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Good morning, my name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to Tennant Company's 2022 First Quarter Earnings Conference Call. This call is being recorded. There will be time for Q&A at the end of the call. [Operator Instructions] Thank you for participating in Tennant Company's 2022 first quarter earnings conference call.
Beginning today's meeting is Fay West, Senior Vice President and Chief Financial Officer for Tennant Company Ms. West, you may begin.
Good morning, everyone and welcome to Tennant Company's first quarter 2022 earnings conference call. I am Fay West, Senior Vice President and CFO. Joining me on the call is Dave Huml, Tennant's President and CEO. Today, we will update you regarding our first quarter performance and our guidance for 2022. Dave will brief you on our operations and enterprise strategy and I will cover the financials. After our prepared remarks, we will open the call to questions. Please note a slide presentation accompanies this conference call and is available on our Investor Relations website at investors.tennantco.com.
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 2022 first quarter earnings release includes the comparable GAAP measures and a reconciliation of these non-GAAP measures to our GAAP results. Our earnings release was issued this morning via Business Wire and is also posted on our Investor Relations website.
I'll now turn the call over to Dave.
Thanks, Fay and thank you everyone for joining us today. In line with our expectations our first quarter results sustained strong momentum from our performance in 2021. Our comprehensive product portfolio and innovative product and solution-oriented offerings continue to resonate with customers. We have achieved pre-pandemic order levels and are encouraged that the demand for our products and services remains robust.
I'm thankful for our employees who are managing dynamic market conditions, but remain committed and focused on the needs of our customers. We delivered adjusted EBITDA of $27.9 million and while our Q1 results were in line with our expectations, the year-over-year decrease was driven primarily by gross margin compression. Inflationary pressures related to materials and freight were offset in part by the impact of pricing actions.
Parts shortages and supply chain volatility constrained our ability to ramp production, impacting volumes and creating higher levels of backlog. Macro environment risks have not moderated or corrected as quickly as we expected, and the impact this has on parts availability and inflation and in turn production and margin has been reflected in our full year outlook. We are lowering our full year guidance for adjusted EBITDA from a range of $145 million to $160 million to a range of $140 million to $155 million, a decision that we did not make lightly, but believe was prudent, based on evolving market conditions.
We continue to take steps to maximize our output worldwide and to safeguard the customer experience. Our supply chain team has expanded our dual sourcing supply options to reduce the risk of production disruptions, accelerated local for local sourcing, and engaged suppliers to address tier-two components to improve availability and predictability. Our engineering team has launched new value add projects that yield tactical and strategic benefits, including the redesign of components that are currently limiting production capacity.
Our operations team has designed and is executing assembly line moves and production capacity shift projects to further enhance output and building machines ahead of schedule, when we are short of components that can be added quickly as a last step. These measures are consistent with our long-term enterprise strategy and part of our commitment to driving continuous improvement.
Our enterprise strategy also includes an unwavering commitment to profitable innovation in developing new products and features that deliver differentiated value to our customers. As we announced earlier this month, we've added lithium-ion technology to our portfolio of autonomous mobile robots or AMR machines, including the T380AMR, T7AMR, and T16AMR.
This new battery technology provides longer run times and hassle-free maintenance versus traditional lead acid batteries, resulting in maximized productivity, simplified operations, and reduced costs. While we navigate the significant near-term challenges, we remain committed to providing our customers with high-quality, innovative products and exceptional service. These investments and focused actions position us exceptionally well to accelerate sales when the macro environment improves.
With that, I will turn the call over to Fay for a discussion of our financials.
Thank you, Dave. First quarter net income was $10.3 million, compared to $25.7 million in the year ago period. This reduction in net income was driven primarily by gross margin compression due to higher inflation related to materials and freight, partly offset by pricing actions. SG&A expenses were lower in the first quarter of 2022 compared to the prior year, due in part to the company's cost containment efforts. Additionally, first quarter results also benefited from a lower interest expense, due to the refinancing of debt in the second quarter of 2021.
First quarter adjusted EPS was $0.73 per diluted share compared to a $1.17 per diluted share in the prior year period. Adjusted earnings per share numbers exclude amortization and restructuring charges, as well as the gain on sale from the Coatings business in the first quarter of 2021. For the first quarter of 2022, Tennant reported net sales of $258.1 million, a 2% decline compared to the prior year, primarily due to an unfavorable foreign exchange effect of 2.2% as well as the divestiture of the Coatings business. This was partly offset by an increase in organic sales of approximately 0.8%.
Volume growth was constrained by the availability of certain parts and components, which in turn contributed to a further increase in our backlog as well as a delay in price realization. As you may know, Tennant groups of sales into three geographies. The Americas, which includes all of North America and Latin America, EMEA, which covers Europe, the Middle East, and Africa and Asia-Pacific, which includes China, Japan, Australia and other Asian markets.
Net sales in the Americas were $160.3 million for the first quarter of 2022, an increase of 1.6% from the first quarter of 2021. Organic sales growth in the Americas, favorably impacted net sales by 2.3%, mainly due to higher selling prices and strong sales in our commercial and parts and consumables categories, partly offset by softness in other revenue channel. EMEA net sales were $78.7 million for the first quarter of 2022, a decrease of 2.7% from the first quarter of 2021.
Foreign currency exchange within EMEA unfavorably impacted net sales by approximately 6.9%. Organic sales growth in EMEA favorably impacted net sales by approximately 4.2%, primarily due to higher selling prices, growth in services, and higher sales of parts and consumables. APAC net sales were $19.1 million for the first quarter of 2022, a decrease of 22.4% in the first quarter of 2021.
Foreign currency exchange within APAC unfavorably impacted net sales by approximately 2.2%. The organic sales decline in APAC reduced net sales by approximately 20.2%, primarily due to government mandated shutdowns in China related to COVID-19 outbreaks, as well as softer demand in certain markets, partly offset by volume upside in Australia.
Adjusted EBITDA for Q1 was $27.9 million or 10.8% of sales compared to $40.7 million or 15.5% of sales in 2021. The decline in adjusted EBITDA was driven primarily by increases in material inflation and freight costs, which were partly offset by higher selling prices and lower S&A expenses, reflecting effective cost management.
Turning to cash flow and capital deployments. In the first quarter of 2022 cash flow used in operations was approximately $10.1 million, which reflects incremental investments in working capital, specifically $29 million of inventory due to rising costs and an increase in inventory levels related to safety stocks and long lead time components. Additionally, CapEx of $5 million was in line with expectations.
In the first quarter of 2022, we temporarily increased debt outstanding by approximately $14 million and we ended the quarter with net leverage of 1.3 times adjusted EBITDA, which is lower than our stated goal of 1.5 times to 2.5 times. We also returned capital to our shareholders in Q1 by paying approximately $4.6 million in dividends. We ended Q1 with a cash balance of approximately $110.4 million and strong liquidity of approximately $374.5 million, allowing for continued progress against our capital allocation priorities.
Turning to guidance. Our updated guidance for full year 2022 reflects a flatter and more prolonged supply chain recovery and higher inflation than previously expected. We will continue to take necessary measures like local for local sourcing and region for region manufacturing to help maximize production output and offset inflation. As we discussed on our last call, we have already enacted price increases this year and we'll continue to monitor throughout the year, evaluating the need for additional pricing actions.
Our quarterly sales cadence will be driven mainly by our ability to produce rather than by market demand patterns. We expect that gross margins will improve throughout the year. In terms of profitability, we also expect that increased price realization, cost out initiatives and strong expense management will drive quarterly improvement in adjusted EBITDA throughout 2022.
For 2022, we are updating our guidance as follows. Net sales of $1.125 billion to $1.17 billion, reflecting organic sales growth of 4.5% to 8.5%. Full year reported GAAP earnings in the range of $3.65 to $4.25 per diluted share. Adjusted EPS of $4.15 to $4.75 per diluted share, which excludes certain non-operational items and amortization expense. Adjusted EBITDA of $140 million to $155 million. Capital expenditures of $25 to $30 million, and an adjusted effective tax rate of 20% to 25%, which excludes the amortization expense adjustment.
With that, we will open the call to questions. Operator, please go ahead.
[Operator Instructions] And your first question comes from the line of Chris Moore from CJS Securities. Your line is open.
This is Stefanos Crist calling in for Chris. Thanks for taking my questions.
Good morning.
Good morning.
Good morning. First, you touched on this a little bit, but can you just provide a little more detail on the pricing strategy for 2022?
I'd be happy to, when we exited last year, we took a price increase effective in October given the signals we were getting from the business relative to inflation and we expected that to readout -- begin to read out within the period of Q4 of last year. What we saw was that our backlog grew, which muted the impact and effectively realization of our of that price increase. Since then, we've been acted another price increase in our key markets here in the last month, it's effective April 2022 and we expect that to have an impact as well perhaps muted by the backlog that we've grown since coming through Q4 and Q1.
When we step back and look at the full year 2022, we expect that the combined effect of our price actions and our cost out actions will offset our expected inflation and that's reflected in our guidance. However, we remain open to the fact that inflation is still fairly volatile and we're sensing what we're seeing in the business. So we remain open to the need to take additional pricing actions as needed.
Got it. That makes sense. Thank you. And then just one more, is the rising interest rate environment have any impact or potential impact on market demand?
Yeah. It's a great question. It's one that we ask ourselves as well. Rising interest rates can affect the general macroeconomic conditions, but there not -- we don't see a direct correlation between rising interest rates and our customers' ability to make the investments in our products and services. So it's not a direct correlation, but certainly rising interest rates can impact overall economics and we serve such a broad range of vertical markets that there can be some ancillary trickle-down effects as a result of rising rates.
Got it. Thanks for taking my questions.
Thank you.
[Operator Instructions] Your next question comes from the line of Steve Ferazani from Sidoti. Your line is open.
Good morning, Dave, Fay. Thanks for taking my questions. I guess, I was a little surprised that you said, the revenue was in line with your expectations, I was a little bit surprised on the negative side on that number. And I'm just trying to think about how much the China slowdown impacted it. And was there something that offered upside to that number that offset that since you weren't expecting that kind of a significant shutdown in China?
Yeah. Thanks for your question. And the top line is largely being metered by our ability to put product out of the plant, so our production volume. So as that becomes management of supply chain shortages and its impact on production volume. So we factored in our expected ability to produce also the known effects. We expect to happen from the China impact, as well as how we are seeing price fleets, because that impacts revenue as well. And that's reflected in our guidance on the revenue line, it's a combination of some upside and some downside risk, but we felt that with what we see right now from a supply chain perspective and our ability to produce that holding on the top line was the prudent outlook.
Okay. And what -- I know you don't give a number on backlog, but can you give a sense of where backlog stands now compared to a quarter ago? Is that still growing?
Yeah. Listen, we've characterized our backlog in terms of a multiple of normal backlog and if you recall last quarter, we talked about backlog being 3 times to 5 times normal. We're at the high end of that range now given what we've grown backlog in Q1. So we're more at the 5 times normal rate of backlog, backlog turns obviously because the plants are operational and we are shipping, and we're having to make some really challenging decisions about who gets the parts that we're able to -- end products and equipment that we're able to produce and manage that backlog as we move ahead.
The backlog is a representation of customers continuing to choose the Tennant value proposition, despite our pricing actions and our extended lead times. And so while we don't like disappointing customers, we'd like to be able to produce at a much higher level and service the demand we see, we're taking that backlog as a strong vote of confidence from our customers that they still prefer Tennant.
And then you made no change to your CapEx guidance, can you give us a sense of if you're shifting priorities for that CapEx given perhaps the change in pricing and demand and what you're expecting going the next 12 months to 18 months?
I think, I see, at this point, the CapEx -- the composition of CapEx remains relatively unchanged. There was a number of initiatives that we included in CapEx that were ultimately result in cost savings for us. And so, we want to make sure that we move ahead with that CapEx.
Okay.
Yeah. So I'd say, if there's been any shift in CapEx, we've been accelerating some of our longer-term strategic investments to help mitigate short-term constraints. So investments in productivity like robotic laser, vertical mill, robotic welders that not only help improve our productivity, but also reduce our reliance on labor in our plants. Some examples of some investments we made, but it's all within the guidance we provided on CapEx.
Okay. And then I know we talked the previous quarter about with COVID restrictions declining the expectation that you could get out there and provide more demonstrations with the AMRs are you seeing that, are you're seeing any shift in acceptance of the AMRs if can get out there a little bit more and show what those products do?
Yeah. We are seeing -- other than China, our markets have opened up in a pretty dramatic fashion and we're able to operate more freely and move around and demonstrate the products to our key customers and get on-site with demonstrations. So that is a positive. We are very optimistic about our AMR platform. We continue to be very bullish on it as a standalone product, because of the benefits it provides to our customers and we think about what our customers are having to manage now in terms of inflation in their business, the availability of labor.
Robotics solve so many problems for our customers as they are now opening back up and operating in a post-pandemic environment. And we're accelerating that progress with our Inventory Scan product recently launched and we talked about that last quarter that really allows us to serve a very attractive adjacency for our key customers. It also improves the ROI and the investment they make in AMR. So it lowers the hurdle rate for those customers that were contemplating an investment in robotics.
So we're really excited about the forward-looking prospects and we're encouraged by the fact that we can operate more freely and demonstrate the product to a wider group of customers. The pipeline is very robust for AMR. So we are anxious to continue to get in front of customers and [indiscernible] them to see when it makes sense to adopt the technology in their location.
Great. Thanks so much. Thanks, Dave. Thanks, Fay.
Thank you.
Thank you.
And since there are no further questions at this time, I would like to turn the call over to management for some closing remarks.
Thank you. We are encouraged by the consistently strong demand we're seeing across our global markets. Our innovative products and solutions are definitely resonating with customers and our teams are working diligently to overcome part shortages and increased production output, reduce our costs and justified price increases to offset inflation and safeguard the customer experience.
I want to personally thank every Tennant employee globally for their hard work, collaboration, and customer commitment, as we work together to create a cleaner, safer, healthier world. This concludes our earnings call. Thank you for your time and have a great day.
This concludes today's conference call. Thank you for your participation. You may now disconnect.