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Text: I'm William Prate, Senior Director of Global Financial Planning and Analysis and Investor Relations.
Chris will brief you on our operations, Dave will provide an update regarding our enterprise strategy and Tom will cover the financials.
After their remarks, we will open the call to questions.
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.
We hope that you and your loved ones are continuing to stay safe.
2020 tested us all.
And I'm extremely proud of the way the Tennant team rose to the challenge.
We did so by remaining true to our guiding principles while continuing to provide the solutions and service that our customers have always expected from Tennant.
Our full year 2020 results reflect our speed and effectiveness in responding to the pandemic, specifically in how we prioritized the health and safety of our employees, the measures we took to manage costs and ensure liquidity, and above all, the determination and dedication that our employees showed in meeting the needs of our customers.
Their hard work helped minimize the overall operational and financial impact of the pandemic.
While the business impact of the pandemic significant across most of our markets, it had little effect on our strategic initiatives within the company.
A year ago, I shared with you our enterprise growth strategy, which is based on three pillars.
To win where we have competitive advantage.
To reduce complexity and build scalable processes.
And to innovate for profitable growth.
We follow through with our plan in spite of the pandemic.
In fact, our strategy was integral to everything we accomplished in 2020.
For example, our recent launch of a range of new floor scrubbers reflects Tennant commitment to innovation and our focus on winning where we have competitive advantage.
We've also made meaningful improvements to our operating model as illustrated by our adjusted EBITDA as a percentage of sales, for which full year 2020 was in line with that of 2019 despite the decline in organic sales.
As part of the ongoing implementation of our enterprise strategy, which Dave will speak to in greater detail in a moment, we've made the strategic investments needed to allow us to exit the pandemic in a strong position as markets continue to recover.
We recognized that now more than ever our customers are relying on us to help them maintain the safety and appearance of their facilities, while at the same time reducing their overall cost to clean.
Also, I cannot overstate how important our strategy has been in channeling those team efforts to ensure the best possible results.
I will walk you through some of our key achievements of the past year in that regard and provide a look at where we are headed.
As Chris mentioned, our enterprise strategy is based on three pillars in support of our value creation objectives.
One, winning where we have competitive advantage.
Two, reducing complexity and building scalable processes.
And three, innovating for profitable growth.
In 2020, the first pillar, winning where we have a competitive advantage, began with a thorough evaluation of all aspects of our business, including products, market geographies, channels and customers in order to identify where we have the strongest competitive advantage.
The findings of that comprehensive review have led to meaningful changes within Tennant.
For example, as we announced earlier this month, we completed the sale of our coatings business.
Although the business represented approximately 2% of our total sales, it was not central to our core strength in professional, industrial and commercial floor cleaning.
By divesting it, we can redirect resources toward more strategic and profitable activities.
Our strategy implementation has been truly global, expanding across our operations worldwide.
In Japan, for example, after a thorough review of our direct sales go-to-market strategy in that market, we have made the decision and begun to shift to a distributor-only model, which offers compelling S&A savings, while delivering a superior customer experience.
On the product side, we continued to simplify.
And in 2020, managed a 35% reduction in our core Tennant legacy product portfolio along with a 20% reduction in product options.
These changes have far reaching benefits in terms of manufacturing, supply chain and sales efficiency.
Furthermore, after rigorously assessing our product lines, we have created a standard offerings across our legacy Tennant products.
This helps customers by eliminating guesswork from the buying process.
Where customers used to have to pick from literally dozens of options and features, they can now rely on Tennant's expertise to identify the solutions and features that best suit their needs.
In addition to enhancing our sales funnel, this change improves our manufacturing process as well.
We will continue to provide customized solutions when needed, but we will do so while prioritizing manufacturing efficiency.
The second pillar of our strategy, reducing complexity and building scalable processes goes to the level of product design and subsystem architecture.
2020 initiatives in this area targeted cost reductions along with customer facing quality and performance improvements.
A great example of this is an industrial tire project review we completed last year.
Through an engineering redesign effort across our large scrubbers and sweepers, we introduced new tires that reduced our cost, improved traction and performance for our customers and reduced our tire SKUs by over 50%.
Another example of reducing complexity is the plant optimization work we completed in China last year.
Our acquisition of Gaomei included a number of benefits, including a skilled workforce based in Hefei, China where we have now centralized our China manufacturing.
These optimization efforts allowed us to close our facility in Qingpu and will enable greater manufacturing flexibility and improved profitability.
As Chris noted, the implementation of our enterprise strategy is a continuous process, particularly with respect to our third pillar, innovating for profitable growth.
That means using a process of innovation to unlock value for our customers and for Tennant.
A great example of how we executed against this pillar in 2020 is the advances in our robotic floor cleaning product category.
In November of last year, we introduced our T380AMR robotic floor scrubber.
Its smaller size enhances maneuverability and navigation in tight areas, leading to maximum productivity and is ideal for customers with narrow spaces or layouts that may have been too challenging for our other robotic machine.
Our customer-centric approach in identifying and solving real world problems is the reason our customers see us as the market leader.
Looking ahead, the continued execution of our enterprise strategy will be central to our success, and is what will enable us to deliver on our annual and longer term goals.
This year, we will be diligent in following through on the projects we started in 2020 and we will selectively activate specific initiatives that will further our ability to improve our operating model.
Included in our plans are improvements to our service infrastructure, specifically in North America.
By investing in new tools to better leverage our teams of service technicians, we are creating additional capacity within our current workforce, improving the way they work and also increasing our ability to meet our customers' needs.
On the product side, we will continue to innovate across our portfolio such as with the introduction of our new commercial products and the recent launch of our new T16AMR. The T16AMR is an important addition to our product category because it makes our autonomous cleaning technology available to our industrial customers.
With this machine, along with the previously introduced T7AMR and T380AMR, we believe Tennant has the broadest robotics offering available that covers the widest range of autonomous cleaning applications.
Furthermore, the commercial products we introduced at the beginning of February, demonstrate how seamlessly the three pillars of our strategy can work together in practice.
In addition to leveraging the benefits of our IPC platform from a value engineering perspective, we are offering versions of these products as Tennant-branded machines with the full complement of Tennant brand sales and support benefits.
The result is a superior value proposition for budget-minded customers backed by Tennant's reputation for quality and service.
On a personal note, I am thrilled with the progress we've made and the plans we have in place to continue executing our enterprise strategy.
While we are cautiously optimistic about the pace of a global recovery, I look forward to working with our team to seize the opportunities that lie ahead.
With that, I will hand the call over to Tom who will discuss our financials.
Please note that in my comments today any references to earnings per share or earnings per share both GAAP and non-GAAP are on a fully diluted basis.
For the fourth quarter of 2020, Tennant reported net sales of $273 million, down 7.4% year-over-year as a result of the pandemic-related slowdown, while our organic sales, which exclude the impact of currency effects, declined 8.9%.
Shifting to our fourth quarter results by geography.
As a reminder, we group sales in the three geographies.
The Americas, which includes all North America and Latin America.
EMEA, which covers Europe, the Middle East and Africa.
And Asia Pacific, which includes China, Japan, Australia and other Asian markets.
Sales in the Americas declined by 11.6% year-over-year and were down 10.5% organically.
Our results in the region were impacted by continued market weakness driven by the pandemic-related slowdown, which impacted both our direct and distribution sales channels.
The region is also lapping an unusually large AMR order in the previous year ago period, which offsets the organic growth we experienced in Brazil in the fourth quarter of 2020.
Sales in the EMEA region increased by 3.7% year-over-year due to currency effects, but were down 3.4% organically, primarily due to pandemic-related restrictions in the U.K., the Netherlands and the Iberian Peninsula.
Despite the negative organic growth, it's worth highlighting the region did deliver positive organic growth in Italy and Germany in the fourth quarter of 2020 with strong year-over-year growth in the parts and consumables and service businesses.
Sales in the Asia Pacific region declined by 10.4% year-over-year and were down 13.9% organically.
The year-over-year decline in fourth quarter sales was primarily due to Korea, which was significantly impacted by the pandemic along with declines in Australia.
These results offset organic growth in China from distribution and strategic accounts as well as growth in service across the region.
Now on to margins.
Adjusted gross margin in the fourth quarter of 2020 was 41.3% compared with 40.5% in the year ago period, increasing due to the positive effect of pricing actions and cost out initiatives driven by our enterprise strategy, which more than offset regional mix and strategic investments we made during the quarter related to our employees.
During the fourth quarter, our adjusted S&A expenses were 33.9% of net sales compared with 30.4% in the year ago period.
As we discussed last quarter, we made a number of strategic investments to enable us to exit the pandemic in a strong position as the markets continue to recover as well as investments in our employees to recognize our efforts through the pandemic.
Our S&A expenses also include additional planned expenses related to our new corporate headquarters.
As for the profitability, we reported net earnings of $2.5 million or $0.13 per share, down from $10.9 million or $0.59 per share in the prior year.
Adjusted EPS, which excludes non-operational items memorization expense totaled $0.48 compared with $0.86 in the prior year.
In terms of adjusted EBITDA, our results decreased to $25.4 million or 9.3% of sales compared with $34 million or 11% of sales in the year ago period, driven by our lower year-over-year revenue and the incremental investments in the quarter mentioned a moment ago.
As for our tax rate, in the fourth quarter, Tennant had an adjusted effective tax rate excluding the amortization expense adjustment of 32.3% compared to 23.3% in the year ago period.
The increase was mainly due to the mix of taxable earnings by country and a decrease in discrete favorable tax items compared to the prior year.
Turning to cash flow, capital allocation and balance sheet items.
In the fourth quarter, Tennant generated $36.3 million in cash flow from operations, primarily driven by business performance and improved working capital levels.
We also reduced outstanding debt by $15.2 million and paid $4.2 million in cash dividends to shareholders.
Turning now to our full year performance.
In 2020, net sales totaled $1 billion compared to $1.14 billion in 2019, reflecting a decline of 11.8% on an organic basis driven by market weakness due to the global pandemic.
As Chris mentioned, our ability to quickly respond to the pandemic and manage costs and ensure liquidity allowed us to deliver an adjusted EBITDA for full year 2020 of $119.4 million or 11.9% of sales compared with $136.9 million or 12% of sales in 2019.
These actions also allowed Tennant to generate cash flow from operations of $133.8 million, reduce outstanding debt by $31.1 million and pay $16.3 million in cash dividends to the shareholders.
While the macroeconomic outlook remains uncertain, we are ready to ramp up quickly as the anticipated recovery continues to gain pace.
In addition to improving market conditions, we expect we'll benefit from our strategic investments in the improvements to our operating model that began last year as part of our enterprise strategy.
As included in today's earnings announcement, our guidance for full year 2021 is as follows.
Net sales of $1.05 billion to $1.08 billion with organic sales rising 5% to 8%.
GAAP earnings of $3.30 to $3.75 per share.
Adjusted earnings per share of $3.50 to $3.95 per share, which excludes certain non-operational items and the amortization expense.
Adjusted EBITDA in the range of $130 million to $140 million.
Capital expenditures of $20 million to $25 million.
And an effective tax rate of 20%.
We are cautiously optimistic about the overall pace of recovery and expect to deliver on our full year guidance assuming no further pandemic-related issues in 2021.
Based on our anticipated pace of recovery in 2021 and our actions to manage costs during the pandemic in 2020, we expect that EBITDA and adjusted earnings per share will improve sequentially each quarter this year with Q1 likely being the lowest quarter for EBITDA and adjusted earnings per share as Q1 2020 was least impacted by COVID last year.
Our guidance also incorporates the divestiture of our coatings business, which we estimate having $20 million to $25 million impact to sales.
Before we start the Q&A, I want to take a moment to discuss our leadership transition.
As you know, Dave Huml will become CEO on March 1 and I will serve as a strategic advisor until the end of this year.
I have been at Tennant for almost 18 years, including 15 years as President and CEO.
This has been, without a doubt, the most wonderful and fulfilling experience of my professional career.
But this is definitely an opportune time for a change in leadership.
One of the most important things a CEO can do is ensure a smooth and seamless transition to new leadership.
I am proud to say that we have accomplished that with the succession plan we have in place, which is the culmination of more than two years of work in cooperation with our board of directors.
I hired Dave a little over six years ago, and we have a very close working relationship.
It's been such a great pleasure to see him grow as a leader and become an important contributor to Tennant's success.
Dave loves the company and has a deep understanding of our business.
He has led our global marketing group.
He has been responsible for Asia Pacific and EMEA.
He was the executive sponsor of our IPC integration.
And he even had us then running our global operations group.
Dave has exceptional leadership abilities as well as the vision to take Tennant to new levels of success.
His industry knowledge, global experience and foundational understanding of our company have been powerful attributes in working with our senior leadership team to develop and now implement our enterprise strategy.
Dave has a keen understanding of where we need to go as an organization to serve all of our stakeholders.
And I am excited to see where he takes us.
In closing, I would like to say that what has touched my heart most profoundly through all my years with the company are the people.
The thousands of wonderful, talented, dedicated and caring people of the Tennant family.
They are the lifeblood of this great organization and the reason it has thrive for 150 years and will continue to flourish for the next 150.
With that, we will now open the call to questions.

user
tennant co q4 earnings per share $0.13 (feb. 25).
tennant co sees 2021 net sales $1.050 billion to $1.080 billion; fy reported gaap earnings $2.50 to $2.95 per share; fy adjusted earnings per share $3.50 to $3.95.
q4 earnings per share $0.13.
q4 sales $273 million versus refinitiv ibes estimate of $271.9 million.

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