Based on the timing of spend, R&D expense will be higher in the fourth quarter. We remain cautious and prudent in our spending. But as expected, we anticipate that S&A will be higher in the fourth quarter, as we invest in employees and strategic growth opportunities. Given these factors and the strong profitable growth in the first three quarters of the year, we are raising our outlook for the full year of 2023. Specifically, we now expect net sales to be in the range of $1.23 billion to $1.25 billion, reflecting organic sales growth of 12.5% to 14.5%; adjusted EBITDA to be in the range of $190 million to $200 million; and adjusted EBITDA margin to be in the range of 15.4% to 16%. With that, I will turn it back to Dave.
Dave Huml: Thank you, Fay. We are on pace for a record 2023 for Tennant Company, and I could not be prouder of the work our high-performance teams have achieved. I’d like to take this opportunity to invite everyone to an Investor Day we will be having in New York in spring of 2024. More details will be published soon. With that, we’ll open the call up to questions. Operator, please go ahead.
Q – Chris Moore: Hello?
Fay West: Hello?
Chris Moore: Yeah. I’m not sure if the line is dead or…
Fay West: No, it’s not…
Dave Huml: Good morning. We’re having trouble locating our operator. Why don’t you go ahead and ask your question? We’ll moderate ourselves.
Chris Moore: Terrific. All right. This is Chris Moore from CJS. All right. First of all, congratulations, a great quarter, great year-to-date. It looks interesting, lots here. So, you talked about orders being resilient. I think they had been pretty much flat year-over-year, Q1 and Q2. Is that about where you ended Q3?
Dave Huml: Well, first and foremost, thank you. Appreciate the recognition of the record quarter. We’re really proud of the results we delivered. From an order perspective, yeah, we’ve been describing our order pattern as resilient, given all of the potential for disruption over the last five quarters of supply chain crisis and growing backlog and inflation, et cetera. Q3 orders were slightly up versus the same quarter in 2022. If you recall, Q2 was a tougher order quarter for us, and we described it as flattish, which left us questioning what Q3 would hold. So the fact that Q3 orders were up on a quarter-over-quarter basis gave us some confidence as we look toward towards fourth quarter. It also appears that we’re returning to some semblance of normal seasonality, which allows us to be more predictable in how we forecast our business.
Q3 was in line with our expectations. And I’ll note, at an enterprise level, if you dig within the quarter, one of the metrics we use to get a signal from the business about how the order demand is shaping up is an average daily order rate. And on an average daily order rate basis, September was actually our highest quarter — excuse me, our highest month year-to-date. So, one month is not a quarter or a year [to make] (ph), but the fact that we finished Q3 strong is another important data point that gives us some optimism, not only on the quarter but for the year. The one area we’re monitoring very closely is EMEA. Orders have been softening in EMEA year-to-date. They were down slightly in the quarter. We think we understand what’s underneath that, and that’s driven from a macroeconomic perspective.
So, we want to keep close tabs, and we’re taking appropriate actions as far as how we plan our business, given the softening order pattern in EMEA. But we’re monitoring closely to make sure that we’re rightsizing the business appropriately and responding to the signals we’re getting. Having said that, our share position provides significant upside for us in the EMEA marketplace. And so, we’re not folding up tents and going home just because orders are a little bit soft, and there are some macroeconomic headwinds.
Chris Moore: Got it. Very helpful. Conversely, it looks like volume was up a bit in China, which lots of companies are calling out kind of challenges there. Anything you’re seeing on that front?
Dave Huml: Yeah, it was a great quarter in China. Markets reopened. We’re up over 20% in the region. Obviously, it was an easier comparable. But the fact that the market is open, we’re able to operate freely and get our product out into the channels and out in front of customers. We are harvesting the reopening within the marketplace. It’s a positive outlook. We have a similar outlook for order demand in China in Q4, a continuing trend of positivity year-over-year. So, we continue to be bullish on our opportunity in China. And the fact that we’ve invested — we invested in an acquisition in China, Gaomei brand, we have a very broad product portfolio. We’ve made investments and continue to invest in our multichannel go-to-market in China. And so, we think we’re really well positioned to capitalize on the reopening and the market demand in the China marketplace here as we exit the year and set up for 2024.
Chris Moore: Got it. And just lots of talk about a longer, higher Fed equation. Just curious how you’re looking at pricing beyond ’23. Historically, maybe normal was 1% or 2%. Just any big picture thoughts in terms of what pricing will look like beyond ’23?
Dave Huml: Yeah. We’re working on that now and pulling the data from the marketplace, not only from internal inflation projections, et cetera, but also market competitiveness. There’s been so many moves in the marketplace over the last couple of years, we’re going to make sure that we’re offering a very compelling value proposition with our products and continue to offer strong customer economics with our price positioning as we move into 2024. Having said that, we’re imagining that we will move to a more traditional kind of an annual price increase kind of pricing structure for 2024. In 2021, ’22, we obviously had to do mid-year price increases in response to the massive inflation that was layering into our business. So, we expect to move into more of a normal annualized kind of price increase.
I think in the low-single digits is reasonable, if you look at what the outlook for inflation is. And importantly, the price increases we’ve published to date and coming through 2023 cover us on a multi-year inflation basis. So, we feel like we trued up and we’re whole as we enter 2024, and we’ll look for a kind of low-single digit type increase across the board. Within that average across the company, there are opportunities where we can take more price and be more aggressive. Where we have a competitive advantage, where we have a strategic opportunity, we want to make sure that we’re harvesting those opportunities, and in other categories, where it’s more competitive, and we’ve got to get more aggressive to go gain share. We’re going to pull that lever as well.
The other piecing relative to pricing that we’ll maintain is our discipline around discounting. That was a muscle that we enhanced coming through our prior enterprise strategy. And so, all of our operating geographies and our business units have a very rigorous process and discipline in place for managing discounting to make sure that where we give discount, it’s specifically targeting incremental volume or share gain.
