Q4 2019 Earnings Call
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John Haines Chief Financial Officer. Please go ahead Sir.
Thank you draw and welcome everyone to Franklin Electrics fourth quarter 2019 earnings Conference call with me today is great things that our chairman and Chief Executive Officer.
On today's call, Greg will review, our fourth quarter business resolved results and I will review.
Our fourth quarter financial results, what I'm through some time for questions and answers before we begin let me remind you that as we conduct this call will be making forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995. These statements are subject to various risk and uncertainty.
These many words 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-K and in today's earnings release. All forward looking statements made during this call are based on information currently available.
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 thing style.
Thank you John.
As we expected our revenue and operating income were essentially flat to the fourth quarter last year.
Good growth in both fueling systems and distribution offset negative organic growth in water systems.
Fueling systems led the way with another record quarter on strong volume in the U.S. and mix.
Distribution sales were also record however, the segment's fourth quarter operating loss was similar to last year.
Our water systems business saw modest top line growth globally, but not enough offset lower large de watering pump skills in the U.S.
Recall that environmental regulations requirement to move to cure for diesel engines, a 2019 drove large pine your pump sales in Q4 2018, making for a very tough comp.
For the year consolidated sales were up 1% operating income was down 3% and earnings per share was down 9%.
Well 2019 earnings were below plan and last year.
I'm pleased to report that are focused on working capital resulted in free cash flow conversion of 163% of net income.
About $3.35 per share a record for any here in our history.
Returning to the fourth quarter I will start with distribution.
The business continued to improve in Q4 with organic growth of about 6%.
However, this came at a cost as our team moved out some more commodity type material at lower margins, resulting in an operating loss in the quarter, Georgia lost in the fourth quarter last year.
And our water systems segment revenue from our U.S. surface pump product line declined modestly in the quarter, while U.S. groundwater product line revenue grew modestly.
Our U.S. Mark you ordering out revenue trailed last year's record results as continued push out of orders and slowing demand in rental and oil and gas end markets compounded the challenging comparison to the strong fourth quarter last year.
At the same time, our operations team continues to improve their ability to flex the operating cost base to maintain margins in this most cyclical business.
Outside the U.S. sales in Latin America Accelerant.
Compared to last year, the team achieved 20% organic wrote in the quarter.
All Latin American markets grew organically with particularly strong results in Brazil, and the southern cone.
In Europe, the Middle East Africa, our water business improved modestly.
Continued recovery in our business in the middle East and Urease, particularly Turkey, offset modest declines in Europe and Africa.
And consistent with prior quarters, our water business in Asia Pacific grew modestly as well.
Are you assuming only business continued to deliver strong growth driving another record quarter.
Over in China fourth quarter results were essentially flat sequentially, but down significantly from last year.
Business in China was below our expectations as a conversion of underground piping systems appears to be winding down faster than anticipated.
Strength across the rest of our international fueling markets essentially offset the sale decline in China.
So overall, our fueling business achieved about 4% organic growth in the quarter.
Turning to 2020.
With more normal weather patterns, we believe our distribution business will experience growth in the 5% to 7% range.
Business is well positioned.
Working capital is trending lower restructuring of our footprint in California is essentially complete as is the integration of Mylan supply, which was acquired in early 2019.
Again was more normal weather in our strengthening Latin American business, we believe our global water systems segment will experience growth, the 5% to 7% range as well.
We expect the U.S. only business to continue to post strong results.
Outside of China, We expect our international joint business to grow modestly.
Well, we expected 2020, fueling shelf and trying to continue to decline on lower sales underground pipe.
We had planned regulatory initiatives around installation in station diagnostics or I as D would partially offset the decline.
This view has changed over the last month.
The uncertainty a negative impact an economic growth from the current Corona virus outbreak will likely delayed the start of installations viability.
Beyond the impact of the Kirk wrote a virus outbreak on the China economy, our supply chain leadership continue to monitor the post Chinese new year startup of our supply base to best anticipate the potential disruptions, both direct and indirect to our supply chain.
While we are encouraged with the information that our own factory in many of our tier one suppliers factories have reopened.
It's still unclear as to the degree delivery commitments will be impacted.
Our global supply organization do continues to monitor situation daily and has contingency plans in place for many but not all sourced items.
So with that as a backdrop, we're initiating our 2020 guidance for earnings per share before restructuring expenses at $2.25 to $2 a 35 cents.
However, where are fueling and large dewatering businesses started 2019 strong and weaken later in the year.
We're anticipating the opposite pattern 2020.
We believe the challenges in China and their impact are fueling systems business compared him combined with a slow start for the sale of our large you ordering equipment sales into rental and oil and gas applications.
Will result in our overall sales and earnings pattern for 2020 start off we had accelerated throughout the course of the year.
We anticipate that due to our continued focus on working capital.
2020 will be another strong year for cash generation.
I'll now turn the call over to John to discuss numbers in more detail John Thank you Greg.
Our fully diluted earnings per share were 42 cents for the fourth quarter of 2019 versus 51 cents for the fourth quarter 20, Eightnm fourth quarter, each yet before the impact of restructuring expenses was 43 cents compared to 2018 fourth quarter EPS before restructuring a 52 cents.
Restructuring expenses in the fourth quarter 2019 were point 8 million in the water segment were related to various manufacturing realignment activities and resulted in a one cents impact on earnings per share in fourth quarter.
Restructuring expenses in the fourth quarter 2018 were point 7 million, primarily related to branch consolidation and other asset rationalizations into distribution segment.
As well various manufacturing realignment activities in the water and feeling segments and resulted in a one cent impact on earnings per share in the fourth quarter 2018.
Fourth quarter 2019 sales were 320.1 million compared to 2018 fourth quarter sales of 316.79, an increase of 1%.
Sales revenue decreased by $5.8 million or 2% in the fourth quarter 2019, due to foreign currency translation and we estimate this revenue declined lowered our earnings per share in the fourth quarter by about two cents versus the fourth quarter 2018.
Water systems sales were 188.2 million in the fourth quarter 2019 versus the fourth quarter 2018 sales of 196.9 million.
Water systems organic sales decreased by about 3% compared to the fourth quarter 2018.
Water system sales of U.S. in Canada decreased by 10% overall compared to the fourth quarter 2018, primarily due to lower sales volumes of dewatering equipment sales of de watering equipment equipment decrease by nearly 50% due to lower sales in rental channels and surgery.
Sales in the fourth quarter 2018, driven by regulatory demand.
Sales of groundwater pumping equipment increased by 4% during the fourth quarter 20 versus the fourth quarter 2018.
The increase in groundwater pumping systems was primarily due to increased sales of residential water systems sales of surface pumping equipment decreased by 5% on lower sales of both wastewater in water transfer systems.
Water systems operating income was $24.5 million in the fourth quarter 2019, compared to 27 million in the fourth quarter 2018, primarily driven by lower revenues.
Fueling systems sales were 77.3 million in the fourth quarter 2019.
Paired fourth quarter 2018 sales of 75 million and were a record for any fourth quarter doing systems organic sales increased about 4% compared to the fourth quarter of 2018 fueling systems sales in the U.S. in Canada increased by 7% compared to the fourth quarter two.
2018.
The increase was principally in the pumping and fuel management systems product lines.
Outside the United States in Canada, fueling systems revenues were flat and increased sales has increased sales in Europe, India, and Latin America were offset by lower sales in China, which declined by about 30% in the fourth quarter in about 14% for the full year 2019.
Versus 2018.
Sealing systems operating income was a record for any fourth quarter at 20.2 million compared to 17 and in the fourth quarter of 2018.
Fueling systems operating income was higher quarter due to favorable product sales.
Distribution sales were $64.4 million in the fourth quarter 2019 versus fourth quarter 2018 sales of 56 million.
In the fourth quarter 29 team sales from businesses acquired since the fourth quarter 2018 were 4.8 million. The distribution segment sales grew about 6% organically compared to the fourth quarter of 2018.
The distribution segment recorded an operating loss of $2.5 million in the fourth quarter 2019, compared to a loss of 2.9 million in the fourth quarter of 2018 higher product costs higher sales mix of commodity type products little price achievement and higher operating expenses contributed.
To the distribution segment earnings loss.
The company's consolidated gross profit was 101.3 million for the fourth quarter of 2019, a decrease from the fourth quarter 2018 gross profit of one or 4.3 million gross profit decrease was primarily driven.
Was primarily due to lower water systems sales, which were only partially offset by higher gross profit from increased fueling systems and distributions.
Gross profit as a percent of net sales was 31.6% in the fourth quarter versus 33% in the fourth quarter 2018.
Selling general and administrative expenses were $71.9 million in the fourth quarter 2019, compared to 75 million in the fourth quarter of 28.
SGN expenses from acquired businesses was 1.8 million and excluding the acquired entities. The company's SGN a expenses in fourth quarter 2019 were 70.1 million a decrease of 7% from the fourth quarter 28.
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During the first quarter 2019, the company changed the management reporting for certain transfers of manufactured products between the water and feeling segments. This change was better was made to better align the production on certain products.
Reportable segments sales to fourth too.
Third party customers to consistently compare 2019 results to the prior year certain 2018 net sales and operating income Reclassifications were made these reclassifications resolve in lowering fourth quarter 2018 results of fueling systems and increasing fourth quarter 20.
During 18 result of water systems.
Sales by about 9 million in 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.
As you can see on our income statement the company recorded $3.8 million of transactional FX losses below the operating income line in the fourth quarter 2019, and $2.4 million of FX gains in the fourth quarter 2018, which has a negative 11 cents swing.
In our earnings per share from fourth quarter 28.
Transactional FX losses for the full year 2019 were 1.6 million.
Historically going back five years, the below the line transactional FX gains or losses have generally been less than $2 million each year for all 2018. They were a point $7 million loss in 2017, they were a $1 million gain the company's primary method of mitigating these two.
Transactional FX losses by minimizing cross currency balances to the extent possible in settling those cross currency accounts receivable and accounts payable balances in a timely manner. As a reminder, these losses are non cash and do not reflect the operational performance of the company.
Since the fourth quarter 2018, however, the transactional FX losses below the operating income line become much more volatile in this is mostly the result of our acquisition last year of industrious rotor pump in Argentina, which has been characterized as a hyper inflation economies subject to special accounting.
Uhhuh.
The Roper pump business, primarily distributors pump products imported into Argentina from all over the world beginning primarily in the third quarter the business in Argentina began to build inventory and accounts payable rapidly in preparation for their primary selling season. This acceleration at exactly the.
Same time, the Argentinian peso weakening significantly drove meaningful.
Period to period on Mount unmatched balance sheet positions and subsequent volatility in the third and fourth quarters in the second half of 2019, despite the unsettled economic and political environment that exist there our business in Argentina grew in constant currency by 3%.
Although although the full year 2019, FX loss of 1.6 meters within our historical range, we've seen more volatility in the quarter to quarter fluctuations, primarily due to the business unit in Argentina.
The end of third quarter, when we were discussing fourth quarter and full year 2019 result, we did not anticipate this magnitude of transactional FX loss recorded in the quarter. So as Greg said with the exception of some variances between individual business units, our fourth quarter operational.
Results were consistent with the fourth quarter last year and our expectations.
In the fourth quarter 2019, our effective tax rate net of discrete events was about 13.5% slightly lower than the 20 TGR effective tax rate of about 14%. The 2019 full year effective tax rate is about 18% compared to the 2018 full year tax rate.
About 12, and a half per se.
For the full year 2020, the company expects the effective tax rate net of discrete events to be between 18 and 20%.
The company ended the fourth quarter 29 team with a cash balance of 64.4 million, which was $5.2 million higher than at the end of 2018, the company at $19 million in borrowings on its revolving debt facilities at the end of fourth quarter, 2019, and 77 million in borrowing at the end.
For the fourth quarter 28.
As of January one 2019, the company adopted the new lease standard and recognize additional operating liabilities of about $20 million.
Its outstanding operating leases with corresponding right of use right of use assets of the same amount.
The impact of this new accounting standard is 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 consolidated results of operation or to the cash flows.
Cash from operations for 29 team was about $178 million compared to 128 million in 2018, an increase of $50 million almost 40% our free cash flow cash from operations less capital expenditures net of proceeds from the sale of prop.
30 plant and equipment is about $157 million in is 163% of net income can tour compared to about 100% for the full year 2018. This improvement in cash flow is primarily due to reductions in working capital, which remains a key.
Strategic focus for the company.
The company did not repurchase any shares of its common stock in the open market during the fourth quarter 2019 at the end of the fourth quarter 2019. The total remaining authorized shares that maybe repurchases about 1.3 million.
On January 27, the company announced a quarterly cash dividend up 15.5 cents, a 7% increase from the 2019 dividend the dividend will be paid February twentyth to shareholders of record on February six.
This concludes our prepared remarks, and we would now like to turn the call over for questions.
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Your question touched upon.
Please standby well be compiled weekend day roster.
First question comes from Edward Marshall with Sidoti and company. Your line is now open.
Greg and John Good morning.
Good morning, Florida.
So I wanted to ask about the is the impact.
As it relates to China and I'm curious.
But your what what the guidance is baking into from the negative effects of that have that situation.
Sure. So as we look we had our IC system approved a late in 2019, we had a handful of installations in late 2019.
We expected.
Several million dollars less than 10.
In 2020.
Biased inflation and that's effectively kind of what we've pushed out or taken out. This is the opportunity long term prize de though is going to be as we see a more significant than the double wall piping initiative.
Our revenue per station, we expect would be about double.
And we think that it'll be a.
Longer term.
The next couple of three years, we saw for the double wall pipe. So we think it's going to be a a more systemic.
Growth in the business in China overtime.
Got it and previously you've talked about by local is that a theme that I SD will affect I asked here is that just on the underground piping systems.
I think that.
My view is that if you go back to the time when that specification for a double wall pipe was reopened it was when there was a pretty contentious trade environment.
With us.
As seems a trade hudson's or at least directionally trending down and given that the the electronics sophistication are these discussion of the product rise the I suspect that they're going to be yes. The and this is also get a government mandate and the whole ideas for government connection at hand oversight of fueling station operator.
And we would expect that that's going to be a pretty good situation for western technology generally.
Got it and as I look into 2020, and we talk about you've given us some good margin.
Rather topline guidance I'm curious if you talk about the margin fueling John I think you've said in the past anticipated at the high Twentys, which is where it's been trending is is likely to high.
Any clarity to provide on that.
At our guidance assumes mid Twentys.
Doing margin for 2020.
Okay.
And then John do you have the.
You said Latin America was up 20% in water do you have the constant currency impact in Latin America have you done that Matt.
Well the 20% is the organic what we would call the organic growth, which would take the.
The FX Alt a okay. So that is none of those constant currency.
That's that's the that takes out at both the acquisition impact.
And which is zero because we've lapped the IR PV acquisition and it takes out the FX. So the FX impact if you look at that table on page three of the release was about 3.7 million or 12% in the quarter for Latin America.
We take that so we think the reported growth and add add that back that's how we get to the twice.
Perfect and then last one from me when you look at your guidance for 2020, you talked about the cadence being first half weaker second half stronger I'm. Just curious about the Q1, you had a pretty soft Q1 in 2019 do you anticipate.
That.
To be down year over year.
If you could frame.
Yes, I mean, we're intentionally not giving guidance in the first quarter AD for for these reasons is difficult for us or predict what we what we can say to you is that we do expect a weak first quarter, but as you rightfully pointed out we had a weak first quarter in 2019 so.
So I think about the we'd say is that as Greg said in his comments.
Viewing is going to move.
To the right throughout the year. So we have some tough comps there and we don't expect viewing to beat up we don't Ics, we expect for sure that our lottery equipment sales are going to be down fairly significantly. They are also facing some very.
Difficult comparable.
The balance of the water businesses and our distribution business should have a decent quarter. So.
We're not optimistic about the first quarter add but we're also not prepared to give specific quarter guidance.
Got it thanks very much for your comments.
Thank you.
Our next question comes from Walter Liptak with Seaport Global Your line is now open.
Hi, Thanks, Good morning, guys.
Good morning, apparel and on China.
Thank you mentioned that China was down 30% in the fourth quarter.
And so I wonder if you can give us an idea directionally is that down more in the <unk>.
And are you starting to see any any turn in China This quarter.
Yes, so our R.R. Thank you for China is no. We don't see any turn back maybe the second part of that question first of all we're concerned about we think the opportunity is great the pipe.
And containment opportunity is basically wound up on as Greg said.
Opportunities a great opportunity for our company, but given the economic uncertainties the virus uncertainty kind of the the situation on the ground as we understand it there right now we just see this opportunity pushing right in 2020. So we think it's there we think will will.
Win our fair share, but we think it's going to be the latter half of the year as opposed to the first half of the or what we can say is that our estimate for revenue in China.
Is dropping to about $30 million in total from 45 million in 2019, and about 53 million in 2018. So.
A meaningful decline there and again just reemphasis on back half loaded.
Okay great.
I also wanted to ask about just generally that comments about the first half being weaker because of.
Fueling some of the water our retail.
I'm sorry rental.
Those are a couple of your more yeah, that's better mix products. So as we're modeling this out I guess I guess, the the profit mix should be back half weighted to is that right.
Yes, and Walter that's why we wanted to point that out in our prepared remarks was that we to see that.
As you pointed out correctly, the fueling business and the the wiring business, which are higher margin business is weather when theyre going and particularly when the deepwater business is going those businesses, we expect you're going to start to your slow.
We do expect the water business to do certainly better than last year's first out, but thats lower margin business water distribution. So.
That's why we see the mix and the expectations for earnings to accelerate for the year, but to start the year slow.
Okay got it and then a lesson on Argentina.
Thanks for pointing out the volatility around.
Currency is there anything that you're doing differently in 2022.
Mitigate the currency or how should we think about.
The kind of.
Impact that Argentina currency could have on 20 twond.
Yeah, we.
A couple of things, we do have hedge positions in place.
All that are really protecting us for the downside of the peso strengthening.
Against the U.S. dollar that's a catastrophic kind of situation for us not to be over.
Over a pretty excited about it or dramatic about it but.
So we do have positions like that in place I think the though the key learning is less working capital settle accounts payable as I pointed out one of our issues here is that we've got product coming in from all over the world both Franklin facilities non Franklin.
Product and.
Settling those and those a piece quicker is really important and that should be made easier by the fact that we're trying to lower the level working capital everywhere. So.
If we have less inventory that that should contribute to that as well. So those are some other things we're doing but it is highly volatile the the peso to the dollar the Argentinian pesos to the dollars lost about 30% just in the third quarter and then it went beyond that lost additional value in the fourth quarter. So.
We're we'll do what we can to to live in that kind of volatile volatile world.
Okay, great. Thank you.
Thank you.
Next question comes from Matt Summerville with D.A. Davidson. Your line is now open.
Can you maybe put a little bit of a finer point on the earnings cadence as you expected throughout the year clearly the first quarter sounds like it's going to me the low point I guess I'm wondering if the underlying trends in sealing and de watering shifts out that normal Q2 Q3.
Hi earnings Watermark for the company, so maybe put down a little bit of context, because I guess I'm, just having a hard times given that North America groundwater such an easy comparison in the first half of the year and given that that is at least in my opinion, a pretty good margin business for the company, especially in the AG.
Older only stuff that you guys sell I guess I'm, just having a little bit of a hard time with the earnings came so maybe can you put a finer point on that.
Yeah, Matt I guess I would say that.
We certainly expect the first quarter to be the low point.
Yeah as you know the distribution business had a poor first quarter in 2019, but the first quarter is still the off quarter for distribution. So even if we recover in the first quarter. The first quarter is never a great great quarter, and then as Greg point.
It out.
The the comp is easier in North America for the balance of water.
And we would expect that to.
Improved for sure, but those products margins are not the same as what we see when we talk about viewing and watering large the water. So that is really the caution that we have I think that the piece being in a.
The second and third quarters from an earnings perspective will remain the same I do think a fourth quarter will be significantly better than than the first quarter and.
That's kind of the way, we're thinking about it right now.
Got it and then with respect to pioneer I believe in the past few publicly stated in 18 that business did around 120 million in revenue can you maybe talk about how it performed in 19 and what your underlying assumption is for that excuse me for that piece do 2020.
Oh, yes.
Matt we can.
In in 2000 and limited is good for the right page here.
Yes, 2019, we did about $109 million full year and pioneer that includes all the international operations and the and the rental business that same number for 2018 was about 119.
<unk> million.
And in 2020, we see that going down.
Marginally are being pretty close to flat.
So we're not expecting growth in that business in 2020.
Got it and then with respect to the profit outlook for distribution I think when you originally.
Made the forward moves into the channel you talked about that business getting into an operating profit range of four to six per side. Obviously you are below that in 18 below that again in 19, what's the sort of expectation you have for that business 20, and do you need to make incremental structural.
Changes to the business to generate that level of profitability.
So now we are planning for the distribution business to be within that range in 2020 or many of the structural steps to get there were taken in 2019, and that's why I want to convey in my comments the things have settled down.
The focus is on the west Yeah, I think we had to step back and say that in 2019, and what we're really tough market conditions.
The distribution business actually was flat organically.
And added to do with a focus by the leader de Davis and his team on cross pollination getting into businesses that are less impacted by the cyclicality of.
The weather impact news for example, the eyes as you pointed out earlier, so they're getting more than two turf and treatment and wastewater too to grow that business and then.
Good opportunity ahead of more weather year to grow the business in the area submersible pumping systems in line, Jeff Durbin pumping systems, which are more focused on the west.
And the margin profile the west.
Generally more positive on the strength there. So we did see the structures in place on the teams in place.
Obviously, it's not a laid out and it's been a pretty competitive pricing environment with the.
With the week business week General climate business climate in 2019.
We got a little bit upside down we acquired.
Some quality products and middle of summer when when pricing was a little stronger and was appointed we sold some of that off will compete will continue to some margin pressure at the from Q1 until we come into the season, but expecting more normal year. Our plan is for the business to be within the range that we originally talked about three years ago.
And then maybe lastly in terms of pricing overall for the company what the average realization was in 19 and what you're expecting for 2020.
Yeah, our realization at 29 team was.
Just over 200 basis points.
And we're we're assuming something consistent with that in 2020.
Thank you guys.
Thank you I'm not showing any further questions at this time I would now that the tend to call back over to Gregg Sengstack for any closing remarks.
Thank you for joining us today on our conference call. We look forward to speaking to you.
In April after the first quarter results are published every two weeks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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