Tennant Co

NYSE:TNC

Earnings Call Transcript 2024-Q3

[Operator]

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to Tennant Company's Third Quarter 2024 Earnings Call. This call is being recorded. [Operator Instructions] Thank you for participating in Tennant Company's Third Quarter 2024 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.

[Lorenzo Bassi, executive]

Good morning, everyone, and welcome to Tennant Company's Third Quarter 2024 Earnings Conference Call. I'm Lorenzo Bassi, Vice President, Finance and Investor Relations. Joining me on the call today are Dave Huml, Tennant's President and CEO; and Fay West, Senior Vice President and CFO.

Today, we will provide an update on our 2024 third quarter performance. 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 2024 third quarter earnings release includes the comparable GAAP measures and a reconciliation of non-GAAP measures to our GAAP results.

I'll now turn the call over to Dave.

[David Huml, executive]

Thank you, Lorenzo, and hello, everyone. On the call today, I will be discussing highlights from the third quarter 2024, our outlook for the remainder of the year and the progress on our enterprise strategy. I am pleased to report on our strong third quarter results, lapping a record high third quarter in the prior year, we delivered both organic net sales growth and increased adjusted EBITDA.

As we anticipated, this quarter's performance was driven more by incoming order demand and less from backlog reduction. With this growth momentum, we are well positioned to achieve our 2024 guidance and continue to execute our enterprise growth strategy effectively.

For the third quarter of 2024, net sales increased 3.6% to $315.8 million. Adjusted EBITDA rose to $47.9 million, yielding an adjusted EBITDA margin of 15.2%. Order rates were very strong in the third quarter, increasing high single digits compared to the same period in 2023. On a year-to-date basis, order rates have increased mid-single digits and are above our long-term revenue growth target of 3% to 5%.

This quarter also marks the second consecutive quarter with strong order growth across all our geographies, a trend we believe will continue in the fourth quarter. Unpacking the third quarter, our business results varied by geography.

In the Americas, order rates during the quarter were up compared to the prior year period significantly outperforming the average growth rates we have seen in the region over the past few years. This was the result of both pricing and volume growth driven by our enterprise strategy initiatives. We reduced our backlog in the quarter at a faster pace than expected due to order softness within our North America industrial product.

Overcoming currency-related headwinds in Brazil, our strategic investments in the Americas continue to deliver order rates outpacing market growth, reinforcing our confidence that our strong leadership position is growing. In EMEA, continued market demand softness this year was compounded in the third quarter by lapping a previous quarter with higher backlog reduction benefit. Despite the overall sluggishness, we continue to see some positive signs in the region.

Third quarter order rates increased double digits and year-to-date orders are up mid-single digits. Go-to-market initiatives helped drive double-digit growth in the U.K. compared to the prior year period and Italy saw strong organic growth as we expanded our distribution network.

Lastly, TCS, our previously announced acquisition in Eastern Europe, continues to perform ahead of expectations. This business drove nearly 6% growth for the region in the quarter. Integration is on track, and we are executing aggressive growth plans for this business in this attractive region.

Turning now to APAC. Our APAC region accounts for 7% of our enterprise-level sales, with China and Australia combined, accounting for over 60% of this region's revenue annually. Business performance in this region was primarily impacted by start declines in China, where overall market demand has slowed considerably. Australia is also showing signals of slower demand, reflecting customers' growing economic uncertainty.

As has been widely reported, excess manufacturing capacity and government-induced overproduction in China are pressuring market prices in our mid-tier product offerings and impacting our results. We do not see this dynamic changing for the remainder of the year. To counter this, we have strategically shifted our focus to vertical markets and product categories that are more insulated from this broader market dynamic, particularly through our Tennant branded legacy product offerings, which delivered strong growth in the third quarter.

Turning now to strategic initiatives. Last year, we introduced the 3 pillars of our new enterprise strategy: growth, performance and people. We continue to resource, invest and execute targeted initiatives across each of these pillars, and I'd like to take the opportunity to provide you with several key updates from the quarter.

Within the growth pillar, pricing is a critical piece to driving growth. During the third quarter, we continued to see price growth across each of our geographies. At an enterprise level, we are targeting approximately 50 to 100 basis points of annual price growth as part of our long-term goals. We are well positioned to achieve that in 2024 and expect our pricing realization to more than offset inflationary pressure for the full year 2024.

New product development is another important focus area in our growth pillar. By launching innovative new products, we help our customers solve their most pressing challenges, capitalize on emerging technology and market trends and differentiate our offerings from our competitors. At an enterprise level, we are targeting new product development to add approximately 150 to 200 basis points of growth as part of our long-term goals. Bolstered by the release of the X4 ROVR earlier this year, we are on pace to achieve that in 2024.

As part of our new product development efforts, we are placing a strong emphasis on small space and product line extensions. Earlier this year, we introduced our i-mop family of products into new geographic markets, including Brazil, France, Portugal and Spain. This international expansion has driven incremental growth of i-mop products during the current year, and we anticipate continued growth through increased country, channel and brand access as we look ahead to 2025 and beyond.

In September, we launched our new T291 small walk-behind scrubber into the North American market. Designed for use in both hard-to-reach spaces and open areas, the T291 is a walk-behind scrubber built to simplify and improve facility management by combining cleaning power and maneuverability. The T291's versatility and small size make it an excellent fit for midsized retail, health care and education environments.

Our product line extensions have proven to be an effective strategy, positioning our mid- and premium-tier products to grow share and generate incremental revenue and margin.

The third area of focus for our new product development efforts is AMR. The strong market reception for the X4 ROVR, combined with continued high demand for our existing AMR products has been encouraging. Customers are choosing Tennant AMR machines supporting our belief that we have a winning product portfolio, differentiated service capability and strong value proposition in the market. Customers are actively upgrading and expanding their AMR fleets with new X4 ROVR and our other AMR models.

In the third quarter of 2024, we saw significant repurchases from existing key retail customers and are reaching new AMR customers with the X4 ROVR, which officially launched in EMEA during the quarter. In the first 9 months of 2024, we have deployed over 2,200 units bringing our cumulative AMR total to over 8,700 units deployed since introduction. We continue to be pleased with our progress on driving disruption in robotics and growing our AMR portfolio, which now accounts for approximately 5% of net sales at the enterprise level for the first 9 months of 2024.

The launch of the X4 ROVR alongside our strong AMR performance fuels our optimism as it relates to our long-term growth strategy. We designed the X4 ROVR as a scalable platform allowing us to bring new products to market more quickly and cost effectively. This includes accelerating the development of new products based on the X4 ROVR platform with additional launches now planned for 2025.

Shifting to the performance pillar of our enterprise strategy, our ERP modernization journey is one of the key components within our performance pillar. The project is on track, and we have hit our current year milestones related to the design and build phase of the implementation with staggered go-live launches planned for 2025. Our significant investment in this ERP project will provide a strong and secure digital infrastructure to enable globally standardized processes and systems for scalable growth. by better serving more customers and unlocking operational efficiencies.

Looking ahead, we anticipate a strong finish to 2024, driven by increasing order growth across all geographies. This momentum, supported by our strategic initiatives, is expected to continue promoting higher order growth in 2025. While this order growth bodes well for our long-term outlook, other dynamics will shape our 2025 performance.

As previously discussed, our 2024 backlog was primarily concentrated in North America industrial equipment. Initially, we anticipated reducing our backlog by $80 million to $100 million within the year. However, we are now on track to reduce our backlog by $130 million by the end of 2024. This accelerated reduction is attributable to lower-than-expected incoming orders for industrial equipment.

In 2024, we experienced lower-than-anticipated demand for industrial equipment across various vertical markets including the rental channel, where we are experiencing extended replacement cycles. This market dynamic has contributed to a larger-than-expected backlog reduction in 2024, presenting a headwind for 2025. Despite anticipated strong order growth in 2025, this significant backlog reduction, coupled with continued softness in certain regions, is likely to result in muted top line performance in 2025.

We continue to see success in the first year of our enterprise growth strategy. The investments we are making are reading out in the current year illustrated by our strong double-digit order growth. We believe we will see continued order growth from these initiatives as we navigate the short-term backlog challenges in 2025.

Our key enterprise growth drivers, pricing, new product development and go-to-market investments, will continue to fuel our growth and help drive our long-term revenue growth targets of 3% to 5%. Additionally, we will continue to prioritize investments aligned with our long-term growth pillars while maintaining strict spending discipline.

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

[Fay West, executive]

Thank you, Dave, and good morning, everyone. In the third quarter of 2024, Tennant delivered GAAP net income of $20.8 million compared to $22.9 million in the prior year period. Net income for the quarter benefited from increased net sales, primarily driven by effective price realization and volume growth in the Americas.

However, this positive performance was partially offset by volume declines in EMEA and APAC. Additionally, operating expenses rose this year due to the ERP implementation costs as well as integration costs related to our acquisition of TCS, which totaled $4 million in the quarter.

Beyond operating income, interest expense in the third quarter was $0.6 million lower than the prior year period. This reduction was primarily due to a decrease in debt balances, coupled with lower interest rates. Our average interest rate, net of hedging for the third quarter of 2024, was 4.63% compared to 4.92% in the prior year quarter.

Income tax expense in the third quarter were slightly higher than the prior year period. Our effective tax rate was 24.4% in the third quarter of 2024 compared to 23.4% in the prior year period. The increase in the effective tax rate was primarily due to an increase in nondeductible executive compensation and an unfavorable change in the mix of forecasted earnings by country. We anticipate that our full year effective tax rate will be within our guided range of 22% to 27%.

Excluding ERP implementation costs and other non-GAAP costs, adjusted net income in the third quarter of 2024 was $26.6 million compared to $25.4 million in the prior year period, a 4.7% year-over-year increase. Adjusted EPS for the third quarter of 2024 increased 3.7% compared to the prior year period to $1.39 per diluted share.

Looking a little more closely at our quarterly results. For the third quarter of 2024, consolidated net sales totaled $315.8 million, reflecting a 3.6% increase from the $304.7 million reported in the third quarter of 2023. Acquisitions contributed 1.3% of this growth, while changes in foreign currency exchange rates had a negative impact of 0.4%, primarily affecting our operations in Brazil. On a constant currency basis, organic sales increased 2.7% with 1.8% attributable to price increases and 0.9% due to volume growth.

On a consolidated basis, order activity grew mid-single digits, driving higher equipment sales, particularly in the Americas. However, volume in the current period was adversely affected by sluggish economic conditions in EMEA and a challenging business environment in APAC. As a reminder, we grew our net sales into the following categories: equipment, parts and consumables and service and other.

In the third quarter, we experienced growth in both equipment and service product categories as compared to the prior year period. Equipment sales grew 3.7% and service increased 9.2% while sales for parts and consumables remained unchanged.

Tennant also groups of sales into 3 regions. The Americas includes all of North America and Latin America, EMEA covers Europe, the Middle East and Africa and Asia Pacific includes Australia, China, Japan and other Asian markets. Organic sales in the Americas increased 4.6% compared to the prior year period. The increase in net sales was driven by a 60-40 split between volume and price. Volume growth across the region was generated primarily from our commercial equipment sales, while volume growth in our industrial equipment was flat.

Organic sales declined 0.8% in EMEA due to volume declines in both equipment sales and parts and consumables, partially offset by price realization in all product categories. EMEA volumes were impacted by weaker-than-expected market conditions and a smaller contribution from backlog reduction in the current period.

Organic sales decreased 4.3% in APAC, primarily due to volume declines in China and Australia, partly offset by price growth in Australia. As Dave mentioned earlier, challenging business conditions persist in the region, and we expect this dynamic to continue for the remainder of the year.

[indiscernible] third quarter of 2024 was $47.9 million, up 4.4% compared to the third quarter of 2023. Adjusted EBITDA margin for the third quarter 2024 was 15.2% of net sales, up slightly compared to the third quarter 2023. Gross margin was 42.4% in the third quarter, a 90 basis point decrease compared to the prior year quarter. The margin rate decrease is attributed to inflationary pressure on materials as well as elevated freight costs. Unfavorable geographic and customer mix also contributed to the decline but to a lesser degree. This was partially offset by price realization.

Our overall margin profile can be impacted by shifts in our geographic, product and customer mix. During the first half of 2024, as we reduced our industrial equipment backlog, our overall margin rate benefited from this higher margin profile shift. In the third quarter, as orders for our commercial products increased, our product mix became more balanced. We expect this balanced mix to continue in the fourth quarter of 2024.

Our pricing and cost initiative efforts during the year have positioned us to achieve our EBITDA margin expansion targets for the full year of 2024. Adjusted selling and administrative expense in the quarter totaled $88.7 million, a $0.5 million increase compared to the third quarter of 2023. Adjusted SG&A expense, as a percent of net sales, was 28.1%. This is an 80 basis point improvement compared to the third quarter of 2023.

Turning now to capital deployment. Net cash provided by operating activities was $30.7 million during the third quarter compared to $54.4 million in the year ago period. Operating cash flow during the quarter was impacted by investments in the ERP project as well as working capital investments related to inventory.

We generated free cash flow of $26.4 million for the quarter, which included investments in the ERP of $9.4 million. When excluding these nonoperational cash flows, we converted 154% of net income to free cash flow during the quarter. The company continues to deploy cash flow toward operational capital needs and to return capital to shareholders in line with its capital allocation priority.

During the third quarter, the company invested $4.3 million in capital expenditures and returned $13.3 million to shareholders through dividends and share repurchases. Yesterday, we announced a 5.4% increase to our annual dividend, raising it to $0.295 per share. This marks the 53rd consecutive year, Tennant has increased the dividend payout. Tennant's liquidity remained strong with a balance of $91.3 million in cash and cash equivalents at the end of the third quarter and approximately $439.3 million of unused borrowing capacity on the company's revolving credit facility.

As previously announced in August, the company refinanced its existing debt agreement, increasing its revolving credit facility limit to $650 million. This provides the company with increased flexibility and capability to fund growth through M&A and create value for our stakeholders. The company continues to effectively manage debt and maintain a strong balance sheet. Our net leverage was 0.56x adjusted EBITDA, below our targeted range of 1 to 2x adjusted EBITDA.

Moving to 2024 guidance. Overall, based on the strong order growth rates and demand for our products and services, we are reaffirming our 2024 guidance. We will remain disciplined and prudent in our spending, focusing on investments in areas that position us for growth and increased operating efficiencies.

For 2024, Tennant reaffirms the following guidance: net sales in the range of $1.280 billion to $1.305 billion, reflecting organic growth between 2.5% to 4.5%; adjusted EPS of $6.15 to $6.55 per diluted share, which excludes certain nonoperational items and amortization expense; adjusted EBITDA in the range of $205 million to $215 million; adjusted EBITDA margin in the range of 16% to 16.5%; and capital expenditures of approximately $20 million.

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

[David Huml, executive]

Thank you, Fay. In summary, I am very proud of the global team and our ability to continue our growth trajectory. As we carry this momentum through the end of the year, we are well positioned to achieve our 2024 guidance. I am optimistic by the positive returns we are seeing from the investments we are making in the first year of our enterprise growth strategy. The work the team is doing is helping create the framework to reach our long-term financial targets of 3% to 5% sales growth and annual EBITDA margin expansion between 50 and 100 basis points.

Our strategy is centered on creating value for our shareholders through returning capital via dividends and share repurchases as well as a renewed focus on value creation through acquisitions. Growth through acquisitions presents an exciting opportunity to capitalize on mega trends, expand our total addressable market and drive growth.

We're excited about the opportunities here at Tennant. As we continue to make investments fueling our growth, we're prepared to tackle the 2025 backlog headwinds and drive forward with the transformational ERP modernization project. This ERP journey will empower us with real-time insights, enabling smarter, faster decision-making across the business. The foundation our team is building now is paving the way for our future success.

If you wish to learn more about our company and the direction we're heading, we are participating in the Baird Global Industrial Conference on November 13 in Chicago.

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

[Operator]

[Operator Instructions] Our first question will come from the line of Steve Ferazani with Sidoti.

[Steve Ferazani, analyst]

Appreciate all the detail on the call. You covered a lot of ground, so a lot of numbers. So I want to see if I can work through at least a couple of big topics, if that's okay. I want to start with the AMR. It sounds like if it's 5% year-to-date, accounting 5% of your year-to-date net sales. It sounds like that's really, if anything, understating the performance, right? Because, as I recall, you only began shipping the new ROVR in 2Q, and now you've just moved to EMEA in 3Q. Is that accurate? Really, if we're looking at it from the period when you started launching the product, that would be a much higher number?

[David Huml, executive]

Steve, thanks for the question. Just to clarify, the 5% number is on total revenue for all of our AMR products.

[Steve Ferazani, analyst]

You're right.

[David Huml, executive]

So I think maybe you were...

[Steve Ferazani, analyst]

But I'm assuming the ROVR is the biggest driver this year? Or is that not accurate?

[David Huml, executive]

Well, ROVR is part of the driver, but it's a really -- so it's a great question. Underneath it, we are growing differentially in our legacy AMR products as well as benefiting from the X4 ROVR. And when you think about X4 ROVR, we're really excited about it. We believe it's a game changer for us. We really started shipping the X4 ROVR in Q2 in the North American marketplace and later in Q3 in the European marketplace. So it's performance is not a dramatic driver of that 5% data point.

[Steve Ferazani, analyst]

Okay. When I think about when you launch -- when you initially launched AMR, it was driven primarily by 2 or 3 big orders. Is ROVR -- the [indiscernible] of ROVR is demand different?

[David Huml, executive]

Yes. So if you think back to the -- if you open the aperture and think about the AMR journey we've been on, we had a large strategic account order that we were public about right out of the gates in 2020 and took into 2021 as well. Since then, we've launched additional models in the T380AMR and the T16AMR and now the X4 ROVR. We are very fast out of the gates with the X4 ROVR. But as I mentioned, we really only got 1.5 quarters X4 ROVR impact in the year-to-date numbers and less than a quarter's impact in EMEA impact results in the year-to-date numbers.

So my point being, we expect X4 to continue to ramp as a percentage of our total AMR sales. And it's important to note the pipeline for X4 and actually the pipeline for all of our AMR is really strong here as we look out into Q4 and beyond.

[Steve Ferazani, analyst]

Excellent. Appreciate that, Dave. Help me out with the backlog. There are a lot of numbers there. So it now sounds like -- let me make sure I got these right, and I can ask. You've converted $80 million to $100 million this year. You're expecting $130 million full year. As I recall, that compares to -- I think you converted $140 million last year. And where are you -- will you be at a normalized rate by year-end?

[David Huml, executive]

Yes. So Steve, your numbers are good. We have guided to an 80 -- or excuse me, an $80 million to $100 million backlog reduction. As we started the year, we're actually going to deliver now but we believe about $130 million in backlog reduction. That compares to $140 million in prior year, and we expect to exit the year with a normalized backlog, which means we're back to market competitive lead times and selling our entire product portfolio at the lead times that our customers expect.

[Steve Ferazani, analyst]

Okay. And then it sounded like you also commented the reason you're able to convert so much of the industrial backlog this year was industrial orders have been a little bit slower. I mean does that set you off for not only challenging sales comps next year, but also your mix is going to be dramatically shifted, right, particularly if industrial is slower?

[David Huml, executive]

Yes, I think it's important to dimensionalize that comment about industrial softness because really it's a very narrow set of products. And we've mentioned earlier that our backlog had become increasingly consolidated in North America and on fewer [indiscernible] product lines. Those were the lines where we saw the softness in incoming orders, which allowed us then to train the backlog more quickly than we expected.

And when you dig deep into what drove the softness in those particular industrial products, it's really a story of a few customers and the rental channel, which we referenced in the script. I can put more color around the rental industry dynamic, if you'd like, but it's -- we believe it's a correction kind of in that industry or coming off of the supply chain prices. We don't expect it's going to rectify itself that specific situation anytime soon in 2025.

But beyond that, we see opportunity in the other industrial vertical markets and the industrial products. So we'll solve for that acute problem in that specific vertical market and the industry, it's not a broad-based industrial downturn. Does that make sense, Steve?

[Steve Ferazani, analyst]

Yes. Because I mean I remember at the beginning of the year, the view was the industrials could be strong because of the labor saving opportunity where there was obviously labor shortages. So you -- what you're saying is that was still playing out, it was specific to the rentals market only where you've seen the softness?

[David Huml, executive]

Correct.

[Steve Ferazani, analyst]

Okay. Okay. That's helpful. Last one for me because I don't want to take up too much time here. I want to let other people have a chance. But can you update us on where you are with the ERP modernization time and costs that remain, and you could walk through what that can mean on the financial side once that's completed?

[David Huml, executive]

Yes. Let me walk through the project sort of where we're at on scope, timeline and Fay fill in the details on the financials behind it. I'm really pleased with progress on this major transformational project for Tennant Company. We're in -- we'll be ending year 2 of the programs. We're in the design and build phase. We're actually building out the system to meet our requirements and configure it to match our business. Team has done a fantastic job, and this has required a significant lift from many resources across the company. We are benefiting greatly from our partners significant lift by our team around the world and also guidance by our Board that has experience with multiple ERP deployments in other industries, other companies.

So we feel like we're really well positioned. We're on pace as far as scope and functionality deliverables as we move through Q3 and are optimistic on our outlook. 2025 is a big year for the program. We have staggered go-lives, land geographically around the world beginning in Q2 and so it will be all hands on deck to make sure that we can deploy the system effectively, help our team members as they change to the new way of working with the new standardized global processes, avoid business disruption and realize the benefits, both tangible and intangible of having a common ERP around the world.

[Fay West, executive]

And Steve, just to put some numbers around it. Year-to-date, we've spent approximately $25 million. Of that $25 million, $9 million is running through the P&L and $16 million has been capitalized. On a full year basis, we anticipate spending right around $37 million, which was in line with our original expectations and the breakout there would be similar as far as what gets capitalized and what [indiscernible].

[Steve Ferazani, analyst]

And what's remaining for cost and timing?

[Fay West, executive]

Yes. So as Dave mentioned, we've got a year of deployment in 2025, staggered throughout the year, and I suspect likely some of that, given the timing of deployment will run into early part of 2026. We're in line with our anticipated cost projections for the project that we outlined early on. So we are tracking time line-wise and tracking dollar-wise.

[Steve Ferazani, analyst]

Okay. And what do you think the impact can be in terms of -- do you view this as potentially beyond just the speed and convenience? Can -- is this a margin enhancing project for the business?

[David Huml, executive]

Yes. So we're planning on efficiency savings between $10 million and $15 million, and we continue to refine and enhance those estimates as we build the system and understand the true functionality we can deliver in that time frame to realize the efficiency savings and that's really only part of the story. The rest of the benefits are going to be less tangible and quantifiable to P&L. But we're looking for enhanced decision-making by putting better data in people's hands to make faster decisions, capitalize on opportunities and candidly, just serve more customers better with less manual effort required. So there's $10 million to $15 million kind of efficiency planning target we have out there. We'll update you as we move through 2024 into 2025, how that number is shaping up as we finalize the estimates.

[Operator]

Our next question comes from the line of Tom Hayes with CL King.

[Thomas Hayes, analyst]

Dave, maybe just a couple of geographic-based questions. I think you mentioned APAC. Obviously, I think everyone knows or kind of understands that the China has been a pressure point for you and everyone in the industrial world for a while. I was just wondering, you had kind of highlighted in your prepared remarks, some initiatives or actions you're taking in that market. Could you just maybe just go over those a little bit more?

[David Huml, executive]

Yes, I'd be happy to. The headline story around APAC is performance is really that market-driven softness in China. China -- and this has been widely reported in the mass media, China is trying to overcome some significant macroeconomic headwinds, and we are not immune to those pressures. And the way that's manifested itself and showing itself in the markets we serve, is that there is overcapacity from a production standpoint on decreasing demand in the market as well as government incentivized over production.

So we've seen price pressure primarily in the lower end of our product line. You would say commercial products [indiscernible] is kind of the very competitive price point products that we have in our portfolio. And so what's happened is there's this price war going on amongst competitors. And we're -- what we're not doing is chasing the price down the sewer. We're being very intentional about where we're choosing to participate in that -- in this market environment. We are taking orders. We're going to do it profitably, and it's incremental volume for us. So we've been very intentional reacting to this market dynamic within China.

And there's a halo effect of this dynamic outside of China because as the overproduction is unable to find a home in the local China market, they're exporting their production at really reduced market rates. So you're seeing some impact throughout Southeast Asia and elsewhere of these exported low-priced units.

So what we are doing in response is flexing our resources to focus more on the higher end of our line. And for us, that's our industrial product. In that space, there are just fewer competitors. We are product advantaged in that space. We have a legacy of product leadership. So we're well known as a preferred partner in that space.

And from a selling perspective, these are more single site sales up and down the street where our direct selling capability gives us an edge and our direct service capability gives us an edge over distribution, for example -- selling into distribution because we have that direct relationship with end use customers. So what we're doing is flexing our selling organization to focus more on the industrial vertical markets to try to drive volume where we can get growth at decent margin, accretive margin rather than kind of just chasing this commercial product as it moves ratchets down in price points.

In the short term, we weren't able to offset the decline in the commercial space with the industrial sales. And -- but we did drive incremental business for us in industrial on a stand-alone basis. So we think it's an appropriate step to take just acknowledging the challenging environment we're in China.

[Thomas Hayes, analyst]

No, I appreciate the color and maybe shifting over to EMEA. It sounds like the acquisition that you guys did, I think it was earlier this year or late last year on the distribution platform is performing well. Just your thoughts on that progress?

[David Huml, executive]

Yes. It's going really well. I appreciate you mentioning and asking the question. It's going really well. Really, really pleased with the performance of the business. We bought a business that's made up of a group of really talented long-tenured people who have long-standing customer relationships in these markets, and they just had not been appropriately equipped to address all the opportunity in their markets, whether that be from a training perspective, from a go-to-market strategy perspective, from a product assortment perspective.

So I'm really proud of the Tennant team for coming in embracing the acquisition moving intentionally with aggressive growth plans so that we can get the products into the hands of the sellers and the sellers trained so they can take those products in front of the end use customers. And the early returns are really positive. I continue to be very bullish on this acquisition. I think it's an excellent example of where we can put our capital to work to create value for shareholders within our core space, our core [indiscernible] market, and this is -- this is a channel play. We've acquired new channels to market in new geographies on a direct basis, direct sales and service bases that can drive incremental value, not only growth for the company but incremental value for shareholders as well.

[Thomas Hayes, analyst]

Okay. I appreciate that. Maybe just one on the AMR business and then I know you covered a lot of that with the previous caller, but I was just wondering on production capacity, I know you added some not too long ago, but what are you thinking on that outlook, especially with your commentary that demand remains pretty robust?

[David Huml, executive]

Yes, we did -- we referenced an earlier call on the X4 ROVR specifically when we launched in North America, we looked at the pipeline of opportunity and orders likely to come, and we decided to make the investment to roughly double our production capacity versus the original launch plan on export Rover. I'm pleased to report we're making great progress securing orders for that increased production. So that -- I think that's proven to be a smart move by the team to double down on the product in that space.

Listen, I think it's a lot of upside for AMR for us in the 2024 and out in 2025. And I would remind you, we're solving for one of our customers' most pressing problems, which is the availability, the cost and the reliability of labor. And all of our equipment enhances productivity, but AMR specifically reduces the reliance on cleaning labor that is increasingly hard to find and expensive.

We are demonstrating success with our legacy AMR products. We've gained some significant re-fleet orders in addition to fleet orders on our T7AMR, for example, our T16AMR was the last -- before the X4 ROVR, that was the most recent introduction that's focused on industrial applications and the uptake on that product has been really, really great and excited about the upside T16AMR.

X4 ROVR, listen, I spent a lot of air time on it, as our first ground-up purpose-built AMR product, I think it's a real game changer for us. And our customers are telling us that it solves a real need to have in a differential way. And so I think we've got a lot of upside on X4 ROVR. If you narrow your view and just think about 2025, we had a midyear launch of X4 ROVR in North America and a late Q3 launch of X4 ROVR in EMEA. So even just straight lining for full year availability in 2025 provides mathematical upside. The pipeline looks very robust. And now I just -- we've got to get out and convert the pipeline of interest into a pipeline of [indiscernible].

[Thomas Hayes, analyst]

Okay. Maybe one more, if I could. Just on your new product launch on the T91, what -- are there any specific markets that's addressing?

[David Huml, executive]

This is really a product that's born out of our product line extension strategy where we look at the platforms, the hardware platforms we have from our acquired businesses in IPC and Gaomei and consider rebranding them into, in this case, Tennant brands so that we can take it through our existing channels. It's a great representation of that strategy.

But what we're targeting is smaller store formats with this product line. It's really compact and highly maneuverable. It's capable of cleaning wide open spaces, but it really shines when you get into tighter spaces. So think about smaller-format retail environments that have checkout aisles or even tight aisles that need to be navigated, think about grocery stores, think about smaller store format retail, general merchandise retail [indiscernible] stores, et cetera, which is really is kind of bread and butter applications for us because we sell the large format stores, but when we get into the smaller format stores, some of the equipment historically is rather hard to navigate the space.

And so we think this gives us an opportunity to penetrate smaller store formats in real and retail vertical market, but also vertical markets like education and health care as well.

[Operator]

Our next question comes from the line of Aaron Reid with North Coast Research.

[Unknown Analyst]

So based on where Tennant is at the full year guidance range right now, what needs to happen in the fourth quarter to really achieve that? Is it really coming back to order growth? Are you thinking more backlog reduction? Or is it a combination of the 2? Can you provide a little more color on that?

[David Huml, executive]

Yes, just a math. At midpoint of our guidance, we need to deliver $334 million in revenue in Q4. Some of that will be driven by backlog reduction. We exited Q3 having taken backlog down by $109 million. And this -- so we got another -- to hit $130 million in estimate we have for full year. There's another $20 million, $21 million of backlog reduction. And then when we'll do that, that will likely happen earlier in the quarter rather than later. But really, the activity as [indiscernible] as backlog reduction is the activity to deliver Q4 is around our strong pipeline of opportunity, and we've got line of sight to a strong pipeline of orders in AMR as well as some key strategic accounts that are already planned, gives us confidence that the orders will materialize in those products and customer segments.

We continue to execute really well against our Elevate strategy and inclusive of AMR, and we talked during Tom's questions about kind of the X4 ROVR and the momentum we have in that space as well. We've come through the last 2 quarters with really strong order growth. And really, that's a direct result of the investments and actions we're taking in our Elevate strategy. We expect strong order growth in the Q4 as well, kind of hovering around that double-digit order growth rate year-over-year, which not only helps us deliver Q4, but it sets us up really well, having 3 quarters of elevated growth rate as we head into 2025.

[Unknown Analyst]

That makes sense. I appreciate it. And then just kind of building off of this, I know you've already touched on it a little bit, but can you tell me about how AMR is performing this year compared to your expectations? And in addition to that, when we look further into 2025 and beyond, how do you see AMR impacting your overall growth trend?

[David Huml, executive]

Thanks for the question. So AMR is -- continues to perform well. And, Aaron, I know you're a bit newer to the conversation. So I'll fill you in on something we've been talking about over the past several years with AMR. We're really bullish on AMR over the long term. We are disrupting an industry. And so the adoption curve of AMR for our customers in this industry is anything but a traditional adoption curve. We've seen really spotty adoption marked by significant orders, for example, in strategic accounts, large fleet orders that can really skew the impact of AMR in a given quarter, month or quarter and even a year because some of these deployments have been significant.

But when you take a step back and think about the cumulative impact that we've driven for the business on AMR, we're at over $250 million in sales cumulatively since we launched AMR, over 8,700 units to 850 unique customers in 25 different countries. And so the reason I bring that up is that we are very pleased that we are getting the product out and in front of as many customers in as many geographies, channels and vertical markets as possible so that we can begin to model engage, where will the adoption be the most quick across those vertical markets that we serve.

This X4 ROVR is a game changer for us. I believe it's our first purpose-built robot, gives us a truly differentiated offering in the marketplace based on it's maneuverability and its performance. It's enhanced by our agreement with Brain, where we have exclusivity on the Generation 3 navigation software. We have exclusivity amongst any competitors in the marketplace, and it's just a superior navigation system.

So -- and we're also participating -- as a result of that agreement, we're participating in the ARR of the subscription revenue, which provides us another profitable revenue stream as we go forward. We expect AMR to be a significant contributor, not only to the enterprise, but to our growth year-over-year as we move into 2025, '26, '27. We're continuing to iterate X4 is a purpose built ground up machine. It's a platform product. So we indicated in the script that we expect to launch more new products off of that platform beginning in 2025, that will give us an opportunity to take kind of the benefits of the X4 platform into even more vertical markets, get into more vertical customers. And we think we think, drive an inflection point in adoption.

And so we're really bullish on the AMR opportunity and think it's going to be a significant contributor to the business, but also a disruption to this industry on a global basis in the coming years.

[Unknown Analyst]

Okay. That makes sense. And then drilling down just a little bit further. One other question I had was, it sounds like right now, you're experiencing some longer lead times on replacement of some of these fleets and some of that equipment. My question is, will you expect to possibly see any sort of offset in terms of more sales coming through the parts and consumables segment as these vehicles are just getting towards the end of their lives and you start to see higher failure rate on parts? Is that a possible offset?

[David Huml, executive]

Yes. That comment about the extended replacement cycles was really limited to the rental industry and our partners in the rental channel. I'll just give you a quick snippet about the dynamic there. Coming through supply chain challenges when customers couldn't get their equipment from the OEMs, like Tennant and many others, the rental industry in general saw that this was going to be a short-term opportunity to capture a demand spike as customers still need equipment, whether it's a backhoe or a floor scrubber or a bull lift. They need the product. They can't get it from the OEM, so they turn to the rental channel.

And so the rental industry as a whole brought in inventory to capitalize on that short-term opportunity. Now that they have the inventory in place and the demand OEMs have taken their backlog down, both Tennant and broader base of OEMs. Now the demand is returning to a more normalized pace in that rental channel, they've got to rent down the inventory they have in place. So it's really kind of a short-term, shorter-term structural challenge overcome, but it's really specific to that rental industry.

Beyond that, yes, we have multiple levers for growth across the vertical markets we serve. And I think I've highlighted many of them on the call. And I think about the fact that we're still seeing growth in our core marketplace. We're focused on the highest growth segments within that marketplace, whether it be small space or product line extensions or AMR, they are growing at rates faster than the core business.

I already talked about our X4 ROVR and how excited we are about the early returns on that product as well as the platform products to come off of following on the X4 deals. We're driving double-digit order growth rate as we exit year, Q3 and Q4, heading into next year, if you just think about the trending of order rates, the direct result of execution of our Elevate growth strategy. And so really excited and confident that we could continue to execute that really well.

And our acquisitions are paying back. The CCS acquisition in Eastern Europe is contributing really, really nicely to that region and to the enterprise and our investments in Brain is yielding commercial benefits as we take AMR out to the marketplace. So really bullish on our growth prospects outside of some of the softness we articulated in a specific vertical market or a channel in North America or some of the geographic softness like China, really bullish on our upside to growth opportunities as a business.

[Operator]

[Operator Instructions] Our next question will come from the line of Edith Priscilla with Northcoast Research.

[Unknown Analyst]

The press release referenced elevated freight costs and inflationary pressures. So I was wondering, how are these freight costs and inflationary pressures trending through October? And do you see this as a temporary headwind or something that could last well into 2025?

[David Huml, executive]

We really see it as a temporary headwind. If you think about what's happened in the global freight industry, you've got a few factors at play. Think about the unrest in certain parts of the world that are influencing carriers willingness to pursue certain trade routes. And so there are other alternating -- other trade routes that are longer, a lot more time on the water and more expensive. I think that's one dynamic we've seen that reacted to from a freight perspective.

There's also been some saber rattling, as you recall, about port closures and port strikes that have impacted people's outlook. I will tell you that we took some intentional actions in preparing for a potential port strikes to reroute some products coming from overseas for domestic markets just to get out ahead of it and avoid the potential business disruption. That came into an expense. I still think that was a prudent for us as a business. But we don't expect that dynamic to continue into the future [indiscernible].

[Fay West, executive]

And just a few more data points. We anticipate that pricing will offset inflation on a full year basis. And while we don't specifically guide to gross margin, when we look at full year over full year, we still expect that we will see gross margin expansion on a full year basis.

[Operator]

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

[David Huml, executive]

I want to thank you all for your participation today and your interest in Tennant Company. This concludes our earnings call. I hope you have a great day.

[Operator]

Thank you all for joining today's presentation. You may now disconnect.