Q2 2021 Franklin Electric Co Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the Franklin Electric reports second quarter 2021 sales and earnings conference call. At this time all of the participants are in a listen only mode Lady wrote a book.
Conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone as the reminder of this conference call is being recorded.
On the likes of hand, the conference over to your host, Jeff Taylor Chief Financial Officer.
Thank you Whitney and welcome everyone for Franklin Electric second quarter 2021 earnings Conference call.
Cited the be joining you on my first of all as Franklin Electric Chief Financial Officer with.
With me today is Gregg seem snack on chairperson and CEO and John on former Chief Financial Officer.
On today's call Gregg will review of our second quarter business highlights and I will review, our second quarter financial results in more detail.
When we're through we'll have some time for questions and answers.
Before we begin let me remind you of that as we conduct this call we will be making forward looking statements within the meaning of the private secure.
Sure.
The litigation Reform Act of 1995 the suits.
Statements are subject to various risks and uncertainties.
Any of which could cause actual results to differ materially from such forward looking statements.
The discussion of these factors may be found in the company's annual report on form 10-K can be on today's earnings.
On the drilling.
All forward looking statements made during the call are based on information currently available and as 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 debt.
Thank you Jeff.
<unk> and thank you all for joining us.
We are very pleased with our robust performance for the second quarter from a financial perspective, we delivered record sales operating income and EPS for any quarter in the history of Franklin electric driven by strong organic sales growth across all of our segments.
We continue to benefit from the sustained momentum.
Jeff.
Delivered record earnings for the last 4 quarters, thanks for a strong demand environment.
At the end of the second quarter, we had record open order balance.
We continue to capitalize on inorganic opportunities as well.
In the second quarter, we completed the acquisitions of 2 water treatment companies Sharon ex and.
Mentioned loans growing our water treatment position in the U S and Canada.
We now believe that this platform has reached critical mass north of $150 million on annualized revenues, establishing a meaningful meaningful foothold in the growing North America water treatment market.
As the water treatment market continues to consolidate our focus.
A few factors will help us to stand out among the pack.
We continue to build upon our position and added runway to do so leveraging our expertise to manufacture and distribute complete water systems from the wealth of the possible.
Despite supply chain and COVID-19 related headwinds facing much of the globe, we have reached new records and deliver value.
For our shareholders customers and other value stakeholders.
<unk> that our current strategy will take as far as we continue to grow as a global provider of water and fuel systems through geographic expansion and product line extensions on leveraging our global platform and competency and systems zone.
Yeah.
Our water systems.
On our <unk> had record revenue for any quarter generating overall revenue growth of 39% and organic revenue growth of 23%.
On the U S strong housing and agricultural demand combined with continued dry weather drove a 16% increase in groundwater pumping systems revenue in the quarter.
Overall organic growth.
In the U S water systems of 17%.
Demand continues to be strong across the globe as well thanks to a recovery of global commodity prices for robust demand in developing regions.
Outside the U S organic losses of the growth was 30% led by our businesses in Latin America, Europe, and the Middle East.
All of which continue to see pandemic.
Demick recovery demand.
Despite our record revenues of our water systems segment had an unprecedented amount of open orders at the end of the second quarter and total over $130 million.
This compares to about $40 million at the end of the second quarter 2020, and about $25 million at this time in both 2019 and 2018.
For U S distribution business also delivered record performance for any quarter Franklin history, producing overall revenue growth of 57% and organic revenue growth of growth of 41% underscoring this segment's role as a catalyst for future growth for our company.
Headwater operating income reached $16 million on the second quarter.
Border.
After quarter throughout the pandemic headwater is top line has grown and profitability improved when.
When facing the same supply chain constraints facing much of the global economy, we leverage our expertise in the space to build of stronghold that will translate current success and to further opportunity over the long term.
Our fueling systems business saw any.
<unk> momentum in the second quarter as well producing overall revenue growth of 29% and organic revenue growth of 27%.
This growth was led by strong performance in the U S and Canada with revenue up 40% along with sustained strength in our EMEA and Latin American markets.
We have a strong business in developing regions and are positioned.
<unk> of ourselves to capitalize upon the post COVID-19 recovery as it occurs in those regions.
At the end of the quarter open orders increased to about $45 million from less than $10 million at the end of the last 3 second quarters.
Looking forward <unk> fueling systems and grid solutions will continue to play a vital role in many regions across.
Over the coming years, thanks to growing energy demand and the buildup of the electrical grid globally.
Throughout the quarter, we generated strong free cash flow of that will allow us to capitalize on many opportunities that will emerge while continuing to maintain our strong balance sheet, enabling us to reinvest capital in our business does that and we see organic and inorganic opportunities.
Across every 1 of our segments and we look forward to continually growing our presence in updating you on future development.
I am extremely proud of our global team for this outstanding performance, especially considering the significant headwinds and challenges we face.
The global supply chain is still recovering from the post COVID-19 demand surge the availability.
The growth here at <unk> and other components is a critical issue for us and it appears that will remain so through the balance of the year.
Additionally, we continue to see rapidly increasing input costs flow for materials and components and also for free which has skyrocketed in the current environment.
Jeff will address these issues more on a moment, but our warrants.
Robinson business in particular was not able to fully offset the inflation, we experienced with price in the quarter. This in part explains our water systems operating income margin decline in <unk>.
Response, we've announced additional price increases increases to be effective in the second half of the year.
For some of our business units. This is the third increase in price.
So far in 2021.
Despite the robust demand environment, we are maintaining our current year earnings guidance of earnings per share before restructuring in the $2.85 to $3 <unk> range, given the rapid increases in costs and supply chain of uncertainties.
Looking forward, we are excited about the strong foundation, we have built.
By staying rooted in Franklin 5 key factors for success quality availability service innovation and cost the.
We continue to see customers return due to the elevated experience of superior products. We deliver we're also excited position ourselves for success over the long term, providing innovative products for customers and bring more.
For sustainable practices to the industry we.
We believe that our ESG initiatives outlined on our recently updated sustainability report are integral to our future success, we look forward to continuing involving our stakeholders of our sustainability journey and providing further updates on our progress over the long term.
Now before I turn the call over to Jeff.
I want to go a little bit off script here of just recognize John Haines.
John as has been noted is retiring from the company.
John starting with Franklin Electric 2008, right before the financial crisis, the steered us through that as our CFO through a number of acquisitions the creation of our headwater distribution.
The standup of the new water treatment business in a number of other acquisitions as well across our segments and most recently John is navigate us through the most of the global pandemic.
So I just wanted to take a moment the C. Thank you the John a number of you on this call has been with the following us with John over the years, So I think.
The segment. Thanks for you all as well.
So I just wanted to do that before I turn the call over to Jeff. So thank you again zone in Cuba.
Jeff.
Thank you Gregg.
Our fully diluted earnings per share were a record for any quarter in the company's history at <unk> 83 for the second quarter of 2021 versus <unk> 50.
<unk> for the second quarter of 2020.
Second quarter EPS before the impact of restructuring expenses was also 83.
<unk> to the 2022nd quarter EPS before restructuring of <unk> 54.
Restructuring expenses in the second quarter of 2021, <unk> 2 million.
And were related to various manufacturing realignment activities in the water segment.
And had no impact on earnings per share.
Restructuring expenses in the second quarter of 2020 zero of $9 million were primarily related to various manufacturing realignment activities in the water segment and resulted in a <unk>.
The impact on earnings per share in the second quarter of 2020.
Second quarter 2021 sales were $437.3 million compared to the 2022nd quarter sales of $308.3 million.
The sales increase from acquisition related sales was $38.9 million.
Sales revenue increased by $6.1 million or about 2% in the second quarter of 2021 due to foreign currency translation.
Water systems sales in the U S and Canada were up about 42 per cent compared to the second quarter of 2020 due to acquisition related sales volume and price.
In the second quarter of 2021 sales from businesses acquired since the second quarter of 2020.
$23.8 million.
1 of our systems organic sales in the U S and Canada were up 17% in the second quarter.
Sales of the groundwater pumping equipment increased by about 16%.
Sales of dewatering equipment were up about 90% and sales of surface pumping equipment increased by about 13% versus the second quarter of 2020 all.
I'll do the strong end market demand and in part, resulting from lower sales last year due to the pandemic.
Water systems sales in markets outside the U.
Absent, Canada increased by 34% overall for.
Foreign currency translation increased sales by 4%.
Outside the U S from Canada water systems organic sales increased by 30%.
Driven primarily by higher sales in Latin America, Europe, and the Middle East and African markets.
Water systems operating income was $34.6 million in the second quarter of 2021 compared to $28.7 million in the second quarter 2020.
Operating income margin for the second quarter 2021 was <unk> 14 per cent compared to the prior year quarter operating income margin of 16, 1%.
Operating income margin decreased in water systems, primarily due to the 2 items first about $3 million of higher shipping and freight cost, which had not been fully offset by price increases mostly in North America.
Contributing to these freight cost or multiple product delivery issues for cross all points of the supply.
It also resulted in more frequent shipment expediting.
Along with many suppliers instituting surcharges the cover their increased costs for drivers of insurance and people.
The result, the water systems unit in the U S from Canada has initiated its third price increase of 2021 effective August 1st.
And second general and administrative cost of about $2 million for transaction legal and other charges incurred in the second quarter.
These 2 items combined resulted in the lower water systems operating income margin of about 200 basis points in the second quarter.
<unk>.
<unk> sales were a record at $144.8 million in the second quarter of 2021 versus the second quarter of 2020 sales.
$92.1 night.
Sales from businesses acquired since the second quarter of 2020 were $15.1 million.
The distribution segment organic sales increased 40.
41% compared to the second quarter of 2020 and.
Revenue growth was driven by broad based demand in all regions and product categories.
The distribution segment operating income was a record at 16.4 million compared to the second quarter of 2020 operating income of $6.8 million.
Operating income margin increased to 11% in distribution, primarily due to revenue growth and operating leverage.
Fueling systems sales were $72.2 million in the second quarter, 2021, and increased 29% versus the second quarter 2020.
Fueling systems Rus.
The sales organically by 27% in the second quarter.
The wing systems sales in the U S and Canada increased by about 40 per cent compared to the second quarter of 2020.
The increase was due to higher demand for piping pumping and fuel management systems.
Outside the U S and Canada fueling.
Fueling systems revenue increased by about 1% driven primarily by higher sales in Latin America, Europe, Middle East and Africa, offset by lower sales in China.
Fueling systems operating income in the second quarter was $18.5 million compared to $13.5 million in the second quarter 'twenty.
'twenty 'twenty driven by higher sales.
The Companys consolidated gross profit was $152.2 million for the second quarter of 2021 and.
An increase from the second quarter of 2020 gross profit of $107.1 million.
The gross profit as a percentage of net sales was 34, 8%.
In second quarter 2021 versus 34, 7% in the second quarter of 2020.
Was essentially flat in most part due to price increases being offset by shipping and freight cost increases.
Selling general and administrative or SG&A expenses were $100.5 million in the second.
For 2021 compared to $72.3 million in the second quarter 2020.
SG&A expenses from acquired businesses were about $10 million.
Excluding acquisitions SG&A expenses were higher by $18.3 million.
The $11 million of which is variable compensation expense.
Second force commissions on higher sales.
In addition transaction legal and other administrative costs for about $2 million.
SG&A cost as a percentage of net sales were slightly below the second quarter of 2020.
The effective tax rate for the second quarter of 2021 was about.
The 18% compared to 21% in the second quarter last year.
The decrease in the effective tax rate was primarily a result of net favorable discrete events the.
The attach rate as a percentage of pretax earnings for the balance of 2021 is projected to be about 20% before discrete adjustments.
As Gregg mentioned the company is reaffirming its guidance for the full year earnings per share before restructuring expenses of $2.85 to $3.05.
The company ended the second quarter of 2021 of the cash balance of about $82 million and generated $35.5 million of net cash flow.
From operations during the first half of 2021.
Versus 47.0 million in the same period of 2020.
The decrease was primarily due to higher working capital requirements in support of heart of revenues.
Yesterday, the company announced the quarterly cash dividend of <unk> 17.
<unk> <unk> per share that will be paid at the August 19th the shareholders of record on the August 5th.
The company purchased about 79000 shares of its common stock in the open market for about $6.2 million during the second quarter of 2021.
At the end of the second quarter. The total remaining authorized shares that may.
Interest is.
It was about 840000.
This concludes our prepared remarks, we'd now like to turn the call over to Whitney to lead the question and answer session.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number 1 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.
Yes.
Yeah.
Your first question is from the line of Walter Liptak with the Seaport.
Okay.
Hi, Thanks, good morning.
Everyone. Good morning.
Good morning.
Yeah. Thanks.
Johnson of pleasure working with all.
All of the best of luck in the Hello to want Jeff as well.
Hi.
The question is about the distribution profit margins look very good and so I wonder if.
That was just say the $60 million of profit if that was cut.
Covering of fixed costs.
And if that is sustainable at this revenue level or is there some sort of it sounds like demand was strong in all kind of.
Category.
Was there any kind of mix going on or.
Or the pricing debt.
That may have helped the profitability and maybe some thoughts about what the back half profitability could look like on a new level.
In the double digits for distribution.
Yes, well, let me take a stab of that and then some.
Jeff.
First of the business performed.
Very well.
We get great operating leverage.
Seasonal.
The discussed in the past the Q2 and Q3 are of the stronger quarters.
But then the.
The margin averages out as you know Q for Q1 of our the softer quarters and while we are now in the black on those quarters.
For Q4 of 2000.
Q1 of 2021.
The lower margins, if you kind of factor that in but certainly during the season.
We've had a.
Solid execution, it's a good pricing environment.
Distributions that are able to act a little bit quicker than we can of manufacturing in that respect but.
Overall, just great execution by the.
<unk> and.
And getting good operating leverage on the fixed cost base.
Okay, great, yes, the strength of seasonality.
I wanted to ask too about.
Yeah.
Sure.
About some of the.
The dewatering.
Wotring and the growth that you saw there how much of that growth was from price and how much of it was from.
Volume when we talked about the organic growth.
On the dewatering.
I don't have the specific price volume of the dewatering.
The product line.
The team overall, we've had pricing actions in the low single digits earlier this year.
And then really most of it would be a volume pickup yes, its more volume will for sure than than the.
Price.
You'll recall last year in the second quarter of that business was impacted meaningfully by.
The co.
The <unk>.
Product line was impacted I think the other thing of note is that on we are seeing some international lift.
In that product in southern Hemisphere markets like Australia.
Brazil, Argentina, and South Africa.
So the bulk of it is.
Covid is volume.
But there is certainly some price in there as well.
Okay.
At the same for the groundwater to.
That most of that growth.
Volume related.
Yes, the volume the volume is.
We look at those more bi.
Hi.
We look at it more of a qualified geographies than we do.
By individual product line.
But the volume change in water.
Call it.
Call of the call it 4 times the.
The price change.
Our balance okay.
Yes, okay, great and that generally will hold true across product lines.
Okay, and then just a quick 1 and I'll, let someone else have a shot at the questions but the.
The legal expense of $2 million, what was that related to end of <unk>.
Recurring.
The other 1 time.
Huh.
Yes, it was.
For the combination of things it is we view it as 1 time.
All of them.
It was transaction related as well so as you know we did these water treatment transactions in the second quarter, there were added costs for that.
The chart.
Banker fees. There were also legal fees for that and then there were just.
The other legal matters that we on.
Are dealing with in the normal course around the globe the.
Kind of had a surge in the second quarter as well so in total.
That was about $2 million of SG&A, and <unk> and we would generally characterize that as 1 time, yes, okay. Great. Okay. Thanks, guys.
Your next question is from the line of Mike Halloran with Baird.
Hey, good morning, everyone.
So.
Good morning so.
Just some thoughts on on price cost inflation.
How are you guys thinking about the pricing environment efficacy of what you're pushing through when do you think parity can can come back into the system, obviously inflation pressures have been ramp it.
And at some point the likely bounce out.
Total lots on on when do you think their balance out is it. This year is it next year any kind of the commentary around those things would be great.
Well I would say Mike that.
We talk we talk about price versus inflation.
Generally I would characterize.
What is happening in distribution and fueling as we're in the were advanced were.
We're seeing greater price than we are inflation.
It's really in water systems.
And more specifically, it's more in the U S Canada.
And then even more specifically the spray.
Of course.
We're a bit surprising to us.
In the second quarter, when we look at.
Our free <unk>.
<unk> adjusted.
Year over year in the first quarter.
In water systems, it was actually positive.
Where we were actually experiencing lower freight costs, and then sequentially that flipped.
And of.
Meaningful way today.
The negative in the second quarter. It did in fueling systems as well so as Jeff mentioned in his comments.
The idea that.
We're having trouble with the supply chain with our suppliers of getting the inbound.
Cereal.
And components and then also because were fall because of that we're falling behind in some cases on fulfilling and meeting the requirement.
Each of our customers. So we're expediting.
Shipping activity on the outbound side all of that is contributing to a very significant.
Unfavorable free.
Variance from from the prior year so to your.
Question.
I think that there are some signs of of that.
That.
Starting to come down I think our supply chain guys.
Talked about maybe the ports being a little bit better shape long Beach Los Angeles.
But then there is more.
<unk> and other parts of the country for example in shipping in the Midwest and through Chicago.
Sure he is seeing in the red.
So that part of it is is a little bit harder for us to gauge as we also mentioned we have more price coming when we announced the third.
Third price increase in our U S water business effective August 1.
Which is.
We think is going to go along the way in the back half of the second half of the year of helping us.
Offsetting some of this inflation so.
That's more about Mike what's really.
The kind of driving.
Driving the biggest concern and quite frankly, driving aware of the water Oi margins went in the quarter.
And you mentioned the headwater margins very impressive maybe just some thoughts on sustainability there.
Obviously, youre going to have a seasonal uptick based on the revenue levels, but.
At a high level, how are you thinking about the sustainability.
Yes.
The first half margins.
And headwater about 7.5%.
Last year's second half margins in headwater mindful of about 3.9 percentage.
Percent. So just at the very low end of our of our expected range. So we expect that to be meaningfully better in the second half of.
This year.
I think something in the high end of our expected range for 2.6% for the.
The second half so yes.
Volume adjusted where we're going to lose some leverages, we go into the lower volume of periods here.
The business has done a nice job on price they've done a really nice job as Gregg said on on managing their costs. So we definitely see margin.
On an expansion second half of the second half, but I don't think that getting back to that first half margin of 7.5% I think will be just short of that.
And then on the on the <unk>.
Water side.
Obviously really strong momentum.
It seems like the basically.
Pretty broad base there.
Thing that you're worried about.
Inflation impacting demand or.
Some sort of air pocket developing it seems like the momentum is pretty consistent here and you feel pretty good about the trajectory on a forward basis, but.
Just curious if there's anything of that worries you yeah.
Again, we're a short cycle business. So we can learn about later than most people, but the to your point I mean, we've got almost 45 days of incremental open orders than what we normally see in the past.
So we've got plenty to work our way through as the supply chain settles down you know we're gonna be.
The kind of catch ups for the back half of the year.
Certainly.
Document of the North American U S market.
The strong housing strong commodity prices, it's been dry in the very dry on the west.
Kind of average in the east for a little bit 1 of the that use of the Mississippi, but certainly dry on the west.
Teething good demand in Latin America, we're seeing good demand in Europe Middle East Africa.
We have all of the timing issue on some age of shipments. So we still see of the Asian market is strong.
We're really not seeing anything out there in our businesses that.
And the way of an air pocket.
And with commodities of strong.
Strong in with.
Metal prices coming up.
Much of the has impacted our margins is also good for demand for our large dewatering pumps as well via debt.
That's a smaller piece of our overall business so well.
Really seeing the demand kind of across all product lines in all geographic the geographies.
Okay, I appreciate that and 1 last thing John.
I just wanted to say best of luck of it's been a pleasure working with you for.
But over a decade now.
I hope everything goes great for you in the future of really appreciate all the help over the years best of luck. The thanks, Mike.
Okay. Your next question is from the line of Matt Summerville with D. A Davidson.
Price a couple of questions and yes, John Congratulations it's been great working with you over the last 13 years or so.
With the.
With respect to your comment Gregg around is open order number I don't remember you guys. Historically sharing that so can you put a little more context around that you mentioned 40.
The days of for lack of a better word on these the work backlog. So 45 days of sort of backlog. If you will what gives a more normal time.
The number if you go back and look at that for Franklin over a much longer term period.
Yes, Matt to your point.
It isn't.
Something that we normally talk about because we're normally on a short cycle business.
Filling orders on a pretty rapid basis. So it typically at the end of the second quarter. If you look back 2018 to 2019 for the company for a manufacturing business it would be about $35 million.
And at the end of the.
5 of this year the was closer to like the 175, so that incremental 130, <unk> hundred $40 million. If you look at our manufacturing business as being a kind of a $1 billion run rate of $1 billion on a 1 billion 2 run rate of $100 million on a month, the kind of get to the numbers. So it is it was significant enough that we wanted to call it out that.
We have this on.
Unfilled orders backlog of it.
Hey.
That is much higher than what we've seen in the past and what we're working on catching up.
And then.
To that point do you get the sense that the.
That type of number in the incoming order rates youre seeing.
Of course that truly indicative of demand or do you get the sense that your end customers are concerned about their ability to get product given what's going on from a supply chain standpoint, and instead of ordering the 3 day would typically order maybe they're ordering for 5.
Can you get what I'm, saying I'm trying to get a sense.
As to whether.
You feel like this is truly indicative about the door demand or whether you feel like the channel may be trying to stock up for their own fears of supply.
I am sure that there is some of the ladder, but 1 of the things we have it again, it's an indicator for 1 of our product lines in the U S market.
As our distribution business itself the <unk>.
Sell through of Franklin at Headwater is greater than the purchase rates that have more buying so you are clearly drawing down inventory as are others. So on.
The 1 level youre going to see.
The customers across the globe trying to refill back up to.
What they can sort of be.
Normal inventory levels on a go forward basis, it was a pretty robust demand requirement now the demand environment now.
To your point of what May also be going on in some anxiety and sold over ordering of our Oregon for multiple suppliers you might see some cancellations, but you are for I mean, as we look at it.
The distribution business in the United States, which because of some outlook.
To me of a broader view of our lens on the on the <unk>.
World Theres, just not of lot of inventory of the system.
And demand remains strong and you can see it on the fueling side of the business.
Is that when we look at our fueling numbers last year.
And United States. For example, we were down 10% of revenue that we had always looked at for example that we thought the <unk> initiative in the U S market was 1 that was maybe neutral from our fueling business.
I have learned now that the fueling distribution companies and the ones, we sell to and fueling actually had a record revenue year last year.
Back on the back of the MV well, that's now coming to an end of the first quarter.
We're now seeing.
Because of the strong surge of fueling so the fueling business is now it was up 43% in the quarter and we're seeing strong end market demand in the U S. As marketers are spending their capital dollars now on things other than the MVC.
That's that's that's good for us as well. So we're just seeing really strong demand and we're not getting the sense that there's a lot of inventory of the channel. So it is rebuilding the inventory over time.
And yes, but I'm sure there's the risk of the author of people trying to.
All of our orders so that they get their fair share.
And then I wanted to follow up on price. If we can maybe just do a recap of.
The price seem you've already put in place on the magnitude the magnitude of what I'm talking about the pricing you already had in place and what the next waves set for August 1st contemplate in terms of magnitude.
Yes so.
All of the water businesses.
<unk>.
Matt.
All of our businesses.
Kind of made at least 1 many of the 2 and now 3 price increases in the case of what were talking about in.
Of the states, where I think the spread is the tightest and actually went negative in the in the second quarter there was a.
There was a 3% price increase of 5% price increase and then this 1 coming in August is a 5%.
And the price increase.
Again so.
That's the makeup of the 3 when you look at the businesses around the world there of kind of different.
Everywhere, but that's basically the order of magnitude the.
We're kind of getting too.
<unk> per.
Price.
List price increases of.
Somewhere in that <unk>.
<unk> 12 range 8 to 12 range.
Got it.
Thank you I'll leave it there and get back in the queue.
So for your next question is from the line of Chris Mcginnis with Sidoti.
Yes. Good morning, Thanks for taking my questions and John Congratulations on the retirement and thanks for the help as well.
Can you just maybe just talk a little bit about the drama from ACA.
The acquisitions and how they're being integrated and can you go into.
Water as well already are or is that the plan going forward. Thanks.
Yes sure Chris.
So we are integrating the for.
The companies that we've acquired more treatment over the last couple of years 3 of the last 8 months.
And we will have of course of the common platform, but the.
The headwater is a customer.
But 1 of the reasons for the Aqua systems acquisitions acquisitions as deep in water quality dealers. So that's the real isn't effectively the new channel for us both off of systems and Sharon ex.
On a pretty deep in that area.
Whereas the first sales.
And the 2 most of your water rate maybe more to the.
For the plumbing wholesale or the groundwater dealers. So really so headwater will be of natural outlet for.
For those stores that are those headwater locations debt.
The Aqua and.
Corrado at all can earn the business.
Yes.
We will have a.
The branded product Franklin electric branded Franklin water treating the branded product will go through the groundwater channel, but the.
The other channels are very important as well, particularly again as the water quality dealer channel is the very.
Very large segment and it's 1 that Aqua has done well and I'm sure on.
Well in the U S and water, it's going well and the Canada. So.
That's that's the the.
On the large area of focus for the company.
Can you just maybe just talk a little bit about the M&A opportunities are out there.
Are you holding off at this point just given the recent acquisitions are still of lot of opportunity.
Yeah, we've always looked at acquisitions of.
Tom would use the word opportunistically, we look at acquisitions across our segments and the standing of your businesses. So we are.
We're certainly engaged and we have identified a number of properties that if they were available we would like to pursue.
I.
I am also.
Those of you who know me we're pretty.
Article about what we do and the ability of capacity you can think about with headwater when we did the initial scan.
Of the headwater business back in 2017.
On the Davis and his team hasn't had a lot of other hand is getting the secondly for business has stood up on 1 platform.
1 of those businesses another use of the pump line was the primary pump line of Franklin that we had we were cut off we had to deal with that so there was a lot going on in our profitability suffered in the initial couple of years, but now headwater for example completed of the Guy kind of acquisition at the end of last year.
And as integrating it very quickly and the sales of the guy kind of of our.
Actually the increase whereas when we did the western hydro, which was kind of on a competitor's product line and there we actually saw a sales decline of that first year, we're actually seeing sales inquiries, so our ability and capacity to do deals and bring them online now that we have a common platform in.
ERP platform, both for our manufacturing and the other 1 for our distribution strength as well and we see of fueling we're continuing to look at opportunities in Adjacencies.
Grid business, we're looking which is a subset of fueling we're looking at opportunities and of course on our water segment as well so.
We are we got to get the bar treatment of these platforms up and integrated.
<unk> of Don Kenny Who's the president of our water business you know he came over from fueling he's done a lot of integration work.
And with the leadership team of of Aqua systems, leading the charge I'm confident we're going to get these businesses integrated and we will continue to look at other opportunities.
So I really don't she is taking on a formal pause but.
We've got some things of digest.
Great. Thanks for taking my questions and good luck for Q3.
Great. Thanks, Chris.
I am showing no further questions at this time I will now turn the call back to Gregg <unk> stack.
Thank you very much for joining us for this call today and we look forward.
On the <unk>. After we have our third quarter results they were going to have a good day.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation how very wonderful day, you may all disconnect.
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Good morning, ladies and gentlemen, and welcome to the Franklin Electric reports second quarter 2021 sales and earnings.
Earnings Conference call at this time all of the participants are in a listen only mode. Later, we'll conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone as the reminder of this conference call is being recorded.
I wasn't the likes to hand, the conference over to your host, Jeff Taylor Chief Financial Officer.
Thank you Whitney and welcome everyone for Franklin Electric second quarter 2021 earnings conference call on them.
Excited to be joining you on my first call as Franklin Electric Chief Financial Officer.
Record with me today is Gregg same snack on chairperson and CEO.
On the former Chief Financial Officer.
On today's call Gregg will review of our second quarter business on line and I will review of our second quarter financial results in more detail when.
On the Mercury 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 the.
The statements are subject to various risks and uncertainties many of which could cause actual results to differ materially from such.
Forward looking statements.
The discussion of these factors may be found in the company's annual report on form 10-K and in todays earnings release.
All forward looking statements made during the call are based on information currently available and as except as required by law. The company assumes no obligation to update.
We're looking statements.
With that I will now turn the call over to our chairperson and CEO Gregg <unk> debt.
Thank you, Jeff and thank you all for joining us.
We are very pleased with our robust performance for the second quarter from a financial perspective, we delivered record sales operating income and EPS for any.
Any forward in the history of Franklin electric driven by strong organic sales growth across all of our segments.
We continued to benefit from the sustained momentum.
Levered record earnings for the last 4 quarters, thanks for a strong demand environment.
At the end of the second quarter, we had record open order balance.
We continue.
To capitalize on inorganic opportunities as well.
From the second quarter, we completed the acquisitions of 2 water treatment companies <unk> and <unk> growing our water treatment position in the U S from Canada.
We now believe that this platform has reached critical mass north of $150 million of annualized revenues, establishing a leading.
For a meaningful foothold and the growing north American water treatment market.
As the water treatment market continues to consolidate our focus on our key factors will help us to stand out among the pack as we continued to build upon our position and have the runway to do so leveraging our expertise to manufacture and distribute complete water systems from the wells.
<unk> losses.
Despite supply chain and COVID-19 related headwinds facing much of the globe, we have reached new records and deliver value for our shareholders customers and other value to stakeholders.
Confident that our current strategy will take us far as we continue to grow as a global provider of water and fuel systems through geographic expansion.
<unk> for the product line extensions, while leveraging our global platform and competency and systems design.
Our water systems business had record revenue for any quarter generating overall revenue growth of 39% and organic revenue growth of 23%.
In the U S strong housing and agricultural demand combined.
And the continued dry weather drove a 16% increase in groundwater pumping systems revenue in the quarter.
Overall organic growth in U S water systems was 17%.
Demand continues to be strong across the globe as well thanks for a recovery of global commodity prices from robust demand in developing regions.
Outside the U S.
Organic launches of the growth was 30% led by our businesses in Latin America, Europe, and the Middle East all of which continue to see pandemic recovery demand the.
Despite our record revenues of our water systems segment had an unprecedented amount of open orders at the end of the second quarter and total over $130 million.
This compare.
Periods of about $40 million at the end of the second quarter 2020, and about $25 million at this time of about 2019 and 2018.
Our U S distribution business also delivered record performance for any quarter fragrance history, producing overall revenue growth of 57% and organic revenue growth of growth of 41%.
Underscoring this segment's role as a catalyst for future growth for our company.
Headwater operating income reached $16 million on the second quarter for.
Order after quarter throughout the pandemic headwaters top line has grown and profitability improved.
When facing the same supply chain constraints facing much of the global economy, we leveraged our expertise.
Houston the space to build of stronghold that will translate current success and to further opportunity over the long term.
Our fueling systems business saw increased momentum for the second quarter as well producing overall revenue growth of 29% and organic revenue growth of 27%.
This growth was led by strong performance in the U S and Canada.
The new up 40% of.
Along with sustained strength in our EMEA and Latin American markets.
We are of a strong business in developing regions and have positioned ourselves to capitalize upon the post COVID-19 recovery as it occurs in those regions as.
At the end of the quarter open orders increased to about $45 million from less than $10 million.
At the end of the last 3 second quarters.
Looking forward fueling systems and grid solutions will continue to play a vital role in many regions across the globe over the coming years, thanks to growing energy demand and the build out of the electrical rigs globally.
Throughout the quarter, we generated strong free cash flow that will allow us to capitalize on.
With <unk> that will emerge while continuing to maintain our strong balance sheet, enabling us to reinvest capital on our visits to that end, we see organic and inorganic opportunities across every 1 of our segments and we look forward to continually growing our presence in updating you on future development.
I am extremely proud of our global team for this outstanding performance.
Especially considering the significant headwinds and challenges we face.
The global supply chain is still recovering from the post COVID-19 demand surge the availability of raw materials and other components is a critical issue for us and it appears that will remain so through the balance of the year.
Additionally, we continue to see rapidly increasing input costs.
Many of them for materials and components and also for free which has skyrocketed in the current environment.
Jeff will address these issues more on a moment, but our water systems business in particular was not able to fully offset the inflation, we experienced with price in the quarter. This in part explained on water systems operating income margin decline.
In response, we have announced additional price increases increases to be effective in the second half of the year for some of our business units. This is the third increase the price so far in 2021.
Despite the robust demand environment, we are maintaining our current year earnings guidance of earnings per share before restructuring in the $2.85 to.
The $3 <unk> range, given the rapid increases in costs and supply chain of uncertainties looking.
Looking forward, we are excited about the strong foundation, we have built by staying rooted in fragrance 5 key factors for success for.
The <unk> availability service innovation and cost we continue to see customers return.
Q2 of the elevated experience of superior products, we deliver.
We're also excited position ourselves for success over the long term, providing innovative products for customers and bringing more sustainable practices for the industry.
We believe that our ESG initiatives outlined on our recently updated sustainability report are integral to our future success, we look forward to continuing.
Evolving our stakeholders of our sustainability journey and providing further updates on our progress over the long term.
So before I turn the call the Jeff I want to go a little bit off script here of just recognize John Haines.
John as it's been noted is retiring from the company.
John starting with Franklin Electric 2008.
Before the financial crisis, the steered us through that as our CFO through a number of acquisitions the creation of our headwater distribution segment, the standup of of new water treatment business in a number of other acquisitions as well across our segments.
Most recently John is navigate us through the most of the global pandemic.
And so I just want to take a moment to say thank you for John.
The number of you on this call have been following us with John over the years, So I think I'm, saying and thanks for you all as well and so I just wanted to do that before I turn the call over to Jeff. So thank you again zone in Q for Jeff.
Thank you Gregg.
No.
The diluted earnings per share were a record for any quarter in the company's history of 83 for the second quarter of 2021 versus <unk> 52 for the second quarter of 2020.
Second quarter EPS before the impact of restructuring expenses was also 83.
Compared to the 2022nd.
Quarter EPS before restructuring of 54.
Restructuring expenses in the second quarter of 2021 zero point $2 million and were related to various manufacturing realignment activities in the water segment.
And had no impact on earnings per share.
Restructuring expenses in the second.
Our full 2020.0.9 million were primarily related to various manufacturing realignment activities in the water segment and resulted in the 2 cent impact on earnings per share in the second.
Second quarter 2021 sales were $437.3 million compared to the 2020.
Quarter over quarter sales of $308.3 million.
The sales increase from acquisition related sales was $38.9 million.
Sales revenue increased by $6.1 million or about 2% in the second quarter of 2021 due to foreign currency translation.
The water systems sales in the U S and Canada were up about 42% compared to the second quarter of 2020 due to acquisition related sales volume and price.
In the second quarter of 2021 sales from businesses acquired since the second quarter of 2020 were $23.8 million.
1 of our systems organic sales in the U S from Canada were up 17% in the second quarter.
Sales of the groundwater pumping equipment increased by about 16%.
Sales of dewatering equipment were up about 90% and sales of surface pumping equipment increased by about 13% versus the second quarter.
Quarter 2020, all.
All due to strong end market demand and in part, resulting from lower sales last year due to the pandemic.
Water systems sales in markets outside the U S and Canada increased by 34% overall for.
Foreign currency translation increased sales by 4%.
Outside.
The U S from Canada water systems organic sales increased by 30% debt.
Driven primarily by higher sales in Latin America, Europe, and the Middle Eastern African markets.
Water systems operating income was $34.6 million in the second quarter of 2021.
Impairments of $28.7 million.
In the second quarter 2020.
Operating income margin for the second quarter 2021 was 14%.
<unk> to the prior year quarter operating income margin of 16, 1%.
Operating income margin decreased in water systems, primarily due to 2 items first about.
About $3 million of higher shipping and freight costs, which had not been fully offset by price increases mostly in North America.
Contributing to these freight cost or multiple product delivery issues for cross all points of the supply chain, but also resulted in more frequent shipment expediting.
Along with many suppliers instituting search.
Is the kind of on their increased costs for drivers of insurance and people.
As a result, the water systems unit in the U S from Canada has initiated its third price increase of 2021 effective August 1st.
And second general and administrative cost of about $2 million for transaction legal and.
And the other charges incurred in the second quarter.
These 2 items combined resulted in a lower water systems operating income margin of about 200 basis points in the second quarter.
Distribution sales were a record at $144.8 million in the second quarter of 2021 versus the second.
Search on for 2020 sales of $92.1 million.
Sales from businesses acquired since the second quarter of 2020 were $15.1 million.
The distribution segment organic sales increased 41% compared to the second quarter of 2020 and.
Revenue growth was driven by broad.
Second point and in all regions and product categories.
The distribution segment operating income was a record at $16.8 million compared to the second quarter of 2020 operating income of $6.8 million.
Operating income margin increased to 11% in distribution primarily.
Due to revenue growth and operating leverage.
Fueling systems sales were $72.2 million in the second quarter of 2021 and increased 29% versus the second quarter 2020.
Fueling systems grew sales organically by 27 per cent and the second quarter.
Fueling systems.
Based on sales in the U S and Canada increased by about 40 per cent compared to the second quarter of 2020.
The increase was due to higher demand for piping pumping and fuel management systems.
Outside the U S and Canada fueling systems revenue increased by about 1% driven primarily by higher.
For sales in Latin America, Europe, Middle East and Africa, offset by lower sales in China.
Fueling systems operating income in the second quarter was $18.5 million compared to $13.5 million in the second quarter 2020, driven by higher sales.
The Companys consolidated gross profit.
Some sales of $152.2 million for the second quarter of 2021, an increase from the second quarter of 2020 gross profit of $107.1 million.
The gross profit as a percentage of net sales was 34, 8% in second quarter 2021 versus 34, 7% in.
In the second quarter of 2020 and was essentially flat in most part due to price increases being offset by shipping and freight cost increases.
Selling general and administrative or SG&A expenses were $100.5 million in the second quarter of 2021 compared to $72.3 million in the second quarter 2020.
Profit SG&A expenses from acquired businesses were about $10 million.
Excluding acquisitions SG&A expenses were higher by $18.3 million.
The $11 million of which is variable compensation expense and commissions on higher sales.
In addition transaction legal and.
And other administrative costs for about $2 million.
SG&A costs as a percentage of net sales were slightly below the second quarter of 2020.
The effective tax rate for the second quarter of 2021 was about 19% compared to 21% in the second quarter last year.
The decrease in the <unk>.
<unk> tax rate was primarily a result of net favorable discrete events.
The tax rate as a percentage of pretax earnings for the balance of 2021 is projected to be about 20% before discrete adjustments.
As Gregg mentioned the company is reaffirming the guidance for the full year earnings per share before restructuring expenses.
Fences of $2.85 to $3.05.
The company ended the second quarter of 2021 of the cash balance of about $82 million.
And generated $35.5 million of net cash flow from operations during the first half of 2021.
Versus 47.0.
In the same period of 2020.
The decrease was primarily due to higher working capital requirements in support of heart of revenues.
Yesterday, the company announced the quarterly cash dividend of $17.5 per share that will be paid the august 19th to shareholders of record on the August 5th.
The company purchased about 79000 shares of its common stock in the open market for about $6.2 million during the second quarter of 2021.
At the end of the second quarter. The total remaining authorized shares that may be repurchased is about 840000.
This concludes our prepared remarks, we'd now like.
On the call over to Whitney the.
The lead the question and answer session.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number 1 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.
The third.
Your first question is from the line up Walter Liptak with Seaport.
Yeah.
Hi, Thanks, good morning, everyone.
Good morning, Walter Good morning, Hey, Yeah. Thanks.
John it's been a pleasure working with.
All of the best of luck and Hello to walk to GAAP as well.
Hi.
My question is about the distribution profit margins look very good and so I wonder if.
That was just a you know the $16 million of profit if that would occur.
Covering of.
Our fixed costs.
And if that is.
Cable at this revenue level or is there some sort of it.
It sounds like demand was strong in all kind of category, but was there any kind of mix going on or the pricing that.
That may have helped the profitability and maybe some thoughts about what the back half of <unk>.
Because it looks like are we at a new level.
On the double digits for distribution.
Well, let me take a stab of that and then.
Jeff Wayne.
First the business performed very well.
We get great operating leverage this business is seasonal.
As discussed in the past so Q2.
The <unk> are the stronger quarters.
But then the.
The margin averages out as you know Q for Q1 of our the softer quarters and while we are now in the black on those quarters and for Q4 of 2020 of Q1 of 2021.
They are low on margins, if you kind of factor that in but certainly during the season.
In the future we've had a.
Solid execution, it's a good pricing environment.
Distribution to able to act a little bit quicker than we can of manufacturing in that respect but.
Overall, just great execution by the team.
And getting good operating leverage off the fixed cost base.
Okay, great Yeah, that's right the seasonality.
1 day or 2 about.
About some of the hour.
On the dewatering and the growth of you saw there how much of that growth.
With from price and how much of it was from.
Volume when we talked about the organic growth.
On the dewatering.
I don't have the specific price volume of the dewatering.
The product line, but.
The overall, we've had pricing.
Actions in the.
Low single digits earlier this year.
And then really the most.
Some of the volume pickup yes, its more volume will for sure then.
Price.
You'll recall last year in the second quarter of that business was impacted meaningfully by.
On Covid.
The product line was impacted I think the other thing of note is that on we are seeing some international.
We will lift.
And that product to southern hemisphere markets like Australia.
<unk>, Argentina, and South Africa.
So the bulk of it is as the volume, but there are certainly some price in there as well.
Okay and is that the same.
For the groundwater to debt.
Of that most of that growth.
Volume related.
Yes, the volume the volume is.
We look at the as more bi.
We look at it more of a qualifying geographies than we do.
By.
Product line.
But the volume change in in water you know call it.
Call of the call it 4 times the price change.
Okay.
Okay great.
Generally we will hold true across price.
The dual plants.
Okay, and then just a quick 1 and I'll, let someone else have a shot at the questions but the.
The legal expense of $2 million, what was that related to and is that of recurring charge with that of onetime.
Alright.
Yes, it was.
Combination of things of that as well.
We viewed as 1 time.
All of them.
It was transaction related as well so as you know we did these water treatment transactions in the second quarter, there were added costs for that.
<unk>.
Banker fees there were also legal fees for that.
There were just.
The other legal matters that we.
Dealing with in the normal course around the globe the kind of had a surge in the second quarter as well. So in total that was about $2 million of SG&A and and we would generally characterize that as 1 time, yes.
And then the great. Okay. Thanks, guys.
Your next question is from the line of Mike Halloran with Baird.
Hey, good morning, everyone.
So good morning so.
Just some thoughts on on price cost inflation.
How are you guys thinking about.
About the pricing environment efficacy of what youre pushing through when do you think parity can can come back into the system, obviously inflation pressures have been ramp it.
And at some point the likely bounce out just some thoughts on when do you think they bounce out is it. This year is it next year any kind of the commentary around those things would be great.
Well I would say Mike that.
Okay.
Talk we talk about price versus inflation.
Generally I would characterize what is happening in distribution and viewing as we're in it we're advanced were.
We are seeing.
Greater price than we are inflation.
It's really in water systems.
And more specifically, it's more in the U S. Canada, and then even more specifically is the spray.
Cost of debt.
I think we're a bit surprising to us.
Seeing in the second quarter, when we look at.
Our free volume adjusted.
Year over year in the first quarter in water systems. It was actually positive.
Where we were actually experiencing lower freight costs, and then sequentially that slipped.
Luke.
And of meaningful way to negative in the second quarter. It did in fueling systems as well so as Jeff mentioned in his comments the.
The idea that.
Yeah.
We're having trouble with the supply chain with our suppliers of getting in.
Material.
In components and then also because were fall because of that we're falling behind in some cases on fulfilling and meeting the requirements of our customers. So we're expediting.
The shipping activity on the outbound side all of that is.
In fact contributing to a very significant.
Unfavorable free.
Variance from from the prior year so to your question I think.
There are some signs of of.
That.
Starting.
Has it come down I think our supply chain guys of.
<unk> talked about maybe the ports being a little bit better shape long Beach Los Angeles.
But then there is more constraints in other parts of the country for example in shipping in the Midwest and through Chicago I'm sure you've seen in the Red.
So that part of it is a little bit harder for us to gauge.
We also mentioned we have more price coming in when we announced the third price increase in our U S water business effective August 1.
As.
We think going to go along the way in the back half of the second half of the year of helping us.
Offset some of this inflation so.
That's more about Mike whats really the kind of driving that.
Driving the biggest concern and quite frankly, driving aware of the water Oi margins went in the quarter.
And you mentioned the headwater margins very impressive maybe just some thoughts on sustainability there.
Obviously, youre going to of seasonal uptick based on the revenue levels, but at a high level of how are you thinking about the sustainability.
Yes.
The first half margins.
And headwater about 7.5%.
Last year's second half margins in headwater mindful of about 3.9%.
Percent. So just at the very low end of our of our expected range. So we expect that to be meaningful.
The better in the second half of.
This year.
I think something in the high end of our expected range for 2.6% for the second half so yes.
Volume adjusted where we're going to lose some leverage as we go into the lower volume of period.
But the business has done a nice job on price they've done a really nice job as Gregg said on on managing their costs.
So we definitely see margin expansion in second half the second half, but I don't think that getting back to that first half margin of 7%.
The 2% I think it will be just short of that.
And then on the on the.
The water side.
Obviously really strong momentum.
And it seems like basically pretty broad base there.
Anything that you're worried about.
Inflation impacting demand or.
Some sort of air pocket developing it seems like the momentum is pretty consistent here and you feel pretty good about the trajectory on a forward basis, but.
Just curious if there's anything that worries you yeah yeah.
Yes.
The short cycle business so.
You can learn about later the most people, but the to your point I mean.
<unk> got almost 45 days of incremental open orders than what we normally see in the past.
So we've got plenty to work our way through as the supply chain of value, we're going to continue to kind of catch ups for the back half of the year.
Certainly.
Well documented North American U S market.
We're on housing is strong commodity prices, it's been dry in the very dry on the west.
Kind of average in the east for a little bit wider than that and use of the Mississippi, but certainly dry on the west we're seeing good demand in Latin America, we're seeing good demand in Europe Middle East Africa.
We had a little of the timing issue on some age of shipments.
So we still see of the Asian market is strong.
We're really not seeing anything out there and our businesses debt.
And the way of an air pocket.
With commodities.
Volume with.
Metal prices coming up as much of this impacted our margins is also good for demand for our large dewatering pumps as well.
Yes, that's a smaller piece of our overall business. So we're really seeing the.
The demand kind of across all product lines in all geographic geographies.
Okay I appreciate that and 1 last thing John I, just wanted to say best of luck of it's been a pleasure working with you for.
But over a decade now.
I hope everything goes great for you in the future.
Shipments I appreciate all the help over the years best of luck the thanks.
Right.
Okay. Your next question is from the line of Matt Summerville with D. A Davidson.
Thanks, a couple of questions and.
Yes, John Congratulations it's been great working with you over the last 13 years or so.
Really.
With respect to your comment Gregg around the open order number I don't remember you guys. Historically sharing that so can you put a little more context around that you mentioned 45 days of the.
The lack of a better word on the ease of work backlog. So 45 days of sort of backlog. If you will what is.
A more normal.
Kind of number if you go back and look at that for Franklin over a much longer term period.
Yes, Matt to your point.
It isn't something that we normally talk about because we're normally on a short cycle business.
It's filling orders on a pretty rapid basis.
So it typically at the end of the second quarter. If you look back 2018 to 2019 for the company for a manufacturing business it would be about $35 million.
And at the end of this.
As of quarter. This year I think is closer to like 175, so that incremental 130, <unk> hundred $40 million. If you look at our manufacturing business as being kind.
The $1 billion run rate of $1 billion on a $1 billion to run rates of 100 million of a month.
To get to that number. So it is it was significant enough that we wanted to call. It out that we have this on.
Unfilled orders backlog on that.
Say.
That is much higher than what we've seen in the past and what we're working on.
On catching up.
And then.
To that point do you get the sense that.
That type of number in the incoming order rates youre seeing is that truly indicative of demand or do you get the sense that your customers are concerned about their ability to get product.
Given what's going on from a supply chain standpoint, and instead of ordering the.
3 day would typically order, maybe they're ordering for 5.
What I'm, saying I'm trying to get a sense as to whether.
You feel like this is truly indicative about the door demand or whether you feel like the channel may be trying to stock up.
For their own fears of supply.
I'm sure of is there some of the ladder, but 1 of the things. We have is again, it's an indicator for 1 of our product line in the U S market is our distribution business itself the <unk>.
All through of Franklin at Headwater is greater than the purchase rates that have more buying so you.
We're drawing down on inventory as are others. So on 1 level you're going to see.
The customers across the the globe trying to refill back up to what they can sort of be.
Normal inventory levels on a go forward basis, it was a pretty robust demand requirement now.
The end environment.
We're clearly.
To your point of what May also be going on on some anxiety and so over ordering or ordering from multiple suppliers you might see some cancellations, but you are for I mean, as we look at our distribution business in the United States, which because of some outlook of.
To me of a broader view of our lens on the.
On the World Theres just not.
Now the inventory of the system and demand remains strong and if you can see the fueling side of the business.
Is that when we look at our fueling numbers last year in United States. For example, we were down 10% of revenue that we had always looked at for example that we thought the <unk> initiative in the U S market was.
1 that would maybe neutral of our fueling business.
I've learned now that the fueling distribution companies and the ones, we sell to and fueling actually had a record revenue year last year.
On the back of the MV well, that's now coming to an end in the first quarter.
We're now seeing.
Because of that.
A lot of the surge of fueling some of the fueling business is now it was up 43% of the quarter and we're seeing strong end market demand in the U S. As marketers are spending their capital dollars now on things other than the NV. So that's.
That's good for us as well so we're just seeing really strong demand and we're not getting the sense. If there is a lot of inventory of the channel so as.
The strong rebuilding the inventory over time.
And yes I am.
Sure there's the risk of out there of people trying to.
Overall orders so that they get their fair share.
And then I wanted to follow up on price. If we can maybe just do a recap of.
The pricing you've already put in.
Place on the magnitude the magnitude of what I'm talking about the pricing you already had in place and what the next waves set for August 1st the contemplate in terms of magnitude.
Yes so.
Well all of the water businesses.
Matt.
All.
All of our businesses have kind of.
Made at least 1 many of the 2 and now 3 price increases in the case of what were talking about in the United States, where I think the spread is the tightest and actually went negative in the in the second quarter there.
There was a.
There was a 3% price increase of 5% price increase and then this 1 coming in August is a 5%.
The price increase.
Again so.
That's the make up of the 3 when you look at the businesses around.
Around the world there of kind of different.
Everywhere, but that's basically the order of magnitude the.
The kind of getting too.
<unk>.
Rice list price increases of.
Somewhere in that.
<unk> 12 range 8 to 12.
Interest.
Yeah.
Got it.
Thank you I'll leave it there and get back from Q.
We'll take our next question is from the line of Chris Mcginnis with Sidoti.
Yeah. Good morning, Thanks for taking my questions and John.
Congratulations on retirement.
Thanks for the help as well.
Can you just maybe just talk a little bit about the Huron ex.
Aqua acquisitions in the how they're being integrated and can you or they've gone through the headwater as well already are or is that the plan going forward.
Yes sure Chris.
So integrating.
Reading the for.
The companies that we've acquired more treatment over the last.
Couple of years 3 of the last 8 months.
And what will happen of course of the common platform.
The.
Headwater is a customer.
1 of the reasons for the Aqua systems acquisitions acquisitions is.
The deep in water quality dealers, so that's a real lesson, but secondly, the new channel for US both on the systems and Sharon ex.
On pretty deep in that area.
As are the first sales.
And the 2 most of your water rate maybe more to the.
For the plumbing wholesale or the groundwater dealers.
So really you know so headwater will be of natural outlet for those stores that are those headwater locations debt.
The Aqua and the.
Corrado at all can earn the business.
We will have a.
The branded product Franklin electric branded Franklin water treating the branded products will go through the.
Per channel, but.
The other channels are very important as well, particularly again as the water quality dealer channel as the.
A very large segment and is 1 that aqua has done well in of Drunks has done well in the U S and water rates the well in the Canada. So.
That's that's the the large area of focus for the.
Groundwater and can you just maybe just talk a little bit about the.
M&A opportunities are out there.
Are you holding off for this point just given the recent acquisitions are still of lot of opportunity.
Yeah.
Always looked at acquisitions of.
John would use the word opportunistically, we look at acquisitions across our segments and standing.
Any of the businesses. So we were of we're certainly engaged and we have identified a number of properties that if they were available.
We'd like to pursue.
I am also those of you who know me.
We're pretty methodical about what we do.
And the ability of capacity you think about with headwater when we did the initial.
And up.
Of the headwater business back in 2017.
On the Davis and his team have had a lot of other hand is getting the secondly for business has stood up on 1 platform.
1 of those businesses. Another use of the line was the primary pump line of Franklin and we had we were cut off we had to deal with that.
There was a lot going on in our profitability suffered in the initial of couple of years, but now headwater. For example completed the guy kind of acquisition at the end of last year and as integrating it very quickly and the sales of the guy kind of are actually of increased whereas when we did the western hydro which was.
And on a competitor's product line and there we actually saw a sales decline of that first year, we're actually seeing sales inquiries, so our ability and capacity to do deals and bring them online now that we have a common platform and ERP platform, both for our manufacturing and the other 1 for our distribution serves us well and we see of fueling we're continuing to look at opportunities in Adjacencies.
Our grid business, we're looking which is a subset of fueling we're looking at opportunities and of course on our water segment as well so.
We got to get the bar treatment of these platforms up and integrated Dan Kenney, who was the president of our water business. You know it came over from fueling he's done a lot of integration work.
And with the leadership team of of.
The Aqua systems, leading the charge I'm confident we're going to get these businesses integrated and we will continue to look at other opportunities. So.
So I really I was just taking of a formal pause but.
We've got some things of the adjusted.
Great. Thanks for taking my questions and good luck for Q3.
Great. Thanks, Chris.
I am showing no further questions at this time all of a lot.
On the call back to Gregg Thanks stack.
Thank you very much for joining us for this call today and we look forward to speaking to you. After we have our third quarter results. They were going to have a good day.
Ladies and gentlemen, this concludes today's conference.
Your participation and have a wonderful day you may all disconnect.