Tennant Company (TNC) Q3 2026 Earnings Call Transcript

DATE

Nov. 3, 2026

CALL PARTICIPANTS

• Vice President, Finance and Investor Relations - Lorenzo Bassi
• President and Chief Executive Officer - David W. Huml
• Senior Vice President and Chief Financial Officer - Fay West

TAKEAWAYS

• Net Sales -- $322.3 million, representing a 6.2% increase year over year driven by volume growth in North America.
• Organic Sales Growth -- 5.7% for the quarter, reflecting a 4.1 percentage point increase in volume and 1.6 percentage points from pricing.
• Robotics Revenue -- $37.3 million, growing 71% year over year and exceeding internal plans for the quarter.
• Adjusted EBITDA -- $48.8 million, or 15.1% of net sales, which included a $6.1 million onetime benefit from tariff refunds.
• Adjusted Diluted EPS -- $1.40 for the quarter, compared to $1.46 in the prior-year period.
• Order Growth -- 9.5% year over year, led by an 18% increase in North American orders.
• Order Backlog -- $118 million at quarter end, representing a reduction of $9 million from the end of the second quarter.
• Normalized Gross Margin -- 40.4%, excluding tariff refunds, which improved from 39.5% in the second quarter despite being 230 basis points lower than last year.
• Americas Organic Sales -- 8.1% increase, driven by higher machine volume in North America and growth in Latin America.
• EMEA Organic Sales -- 2.3% growth, marking the region's strongest performance of the year due to price realization.
• APAC Organic Sales -- 4.8% decline, reflecting soft demand and elevated distributor inventories in China, Australia, and Southeast Asia.
• ERP-Related Inefficiency Costs -- $2 million in the third quarter, a decrease from approximately $10 million in the first half of the year.
• Operating Cash Flow -- $11.9 million for the quarter, which was $16.8 million lower than the prior year due to higher working capital requirements.
• Accounts Receivable -- $291.7 million, an increase of $35 million from year-end 2025 due to collection timing issues following the ERP implementation.
• Inventory -- $213.2 million, up $15 million from year-end 2025 primarily to support the production ramp of X2 robotics and components in EMEA.
• Equipment Sales -- 7.8% increase, supported by higher machine volume in North America and robotics expansion.
• Parts and Consumables Sales -- 6.3% decrease, as pricing gains were offset by lower volumes in North America and delivery delays in EMEA.
• Net Interest Expense -- $5 million for the quarter, up from $2.4 million last year due to higher average borrowings for share repurchases.
• Full-Year 2026 Net Sales Guidance -- $1.27 billion to $1.31 billion, representing organic sales growth of 3.5% to 7.0%.
• Full-Year 2026 Adjusted EBITDA Guidance -- $155 million to $170 million, reflecting a margin range of 12.2% to 13.0%.
• Full-Year 2026 Adjusted Diluted EPS Guidance -- $3.80 to $4.45, which excludes ERP modernization and amortization costs.
• Quarterly Dividend -- $0.325 per share, representing a 5% increase recently approved by the Board of Directors.

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RISKS

• West stated, "we now expect inflationary pressures to remain higher than previously anticipated and not be fully offset," noting that material and logistics inflation linked to the Middle East conflict continues to affect plant efficiency.
• Huml noted that performance in the Asia Pacific region fell below expectations, stating, "Soft demand in China, Australia and parts of Southeast Asia is keeping distributor inventories elevated and slowing our deal conversions."
• West warned that parts availability constraints continue to cause production inefficiencies and under-absorption, particularly in North American manufacturing.

SUMMARY

Tennant Company (NYSE:TNC) reported record third-quarter net sales of $322.3 million and reaffirmed its full-year 2026 financial guidance. Management reported organic sales growth of 5.7% driven by volume increases in North America and robotics, where revenue grew 71% year over year. The company reported a sequential improvement in gross margins and a significant reduction in costs related to its Enterprise Resource Planning (ERP) implementation in North America. While the company faces demand challenges in the Asia Pacific and EMEA regions, management stated that a backlog of $118 million and robust order trends provide visibility into its fourth-quarter performance targets.

• CEO Huml stated that the company has extended its exclusivity agreement with Braincorp for next-generation robotic floor care for three years and expects to introduce 10 new products within 24 months.
• The company announced a decision not to proceed with the planned ERP deployment in the EMEA region to focus resources on optimizing North American operations and reducing risk.
• Management introduced the Performance Series, or P Series, to target more price-sensitive customers using contract manufacturing to minimize capital intensity.
• CFO West indicated that approximately half of the sequential sales increase projected for the fourth quarter is expected to come from the conversion of the existing order backlog.
• Huml noted that year-to-date robotics sales of $95.3 million have already surpassed the company's total robotics revenue for the full year 2025.
• The company reported that tariff refunds provided a 190 basis point benefit to gross margin in the third quarter, though management assumes no further refunds in its outlook.

INDUSTRY GLOSSARY

• Autonomy Subscription: Recurring revenue generated from the software and services that enable robotic machines to navigate environments without human operators.
• Braincorp: A technology partner that provides the artificial intelligence and spatial intelligence software for Tennant's premium robotic floor care machines.
• ERP (Enterprise Resource Planning): A centralized software system used to manage core business processes, including manufacturing, supply chain, and finance.
• IEEPA (International Emergency Economic Powers Act): A United States federal law that gives the president authority to regulate international commerce, under which recent tariff regulations were adjusted.
• P Series (Performance Series): A value-oriented line of robotic cleaning equipment designed for price-sensitive customers and distributed primarily through third-party channels.
• TAM (Total Addressable Market): The overall revenue opportunity that is available to a product or service if 100% market share is achieved.
• X Series: Tennant's premium line of robotic floor care products that leverage advanced autonomous navigation technology.

Full Conference Call Transcript

Operator: 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. There will be time for Q&A at the end of the call. Please press star 1 if you would like to ask a question. After the Q&A, if you joined our call today via telephone and logged into conference call presentation on your computer, please mute the audio on your computer to avoid potential quality issues during the 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: Good morning, everyone, and welcome to Tennant Company's Third Quarter 2026 Earnings Conference Call. I am Lorenzo Bassi, Vice President, Finance and Investor Relations. Joining me on the call today are David W. Huml, President and CEO and Fay West. Senior Vice President and CFO. David will discuss our third quarter results, our ERP progress in our robotics business. and Faye 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 a reconciliation of these non GAAP measures to our GAAP results. I will now turn the call over to David.

David W. Huml: 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 that 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 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 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 the service and other category. 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 are 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 conversions. 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 tariff regulations. Excluding this onetime benefit, adjusted EBITDA margin improved approximately 35 basis points from the second quarter. Normalized gross margin was 40.4%. Up 90 basis points from 39.5% in the second quarter ahead of our expectations, reflecting continued progress at operational execution and production output.

Margins remained below last year. While we executed solid pricing realization, the primary drivers 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-thirds of the year over year pressure came from North America and 1-third 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, change management. ERP related inefficiencies and costs 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 reduced 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 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 the 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 ROVR and X16 SWEEP are 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 contract manufacturing partnership rather than relying on the same product and investment model used for premium offerings. This approach provides us 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 walls and edges into the cleaning pad. 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 ROVR series combines Tennant's equipment, customer success, and service capabilities with Brain Corp'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 and in line with our goal of $250 million in robotics revenue by 2028. With that, I will turn the call over to Fay.

Fay West: Thank you, David. 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 schedule. 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 consumable shipments. And we are working to resolve them. Service and other increased 17.3% on higher autonomy revenue in 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-quarter of the increase.

Despite continued production and fulfillment constraints. And 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-thirds of the year over year decline in the gross margin came from North America and 1-third 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 added labor and freight costs of approximately $2 million Favorable pricing partially offset these pressures. The tariff refunds recovered a portion of the cost absorbed in prior periods. Any additional claims will be subject to legal administrative, and governmental processes, and our outlook assumes no further refund.

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 are 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 1x 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 32.5¢ 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% to 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 $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 have 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 improve and the recovery in EMEA orders. And even with a moderate shortfall in both, we would expect to remain within our guidance range. With that, I will turn it back to David.

David W. Huml: 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 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 will share our 2027 outlook when we report fourth quarter results. With that, we will open the call to questions. Operator, please go ahead.

Operator: We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset before asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Aaron Reed with Northcoast Research. Your line is open. Please go ahead.

Aaron Reed: Hi, David, Sam, Lorenzo. Great quarter. I was happy to see it. My question for you is around the gross margin recovery seem to have come in ahead of expectations. I was wondering if you could just kind of review that beat and how much of that underlying 230 bps decline do you expect to recover in Q4 as parts availability improves?

Fay West: Good morning, Aaron. So when you look at third quarter margin, so there is a big impact in the quarter from tariffs and the refunds from tariffs. And so on a more normalized basis, roughly 40.4% gross margin. it is a little bit higher than what we had initially anticipated. When we look at the drivers for that, it is primarily price realization coming through differentially in both North America and EMEA.

Aaron Reed: K. Great. And then the other question I had is, so that is where we are.

Fay West: You know, that is the biggest driver of the beat here in the quarter.

Aaron Reed: 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?

David W. Huml: Yeah. Thanks for the question, Aaron. Let me expand a bit and talk a little bit about ERP more broadly. We have given ERP a lot of airtime last several quarters, understandably so, given the impact it is had on our ability to operate. When we think about the ERP related inefficiencies in Q3, they are much lower than they were in prior quarters, lower than Q2. And I would point at gross margin impact 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 are clearly driving greater throughput at better margins as it relates to ERP efficiencies.

We try to. it is becoming increasingly difficult to assign our challenges specifically to ERP related issues. Versus forecasting issues. Our order. Incoming order demand is very robust. And we have got some forecasting challenges. We did not see it coming in all instances. As well as the mix. Of our businesses coming differently than we expected. So when I think about ERP specifically in your question, how much of the, I am going to call it, margin impact assigned to ERP? The majority of what we saw in the quarter and what we are 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. 1 is around the demand signals that we put on our supply base. Were either incorrect short, or zero. Which results in us having to scramble and expedite to get parts in to meet our incoming demand. You have seen that come through in terms of expedited freight and inefficiency through lost production time where we did not have parts to run the plant The other residual impact we are 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 that either did not go out or 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 parts shortages and the AR issues are still being managed and showing up on our financials as we came through the through the quarter. We expect those to continue to reduce in terms of impact. And we are working hard to make sure that we are closing those gaps. Looking for, I think you are sort of asking how should we think about ERP related issues as we move through Q4 and into 2027.

We are really focused on 4 key areas. Around ERP related productivity or inefficiency issues. 1 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, move parts to the warehouse to the line, So there is there is 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 have got some work going on there to improve our invoicing practices to reduce the collections challenges downstream. Our customer master data, we.

We are 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 are transitioning our long term support model from an IT perspective with closer linkage to the business to make sure that the priorities that we are addressing are the ones most urgently required by the business to serve the customer and deliver on our financial commitment. So we are focused on the right areas. I have said it before. I said it in the script. We have largely insulated the customer from impact of direct impact to our ERP challenges and inefficiencies.

We are working through the residual impacts in Q3. We expect those to be lower in Q4 and eventually be, you know, very difficult to-- prescribe a specific impact to. And so we expect to be. You know, candidly, we move through Q4 and from 2027, I do not 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.

Aaron Reed: Super helpful. Thank you. So it sounds like the short version is almost the vast majority of it is behind you, and this is probably 1 of the best times you have a really good clear visibility in the future. Is that accurate, but wildly oversimplification of that.

David W. Huml: Wildly oversimplified, but accurate. We have got our arms around where we want to continue to drive efficiency and productivity. We see the P and L financial impact continuing to reduce quarter over quarter, and so we are getting to work to right the ship fully. And, actually, it is worth noting the target is not just to get back to pre go live efficiency and productivity. it is to capture the full efficiency we envisioned when we made the investment. And so we will continue to focus on that. As our as our ultimate goal as we work through the residual impact and the remaining challenges relative to the ERP system. Or processes and change management.

Aaron Reed: Thank you very much. Things are getting very exciting.

David W. Huml: Thanks, Aaron.

Aaron Reed: Thank you.

Operator: Your next question comes from the line of Steve Ferazani with Sidoti. Your line is open. Please go ahead.

Steve Ferazani: Morning, David. Morning.

David W. Huml: I appreciate all the detail on the call, a lot of numbers.

Steve Ferazani: I did wanna ask because your EBITDA margin, even with some of the numbers you walked through, it was still massively ahead of what we were thinking. And I am looking at the S&A line. I know we have talked about you have. Carrying some extra contracted IT professionals to manage through this. But that number is even lower. I am just trying to think, is there some lower LTI in this quarter that drove that? Because that is way lower than we were thinking.

Fay West: Yeah. I mean, I think when we talked last quarter, we had said that second half and 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 impacting this quarter's results.

Steve Ferazani: Okay. 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? Looks like really strong demand drives the growth. How much you are managing and the challenges around component availability?

David W. Huml: Yeah. Our parts. You know, broadly speaking, our parts shortages are easing. Not completely recovered because they are easing. We saw a significant impact in Q3 from parts shortages driven by the factors we have we have talked about in the past. And robotics has not been immune to those challenges, both on the components you would expect but also beyond the sensing and the compute components that enable roboticS&And autonomous navigation. So we are actively managing part shortages across the entire network. We have seen easing and an extended line of sight to having the parts. To meet our production demand. But we are not completely out of the woods yet.

Steve Ferazani: Okay. that is helpful. Turning to robotics, I gotta say I did not have the P1 back on my bingo card for product rollouts. Actually, I have to go back to your website because I did not even realize you sold vacuums. Be honest, I have covered you for so many how many years. How did this end up in the product lineup? Does this grow your addressable market? Because it seems like it is gonna serve a lot of markets that maybe were not bigger for you previously.

David W. Huml: Yeah. We do not. So we do not go fully disclose our new product road map for obvious reasons, but the space. This space has always been on our road map to evaluate address, and the team has been working over the past you know, kind of year to 15 months to begin by understanding the market customer application, the expectations, And then, you know, I think what is really interesting and compelling about the P1 vac, a, it is our first vacuum, but b, when we fully scoped the market opportunity and who we. What position do we want to occupy in that space.

We then did a really robust evaluation around how we would bring that product to market, and we were rather open minded about having to build it ourselves borrowing it, or buying it. And if we landed in a really good place, we have got a product that meets the customer's expectations for the application. As well as the value proposition that allows us to compete profitably. And, 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 1 that we could we could support with our ecosystem support. So.

And we are excited about it. I think that this has always existed. We chose to focus elsewhere with our with our more recent product introductions that we have talked about. This 1 was always on the on the road map, and the team found, I think, a really innovative, creative way to bring it to market. We are excited to get it out launched. Early returns are really good. You know, this plays kind of at the lower end of the market. If you think about vacuuming, less sophisticated than scrubbing. it is at a. it is more of a value price point and a different.

A differentiated expectation, you know, for performance and reliability and life and ease of use. And as I mentioned, it goes through distribution as well. I think the best way to learn a market is to actually be participating in it. So we were able to get to market with a product that meets the customer's needs in a very. In a less capital intensive way and very quickly. You know, we are out in the market now after kind of a highly accelerated development time. So excited to get it in the market and see what feedback we get from customers around the world.

Steve Ferazani: When you are thinking about a product like this, how much of this is additional selling to customers that you have served their hard floors, now you are trying to serve soft floors. Versus brand new customers that you have never serviced before?

David W. Huml: Yeah. Great question. Time will tell. You know, obviously, we are gonna start with customers we already have a relationship with who have chosen the tenant value prop, whether that be in nonrobotic or robotic equipment. We do think there is significant opportunity in vacuuming with new customers, especially in this form factor. And these price points. Yeah. And these are 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.

Steve Ferazani: Excellent. Just. If you could. Last 1. If you can just remind us the cadence of initial deliveries with the last 3 products when we should start seeing them in your p and l? The. I guess, the X2, X16, and now the P1 Vac.

David W. Huml: Yeah. Think about. So we have we have done a good job of launching the product to market before we. And taking preorders we actually ship. So let me clarify when we ship. Does that make sense? So we announced the X2 and x 16 in Q3. X2 starts shipping in Q3. X 16 starts shipping here now in Q4.

Steve Ferazani: P1 was an October launch. And starts shipping in Q4.

David W. Huml: So the quarter we are in? Correct.

Steve Ferazani: Excellent. So that is real fast.

David W. Huml: Yes. Excellent. Thanks a lot, Steve.

Fay West: Thanks,.

David W. Huml: I think it seems. Terms of that, I think it is a proof point of why we stood up the robotics venture 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. Excellent. Excellent. Thank you. Thanks, David.

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

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

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

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