Korea.

Gross margin was 42.7% in the third quarter, a 30-basis point increase compared to the prior year quarter. The margin rate increase was driven by strong price realization, partially offset by lower productivity due to volume decreases. S&A expense totaled $96.6 million in the third quarter of 2025, a $3.9 million increase compared to the third quarter of 2024. The increase was driven by continued ERP spend, legal contingency costs and restructuring costs.

This quarter, we have recorded an additional legal contingency expense in the amount of $5.3 million related to the intellectual property dispute that we disclosed in our 2024 year-end results. This amount is comprised of a $2.9 million enhancement of damages and $2.4 million in additional prejudgment interest. We continue to disagree with the verdict and are actively preparing for the appeals process while also continuing to explore all of our other alternatives. As a reminder, this ruling does not impact our ability to sell any of our products and is not expected to affect our long-term financial performance.

Excluding non-GAAP costs, adjusted S&A expense in the quarter totaled $83.3 million, a $5.4 million decrease compared to the third quarter of 2024. Adjusted S&A expense as a percent of net sales decreased to 27.5% compared to 28.1% in the prior year period, driven by lower variable compensation and reduced payroll costs following last year's restructuring actions.

Adjusted EBITDA for the third quarter of 2025 was $49.8 million compared to $47.9 million in the third quarter of 2024. Adjusted EBITDA margin for the third quarter of 2025 increased by 120 basis points compared to the third quarter of 2024, representing 16.4% of net sales.

Turning now to capital deployment. Net cash provided by operating activities was $28.7 million during the third quarter, a $2 million decrease compared to the prior year period. Operating cash flow during the quarter was impacted by investments in our ERP project as well as working capital investments.

We generated free cash flow of $22.3 million in the third quarter, including ERP spend of $14 million. Excluding these non-operational items, we converted 183.3% of net income into free cash flow during the quarter. On a year-to-date basis, we converted 121.2% of net income into free cash flow, which positions us to achieve our 2025 goal of 100% conversion. The company continues to deploy cash flow toward operational capital needs and to return capital to shareholders in line with its capital allocation priorities.

We invested $6.4 million in capital expenditures during the third quarter, tracking to our full year guidance. Additionally, we returned $28.1 million to shareholders through share repurchases and dividends in the quarter. On a year-to-date basis, we returned $72.7 million to shareholders comprised of $56.3 million of share repurchases and $16.4 million of dividends. Last week, we announced a 5.1% increase to our annual dividend, raising it to $0.31 per share. This marks the 54th consecutive year that Tennant has increased the dividend payout.

Tennant's liquidity remains strong with a balance of $99.4 million in cash and cash equivalents at the end of the third quarter and approximately $409 million of unused borrowing capacity on the company's revolving credit facility. The company continues to effectively manage debt and maintain a strong balance sheet. Our net leverage was 0.69x adjusted EBITDA, providing the company with continued flexibility and capability to fund growth through M&A and create value for our stakeholders.

Moving to 2025 guidance. As Dave mentioned, we are pleased to report third quarter results that demonstrate the resilience of our business model even as we navigate an increasingly complex and uncertain market environment. Net sales of $303 million reflected expected headwinds from lapping last year's significant backlog reduction, resulting in a 5.4% organic decline.

We generated 2% year-over-year order growth, expanded gross margins by 30 basis points despite tariff-driven inflationary pressures and managed S&A expenses to grow adjusted EBITDA margin to 16.4%, a 120-basis point increase.

Looking ahead, we anticipate sustained macroeconomic volatility and ongoing tariff-related pressures. Based on current tariffs, we project a slight increase in the overall full year 2025 tariff impact compared to our estimate at the close of the second quarter. However, through a combination of strategic supply chain initiatives, targeted procurement efforts and pricing actions, we expect to largely offset tariff-driven inflation in 2025.

Turning to our net sales outlook. While we did observe some deceleration in demand during the third quarter, most notably within our Industrial Sales segment in the Americas, we are nevertheless positioned to deliver full year net sales within our previously guided range of $1.21 billion to $1.25 billion through strong fourth quarter performance. This performance is underpinned by several key drivers: continued expansion in strategic account sales, the successful performance of new products like the Z50 Citadel outdoor sweeper and X6 ROVR, a return to historical seasonal patterns and sustained momentum across various geographic markets.

It is important to note that while we expect to meet our overall net sales target, we now project organic growth to be marginally below our negative 1% to negative 4% guidance, reflecting a more significant contribution from favorable foreign currency movements. Our focus on diligent cost management will continue across both gross margin and S&A throughout the fourth quarter. This concerted effort, coupled with solid net sales, positions us to achieve adjusted EBITDA within our previously stated guidance range of $196 million to $209 million with an expectation of landing near the lower end of that range.

While the fourth quarter will deliver both sequential and year-over-year margin improvement, the margin headwinds realized in the first half of 2025 will create a structural headwind to achieving meaningful full year margin expansion.

With that, I will turn the call back to Dave.

Thank you, Fay. In closing, I want to emphasize that while we're navigating a challenging macroeconomic environment with significant tariff volatility, our team has demonstrated focus, execution and discipline. We've delivered solid order momentum, meaningful gross margin expansion and strong adjusted EBITDA growth, all while making strategic investments in our digital transformation. The successful APAC ERP go-live represents a critical milestone in our enterprise evolution, positioning us to enhance customer experiences, drive operational efficiency and unlock AI capabilities across our organization.

We've targeted investments and rigorous execution across a robust set of growth initiatives, including new product innovation, go-to-market expansion and strategic pricing. We have clear line of sight to mitigating tariff impacts through targeted supply chain adjustments and pricing actions in 2025, and we're confident in our ability to manage near-term uncertainties while capitalizing on the opportunities ahead. I'm really proud of our team's commitment and focus on value creation for all stakeholders, and I'm optimistic about our path forward.

With that, we'll open the call to questions. Operator, please go ahead.

[Operator Instructions] Your first question comes from the line of Steve Ferazani with Sidoti.

I appreciate all the detail on the call. Dave, the one number that sort of concerned me a little bit was the order growth. I think you covered that a little bit. But through the 3 quarters this year, your year-over-year order growth was slower each quarter. Is your expectation that turns around? Or is the tariff uncertainty likely to continue to pressure the order book?

I think the order book is partially due to the prior year comp. Obviously, we're comping a more difficult second half. I think I'd answer the question this way. We've had strong order momentum. Our orders are up 6% year-to-date. And although it's been declining by quarter, I think that's largely driven by the comp.

Maybe I will shift focus to Q4 and just talk about what has to be true to deliver on the quarter because I think that really gets at the heart of the orders question. So thinking about Q4 from an order perspective and from a sales perspective, we need about $318 million in sales to deliver on Q4 midpoint guidance. And if you adjust Q4 of 2024 for the backlog reduction benefit, we did $328 million in Q4 of '24, less $17 million in backlog reduction benefit.

So without backlog in 2024, the baseline is –- I'll call it $311 million. So in Q4, we need to grow orders and sales by $8 million or about 2.5%. So when I think about the order momentum year-to-date of 6%, putting up 2% in Q3 –- and Q3 also reflects a return to normal seasonality. Q3 is usually a light quarter for us. And then the need to drive a 2.5% increase in Q4, we think it's within reach. And actually, we have a fair amount of confidence we can deliver on that kind of order growth. So I think it's important to dimensionalize the decreasing year-over-year order trend in terms of year-over-year comp, return to normal seasonality and kind of what needs to be true to deliver on Q4.

And what are you hearing from customers now? Obviously, I'm not going to ask you about next year, but a lot of the analyst focus here is going to be on how this drives what next year starts looking at and what's your feeling based on what you're hearing from customers right now?

Yes. So restricting -- you're right, I'm not going to guide on 2026. But I can tell you what we're hearing from customers, and we'll have to see how the quarter shapes up as we finish out hearing what the customer is telling us. I think it's important to acknowledge that we are operating in a much higher level of uncertainty than we would normally be at this point in the year or in any year. And so I think that what we're hearing from customers, largely the order rates are solid, customers across -- I can break out some regional comments for you, but we did comment on the one point of softness, which is our North America Industrial demand. So let me make a few comments on North America Industrial, and then I'll broaden the comments to talk about the enterprise at a more regional basis.

Thinking about the North America Industrial business, our orders in North America Industrial are actually up double digits year-to-date, but they're not up to what we expected them to be for the year. And so this new dynamic we experienced in North America Industrial really started in July and August. And some customers in some vertical markets, primarily focused on manufacturing and warehousing vertical markets, there's this theme of deferring and delaying planned purchases, freezing automation budgets, et cetera, sort of taking a pause on planned purchases, which is slowing the conversion of our opportunity funnel.

When you dig underneath it and really ask customers what's underneath the pause or the delay, they do cite the tariff uncertainty as a reason for the pause. And I believe it's because the tariff impact is just now starting to bleed through people's P&Ls. You had an inventory lag from when tariffs were enacted and inventory in the pipeline that delayed the impact on customers' P&L as well as the customers who capitalize their variance. Q3 was really the first time customers started to feel the tariff impact in their results.

At the same time, we're all trying to project how we finish the year so we can provide good solid forecast and guidance. And we're also planning for 2026. So I think it's logical that customers as they've had to absorb all of the inflation from tariffs, they're sort of taking a pause, looking at their CapEx spend and forecasting the year and preparing for 2026, much like we are, and I know many of our peers are doing the same.

When you think about Q4, we assume stabilization in the North American Industrial demand, which means we factored in some of this softening, but no further deterioration from an order demand perspective in that segment of the business in Q4. Looking across the rest of the business outside of just North American Industrial, there's actually considerable points of strength as you look across the rest of North America, look at our commercial business, look at our service business, look at parts and consumables. We're getting price to stick. Our new products are selling well, inclusive of AMR. We've demonstrated that we're capable of taking action to offset the tariff impact.

The new demand like – or the new dynamic, like I said, is this impact of tariffs on one segment of our North American Industrial business in Q3. And we are watching closely to understand that dynamic as it matures here in the quarter and then if there's any contagion into other vertical markets.

I appreciate that. That's helpful. And seeing the benefits of the cost outs in 3Q, which you had talked about earlier in the year, I mean you had EPS year-over-year growth despite you still had a chunk of backlog to lap and margins improved on lower revenue. Is there more to go on the cost outs?

Yes. So we did see kind of 30 basis points improvement on margin over the prior year. That was really kind of price, both from regular pricing and tariff-related pricing. That offset the impact of kind of tariff input costs as well as other inflation and also the lower productivity from decreased volume. We do expect to see sequential improvement versus Q3 and Q4. So we expect to see sequential improvement as well as margin improvement versus prior year fourth quarter.

What I will say, though, is on a full year basis, we had originally anticipated seeing about a 30-basis point improvement. We've talked about that in the past. And if you recall, in the first half of the year, mix was a very large component of gross margin performance, specifically the impact of sales to strategic customers and to -- for commercial equipment sales. At the end of Q2, we expected that we would see margin improvement in the second half of 2024 based on market signals at that time and our assumption that we would see an increase in industrial sales in the second half.

As Dave just talked about, this is where we're seeing some softness. So we will not see that improvement in gross margin that we anticipated due to mix shift on a full year basis. And so -- and additionally, we continue to work very diligently to solve for inflation and for the evolving tariff implications and believe that there will be some impact to gross margin on a full year basis. So in Q4, we'll see kind of margin improvement. But on a full year basis, we will not quite get to that 30-basis point improvement that we anticipated at the beginning of the year.

Got it. That makes a lot of sense. If I could squeeze one last one in here. When I look at that capital deployment slide, what stood out to me was you took on $25 million in debt to repurchase $23 million in shares. You did more than just offset dilution, which is more typical. Are you open to getting more aggressive on the repurchase program given the strong balance sheet and where the stock is right now?

Yes. So we -- I think in the prepared remarks, we talked about how we've deployed capital this year, and we have more than offset dilution. We continue to be active in Q4, and we'll likely purchase roughly 4.5% of outstanding shares through the end of the year on a full year basis. So roughly 840,000 shares is where we think we'll end up on a full year basis. And so -- and that's our position right now, and we could -- we have flexibility if we need to adjust.

Your next question comes from the line of Tom Hayes with ROTH Capital.

Maybe just one follow-up to Steve's question. I just want to make sure I had it right. As far as the comparison in 4Q for the backlog drawdown from last year, it's a $17 million bogey?

Correct.

Okay. All right. And then maybe on the ERP, congratulations on getting the first region under your belt. I was just wondering, could you just remind us what the time line looks like for the balance of the business?

Yes, I'd be happy to. So we referenced in the script that we went live in APAC in Q3. We're about -- we're over 60 days in now. Really solid early returns. North America goes -- already went, and we're in the midst of managing through it in Q4. And EMEA is in Q1 that we are working hard to prepare for the go-live.

Okay. Appreciate that. And then, Dave, we didn't have a chance to discuss previously, but I just wanted to circle back on the rollout of the Z50 Citadel unit. Maybe just some additional color on the end markets and initial customer reactions. I think it's a pretty revolutionary product.

I appreciate the question. Yes, we're really excited about the Z50. This marks a return into a new space for us in outdoor sweeping applications. It's about a $400 million TAM that we can now unlock because we own product to go address these customers. It's a natural extension of our sales and service reach around the world because we know these customers. In some cases, they buy other products within our portfolio. And we're really well suited for these kind of heavy use applications where customers rely on service to deliver uptime.

We partnered and have a product designed specifically for us to take to market. We're really pleased with the early returns and the positive feedback from customers. As you can imagine, these are $0.25 million apiece machines. And so it has -- typically, it has a relatively long sales cycle. I've been rather impressed by how quickly we've converted some orders here in the year. We expected it to be more like, call it, 6-, 9-, 12-month sales process. We converted some quickly customers. So it makes me -- it gives me confidence that this is an attractive segment where we're going to have a differentiated offering to deliver. It's been a solid contributor to our new product sales in 2025, and we've got big plans for it in 2026.

Do you see -- I mean I'm assuming that you see it as a global opportunity. But I'm just wondering, did you roll it out globally? Or are you running it out in specific markets to start?

Yes, we did a staged rollout, but we are globally deployed with that product. And what that means is we're trained and capable of selling it as well as servicing it with aftermarket parts and consumables. And it is a global opportunity. When you think about these heavy industry applications, they're very similar everywhere around the world. So we think we've got some really great opportunities to take this product into new and existing customers and serve those heavy sweeping applications.

Okay. Maybe just lastly, kind of circling back, again, one that you talked about a little bit, I just want to make sure I got it down right. As far as the North American Industrial segment that you saw the weakness, it was primarily in manufacturing and distribution-based customers?

Yes, manufacturing and warehousing customers.

[Operator Instructions] The next question comes from the line of Iva Prcela from Northcoast Research.

I am asking questions on behalf of Aaron Reed today. And you guys earlier highlighted strong year-to-date growth in both the units and net sales within the AMR business. So could you maybe just share some more detail on where you're seeing the most traction and maybe what factors are driving that growth?

Yes, I'll be happy to. We're really pleased with our results in AMR to date. Just to reiterate the data points we supplied. Year-to-date, our sales are up 9% and our units are up 25%. Obviously, there's some mix shift in there as we've launched new products. Really, the demand is being driven by a couple of underlying factors. One is the introduction of our X4 and X6 ROVR, which are really purpose-built ground-up machines with fantastic performance.

We're leveraging our brain exclusivity agreement to improve our selling efficiency, our deployment capability and also our road map alignment and new products. It's important to note that we are bringing more new products to market faster than we have in the past in this AMR space. We're also leveraging the new Generation 3 autonomy package, which just delivers better performance on the ground for the customer.

Specifically answering your question where we're winning and what's driving the growth. We're winning with large strategic accounts in both the direct selling channels -- we sell them on a direct basis -- primarily in mature markets, North America, EMEA and Australia. These are customers that really value superior cleaning performance. They have multisite networks, so a large number of stores that they need to be cleaned regularly on a consistent basis. These are customers that value our unique deployment support and training to be sure their teams will use the investment in automation. And our aftermarket service is critically important to these customers so that we can deliver the uptime and they can get the return on their investment.

And so I think we've got a great portfolio. We continue to add to that portfolio, not only in new products, but also in new business models with our Clean 360 offering that offers customers a bundled solution. One monthly price that includes equipment, service and their autonomy subscription. So I think a lot of innovation in this space. We're really pleased with the results to date. But there's a tremendous value unlock here. There's a tremendous growth opportunity for us in the market as we disrupt mechanized cleaning. And so we're committed to driving that growth and that disruption here as we enter Q4 and into 2026 and beyond.

Perfect. That was super helpful. And then obviously, tariffs have been a headwind. But I was just curious, is there any maybe silver lining in that they might be slowing cheaper Chinese imports or maybe easing competitive pressure in certain categories at all?

Yes, great question. We're on the lookout for it. I wouldn't say we've seen any material shifts from competition in terms of sort of their price competitiveness in the market. I do think there was some lead lag with people buying ahead of tariffs and forward stocking inventory in anticipation of prolonged tariffs. So we'll see as kind of the year shakes out here in 2026. But we can't bank on that. We've got to be out growing our business and selling our customers and reaching new customers with our value prop rather than sort of bank on having a competitive advantage because of tariffs. If there were to be an advantage, I think it would show itself over the longer term. And from a tariff impact perspective, I think we're still kind of early days.

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

Thanks, John. If you'd like to learn more about Tennant, we will be participating in the following conferences: Baird's 2025 Global Industrial Conference in Chicago on November 13, the 14th Annual ROTH Technology Conference in New York City on November 19, Oppenheimer's Winter Industrial Virtual Summit on December 11.

Thank you for your continued interest in our company. This concludes our earnings call. Hope you have a great day.

Ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines. We thank you for your participation. Have a good day.