Q3 2020 Franklin Electric Co Inc Earnings Call
[music], ladies and gentlemen, thank you for standing by and walking kids from clean electric is sports third quarter.
Whiter teeth housing train the sales and earnings conference call at this time all parties. She thinks I am I, saying Oh email later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance during the conference. Please.
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Very minor <unk> conference call is being recorded I would now like to turn the conference over to your host Mr. Johnson, Our Chief Financial Officer. Please go ahead.
Thank you Lori and welcome everyone to Franklin Electrics through 2020 earnings Conference call with me today is Gregg Sengstack, our chairman and CEO.
On today's call Gregg will review, our third quarter business results in the impacts our company is experiencing from the global pandemic and I'll review, our third quarter financial results.
I will 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.
They are subject to various risks and uncertainties many of which could cause actual results to differ materially from such forward looking statements.
These factors may be found in the company's annual report on form 10-K and in today's earnings release.
Forward looking statements made during this call are based on information currently available.
Nick.
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 Gregg Sengstack.
Thank you John Thank.
Thank you all for joining us as I noted in our press release I am consistently impressed with our company and my 5500 colleagues are doing with the pandemic.
Global product supply leadership and facilities teams continued to do a great job maintaining protocols to keep more people say wow.
We continue to follow the guidelines as health authorities around the globe, including the CDC National State and local government requirements.
Even with these new protocols guidelines and requirements for operating performance continues to improve.
Once a week and year over year.
With the benefit of price mix and thoughtful expense control recovery in our third quarter revenue drove record consolidated operating income and earnings.
Earnings per share for any quarter in our history.
Water systems product demand strengthened through the quarter driving double digit organically outside the U.S. and excluding or large dewatering pumps in the U.S. as well.
While our business in Brazil, and Turkey experienced the strongest organic growth driven in part by price increases to offset inflation generally our business was strong in all end markets with the exception of the middle East and North Africa.
Mark do you worry pump sales are stable, albeit at depressed levels, given a lack of demand I pump rental customers.
Our fueling systems business is recovering slowly.
Outside of China revenue was down 7% in the quarter.
Western Canada joined declined 5% compared to the third quarter last year.
Our business in China improved slightly but the run rate is probably sub 20 million more like it was in 2017.
Our U.S. distribution business continues to perform well demand is strong.
While this dry in the western U.S., which is generally favorable for groundwater manufacturing and distribution businesses. It has been wetter than average east of the Mississippi.
However, overall sales gains are uniform across the country, except for the upper Midwest, We've seen strong post lock down recovery and share gains.
Although we continue to experience some challenges in our supply chain, our product availability continues to improve.
Across the company, we continue to make progress on reducing working capital driving record free cash flow.
Turning to the fourth quarter, we see ground water demand remained strong in the U.S.
For our manufacturing and distribution segments.
As a result of the second quarter, Lockdowns and generally favorable weather conditions contractor backlogs are significant for this time of the year we.
We also see the plumbing each gate she business is steady with good end market demand and channel inventories recovery.
We expect largely watering pump demand to be steady.
Outside the U.S., except for the Middle East North African and South.
Outside of China, We expect our fueling systems business to see a small sequential improvement.
Gasoline consumption in the U.S., we have good data is getting closer to pre pandemic levels.
We expect to outside the U.S. consumption rates are growing as well.
In China, our visibility into the funding of government mandated programs has always been a challenge.
I remain optimistic that with the recovery of the Chinese economy, you will see some additional double wall pipe upgrades and installation of a meaningful number of fuel deeper monitoring systems and gas station. However, we do not currently see that happening this year.
Overall with a continued drag of lower dewatering pump sales, we are forecasting fourth quarter water systems revenue down middle since mid single digits.
Consistent revenue down around 10% and distribution revenue up around 10%, but.
With improved overall operating performance, we believe our fourth quarter operating earnings will be up 10% to 15% for the fourth quarter last year.
Increasing our annual guidance for earnings per share from a midpoint of $1.82 to midpoint of $2.12 also.
Also with our strong free cash flow performance, we are increasing our estimate of annual free cash flow of 170% net income.
I will now turn the call back over to John John.
Thanks, Gregg our fully diluted earnings per share were a record for any quarter in the company's history at 82 cents for the third quarter 2020 versus 72 cents for the third quarter 2019 third quarter EPS before the impact of restructuring expenses was 83 cents compared to 29.
Key third quarter EPS before restructuring.
73 cents.
Restructuring expenses in the third quarter of 2020.
For me it and were related to various manufacturing realignment activities in water systems segment and resulted in a one cents impact on earnings per share in the third quarter of 2002 and restructuring expenses in the third quarter 2019, We're also point 4 million related to various.
Manufacturing realignment activity in the water system segment and also resulted in a one cents impact on earnings per share in the third quarter of 2019.
Third quarter 2020 sales were 351.2 million compared to 2019 third quarter sales of 348.4 million an increase of 1% sales revenue decreased by 10.4 million were about 3% in the third quarter of 2020.
Due to foreign currency translation water.
Water systems sales in the United States, and Canada were flat.
Compared to the third quarter 2019 sales of groundwater pumping equipment increased by about 17% and sales of surface pumping equipment increased by about 8% versus the third quarter 2019 due to strong end market demand. These increases were offset by lower sales due to water.
Equipment, which were down by about 54% due to lower sales in the rental channel.
Water systems sales in markets outside the U.S. in Canada increased by 3% overall foreign currency translation decreased sales by 12%.
Outside the U.S. in Canada water systems organic sales increased by 15%, primarily driven by higher sales in all three major geographic region.
In America Europe, the Middle East in Africa, and the Asia Pacific markets.
Water systems operating income was 36.6 million in the third quarter of 2020 compared to $28.4 million in the third quarter 2019, driven by price realization product sales mix and cost management.
You in system sales in the U.S. in Canada decreased by about 5% compared to the third quarter 2019. The decrease was in all product lines in due to declining demand for new buildings.
Outside the U.S. in Canada, fueling systems revenues declined by about 27% driven by lower sales in Asia Pacific primarily China.
In the third quarter outside of China Global fueling systems sales were down about 7%.
Prudent from being down about 20% in the second quarter.
In China fueling system sales improved sequentially.
I continue to be less than half of last year sales.
Fueling systems operating income was 18.9 million in the third quarter 2020, compared to 21.6 million in the third quarter of 2019, driven almost entirely by lower revenue.
Distribution sales were a record at 98 million in the third quarter 2014 versus third quarter 2019 sales of 87 in the distribution segment organic sales increased 13% compared to the third quarter of 2019 favorable weather condition.
Conditions versus the third quarter last year contributed to the revenue growth.
The distribution segment operating income was 6.4 million in the third quarter of 2014 compared to 5.9 million in the third quarter of 2019 operating income growth did not keep pace with sales growth, primarily due to unfavorable product sales mix and higher personnel cost for.
The Companys consolidated gross profit was 124.3 million for the third quarter of 2020, an increase from the third quarter 2019 gross profit of 117.6 million the.
Gross profit as a percentage of net sales was 35.4% in third quarter of 2020 versus 33.8% in the third quarter 2019, and improved primarily due to better price realization and product sales.
Hi, Matt.
Selling general and administrative rescue expenses were $75.5 million in the third quarter 2020, compared to 74.5 million in the third quarter 2019, SGN expenses were higher primarily due to variable compensation expenses, partially offset.
Foreign currency translation.
Third quarter 2020, our effective tax rate not a discreet events was about 70% down from about 20% in the third quarter 2019 due to the net.
Result of favorable discrete events.
Our 2020 effective tax rate net of discrete events.
Should be between 18 and 20% in consistent with our original financial guidance.
The company ended the third quarter 2020, with a cash balance of $114.5 million and generated 118.5 million of free cash flow from continuing operations during the nine months of 2020.
Versus free cash flow in the nine month first nine months of 2019 of 75.5 million.
The company's total incremental borrowing capacity was $532 million on September Thirtyth 2020.
Yesterday, the company announced a quarterly cash dividend of 15.5 cents that will be paid November 19 to shareholders of record on November 5th.
The company made no purchases of its common stock in the open market during the third quarter 2020 at the end of the third quarter 2020. The total remaining authorized shares that may be we repurchased is about 934000.
This concludes our prepared remarks, and we'd like to now turn the call over for questions.
Ladies and gentlemen, if you have a question at this time. Please press the Star then the number one key touchstone telephone.
Good question.
Or this will give yourself crazy queue. Please press the pound key.
Our first question comes from the line of Mike Halloran from Baird. Your line is open.
Good morning, gentlemen.
Hi, Mike So so let's just make sure I understand the trends in the fourth quarter on the water side and.
How are you thinking about sustainability here, if I heard the prepared remarks correctly it sounds like the underlying dynamics in the third quarter.
We are going to be mirrored in the fourth quarter.
But could you give some granularity.
How you're thinking about some of the sustainability of those pieces that kind of excluding what weather looks like.
With a real focus on maybe the AG market as well as the other ground water markets.
Sure Mike. So if you look at our North American business to your point, we are seeing is actively.
Much of the second Q2 kind of pushed out to Q3 Q4.
And it's been a it's been a good climate for our business.
And both in the residential an AG space for the groundwater business and we've also seen a nice recovery in the plumbing HK see business and we just feel that given the information we get from our distribution side of the business, which is more focused on groundwater that there's good backlog with contractors those.
Long as the weather's reasonable contract you can continue to get out in the field that unlike.
Prior year receive more slowdown Q4, we you think that's going to carry a little bit more into Q4.
Outside of the United States you go around the globe with the exception again of of North Africa, and like Saudi and were impacted by lower oil prices is that we're seeing is generally good demand in Latin America.
Africa, Europe steady Asia study, so positioning good water demand across those end markets as we move into the last quarter of the year.
So maybe maybe touch on what the inventory levels look like through the channel both within the water segment as well as.
Indeed distribution.
And then any thoughts on an early by this year and whether whether there's nothing out there for us.
Some of your key some of your customers are trying to pull it out and get some rebates.
Well with no business being.
Basically strong people got plenty to do and there are plenty busy.
Yes, I cant really comment to the early buy side I would just say generally inventory is.
His good maybe even little bit skinny, because the supply chains for ourselves and others, because we see multiple suppliers for Ed water distribution company supply chain struggled actually in third quarter, maybe not as much in the second quarter, but you still had to struggle as people start ramping up their supply chains.
So we saw even in our in our own case in Franklin towards the back half of September.
We're struggling getting some component.
Components from key suppliers, we mentioned deal that help now, but I wouldn't think that inventories are particularly robust you know people tend to go for cash needs situations. Whenever you have a shock to the system and so I would not think that inventory levels are particularly robust in the channel.
No that makes sense and then last one really strong cash generation really good cash position.
I guess and not much has changed would love some thoughts on how you're looking at the M&A landscape out there with the Optionality looks like in any caps usage and price.
Thirtys, excluding the obvious which is invest in yourself first.
Yes, Mike we.
Our view toward M&A really hasn't changed.
We have some transactions that we continue to look at so.
The pipeline I'm not sure I would say is really robust, but we've got we're getting looks and.
We'll see where some of those may may take us here, but that continues to be our priority as you know is.
It's accretive acquisitions and from.
From there, we'll we'll we'll go and we're not we're not really.
Particularly if its a good opportunity it's a good opportunity that may be in water. They been fueling maybe distribution that may be outside the U.S. in the u.
The cash generation is really coming as you can see.
From the working capital improvements that we've made largely around the corporation, our working capital ratios down to 29% at the end of the quarter, which is important.
Performance measure for the leadership team here and.
It's almost 400 basis points better than where we were last year at this time so.
Kudos to the team for the great improvements they've made there's great points out and not particularly easy supply chain kind of.
The environment in the third quarter.
Great. Thanks, Thanks, guys appreciate the time.
Right.
Well go next question comes from the line of Ryan Connors from Boenning <unk> Scattergood. Your line is open.
Great. Thanks for taking my question and congrats on the great results, what a difference six months makes huh.
Thank you Ryan good morning, Ron really remarkable that bounce back so I wanted to talk a little bit about.
About fueling.
And particularly it to start with on the margin side I mean, obviously you know there's some top line headwinds there, but the margins.
You know holding up really well so can you drill down on that a little more than you did John and.
Hey, what's driving that and whats, enabling that to be what are the different scenarios for margins from here. If we get a topline bump outs are actually upside to that and if we do get a leg down at some point okay.
Can we continue to hold the line on margins there at fueling.
Yes so.
Two factors at work there Ron first one is we had nice price realization feeling.
In the quarter.
In.
In the neighborhood of 350 plus basis points, so other than that.
The business has done a nice job that managing supply chain matching increases inflation, that's coming at us and then going into the marketing getting.
Price. So that's that's a big impact the other thing that this business has done really well.
Is controlled or asked you that expenses understood. The 2020 was going to be kind of a.
Flattish here and now a down year because of the pandemic and really held the line on on SGN a increases so as you know I always get a little uncomfortable when we try to get talked up on fueling a lie margins 27.6%.
Is pretty healthy sequentially, it's up it is.
Just about even with where we were in the third quarter of 2019.
So product mix matters, geography, geography mix matters and I, just don't think I'd get to fired up beyond that mid 20 range for very long for fueling systems now as we look forward and we capitalize on some of these opportunities in China.
Which are just great other developing world opportunities continue to hopefully see station builds come back in the U.S. Im some of those some of those this unit costs are going to come back. There's no question about it some of the comp variable comp those kind of things are going to come back, but overall I would point to pricing the SDN is.
The main contributors to that and and the businesses. The leadership team. There is doing a really nice job of managing those factors.
Okay.
No you know obviously the election impacts many businesses, but you know it's.
It's hard to imagine a business that's that's more impacted than fuel like I mean, you've got two very different visions there of kind of the path forward in terms of electric vehicles and and.
And and so forth. So obviously, we can come back three months from now and talk about it a little more definitively no no what the landscape is but what's your your broad view on the on the risks and opportunities there as you.
As you look out is that something that you look at us as a risk that if.
Theres this movement.
Away from.
From.
From fossil fuels or that could impact to tactically or is that still something that even if that does take place that's still kind of pretty.
Pretty far out there in terms of the tangible impact.
Right a couple observations with respect to the U.S. market much of our growth.
It's coming from innovation.
And solving customer pain points. So they can operate the systems sales.
Finally, with the lowest total cost of ownership.
Demand for example, we just started shipping some corrosion control systems for underground diesel storage tanks were the problem with corrosion from low sulfur diesel which is going to become a bigger problem worldwide. As we go to low sulfur diesel which is a good thing maybe even low sulfur diesel is better for the environment, but it's going to create some corrosion.
Challenges and we have a solution for that so that's that's an example of a product that's not being driven by regulations being driven by again the station operators looking for.
Total cost of ownership.
Also I would keep in mind that within the United States or even outside the United States of vehicles sold today to to liquid fuel vehicles, most likely going to be on the road for 20 years.
While there's.
No question as the conversion easy vehicles over time of question is going to come in developing regions first.
There is a long buildout and if you look at various data around energy consumption or across the globe without massive.
Conversion too.
Some type of.
Solar wind and so on is that we're going to need energy from all sources and liquid fuels are really.
Great way to move vehicles around no aircraft around and so that's going to be a part of the of the energy solution for for decades.
And so we do see the fueling business.
Our growth rates actually inside the United States, it's often exceeded or growth rates outside the United States as we see major marketers consolidating.
The smaller stores in building out new stores and as they get more sophisticated stores they like our equipment.
Outside the United States, which would not be so impacted by the us elections again some of the environmental initiatives that you're looking at in China and India.
Yeah round the gas stations are severely simple solutions that can really help with the cleaning up the environment stage do vapor recovery.
Which was started in China, and then the subsided, but now they want to put in station diagnostics to confirm that these sales to systems are working correctly and that will be good for the environment to do that someone in India, where we know there are real.
We'll air pollution problems again as long as you have liquid fuel vehicles. These studies of heat recovery systems are very effective way to capture significant amount of deals c. So we see these as being you know as long as we have liquid fuels in a world that we're going to have those for decades we've.
We see our system is being relevant we seeing it as being a good driver growth for fuel business.
Got it no that's really.
Really great commentary, Thanks, Greg and then my last one was.
And I apologize if I missed this a little choppy you were a little choppy towards the end of your answer to the last question, but.
When you talked about M&A and sort of acquisitions. It seems like distribution has really gotten its legs under it and is in a good place here.
The growing pains kind of pass that.
And that business is really doing well, but yet it's still smallish in the overall mix.
Is that a particular area, where you would be looking to maybe build through acquisition I know that space needs to consolidate anyway.
Yeah, Ryan it is.
We're going to be thoughtful and patient and.
A couple more comments, we don't we don't see anybody else out there kind of consolidating the space. We've done several acquisitions. So we think we know the ins and outs and the key factors when it comes to valuation Valuating These kind of.
Entities.
So, yes, there's going to be more opportunities and we're going to be thoughtful and consider those we think about your geographic presence in where you know certain parts of the country it might be better to own.
Platform there that we don't have so.
So the answer the short answer is yes, and we'll consider we'll consider opportunities.
And they come at us and be very thoughtful in how we execute.
Super Thanks, I appreciate your time.
Thank you.
Thank you I next question comes from the line of NAPW Summerville from D.A. Davidson. Your line is open.
Thanks, Hey, guys.
Okay.
With respect to the two pieces of the business that are pretty soft free right now first with de watering where do you think pioneers business comes in from a revenue standpoint, and 2020 and do you have an initial preliminary sort of view on how that might shape up.
Up in 21.
Yes.
2020.
Matt 60, Sixtyish 65.
Million topline there.
We are doing our work right now on 2021, I'm I'm, a little hesitant to share something there but.
You know a big as you know the big impact.
This equipment is sold to rental houses and then in the U.S. anywhere they put those out on rent too.
Angie activity, including fracking activity so.
I think that.
Theres differing views on that but we're not we're not real bullish on that at least in North America at the moment.
The good news is the business continues to pick up traction internationally.
Really good applications for mining the watering applications other types of things like that and.
We see some traction in Latin America, Australia, we see some traction in southern Africa with those products. So it's much smaller of course, then you know kind of the both in the us that.
There there are some positives in this product line as well and we'll continue to try to push that.
Just sticking with that theme if I recall correctly.
Our dewatering business.
I think it was down like 50% in the fourth quarter of Knight team and if I heard you guys correct in your prepared remarks, you're thinking water is going to be down kind of mid single digits in Q4, and unless I didn't hear you correctly. So I guess, some maybe a little surprised that you're anticipating.
Abating water to be down in Q4 can you expand on that.
Yes, I think the key thing that it's you know seasonally as you know we were going into the fourth quarter.
As Greg pointed out I.
We saw a really nice quarter in both groundwater and surface pumping in the U.S. ground water was up 17 and surface was up maybe some of that surface is recovery of de stocking. We believe that was happening in the in the in.
In the second quarter, that's going to that's going to trail off right is seasonally we get into the winter months, that's going to start to decline and then groundwater is really you know it's difficult to predict as Greg said right now the the weather conditions have been in our favor at least in this country.
We definitely think that Theres. This.
Resurgence of demand Thats coming out of the second quarter with a lot of areas were were suppressed and.
You know a lot of that's going to depend on contractors being able to get out there do the work.
We're still hearing a lot of positive things from our distributors and in the headwater business. We're hearing positive things that there's there's there's more work than there is time. So that's a tailwind for the fourth quarter, but there's lots of puts and takes and we don't expect the water into change that much in the second quarter.
Wondering was down 70% was down 54% now the comps get easier.
But.
Well as I said, we're not expecting much out of that product group and in the fourth quarter.
Got it.
Then over to fueling the other piece of the business that is kind of a soft for you guys, where do you think China ceiling comes then from a top line standpoint in 20 and similar to my de watering question, how should we be thinking about how that soon.
Wave of environmental related stuff. The is the sort of revenue how should we think about that in the context of 2021 at this point.
Yes, the the topline number for 2020, Matt.
17 to 20 somewhere in that range 17 to 19.
It.
We keep kind of inching it down a bit here.
In terms of looking forward again.
Little hesitant to give too much on 21, just yet but.
Reality is is that these environmental mandates in China real there's lots of volume.
And our our it's it's competitive for sure, but our product and our our technical solution fits with what is needed there. So.
We continue to be optimistic.
I think 2020, or we think 2020 was a highly unsettled year in China.
Endemic and floods and other issues there so.
I think generally our view is that it will stabilize and we'll see more volume traction in 2021 in China for our fueling systems business.
Got it let just last real quick you mentioned the price realization ceiling can you give us the same figure for your water business. Thanks.
Yes, and water. It was it was a nice quarter as well now some of that as Greg pointed out is not developing region. So our developing region businesses pricing on spot rates those effect starts to.
Go up and they go get more price in water systems were in the two in order to kind of to 50 range.
Matt in distribution were in the half a point to a full point kind of range of price realization.
For a year to date through the three quarters.
Water in the 200 basis point range in viewing in the 300 basis point range. So you know.
It's been a nice it's been a good year in the <unk> and the teams have done a nice job at getting price there.
Great. Thank you guys. Thanks.
Thanks, Matt.
Ladies and gentlemen asked a question since you press. The Star then the number like I know telephone keypad.
[music].
Lucy I think we're ready to wrap.
Wrap up the call with some final comments are from ministers things die.
Hi, Thank you I will now turn to calibrate to Mr. Gregg Sengstack for any closing remarks.
Hey, you alluding before in this call I would like to call your attention to the 2020 Franklin Electric sustainability report that will be issued today and available for download on our website.
While this report is our first public disclosure some important environmental and social measurements.
Couple of sustainability or the foundational tenants of Franklin Electrics culture, and long contributed to our success.
The commitment to safety ethical compliance with the SEC.
History of innovation, environmental protection continuous improvement and lean manufacturing practices.
Thank you for joining us. This morning, we look forward to your joining us on our conference call. Following our fourth quarter earnings release take care and Stacy.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating have a wonderful day.
Good luck.
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