Franklin Electric Q2 2024 Earnings Call Transcript

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July 23, 2024

There are 7 speakers on the call.

Operator

Hello, and welcome to the Franklin Electric Reports Second Quarter 2024 Sales and Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference is being recorded. It is now my pleasure to introduce Chief Financial Officer, Jeff Taylor.

Speaker 1

Thank you, Andrew, and welcome everyone to Franklin Electric's Q2 2024 Earnings Conference Call. With me today are Joe Rozinski, our Chief Executive Officer and Greg Semsdek, our Executive Chairperson. On today's call, Greg will review our Q2 business highlights. I will provide additional details on our financial performance, and then Joe will share some initial thoughts on his 1st few weeks with Franklin. We will then take questions.

Speaker 1

Before we begin, let me remind you that as we conduct this call, we will be making forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which could cause actual results to differ materially from such forward looking statements. A discussion of these factors may be found in the company's annual report on Form 10 ks and today's earnings release. All forward looking statements made during this call are based on information currently available and except as required by law, the company assumes no obligation to update any forward looking statements. With that, I will now turn the call over to Greg.

Speaker 2

Thank you, Jeff, and thank you all for joining us. Our Q2 results were solid, but fell below the record levels reached in the prior year period. Macroeconomic challenges and wet weather across the U. S. The U.

Speaker 2

S. Continued to pressure sales, but our performance held up well as we delivered near record high earnings during the quarter. Further, strong execution by our global teams, along with the diversity of our product lines, geographic presence and customer base demonstrated the resilience of our business as we drove margin expansion on lower sales. The 2nd quarter represented a sequential step up in sales due to seasonal factors. However, this impact proved to be a bit softer during the quarter as compared to prior years.

Speaker 2

Consolidated sales were down 5% or $26,000,000 compared to our Q2 2023, reflecting the ongoing challenge of project delays in part due to adverse weather, particularly in the United States and within our distribution segment. Similar to the Q1 of 2024, one of the main factors pressuring sales was a decrease in large dewatering equipment sales in the U. S. To our fleet rental customers. Coming off record sales activity in the prior year during which our customers built up substantial inventory.

Speaker 2

Outside of these lower large dewatering volumes in the U. S, the rest of our U. S. Water Systems business delivered solid growth. Outside the U.

Speaker 2

S, excluding the impact of foreign currency translation, we saw positive performance in large systems, including robust growth in Asia Pacific and steady demand in MENA and the Southern Hemisphere. The strength in our manufacturing business, however, was offset by order softness and distribution in the United States. As we mentioned before, we are experiencing some of the wettest weather patterns on record in the U. S, which negatively impacted sales. We achieved strong margin performance in the quarter, led by our Water and Fueling Systems Manufacturing segments.

Speaker 2

Consolidated operating margin was 14.6 percent representing an improvement of 40 basis points overall compared to the prior year period. We're encouraged by the increased productivity across our operations and stabilizing input costs. Turning to our segments, Water Systems 2nd quarter sales declined 2%, but operating income increased 23% to set an all time quarterly record for the segment. As mentioned, much of the sales decline can be attributed to a continuation of lower volumes due to the cyclical nature of our large dewatering business. However, our residential groundwater and surface pump businesses continue to grow and we're gaining wallet share with both new and existing customers.

Speaker 2

Overall operating margins in Water Systems improved to 19.7 percent, up 3.90 basis points versus prior year, driven by favorable product mix as well as operational efficiencies and lower freight expenses. Fueling Systems sales and operating income decreased 9% to 3% respectively versus the prior year driven by lower volumes. However, in the Q2 of last year, the team worked through a close to $10,000,000 of backlog. With backlogs at normal levels, orders entered in Q2 of 2024 were actually up about 5% over Q2 of last year. This supports what we are hearing from major marketers.

Speaker 2

The build season has progressed largely as expected outside of weather related delays, which is encouraging for the back half of the year. Despite softer sales, Fueling Systems operating margin was an all time quarterly record of 35.6%, representing an increase of 240 basis points compared to the prior year. Margin improvement was a favorable product was a result of favorable product and geographic mix. Sales in the distribution business decreased 1 from the prior year, primarily due to continued negative impact of wet weather across the U. S.

Speaker 2

That has delayed contractor installations. Starting in June, weather began to drive in the Western U. S. And order rates increased commensurately. Operating margin was 5.1%, a 4 10 basis point decline versus the prior year due to higher overhead costs.

Speaker 2

At the end of the quarter, we took action to reduce our operating and SG and A expenses within the Distribution segment. We expect to financially benefit from these actions in the back half of the year. Overall, global inventory levels are favorable compared to the prior year period, though higher sequentially, which is typical for the Q2 as we build inventories for the busier summer season. We are mindful that after a rather historic post pandemic multi quarter decline in channel inventory levels, we need to be positioned to respond to any surge in demand as channel inventories continue to settle out. That said, we continue to forecast our free cash flow will again exceed our net income for the year.

Speaker 2

With that, I will now turn the call back over to Jeff. Jeff?

Speaker 1

Thanks, Greg. Overall, our 2nd quarter was solid. While sales were below the record sales levels of last year, we were able to improve our gross profit margins to record levels. Our fully diluted earnings per share were $1.26 for the Q2 of 2024 versus $1.27 for the Q2 of 2023, the 2nd best quarterly EPS in the company's history. 2nd quarter 2024 consolidated sales were $543,300,000 a year over year decrease of 5%.

Speaker 1

The benefits to sales from our 2023 acquisitions were more than offset by lower volumes and the negative impact from foreign currency translation. Water system sales in the U. S. And Canada were down 5% compared to the 2nd quarter of 2023, due entirely to volume declines in the sales of large dewatering equipment, which decreased 44%. All other major product lines increased with sales of water treatment products increasing 12%, sales of all other surface pumping equipment increasing 11% and sales of groundwater pumping equipment increasing 6% compared to the Q2 of 2023.

Speaker 1

Water system sales in markets outside the U. S. And Canada increased by 3% overall. Foreign currency translation decreased sales by 4%. Outside the U.

Speaker 1

S. And Canada, sales in the Q2 of 2024 increased in all major regions, EMEA, Asia Pacific and South and Latin America, excluding the impact of foreign currency translation. Water Systems operating income was a new record for any quarter at $62,300,000 in the Q2 of 2024, up $11,500,000 or 23 percent versus the Q2 of 2023. Operating income margin was 19.7%, a year over year increase of 3.90 basis points. The increase in operating income and improved margin was due to improved manufacturing productivity, favorable product mix shifts and cost management.

Speaker 1

Distribution 2nd quarter sales were 190,500,000 versus Q2 2023 sales of $193,100,000 a 1% decrease. Continued wet weather through the 2nd quarter dampened sales, notably in the West, Northeast and Midwest regions of the U. S. The Distribution segment's operating income was 9 $800,000 for the Q2, a year over year decrease of $8,000,000 Operating income margin was 5.1 percent of sales in the Q2 of 2024 versus 9.2% in the prior year. Income was negatively impacted by lower sales and higher SG and A cost.

Speaker 1

Fueling system sales in the 2nd quarter were $73,100,000 Sales decreased $7,300,000 or 9% in the 2nd quarter 2024. Fueling system sales in the U. S. And Canada decreased 4% compared to the Q2 of 2023. The decrease was across all major product lines.

Speaker 1

Outside the U. S. And Canada, fueling systems revenues decreased 7%, primarily due to lower sales in EMEA and Asia Pacific. Fueling systems operating income was $26,000,000 compared to $26,700,000 in the Q2 of 2023. The Q2 of 2024 operating income margin was 35.6% compared to 33.2% of net sales in the prior year.

Speaker 1

Operating income margin increased primarily due to improved manufacturing, productivity, price realization and cost management. Franklin Electric's consolidated gross profit was a record $199,800,000 for the Q2 of 2024, a 6% year over year increase. The gross profit as a percentage of net sales was 36.8% in the Q2 of 2024, up 370 basis points versus 33.1% of net sales in the prior year. The gross profit margin was favorably impacted in 2024 by improved manufacturing productivity and utilization with fewer supply chain disruptions, lower freight cost, cost management across the company and a favorable product mix shift. Selling, general and administrative or SG and A expenses were $120,600,000 in the Q2 2024 compared to $107,400,000 in the Q2 of 2023.

Speaker 1

The increase in SG and A expense was due to the incremental expense from recent acquisitions, higher compensation costs and increases in advertising and marketing expense. Consolidated operating income was $79,100,000 in the Q2 of 2024, down $1,800,000 or 2% from $80,900,000 in the Q2 of 2023. The decrease in operating income was primarily due to the Distribution segment. The Q2 2024 operating income margin was 14.6% versus 14.2% of net sales in the Q2 of 2023, driven by strong operating margins in our manufacturing businesses. The effective tax rate was 23% for the quarter compared to 19% in the prior year quarter.

Speaker 1

The company purchased about 379,000 shares of its common stock in the open market for approximately $37,000,000 during the second quarter of 2024. At the end of the Q2 2024, the remaining share repurchase authorization is approximately 460,000 shares. The company ended the Q2 of 2024 with a cash balance of 58,000,000 and generated $35,000,000 in net cash flows from operating activities during the 1st 6 months of 2024 versus $43,000,000 in the 1st 6 months of 2023. The company is focused on improving its cash flow and working capital requirements through improvements in customer and vendor terms in addition to managing inventory levels. Earlier this week, the company announced a quarterly cash dividend of $0.25 that will be paid August 15 to shareholders of record as of August 1.

Speaker 1

Looking ahead, despite ongoing macroeconomic pressures and what we believe to be transient weather related challenges, we hold an optimistic view for the underlying demand in our core markets. We are maintaining our full year sales guidance to be in the range of 2,100,000,000 dollars to $2,170,000,000 However, we are lowering our full year EPS guidance to between $4.16 $4.34 which incorporates our first half performance and our outlook for continued solid execution in the second half, while maintaining strong margins similar to the first half. I will now turn the call over to Jeff.

Speaker 3

Thank you, Jeff. Thank you, Greg, and good morning, everyone. I would first like to express my deep gratitude to Greg Sengstack for his exceptional leadership and contributions to Franklin Electric over these past 35 years and the past 10 years as CEO. Under Greg's stewardship, Franklin Electric has achieved remarkable growth and maintained a strong reputation in our industry. I'm excited to build on this legacy and lead Franklin forward.

Speaker 3

From this strong foundation established by Greg and the entire Franklin team, confident in our ability to capitalize on numerous opportunities ahead of us to drive differentiated growth as a global leader of water and energy systems. As I've joined and spent time with our team, I'm particularly excited about the opportunity to bring our expertise and solutions to adjacent faster growing markets, our use of data and analytics to increase our ability to bring new products to market with velocity, our strong global footprint to take advantage of the biggest needs around the world for clean water and a robust M and A pipeline I also see that we're in a great position to accelerate productivity to fuel and to fund our growth opportunities. I look forward to closely working with our talented team and stakeholders to continue to deliver value to our shareholders and meet the incredible demand for water and energy around the globe. This concludes our prepared remarks, and we will turn the call over to Andrew for questions. Andrew?

Operator

Thank Our first question comes from the line of Mike Halloran with R. W. Baird.

Speaker 4

Hi, good morning, everyone. This is Pez on for Mike. Greg, just wanted to take a second and congratulate you on a fabulous career and tenure and thank you for all the help that you've provided over the years.

Speaker 2

Thank you.

Speaker 4

Maybe yes, absolutely. Maybe Joe, I want to kind of touch on a comment you made at the end there. You talked about numerous opportunities to drive differentiated growth, talked about pivoting towards higher growth markets, implementing data and analytics in a robust M and A 8 pipeline and funnel. Obviously, all of that sounds fabulous. Maybe talk a little bit about how you see Franklin down the line, maybe talk a little bit more about your vision for the business as it stands today, and maybe some of those avenues for differentiated growth that you see as you're stepping into the role?

Speaker 3

Yes. Thanks, Mike. One nice thing about starting when I have this is during the strategy cycle. So I see a lot of the seeds for those opportunities and growth already that the teams are working on. But I look maybe a couple of examples in wastewater and mining as really good examples of new products and recent acquisitions we've made around the world for faster growing markets.

Speaker 3

And I think can give us some good natural hedges to some of the weather and the other things that we're seeing in the world today. Some of those opportunities for acquisitions are taking advantage of Franklin's tremendous channel. And I think bringing products that we see needs for locally that we acquired globally and getting those to

Speaker 5

our customer.

Speaker 3

The comment on data and analytics, a tremendous system architecture and a very clean look at data here. I think Franklin Electric's opportunity to use data end to end, the intimacy we have in our end markets through our distribution channel as an example, really gives us that opportunity to understand our customers, what they're looking for and to respond faster than anyone else in the industry. So I think really a lot of nice opportunities and I look forward to working on it with the team to develop and execute.

Speaker 4

That's excellent. Thank you. And we look forward to hearing more about that and working with you in the future. Switching gears to the quarter, obviously, a healthy performance here. I want to kind of dial in on the margin and price cost.

Speaker 4

Maybe could we touch on price cost across the 3 segments? And how are we thinking about that fueling margin? What Anything one time that we should be thinking about as we move into the back half and start thinking about next year?

Speaker 1

Yes. Thanks, Spence. I appreciate the question. I mean really strong performance in the business this quarter from a margin perspective, certainly focused on the manufacturing businesses within water and fueling and fueling set a record operating margin for their quarter this year. So we have really good manufacturing cost as supply chains have settled down.

Speaker 1

We've gotten stability in input costs for the most part. The team has been able to really take a lot of the uncertainty out of the manufacturing environment and we're seeing that improvement in our manufacturing costs. That's certainly a piece of it in both water and fueling, I would say. Also within fueling, we're seeing while volumes are down year over year, the mix is still pretty positive and pretty favorable as we continue to focus on higher value technology products that's continuing to drive our business. But also we have a business is a little heavier this quarter in the U.

Speaker 1

S. Than it is outside the U. S. And that's typically favorable for our business on the margin side as well. When we look at price, fueling is getting good fair price in the market.

Speaker 1

So they're in that kind of lowtomidsingle digit price improvement. And they're also, like I said, their volumes are down year over year, but we've seen we're starting to see improvement in order patterns, as Greg talked about in his prepared remarks. So we're optimistic there on the back half of the year. For water, price is low single digits. Markets have kind of the competitiveness has increased in the markets, but we're holding price there and still getting positive price.

Speaker 1

We have negative volume in water. That's entirely driven by our large dewatering business, which we talked about as well. And so all of our other major product lines have positive volume and really nice growth and that includes both inside and outside of the U. S. Let me stop there and see what other questions you have.

Speaker 4

No, no. I don't want to bogart the start of the call, so I'll pass it along and hop back in line. Thanks gentlemen.

Speaker 1

Thanks, Vince.

Operator

Thank you. One moment please for our next question. And our next question comes from the line of Walt Liptak with Seaport Global.

Speaker 6

Hey, good morning guys. Great quarter and nice to meet you Joe over the phone. With the weather headwinds seem to be really pretty brutal and some of the commodity prices seem to be pretty brutal. And I think what you guys are saying is that, in the water systems part of the business, you had volume growth, not just price. Is that right?

Speaker 6

Or were you seeing volume declines in some of the farmer related products?

Speaker 2

So Walt, this is Greg. What we'd say is that from the NOAA data is they look back the last 130 years, we're in the 90th percentile for rain across the country. It's really broad based. It wasn't kind of it started in the West and then it moved East and it just hit all of our key markets. So certainly that put pressure on volumes, although we did see in our prepared remarks, you'll see that our groundwater business was up and leaning more heavily to the small pumping system for residential, whereas more replacement market, you don't turn on systems as you know in ag markets when it's raining.

Speaker 2

And so that's where, as you point out, we had some pressure on the volume side. And that's where we felt like we were seeing it drying out in the West starting in June. And as soon as it dries out here, we saw it in Europe, orders start coming in. So that's why we're looking at the back half on a more positive basis. So volume decline, as Jeff and I both mentioned, really relates to the cyclicality of the Larky Watering pump market, which is more of a capital cycle exposure.

Speaker 2

These rental companies, they bought a lot of product last year, catching up from the pandemic and just had the challenges getting it out in the field. And so, it's just been a delay there. They'll work through that. We still see strong indicators for the end markets that construction is going to do well, but that's what addressed that piece of the market. But related to the ag piece, that was under some pressure because of just the wet conditions in Q2.

Speaker 2

And again, as we move to the back half, since this things will dry out, if you follow El Nino, La Nina, it should be saying we're going to move to miles La Nina, it's certainly favorable for us, but I'm not a weather predictor, so I don't go any farther than that. I mean, Jeff, you want to add on the margin side here, Jeff?

Speaker 1

Well, I was going to add that in the dewatering business, that is concentrated in the U. S. With our fleet customers outside the U. S. We are our business is up in our dewatering business.

Speaker 1

So I think that supports the what we're seeing in our business today.

Speaker 2

Okay, great.

Speaker 6

So if I'm understanding the outlook, the idea is that, yes, we're with this drying out, the weather is going to be hotter, I think, in the Midwest, maybe not as much rain. So as some of these irrigation systems get turned on, you might get better pull through into the Q3 and throughout the rest of the year. Is that the way we're supposed to read it?

Speaker 1

Yes. I think that's consistent with the guidance and the outlook that we have, Walt, and that is that we'll see some improvement in weather certainly the back half of the year. That will pull through on our distribution business and hopefully be helpful in the second half of the year. So that's a part of it. Strong execution in Water Systems.

Speaker 1

Water Systems, as you know, is performing very well in all areas except for that large dewatering in the U. S. And I would tell you that our view on large dewatering for the back half is it's probably going to look similar to the first half, but I also expect the rest of the business to perform well in the second half. And so that's good solid outlook for Water Systems. And then Fueling Systems, as we've started to see improvement in order entry there and we're expecting some improvement in the back half there as well.

Speaker 6

Okay. Yes, that sounds great. When you talk about the La Nina part of it, Greg, that's interesting because that does, I think, bring in

Operator

I'm sorry, it looks like we lost Walter's line. One moment please. Our next question comes from the line of Matt Summerville with D. A. Davidson.

Speaker 5

Thanks. And of course, congrats, Greg. Just a quick question on the distribution $1,000,000 year on year, yet operating profit dollars fell by a materially higher amount. So can you help kind of parse out the main operating income drivers on a year over year basis for distribution during the quarter?

Speaker 1

Yes, Matt. The distribution business, I think I had a line on this in my comments, but the distribution business obviously on lower volume. If you They had an acquisition at the end of last year and so that was additive to their overall revenue. But their core business was down by that amount plus the miss. So volume is a driver.

Speaker 1

Business where we've added, what I'll say, our new locations, some greenfield sites. It takes those greenfield sites about 2 years to get up to speed into a normal operating performance. And so we do have some higher operating expenses because of some of those investments that we've made overall. And then they continue to see commodity price pressure in the business. And so commodities were down about 4% in this quarter.

Speaker 1

We are starting to see that stabilize, but it continues to be a hand wind for us in the business.

Speaker 5

Got it. And then with respect to the water system and the margin performance there, any unusual sort of benefits beyond mix? It sounded like volume was maybe a touch down a bit, obviously, dewatering driven. But help me understand the big ramp we've seen in water margins how we should think about sustainability given your historical kind of long term target for that segment? Thank you.

Speaker 1

Yes. I mean, we saw a really solid performance in the water business in the quarter, but in the first half of the year both. And so that business is doing really, really well with the exception of the large dewatering. So strong growth in the water treatment business, strong growth in our surface pumping product lines that we have in that business and then growth in groundwater. And that all contributes to having a favorable mix.

Speaker 1

But they also benefited from having a nice step up in manufacturing productivity and utilization in the quarter. And so as I commented earlier about those improvements, that certainly benefited the water business the most because they're the biggest they operate the biggest manufacturing footprint in the company. And so we got really good manufacturing productivity throughput. I would say nothing is popping in my head in terms of unusual or one time items that would have driven that strong performance. It's really mix driven, productivity driven and volume driven in all product lines except for Large Tea Water.

Speaker 5

Got it. Thanks, Jeff.

Speaker 1

You're welcome. Thank you.

Operator

Thank you. And I'm showing no further questions. So with that, I hand the call back over to CEO, Joe Rozinski, for any closing remarks.

Speaker 3

Thanks, Andrew. Well, we want to thank everyone for your time today and your interest in Franklin Electric. We are excited about our future and look forward to speaking with you all at our next earnings call. Thank you.

Operator

Thank you for participating. This concludes today's program and you may now disconnect.

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