Q3 2019 Earnings Call
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You will be on hold until the called began you would need to press star one on your telephone. Please be advised said today's conference is being recorded.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, John Haines Chief Financial Officer. Thank you. Please go ahead Sir.
Thank you Ashley and welcome everyone to Franklin Electrics third quarter 2019 earnings Conference call with me today as Gregg Sengstack, our chairman and CEO on todays call. Greg will review, our third quarter business results in our I will review, our third quarter financial results went on.
Through we'll have some time for questions and answers 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.
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-K and in today's earnings release. All forward looking statements made during this call are based on information currently.
Bill and his except except as required by law. The company assumes no obligation to update any forward looking statements with that I'll now turn the call over to our chairman and CEO , Greg things that thank you John .
Our third quarter earnings were a record for any third quarter and the company's history. Our earnings per share grew 14% from the third quarter 2018.
Our improvement in earnings was led by our distribution segment, which grew operating income by over 70% as result of more favorable weather conditions and much of the United States and acquisitions.
Our free cash flow after capital expenditures is about 65% higher through the first three quarters. This year versus same period of 2018.
Despite these earnings and cash generation improvements organic sales growth was below expectations, and our water and drilling systems businesses.
In the U.S. Encana water systems business groundwater pump sales were up about 1%.
Sales of groundwater equipment through the professional distribution channel were up 7% overall due to increases in transfers to the headwaters segment and down 3% to third party distributors.
Large you aren't pump sales were up 2% due to continued strength in rental equipment end markets.
Log in this product line is down from the second quarter, primarily due to expanding manufacturing capacity.
Sales other categories of surface pumps were down mid single digits coming off a strong second quarter.
Moving outside the us our water systems business grew organically mid single digits in Latin America and EMEA.
In Latin Americas sales were flat in Mexico, and up in Brazil, and increased more significantly in the southern cone, while Europe continues to be slow our business in the near and Middle East as well as Africa improved meaningfully.
You may recall that last year, the Turkish lira devalued significantly impacting our business there.
Our fueling systems business delivered another record quarter sales were up again up double digits in the us in Canada.
Was offset by an approximate 20% year over year decline in business in China.
In the rest of the World, we saw declines in EMEA, Latin America, and Australia, offset by growth in India and Southeast Asia.
Turning to distribution with a more normalized weather pattern in the U.S. and stronger execution from our new branch structure, the west headwater team delivered organic growth of 2% and with the earnings from the acquisitions earlier this year record results for the quarter.
That brings me to our outlook for the fourth quarter I will start with distribution.
As expected the business improved in Q3, and we expect the fourth quarters is similar improvement over last year as well.
We expect modest growth in our us groundwater and surface pump lines being offset by a tough comparison to last year for a large dewatering pump one.
Outside the us we expect modest organic growth somewhat offset by currency translation.
Our us fueling business should continue to deliver strong growth and while we expect our business in China to recover some from Q3, we do not expected to reach level of last year's Q4. So we expect overall fueling organic growth to be modestly positive.
Based on our third quarter results and our current view of our end markets. We expect our fourth quarter to be similar to last year in both revenue and earnings.
This would result in full year 2019 earnings per share before restructuring at the low end of our current guidance.
Ill now turn the call over to John to discuss the numbers in more detail John .
Thank you Greg our fully diluted earnings per share were 72 cents per the third quarter of 2019 versus 63 cents for the third quarter 2018 third quarter EPS before the impact of restructuring expenses was 73 cents compared to 2018 third quarter EPS before restructuring.
End of 64 cents restructure expenses in the third quarter, 2000, 19.4 million and were related to various manufacturing and distribution realignment activities and resulted in a one cents impact on earnings per share in the third quarter of 2019 risk.
Capturing expenses in the third quarter 2018 were point 3 million related to branch consolidations and other asset asset rationalization in the distribution segment and resulted in a one cents impact on earnings per share in the third quarter of 2018.
Third quarter 2019 sales were 348.4 million compared to 2018 third quarter sales of 341.9 million an increase of 2% sales revenue decreased by 5.8 million or about 2% in third quarter of 2019 due to foreign currency.
See translation and we estimate this revenue declined lowered our earnings per share in the third quarter by about two cents versus the third quarter 2018.
Water systems sales were 199.8 million in the third quarter 2019 versus third quarter 2018 sales of 199.3 million.
In the third quarter of 2019 sales from businesses acquired since the third quarter 2018 were 2.3 million water systems sales decreased about 2% in the quarter due to foreign currency translation water systems organic sales increased by about 2% compared to the third.
Quarter of 2018.
Water systems operating income was $28.4 million in the third quarter 2019, and the third quarter 2018.
During the third quarter. The company acquired first sales LLC, a manufacturer water treatment and filtration equipment for the residential and commercial markets first sales, which has about $14 million an annual revenues creates an operating platform in the highly fragmented water treatment.
Space and provide synergies with our core groundwater customers and channels in North America.
Fueling systems sales were $78.1 million in the third quarter 2019, compared to third quarter 2018 sales of $77.8 million and were a record for any third quarter fueling systems sales decreased about 1% in the quarter due to.
Foreign currency translation fueling systems organic sales increased about 2% compared to the third quarter of 2018.
Fueling systems operating income was a record for any third quarter at 21.6 million compared to 20.9 million in the third quarter of 2018 viewing systems operating income was higher in the quarter due to favorable product sales mix.
Distribution sales were 87 million in the third quarter 2019 versus third quarter 2018 sales of 78 million in the third quarter of 2019 sales from businesses acquired since the third quarter of 2018 were 7.3 million.
The distribution segment sales grew about 2% organically compared to the third quarter of 2018.
The distribution segment operating income was 5.9 million in the third quarter 2019, compared to 3.1 billion in the third quarter 2018 distributions operating income was higher in third quarter due to higher sales volumes and acquisition.
The company's consolidated gross profit was 117.6 million for the third quarter of 2019, an increase from the third quarter of 2018 gross profit of $113 million. The gross profit increase was primarily due to higher fueling systems and distribution sales gross profit.
But as a percent of net sales was 33.8% in the third quarter 2019 versus 33% in the third quarter 2018.
Selling general and administrative expenses were 74.5 million in the third quarter of 2019 compared to 72.5 million in the third quarter 2018, SGN expenses from acquired businesses were 1.5 million the company that Sienna expenses in the third quarter of 29.
Team declined by about $1.7 million due to the effect of foreign currency translation.
During the first quarter of 2019, the company changed the management reporting for certain transfers of manufactured products between the water in fueling segments. This change was made to better align the production of certain products by reportable segment and sales to third party customers to consistently compared to.
Many 19 results to the prior year certain 2018 net sales and operating income clock Reclassifications were made these reclassifications resulted in lowering third quarter 2018 results of fueling systems and increasing third quarter 2018 results of water system.
Net sales by about 1 million.
And operating income was unchanged versus what was reported in this period last year. There is no impact on the company's previously reported consolidated financial statements.
During the third quarter 2019, the company recognized about $2.1 million of foreign exchange transaction gains below the operating income line virtually all of this gain was driven by the 36% weakening of the Argentinian peso during the quarter. The company has some heads.
Section against a significant strengthening of the Argentinian peso.
In the third quarter 2019, our effective tax rate net of discrete events was about 20% higher than the third quarter 2018 effective tax rate of about 16% higher tax rate resulted in about $1.6 million of incremental income tax expense add to third quarter 2018 rate.
Then in effect.
Our tax rate negatively impacts earnings per share by about four cents, 20% is a reasonable estimate for the full year 2019 effective tax rate.
The company ended the third quarter of 29 team with a cash balance of 47.8 million, which was $11.4 million lower than at the end of 2018 cash decreased primarily due to acquisitions and debt repayments the company at $79.1 million in.
Showings on its revolving debt facilities at the end of the third quarter of 2019, and 89.1 million in borrowing at the end of third quarter 2018.
As of January one 2019, the company adopted the new lease standard and as recognized additional operating liabilities of about 25 million for its outstanding operating leases with corresponding right of use assets of the same amount the impact of this new the new accounting standard.
Noncash in nature and does not affect the company's cash position the company does not consider.
The impact of this standard to be material to the consult.
Or to the cash flows.
Cash from operations through the first three quarters of 2019 was about $90 million or 119% of net income compared to $60 million or 74% on than net income for the same period of 2018, our free cash flow cash from operations less cap.
Total expenditures is about 75 million and about 65% higher through the first three quarters of this year compared to the same period of 2018.
This improvement in cash flow is primarily due to a reduction in working capital requirements as a company focuses on improvements in customer and vendor terms.
The company did not purchased any shares of common stock in open market. During the third quarter 2019 at the end of the third quarter 2019. The total remaining authorized shares that may be repurchases about 1.3 million.
On October 22nd the company announced a quarterly cash dividend of 14.5 cents per share the dividends will be paid November 15th the shareholders of record on November firsts. This concludes our prepared remarks. So we would now like to turn the call over four.
Question.
And as a reminder to ask a question you need to press star one under telephone to withdraw your question press the pound or hash key please standby compared to Q and a roster.
And your first question comes from Edward Marshall with Sidoti and company.
Hey, guys. Good morning, how real good morning, good morning. Thanks.
So I'm looking at headwater.
On a sequential basis from Twoq to 19 revenues about the same.
Was there something in them and the mix or was there something structurally that changed within your head water division that had a much better drop through relative to Q2 of this year.
Yes.
Couple of things on headwater, we were hurt in first half of the year on the topline by the weather as we as we've talked about.
It was a much more moderate weather environment really across the country in the third quarter.
Our business in the southeast part of the United States, especially the drill or services Inc. business on a really nice quarter the drop through though the benefit that we saw on operating income was really in the businesses that are on the in the western part of the United States.
The western Hydro and two am acquisitions remember that last year those were the businesses that we're going through a lot of the branch restructuring and rationalizations. We closed some branches we combine some branches, we otherwise rationalize some some assets there and despite the fact.
With that business had a decline in revenue they had a really meaningful improvement in their operating income. So those two businesses combined had almost 60% increase year over year in third quarter operating income so.
It wasn't do really to a lot of topline benefit there, but it was due to a lot of these costs in restructuring.
Efforts, and then that combined with the strength of Dxi in the southeast and combined with the acquisition. We did this season. This year a company called Mylan in Michigan. Those were all the main drivers for the the improved operating results that at the distribution segment.
Got it and if you took if you took the costs last year.
Why do we see the impact in Q3 in Q2, just trying to.
I understand that.
As you guys again look at US we were going through some changes and so is there some stabilization.
There are some margin pickup.
Q2 was people are still recovering from a very weak Q1, I think pricing was just a little bit more aggressive out there. So we saw some stability in margins, we again sauces better execution that we saw some lower fixed costs as well. So the structural changes is now I'm on call a permanent but are more normalizing as we move forward and this is kind of.
A margin that we should anticipate on a go forward.
These are the kinds of margins, we would expect ended the season, which would be Q2 Q3.
And then keep in mind, Q4, Q1, which is the low season as when we get the Levered.
And why we think we'll Travis at improvement year over year to last year's Q4.
Q4, Q1, our orders were either marginally profit and margin lose money.
Got it okay.
So looking off to the fueling business I think John Youve caution this last quarter to not get comfortable in the high Twentys. The mid twenties is more of the range.
But the run rate continued.
What's going on a few is it continuing to be the positive mix in North America, and how does that how does that look is for the balance of the year in 2020.
Yes, the NOI margin really two things that is positive sales mix said.
So our sales in the us in Canada of fuel management systems.
Continues to be very strong and we have a very nice margin profile on those products. The second thing that I've mentioned in the past is you know the business does a really good job leveraging its fixed costs. So theres not a ton of SGN at or other fixed cost that as the business continues to grow topline so that leverage.
Is it is helpful. Though there as well the caution remains around a mix shift away from maybe some of the more favorable profitability products.
Geography mix also matters, so in quarters, where we might see big spikes in in revenue in some of the developing world markets that that can impact our.
Our margin profile as well so.
Was a good it was not a greats growth quarter organic growth quarter, peeling, mainly because of China, but from our from an earnings perspective that continues to be very strong.
Okay. Good.
And then the the the foreign exchange gain.
Below below operating income it looks like there was a change on the balance sheet.
Did you sell something or what's going on there a 2.1 million.
No.
The 2.1 million is again that is primarily driven by the hyper inflation accounting in Argentina. So though the reason we benefit from that is is that the hyper inflation accounting rules require us.
Two separate our assets into monetary versus nonmonetary assets and liabilities, our net position in Argentina is a net monetary liability. So thats unusual in the big portion of that is driven by a deferred tax liability.
It's unusual in a sense at many other companies have net asset position not net liability position. So when the Argentinian peso weekend. So the U.S. dollar, which it did significantly in this quarter and has year to date, we will recognize.
Gains so that the.
That's the rationale for why we had that significant gain and in the third quarter. It added there was a big movement in advance of this past weekend election in the third quarter in the peso to us dollar.
Got it thanks very much.
Hi, good for any questions. Please press star to that number one and our telephone keypad and your next question comes from Walter Liptak with Seaport Global.
Hi, Thanks, Good morning, guys.
Part of our morning wall.
No one asked about.
The trends that you're seeing are fueling systems in North America It sounds like the.
The market's pretty robust and.
Could you I wonder what kind of.
Patrick funnel, you've got looking into 2020, and you think it's kind of growth rate.
Yeah, we haven't gone out with 2020 does it say broadly with.
Capital is relatively inexpensive and you're seeing I think a secular move by major marketers to acquire an upgrade large networks of stations.
And I think thats driving some of the underlying growth you're seeing that.
Through us I think Dover informed of both reported that they had.
I think something north of 10% growth as well I think theres was driven by North America. So the markets robust we're all seeing this.
Vestments. These major market have seen the returns by by making these upgrades to stores.
A lot of these stores were upgraded or the four quarter upgraded over 20 years ago. When the last major take rates came out.
So it's kind of a maybe a natural secular time in the marketplace.
And then Franklin is doing well with getting wins and getting market share gains.
On some of our.
Our fuel management system technology, which we mentioned earlier is whats, resulting in some of the margin improvement and North America as well so.
As long as we continue to see I think a relatively payroll capital environment.
There is some upgrade for the M.D. initiative for dispensers.
You could argue that helps US also argue that hurts us because of where the dollars go.
What we've all seen some pretty nice lift here in the North American market.
Okay, great and the.
The China market.
That seems to be slowing.
A little bit sooner than we thought.
Maybe a little bit more dramatically with it.
The same issue that was.
You talked about last quarter.
For underground or was there something else that what's going on this quarter to slow sales in China.
Again, two factors seem to be affecting our business in China one is.
Your comment I think things are getting done a little faster and with a little bit more.
For the independent marchers not the state owned enterprises, a little bit more with local product.
Than we anticipated second factor is eventually last quarter is that.
The scale of capital that the major the stable enterprises are allocating to station upgrades has been strong shrunk our shrunken I guess.
And so what we're seeing is at the station owners or the the steel enterprise stations are only investing in the underground piping systems and not so much in fuel and fuel management or fuel pumping and some of the other product we're capturing as well. So a couple of factors. There is slowed it down a third factor is that.
Recognizing their seventyth year here at the end of the month and.
We ended the quarter. So there were some slowdown we know that impact.
As several initiatives other to slow down first for several weeks in construction, we think thats whats going to.
Come back little bit in Q4, the thing we're looking for in China now is that as the.
As the piping initiatives kind of wines its way down is we're looking at inception diagnostics as being the next wave for the the Chinese.
State owned enterprises and other stations to be upgraded so that they're going be a continuous monitoring of the vapor recovery systems and we see that is being the next kind of multi year initiative and we expect to see some traction that we just don't know if it's going to be early 2020 or later in the year.
So we're having one kind of declining revenue source, we should have a lift and other revenue source how the how the crossover is not yet clear for us.
Okay.
Hi.
Good.
We will.
The water.
The groundwater business.
Maybe just review.
With us that market.
And how that tends to trend in the fourth quarter I think it's still relatively slow but.
In thinking about 2020 could there be picked up kind of or.
No that's happened this year.
Sure. So well two things one is that tierpoint, it's been pretty slow I'd say generally kind of flattish.
Our sales to third party distribution, because we don't have visibility of their inventories other than anecdotally.
For the year up a percent or two but for the quarter were down 12%.
Our best visibility is on our own distribution out the door sales, which.
Our down year to date, though were up in the quarter couple of percent.
Yes, and I'd say that headwaters footprint is more western.
Based and so that's where we had the toughest situation with California, and just in kind of the so less than as some are going to Midwest southeast been relatively dry we've done relatively well there.
Looking at 2020.
If we have another and 25 year events or a year, where this year on record.
Expected results would be similar but if we have a more normalized weather year that will vehicle of course, it should be a positive driver for us.
Okay. Thank you.
Hi, I'm showing no further questions at this time I would now turn the call back to Greg. Thanks <expletive> .
Again, we thank you all for joining us for our third quarter Conference call. We look forward to speaking to you in the new year for their fourth quarter and your annual results you all have the week.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.