Q1 2021 Franklin Electric Co Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Franklin Electric reports first quarter 2021 sales and earnings conference call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone requires assistance. During the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host Mr. John Haines Chief financial officers.
Thank you Stacy and welcome everyone to Franklin Electrics first quarter 2021.
The conference call with me today is Gregg thanks for our chairperson and CEO on.
Today's call Gregg will review, our first quarter business highlights and I will review, our first quarter financial results in more detail when on through the house from 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 each day.
Agents are subject to various risks and uncertainties many of which could cause actual results to differ materially from such forward looking statements.
On a discussion of these factors may be found in the true belief.
For the on form 10-K.
In today's earnings release.
All forward looking statements made during this call for 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 <unk>.
Thank you John Thank you all for joining us, we're very happy with our first quarter results.
We see the momentum that was building in the back half of last year, continuing presenting us with robust demand environments for most of the end markets you serve.
Our financial results in just about every measure for records for any first quarter in our history.
<unk> net sales gross profit operating income net income and earnings per share.
Our strategy to grow as a global provider of water and fuel systems through geographic expansion and product line extensions leveraging our global platform and competency in system design continues to produce strong results as expected.
During the first quarter, we continued to expand on water treatment adjacency in water systems and the distribution segment achieved tremendous organic growth.
Our water systems business had a record quarter generating overall revenue growth of 20% and organic revenue growth of 18%.
We see multiple signs of demand strength in our water systems and markets, including a strong housing market the growth.
Full recovery of commodity prices.
On a weather.
Plus demand.
Regions.
Our water systems revenues also grew by over 3% from price actions realized in the quarter.
Which were necessary given the significant raw material inflation, we continued to experience.
Although our dewatering equipment sales declined by about 4% in the quarter.
Consciously this decline is much lower than what we had experienced in 2020 due in part to greater international demand.
Although still a headwind foreign currency exchange translation was a lesser impact on our topline and it has been in recent memory for just over 2%.
In the U S strong housing agricultural demand combined with continued dry weather drove a 24% increase in groundwater pumping systems revenue and net.
<unk>.
Overall organic growth in the U S water systems was 11%.
Outside the U S organic one system growth was 26% led by our businesses in Latin America, the Middle East and Asia Pacific All of which continue to see pandemic recovery demand.
With notable strength in Brazil, Turkey, and Thailand.
Our U S distribution business had an exceptional first quarter.
Even with weather in most of the U S pent up demand for well equipment and the guidance on acquisition. We made at the end of last year for all factors that drove overall first quarter revenue growth of 58% and 31% organic revenue growth.
Revenue growth in distribution was broad based across all geographies and product lines.
The lowest revenue increase in any one of our legacy distribution businesses in the first quarter was 23% over the first quarter last year.
<unk> started the year strong and benefited in the quarter from the winter storm in Texas, It caused multiple equipment failures and replacement and Thats true.
The icon integration is going well and we've already completed the combination of two branches with those from our legacy businesses.
Overall, our distribution customers are experiencing some product shortages, notably tight and well patients net.
And that puts a quote by forward any demand on some of these products.
As a result of these revenue achievements our distribution business made money in the first quarter for the first time in its history.
Reversing the $2 2 million or a loss for the first quarter of 2000 $20 million to $2 million of operating income in this year's first quarter.
Our fueling systems business picked up momentum in the first quarter growing revenue by 3% overall for 1% organically in meaningful sequential improvement from the overall fourth quarter 2020, a decline of 15%.
For fueling growth is being led by end markets outside of North America, notably Europe, The Middle East and Africa were up 30% and Latin America was up 19%.
Sales in the U S. Canada were flat to last year's first quarter net sales in China declined by about 19%.
Despite the pandemic related slowdown of new fueling station builds we believe major marketers continue to see filling stations as good investments and expressed their intention to ramp up in 2021.
We also believe environmental challenges like religion on underground storage tanks caused by alternative fuels creates new opportunities, especially in developing regions, where liquid fuel consumption is increasing and greater protection on environments as necessary.
Even with 3% revenue growth fueling systems achieved a record first quarter operating income of $14 9 million on operating income margin of 26, 2% because of price achievement and fixed cost leverage.
Due to better first quarter earnings in April one 2021 completion on the acquisition of <unk> for raising our full year 2021 revenue estimates to be in the range of one for 5 billion for 148 billion for full year 2021 earnings per share before restructuring expenses to be in the range from $2 eight for <unk>.
$3 <unk>.
The raising our financial guidance, we have assumed there'll be no worsening impacts from the global pandemic and we will continue to offset raw material cost inflation with price.
I'll now turn the call back over to John.
Thanks Gregg.
Our fully diluted earnings per share were a record for any first quarter in the company's history at 59.
For the first quarter of 2021 versus 20 <unk> for the first quarter of 2021st quarter EPS before the impact of restructuring expenses was also 59 compared to 2021st quarter EPS before restructuring of <unk> 24 cents.
Restructuring expenses in the first quarter of 2021 2 million and were related to various manufacturing realignment activities in the water and distribution segments and had no impact on earnings per share in the first quarter of 2021 restructuring expenses in the first quarter of 2021 9 million.
And were primarily related to various manufacturing realignment activities in the water segment and resulted in a one <unk> implant on earnings per share in the first quarter of 2020.
First quarter 2021 sales were 333 million.
Moving to 2021st quarter sales of $266 eight.
8 million sales inquiries from acquisition related sales was $23 5 million.
Sales revenue decreased by $2 9 million or about 1% in the first quarter of 2021 due to foreign currency translation.
Water systems sales in the U S and Canada were up about 21% compared to the first quarter of 2020 due to volume price and acquisition related sales in the first quarter of 2021 sales from businesses acquired since the first quarter of 2020.
Seven 2 million sales of groundwater pumping equipment increased by about 24% sales of surface pumping equipment increased by about 10% versus the first quarter of 2020 due to strong end market demand.
Part due to lower sales last year due to the pandemic. These.
These increases were offset by lower sales of the watering equipment, which were down by about 8% due to lower sales in the.
Channel.
Water systems sales in markets outside the U S and Canada increased by 20% overall foreign currency translation decreased sales by 6% outside the U S and Canada water systems organic sales increased by 26% driven by higher sales and on.
All regions of the World.
Erica Asia Pacific Europe, Middle East and Africa markets.
Water systems operating income was $31 $3 million in the first quarter 'twenty, one 2021 compared to $18 8 million in the first quarter of 2020, driven by price realization product sales mix and cost management.
Distribution sales were a record at $95 7 million in the first quarter 2021 versus first quarter 2020 sales of $60 4 million in the first quarter of 2021 sales from businesses acquired since the first quarter of 2020 were $16 3 million.
The distribution segment organic sales increased 31% compared to the first quarter of 2012 revenue growth was driven by broad based demand in all regions and product categories. The Guy cant acquisition, some customer purchase pull forwards in the Texas winter.
On the.
For the distribution segment operating income was a record for any first quarter at $2 million compared to a loss of $2 2 million in the first quarter of 2020.
Fueling systems sales in the United States, and Canada increased by about 1% compared to the first quarter of 2020. The increase was due to higher demand for pumping and fuel management systems outside the U S and Canada fueling systems revenues increased by about 7% driven by higher sales.
In Latin America.
On Mena.
Fueling systems operating income was a record for any first quarter at $14 $9 million compared to $12 1 million in the first quarter of 2020, driven by price realization and cost management. The company's consolidated gross profit was 115.
$5 million for the first quarter of 2021, an increase from the first quarter of 2020 gross profit of $93 million. The gross profit as a percentage of net sales was 34, 7% in the first quarter of 2021 versus 33, 9% in the first quarter of 2000.
Good morning, and improved by 80 basis points, primarily due to better price realization product sales mix and cost management.
Selling general and administrative expenses were $81 $6 million in the first quarter of 2021 compared to $75 6 million in the first quarter of 2020 SG&A expenses from acquired businesses were $4 $9 million excluding acquisitions.
SG&A expenses were higher by about 1%, primarily due to variable compensation expense, partially offset by foreign currency translation.
The effective tax rate for the first quarter of 2021 was about 14% compared to 19% in the first quarter last year due to larger net favorable discrete events, which include tax benefits from share based compensation and for deferred tax benefit from a tax election made in our board.
For <unk> the tax rate as a percent of pre tax earnings for the balance of 2021 is projected to be about 20% before this free adjustments.
As Gregg mentioned the company is raising its guidance for full year earnings per share before restructuring expenses to two.
$2 80 to $3 basically on the strength of the first quarter results and the recently announced water treatment acquisition, we expect revenue in the one for five to one point.
For $8 billion range, and our free cash flow conversion to be 115% or better for the full year 2021, although end market demand for most of our products remains strong on.
<unk> impact for the pandemic global raw material and component availability and costs are key factors potentially impacting the balance of 2021 resolved.
The company ended the first quarter of 2021 with a cash balance of $118 3 million and generated a record $5 $4 million of net cash flows from operations. During the first quarter of 2021 versus a negative for $7 million in the first quarter of 2020.
The increase was primarily due to higher net income and lower net working capital requirements.
The company's total incremental borrowing capacity was about $645 million at the end of the first quarter 2021.
Yesterday, the company announced a quarterly cash dividend of $17 five.
That will be paid may 20 to shareholders of record on May six.
Company purchased 14000 shares for about $1 $1 million of its common stock in the open market. During the first quarter 2021 at the end of the first quarter. The total remaining authorized shares that may be repurchased is about 919000.
This concludes our prepared remarks, and we'd now like to 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 on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
And we'll pause for just a moment.
Our first question comes from Mike Halloran from Baird.
Until <unk>.
Handful of questions here first maybe you can just talk a little bit about.
Underlying.
Apply chain trends, how you're looking at pricing and how you think price cost balances out for the remainder of the year.
Mike. Good morning. This is Gregg on the supply chain continues to be in flow.
<unk> isn't a whack a mole.
We continue to have challenges around the globe and the team is responding tremendously Adam glitches on the challenges that are in front of us to keep the supply chain moving.
We're seeing all the headline.
Commodities and.
Semiconductors or what else is saying so I don't think is anything new on that front.
To be a daily daily battle on that side as to the <unk>.
Cost input.
And price realizations I'll turn it over to John.
Yes, so Mike.
We saw.
Very significant input raw material inflation on our manufacturing entities in the first quarter.
Quantify that is twice as high.
On a percentage basis as any first quarter in the last five years.
So we are going to respond to that with price actions. This is mostly in the water systems segment, although it will impact fueling as well so.
So we will respond to that with incremental price actions later this quarter in the U S and Europe specifically.
And then when we look at the inflation price on an output basis that was on an input basis. When you look at it on an output basis through cost of goods sold because you know the input stuff gets hung up on the balance sheet for a period of net inflows into cost of goods sold when you look at it on an output basis, we made.
Teen the spa.
Bread of price over inflation in the first quarter.
However that spread measured in basis point is lower than what it has been for the last four quarters and was lower than what it was in the first quarter of 2020. So we knew this was coming at US we took price actions late last year earlier this year in anticipation of that we saw even.
More in the first quarter than we had expected in our our annual operating plan and we are now going to respond to that with additional price actions. Our guidance assumes that we will continue to maintain this positive spread of price or inflation for the balance.
Of the year. Despite the fact that it is narrowing in the first quarter.
So that's helpful and just to clarify maybe greg's comments I know you mentioned that headwater were seeing some product shortages and it felt like non Franklin electric water product shortages are you seeing any shortages of supply chain pressures that are impacting your ability to put content into the market.
Fueling or water or is that comment just limited to headwater.
No it's across the board Mike were seeing some challenges in the manufacturing space, that's really where by my comments responded to.
Is that across the globe. We're just continue to have challenges with <unk>.
Suppliers that gets shut down on a temporary basis because of COVID-19 because of availability of parts.
Expediting a lot of products.
Components were dealing with the tank.
On the excuse me the.
Transport of containers on ships you get stuck on the port of L. A and just so just pretty much anything youre reading in the topline on the headlines on newspapers, it's impacting us as well.
So in guidance from a from a topline perspective, maybe you can just walk through what's embedded in it and then.
Are you assuming pretty normal sequential is from here on improvement deceleration on any specific markets any markets, where you think there was some pull forward in the short term or do you think that there is a lot of more backlog that still needs to be let out just some context on what the underlying thoughts on within the guidance.
Yes.
The manufacturing entities for backlog Mike remains.
Very strong.
For a fact.
When you measure the backlog in what we can measure from a backlog perspective, it's basically double at the end of the first quarter 2021 than it was at the end of the first quarter last year. So we.
We continue to.
Expect.
On.
The strong organic growth in both water and distribution, but we're not going to say that we're going to expect the strongest growth organic growth that we saw in.
The.
The.
The first quarter.
We also announced an acquisition in water treatment on April 1st that estimate for your per on exit then.
Our guidance as well, so we see a lot of opportunity and tailwind, but these issues that Gregg just described combined with the.
With the inflation that comes with it.
Is what's causing us a bit of.
A bit of.
Pause and want to make sure that we.
We see this play itself out on the second quarter in the manufacturing.
And distributions.
Again, as we mentioned there is a lot of underlying.
Demand strength.
I'm not sure of the timing of organic growth that we saw in <unk>.
In the first quarter, 31% should be expected for the full year, but we're clearly discussing or thinking about solid double digit organic growth for distribution as we look at the balance for the year and then their issues again are.
Theyre not issues unique to headwater, but their issues again are they are starting to feel some cash from a supply perspective.
We'll have to wait and see how that plays.
I'll follow up.
In terms of their topline, but tidewater has got a lot of momentum broad based momentum icon has a lot of momentum and we expect strong results from them for the balance for the year and Michael on the fueling side Ray rebound and again really didn't start seeing the slowdown outside.
Out of Asia Pacific from the pandemic in the first quarter last year.
Strong results outside of North America outside of China, China is still kind of offline for us for the initiatives. We were looking forward to and still look forward to on China on installation diagnostics, but in the U S market.
It was flat.
There is a strong sense that we're going to see the rebound station builds here on the us actually one of the.
Constraints, there as that resident supplies for fiberglass tanks.
Isn't critical supply and it may cause the pushout on some of these availabilities for people deliver tanks, we haven't seen that impact us yet, but we've heard in the marketplace debt there is a.
Limited availability of underground tanks on a go forward basis, which may dampen, but not pushed out some revenue but.
We still see a robust business in the U S for fueling as well.
Okay, great stuff, thanks, guys I appreciate it.
Thank you for longer.
Your next question comes from Walter Liptak from Seaport.
Yeah.
Alright, Thanks, good morning, guys.
Paul.
I wanted to stick with.
The discussion about the distribution segment and congratulations on getting the $2 million.
<unk>.
And.
You guys have made a lot of progress with it but I wonder.
What does that imply for the full year profits that you've turned on.
For corn from the first quarter with profitability.
And.
And then you've owned this business for a while.
I'm just wondering why first quarters tend to be losses, as if like in overhead absorption.
They are front loaded.
Costs for the year something that run through distribution.
Yes.
On the on the full year.
As I said, we expect really robust organic growth.
Headwater.
<unk> talked about 4% to 6% operating income margins in this business, we've been short of that kind of throughout its history, we expect to be solidly in the middle of that range or better.
For the full year 2021.
Other than these some of these supply.
Kind of concerns around certain products.
Business again has a tremendous amount of momentum going right now in terms of the first quarter I think it's more seasonal really walton than anything.
It's not really the accounting driven per se.
In the U S. This is the low season.
The ground, it's winter on the grounds frozen some of.
This work is necessary is just not able to be done because the.
The wells and work sites can't be reached or can't be access because of the.
Other than that typically is what's driven the lower top line and then of course with a lower top line you have a lower you lose leverage on the fixed cost base that we have in the business. So.
We saw the reverse of that thankfully here in the first quarter of 2021 and that's big.
That's a big driver.
With topline growth and of course for fixed cost leverage that we get on top of that.
Is that driving profitability in the first quarter.
Okay, great. Okay, alright, so for the full year.
Youre thinking in that range of 4% to 6% operating profit margins.
Yes, Sir.
Okay Alright, great.
Wanted to ask about the profitability for fueling systems business.
You called out for a strong.
$14 9 million in profit as a result for mix.
I wonder.
You also talked about cost management I Wonder if you could talk about which one of those for more meaningful in the quarter and some of that.
Is sustainable for the rest of the year.
Yes, fueling systems as we've mentioned in the past.
They've done a really nice job on managing the fixed cost base SG&A base.
It's a little more flexible there than what you might see in the water and the water systems segment wall and.
They've done a good they did a good job in 2020 of lowering that fixed cost base is coming back slowly.
<unk> wanted to support the international growth that we're seeing here we saw in the first quarter, we will continue to see it but.
The incremental margins here are really really strong and it's because the business doesn't have to add them on fixed costs when their topline growth. So.
That really is the key formula here, they did achieve price as.
As well all of our segments achieved strong pricing that was a contributor to their profitability in the first quarter as well.
Okay got it okay. Thank you.
Your next question comes from Matt Summerville from D. A Davidson.
Hey, Thanks couple of questions first I want to make sure I'm clear what was the magnitude of uplift you saw maybe from the Texas weather situations as well as by Ed you've referenced in the quarter.
Yes, we think both of those things.
Matt we're in the $6 million.
Other range in total $6 million to $7 million.
About half on half Matt about half from taxes is about half of the buyer.
Perfect and then what exactly I understand the types of thing, but what would have prompted the buy ahead and just in the business overall, what's your assessment of channel inventories currently.
So Matt Con.
Contractors need piping to install pumping systems and when.
<unk>.
Supplies get tight day.
Day by pipe.
Because if they don't buy for Kent install you need all the other products as well, but pipe. It was as a critical item. When you get an event like you had in Texas to get a hurricane or something like that everyone starts buying on pipe and so that's what we are saying that said because of generally for the supply constraints we're seeing.
Get a sense if there is a whole lot of channel inventory that is.
Out there.
Our working capital actually declined.
Trailing 12 month basis.
Our distribution business that have water side.
What they are what they are buying they are putting on the ground.
With the exception of again, maybe we will buy forward on on a byproduct.
And then as a follow up with respect to North America groundwater.
One of your comments I think it was mentioned bad debt. It was up 24% can you attempt to parse out on what youre seeing in resi versus AG around that 24% number.
Yes.
More than that AG was up about 11%.
Matt.
So our AG.
We isolated certain product categories that we call lag and when you look at those in North America. They were up about 11% on the residential product categories were up.
More significantly.
Got it and then just.
Maybe two other quick ones you mentioned.
On the water business, you took about 300 basis points of price on a year over year basis in Q1.
Jim asked earlier on the call in order to maintain the price cost equation from your restaurants, John based on where spot prices are for things like steel copper RASM aluminum et cetera, all things you use some fairly large quantities how much additional price do you think you need to take on that business.
Yes.
It depends on the end market, Matt, but the big.
The Big thing is this inflation exceeding expectation on an input basis in the first quarter. So I think it's in the.
75 to 100 basis point range or something like that.
We see the FIFO layers start to flow through in the second and third quarter, they're going to have these higher input costs and we need to have more price to offset that so that would probably be my best estimate on the water system side.
Got it and then just lastly.
You mentioned, China, fueling down 19% not necessarily a surprise, but may be looking for.
Date on are you seeing starting to see any movement at all on that ISG initiatives do you think it's sort of a mute issue in 'twenty, one not going to happen.
I guess is the right way to think about that.
Yes, Matt that's tough we are we're seeing a little bit of activity and a little bit maybe less than 10% on the market activity and the challenge you've always had with China as it's been rather opaque.
So when it comes on and how fast it comes on.
Is not evident to us at this point, it's out there the rigs are out there the needs are out there, but when it turns on and how fast it turns on us not necessarily apparent at this point.
Got it thank you very much guidance.
Your next question comes from Chris Mcginnis from Sidoti <unk> Company.
Hey, good morning, Thanks for taking my questions and nice quarter.
I was just wondering if you could talk a little bit about the peer on X acquisition, how that adds to the business and I think thats. The third acquisition. Since November can you just talk about the.
The landscape for M&A going forward as well thanks.
Sure Chris So yes. This is the third acquisition since we got into water treatment now for over a.
A year ago.
What we're doing is we see an opportunity it's a very fragmented business. It's also a business that is on a nice adjacency for Franklin because.
Much of the product goes through professional contractors, whether their water quality dealers they're on.
On the contractors for the plumbing channel or through our strong position on the groundwater channel. So we just see this as just being a natural on growing adjacency for us.
And we've been learning a lot about the space and about the the product requirements.
And about the key factors for serving the industry and that's what we've been doing over time and as you've seen Franklin in the past.
By smaller businesses, we put them together, we get operating leverage we learned about the industry that allows us to grow that organically.
And you can see that a little bit like what we do with distribution that we have.
<unk> bought businesses and put them together then we once we combine that we get that operating leverage on them and get some nice organic growth. So we see warrant treatment again as being an important space.
Rapidly relatively rapidly growing space and one is a natural adjacency here in North America, and then because we have reached outside North America and expect with water treatment is going to be the demand across the globe. We will see how we do that over time as well.
Great I appreciate that and I guess, just the landscape for additional M&A going forward.
Gregg good market starting to rebound are you seen valuations start to pick back up maybe just any color for you today.
Thank you.
Yes, I think.
Chris.
The pipeline is fairly robust.
I would say that.
The expectation sellers' expectations are.
Hi.
Certainly historically higher than where Franklin is typically.
Transacted.
Gregg mentioned.
This water space, which is a targeted adjacency for US right now is highly fragmented. So we think theres going to continue to be opportunities, we see some opportunities in the water treatment space.
Average deal is different but.
On there.
The real possibility.
Could we could continue to see opportunity there.
The same is true really on the distribution side on meters you were kind of been properties out there right now we would say that.
That might be.
<unk>.
The kind of property, we want to own but there are some and we've done a fair number of acquisitions here. So we can be fairly selective and we think we know how to value. These these properties kind of the right way.
They're out there and we continue to look at.
At.
On a handful of those cycle properties as well so.
I would say generally that.
The climate for M&A is.
Not bad right now.
We've got a reasonable pipeline.
And have a look at a few things and we expect that to continue.
What we saw.
Last year and I think we May again see this year is a lot of these sellers are taking the read on tax law.
As kind of other.
Indicator of what to do.
We.
If the U S tax situation moves away that is expected to move we might see more people interested in transacting before those those changes take effect.
No.
We know that for the kind of.
That we're talking to that.
And it has to be a pretty big issues for us one additional points from set over the last several years. The last 10 deals for Franklin have all been in the U S and Canada.
And that's not for a lack of interest or effort outside the us and Canada, but again for the properties. We're looking for these are family held businesses.
On the timing for the family or an event.
We continue to look at growing globally.
And have an appetite to do transactions outside the U S before as well we've done many of them in the past and I think we've done pretty good at it so.
We continue to look for deals across the globe has been.
More opportunity for us in the last couple of years have been in the U S from Canada.
I appreciate the color.
Thanks for taking my questions and good luck.
Thank you Chris Thank you.
I'm showing no further questions at this time I would now like to turn the conference back to Mr. Gregg Thanks for that.
Thank you Stacy we appreciate your joining us today on look forward to speaking to you in July with our reviewing our second quarter results you all have a good week.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
[music].