Q4 2020 Franklin Electric Co Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Franklin Electric reported fourth quarter, 'twenty and 'twenty sales and earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer the question.
That's a good question during the session you will need the press star one on your telephone. Please be advised that today's conference is being recorded is the acquire any further assistance. Please press star zero and I would now like to hand. The conference you speak of today, John Haines Chief Financial Officer. Please go ahead Sir.
Thank you Joelle and.
And welcome everyone to Franklin Electrics fourth quarter, 'twenty and 'twenty earnings Conference call with me today is Gregg things stack of our chairperson and CEO.
On today's call Gregg will review, our fourth quarter and full year of business highlights.
And review, our fourth quarter financial results in more detail when I'm through warehouse and 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.
The statements are subject to various risks and uncertainties many of which could cause actual results to differ materially from such forward looking statements and.
The discussion of these factors may be found and the company's annual report on form 10-K, and in todays earnings release and.
All forward looking statements made during this call and 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 our chairperson and CEO Gregg things of that.
Thank you John Thank you all for joining us as I noted in our press release I am extremely proud of the dedication and execution of our global team as we continue to operate during these difficult times and.
I want to publicly thank our employees for their continued laser focus on serving their customers, while negotiating the inherent challenges and done.
And then.
Turning to our results, we ended 2020 and the strong position delivering record sales and earnings and the fourth quarter.
And our water systems business continued to rebound from the pandemic slowdown and the second quarter, posting 4% organic growth.
Record operating income and operating income margin and the quarter.
In addition, our distribution business grew net sales of organically, 21% and was profitable and the fourth quarter for the first time and its history.
On the consolidated basis earnings per share increased 36% to 57.
And the fourth quarter the record for any fourth quarter.
For the full year, our net sales declined by about 5% and our operating income increased by 3% versus 2019.
Our earnings per share before restructuring expenses was $2 18.
The 5% increase versus 2019, and the full year 2020 free cash flow from operations was a record $189 million.
Approximately 187% of our 2020 and net income for about $4 <unk> per share.
We gained momentum throughout the back half of 2020 and are poised to capitalize on the strong tailwind as the materialize and the water and markets we serve.
We also completed two strategic acquisitions, one of the water treatment space in Canada, and the other a key groundwater distribution business and central Texas.
We are confident that each offers a great new growth platform for 2021 and beyond.
Our strategy to grow as the global provider of water and fuel systems through geographic expansion and product line extensions and leveraging our global platform and competency and system design and is working.
Favorable weather and some catch up demand from earlier in the year continued to drive strong U S. Water systems results, which continued to bear the brunt of lower dewatering pump sales.
Organic growth and the U S water systems was 7% when you exclude the dewatering pumps impact.
Outside of the U S and excluding our large dewatering pumps growth was 4% led by our businesses and Latin America Africa, and the Middle East.
Our water businesses continue to benefit from price actions, we've taken to offset inflation.
Overall, we achieved about 340 basis points of price and the fourth quarter and as I mentioned to the fourth quarter Records for both operating income and operating income margin and our water systems segment.
And this price achievement and addition to new actions, we will take and 2021 are necessary for us to maintain margins and the face of increasing raw material prices globally.
Our U S distribution business has a lot of momentum.
Favorable weather and most of the U S. Some indications of recovery and agricultural commodity prices and the continued catch up of well installations due to the the pandemic are all factors driving the underlying market and favorability.
We see this momentum continuing and early 2021, and we're also encouraged by the completion of the Geico and pump acquisition in late December.
Icahn provides seven new distribution outlets and central and West Texas.
The strong market position and a very important groundwater and market and is a great fit for headwater.
Finally, headwater chief profitability and the fourth quarter for the first time in its history and more importantly grew there for 2020 full year operating income margin before restructuring charges by 200 basis points.
So as we look forward to 2021 of our core water distribution markets and the U S were strong and both our own and measurable customer backlog remain high for this time of the year outs.
Outside the U S. We also see strong demand, most notably in Latin America and Asia Pacific.
As a result, we expect mid single digit organic growth and our water systems and distribution segments and 2021.
Our fueling systems business revenue declined about 15% and the fourth quarter slightly worse sequentially than we saw and the third quarter.
As we have pointed out in the past we believe this business will recover more slowly from the pandemic and the water systems business.
Overall sales and the U S and Canada declined about 13% and our business and China declined about 66% versus the fourth quarter last year slightly worse and the decline we saw and the third quarter. Despite.
Despite these revenue declines fueling systems achieved a record operating income margin of 28, 7% and the fourth quarter due to intense focus on fixed costs.
Even with tight expense controls are fueling team continues to innovate and introduce compelling new products for our customers, including the new corrosion control system that mitigates corrosion, causing water buildup underground fuel storage tanks.
Despite the tough year, we see no indicators and we are not winning our fair share of global fuel station equipment.
We are confident and our fueling systems business will recover more completely and 2021 and are expecting 6% to 7% organic growth.
Although we do not expect much recovery in China, we of solid opportunities for organic growth and Latin America Africa, and India, and we will capitalize on this year, we expect the U S and Canada will grow and the 5% to 6% range based on the view that major retailers will continue station build outs this year as favorable economic and market factors.
To make retail fueling facilities attractive targets for new capital.
For the company, we believe 2021 revenue will grow approximately 10% and our 2021 earnings per share will be and the range of $2 and 52.
The $2 75.
We also expect to generate significant free cash flow due to working capital improvements.
We expect the free cash flow conversion of net income to be greater than 115% and 2021 and coupled with our strong balance sheet provides us the opportunity to continue to grow inorganically as well.
We see many growth opportunities ahead of us and look forward to continuing to drive strong performance and the years ahead I will now turn the call back over to John John and thank.
Thank you Gregg.
Our fully diluted earnings per share were a record for any fourth quarter and the company's history at 57 for the fourth quarter of 2020 versus <unk> 42 for the fourth quarter of 2019.
Fourth quarter EPS before the impact of restructuring expenses was 57 zone.
Compared to 2019 fourth quarter EPS before restructuring of <unk>.
The three restructuring.
Restructuring expenses and the fourth quarter of 2020.
And $3 million and were related to various manufacturing and realignment activities and the water segment and had no impact on earnings per share and the fourth quarter of 2020 <unk>.
Restructuring expenses and the fourth quarter of 2019 were weak.
Ian.
And we're also related to various manufacturing alignment activities in the water segment and resulted in a one cent impact on earnings per share and the fourth quarter of 2019.
Fourth quarter 2020 sales were $321 1 million compared to 2019 and fourth quarter sales of $321 million sales revenue decreased by $8 9 million for about 3% in the fourth quarter of 2020 due to foreign current.
The translation.
Water systems sales and the U S and Canada were up about 2% compared to the fourth quarter 2019, primarily due to acquisition related sales and sales of groundwater pumping equipment increased by about 11% and sales of surface pumping equipment increased by about 2%.
Versus the fourth quarter of 2019 due to strong and market demand. These increases were offset by lower sales of the watering equipment, which were down by about 33% due to lower sales and the rental channel.
Water systems sales in markets outside the U S and Canada decreased by 1% overall foreign currency translation decreased sales by 10% outside the U S and Canada water systems organic sales increased by 9% primarily drew.
And by higher sales and Latin America, Europe, the Middle East and Africa markets.
Water systems operating income was $34 million and the fourth quarter of 2020 compared to $24 $5 million and the fourth quarter 2019, driven by price realization product sales mix and cost management.
Distribution sales were a record at 77 9 million and the fourth quarter of 2020 versus fourth quarter 2019 sales of $64 4 million. The distribution segment organic sales increased 21% compared to the fourth quarter of 2019 favorable weather condition.
<unk> versus the fourth quarter last year contributed to the revenue growth.
The distribution segment operating income was $5 million and the fourth quarter of 2020 compared to an operating losses of $2 $5 million in the fourth quarter of 2019.
Fueling systems sales and the U S and Canada decreased by about 13% compared to the fourth quarter of 2019. The decrease was in all product lines and due to declining demand for new tooling station.
Outside the United States, and Canada, the fueling systems revenues declined by about 21% driven by lower sales in Asia Pacific primarily China.
Fueling systems operating income was $18 8 million and in the fourth quarter of 2020 compared to $22 million and the fourth quarter of 2019, driven almost entirely by lower revenues. However, fueling systems operating income margin increased by 260 basis points and.
The lower revenues were offset by better sales mix and aggressive fixed costs and management.
The company's consolidated gross profit was 111.
$4 million for the fourth quarter of 2020 and increase from the fourth quarter of 2019 gross profit of 101 3 billion.
Gross profit as a percentage of net sales was 34, 7% and the fourth quarter of 2020 versus 31, 6% and the fourth quarter of 2019 and improved by 300 basis points, primarily due to better price realization product sales mix and cost management.
And.
Selling general and administrative expenses were $76 7 million in the fourth quarter of 2020 compared to $71 9 million and the fourth quarter of 2019, SG&A expenses were higher primarily due to variable compensation expense, partially offset by COVID-19.
Foreign currency translation.
And the fourth quarter 2020, our effective tax rate net of discrete events was about 16% up from about 13, 5% and the fourth quarter 2019 due to the the net result of favorable discrete events in 2019.
The 2021 effective tax rate net of discrete event is the.
Estimated to be 18, 5%.
The company end of the fourth quarter of 2020, with the cash balance of $138 million and generated a record $189 million of free cash flow from operations and 2020 versus free cash flow and 2019 of 157 day the comp.
The total incremental borrowing capacity was $606 million on December 31, 2020.
Last month, the company announced the 13% increase of our quarterly cash dividend of $17 five per share that will be paid February 18, the shareholders of record on February for.
The company made no purchases of its common stock and the open market during the fourth quarter of 2020.
At the end of the fourth quarter of 2020 of the total remaining authorized shares that may be repurchased is about 934000.
This concludes our prepared remarks, and we would now like to turn the call over for questions.
Thank you as a reminder to ask a question and you will meet the press star one on your telephone so let's try your question post the panty.
Please standby will be compared of the Q&A roster.
Our first question comes from Matt Summerville with D. A Davidson your line is now open.
Thanks, Good morning couple of question for.
First and the fourth quarter. It sounded like you had very strong price realization up almost 350 basis points year over year should we be thinking about something similar in magnitude for the entirety of 'twenty, one and if so will that be enough to offset the inflationary pressure, we're seeing particularly and things like copper and steel.
Hey, Matt good morning.
The second part of that we do expect to offset inflation in 2021.
And part of the achievement in the in the back half of 2020 was the in anticipation of what's going on and what we expect to happen all of the inflation side and 2021. So I don't think the actual 2021 price achieved will be at that same level, but when we consider the carryover.
The impact from 2020% of 2021, and then the incremental inflation that we expect in 2021, we still think we're going to come out of ahead, but.
But part of the 2020 actions of course were to get in front of of the 2021 and inflation.
Got it and then I.
And think there was then perhaps greg's remarks.
Talking about the.
The international fueling business seeing some activity in Latin America Africa, and India, maybe if you could expand.
Upon that a bit number one and the number two sticking with fuel and where we're at with this next wave of and by our government related.
Environmental mandate activity and China. Thank you.
Sure Matt what we believe is that Latin America, we're seeing more station build out generally southern Africa. There has been a couple of significant programs that have been pushed to the.
The the right for a couple of years now that we believe are going to go.
And of the ground and then.
And India.
<unk>.
The joint venture BP with reliance they look to be underway with the station build out and India, which we plan to participate in.
With China has indicated its a little peak we.
We expect that Theres still some legacy double wall piping initiative to build out last year for any number of reasons and not all related to COVID-19 actually because China got back to work pretty quickly but related to weather and some other factors. We just didn't see that we are seeing some some life and that program the Isd program and China less clear.
So we're just as we need we're ready we're there of our systems are approved but it's the question about when they turn the spigot on and China.
And then just for one final follow up embedded in the organic assumption for <unk>.
Water and distribution what would the outlook be for your North America residential versus AG markets and embedded in that thank you.
Yes so.
We're thinking about water and distribution of organic growth and 21 to be right and the 5% range, maybe maybe slightly better than that Matt and we embedded and that is the expectation that residential and we will continue to be strong for.
For both segments.
We're seeing some.
And this will sound and we're seeing some green shoots on the AG side.
Couldn't resist that but the reality is that we're not we're not and we're.
We're not.
Not over the top ready to say that AG is is back I know the.
Some folks like Belmont and Lindsay had been pretty fired up about AG, but the.
The the reality is that we think.
Will.
We'll have some some tailwind and and.
The positive, but the bulk of what we're thinking of is <unk>.
Continuing the residential strength continuing groundwater.
And.
And.
And then just.
The incremental share of pickups that we can get and different parts of the.
Of North America.
Great. Thank you guys.
Thank you. Our next question comes from Chris Mcginnis with Sidoti and company. Your line is now open.
Good morning, Thanks for taking the question.
For the and Bruce are coming and very weak.
Okay.
Helpful.
Yes, that's better Chris Good morning, Greg Good morning.
Thanks for taking my questions and nice quarter and guidance.
Can you, maybe just talk a little bit about the.
<unk> acquisition, and just how of that strengthens the market for you and obviously, it's been a very good year for distribution. So how does that.
Change the landscape and then maybe can you just talk maybe a little bit about synergies within the top.
And how they should come through.
Sure so for.
You could go back to 2014, and our decision to move away from.
The large distributor.
And it shows the national footprint of preferred on the coasts and their decision to move away from us and the central United States. So we have we've had a long standing relationship with icon that preceded that change.
But we just felt that we had not fully recovered our share in the Texas market, which is probably the largest groundwater market and the country, we maintain contact with the owners of the icon for the five owners, we're not active and the business. We saw the guy kind of footprint of being a really solid footprint for us they had made of <unk>.
A lot of progress of Franklin product generally and.
And those markets and then when the owners of side of his time for them to the.
The liquidator position, we were here and ready to support that decision.
Along with the company comes and industrial businesses.
And Jeff turbine business.
Which complements the acquisition, we made of Cps pumps.
And our product line, we acquired about a year ago and so.
So we see this as being of natural outgrowth of <unk>.
For the headwater businesses and for Franklin is the synergy between the acquisition that we did a year ago and the lion's share of business.
And then <unk> and then given that knowledge base within daikon, the ability to leverage the platform of the headwater has across the country of multiple locations.
Cross the country, it will be able to have more local representation with municipalities and larger.
Pump system customers leveraging the good guy kind of knowledge of Cps pump acquisition.
And the headwaters platform. So that's the the synergistic side of the business and of course on the.
Bringing in another business and the head of mortgages have more and more scale and more opportunity and the.
And on the cost side as well.
But those were the principal location recent scanning for recovering share and Texas, a buildup on the lion's share business and operational efficiency improvements.
Okay.
For that and then can you just maybe talk about given the strength of the balance sheet.
And just your.
Your outlook for <unk>.
I shall M&A, and what youre seeing and the marketplace.
Yes, so the M&A view has not changed Chris.
It's the number one place that we would like to apply our free cash flow.
Strategically.
Geographic expansion and product line extensions continues to be what.
And we're trying to achieve and and our acquisitions.
I'd say we have.
A fairly robust pipeline of opportunities.
And are continuing to pursue those across all segments and we will continue to pursue them across all segments and.
Kind of review these on an opportunistic.
Deal by deal basis.
For how much sense the mix.
And for Franklin of luck as well.
Yes.
We're pretty confident that the deal flows will continue to come at us and.
And we'll have some some good books.
Great and then just one last question just with and fuel systems, you talked about really controlling the cost structure, there because any of them.
The change if that if that recovery picks up in terms of keeping the cost structure.
Structure of the same from the savings you've had this year.
Yes, I think that I think when you look at the SG&A base of of really this is kind of both fueling and.
Water.
What you see in 2020, we're big Takeouts and round like travel and Chris.
Advertising and trade shows and maybe some of the customer activity that we would normally do.
And if things come back and start to pick up of course that is.
A good part of that is going to return.
Gregg mentioned earlier.
And as a fair number of international opportunities around station growth of what's happening in different parts of mostly the developing world and.
And those we need to be prepared for commercial and we will be prepared for but that's going to mean that we got out of the right people. There we got to have the right engagement with our customers and we need to make sure that.
Those customers feel like they're being served well by Franklin during the the decision process to choose equipment, but then more importantly afterward, so those of the kind of.
Those are the kind of cost that we're not going to skimp on and we're going to make sure. We are prepared to capitalize on these on these international opportunities as they present themselves.
Great. Thanks for taking my questions and good luck for Q1.
Thank you for thanks Gregg.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Gregg Thanks for that for closing remarks.
We appreciate you joining us this morning for our conference call and look forward to speaking to you. After the end of the first quarter of their first quarter results have a great week.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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