Q3 2021 Franklin Electric Co Inc Earnings Call
Good day and thank you for standing by what comes to the Franklin Electric reports third quarter 2021 sales and earnings conference call. At this time, all participants in a listen only.
After the speaker's presentation, there will be a question and answer session. Just a question during the session you will need to press star one on your telephone. Please be advised today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Jeff Taylor.
Chief Financial Officer. Please go ahead.
Thank you Mary and welcome everyone to Franklin Electrics third quarter 2021 earnings Conference call.
With me today is Gregg things stack, our chairperson and CEO.
On today's call Gregg will review, our third quarter business highlights.
I will review, our third quarter financial results in more detail. When we are through we 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 $19 95.
These statements are subject to various risks and uncertainties many of which could cause actual results to differ materially from such forward looking statements a.
A 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 this call are 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, Jeff and thank you all for joining us.
Pleased to report that we delivered another record quarter, which included the highest consolidated net sales operating income and EPS for any quarter in Franklin Electrics history.
Demand across our end markets remains robust fueling our sustained growth and sizeable open order balance.
This strong performance reinforces that we have the right strategy in place, which is laying the groundwork to grow as a global provider of water and fuel systems.
Geographic expansion and product line extensions, leveraging our global platform and expertise in system design.
The supply chain constraints continue to persist our team remains focused on managing these ongoing challenges to meet our customers' needs.
As we expect this volatility to stretch into 2022.
From a supply chain perspective is one of the most challenging environments that I've experienced during my career and I want to recognize the continued relentless focus of our global team to minimize the level of disruptions for the company and our customers.
As we anticipated during the quarter inflationary pressures were a more substantial headwind.
We experienced high material component and logistics cost increases in addition to the continuing impact of tariffs.
In response to these cost increases we continued to implement price increases to maintain an appropriate margin recognizing the highly competitive nature of our end markets.
Turning to our segments and water systems, we achieved record sales with overall revenue growth of 28% <unk>.
Including organic revenue growth of 11%.
Robust demand continues driven in large part by a strong housing market domestically drier weather healthy commodity prices and strong ongoing demand in developed regions.
In the U S groundwater pumping systems revenue increased 12% in the quarter supported by strong housing and agricultural demand.
Overall organic growth in the U S for water systems was 10%.
Outside of the U S organic <unk> growth was 12% led by our business in Latin America seems substantial success with 22% growth as well as strength in Europe, the middle East and Africa, all of which continue to see post lockdown recovery demand, notably our business in Brazil, and Turkey continues to be strong.
During the quarter, we continued to execute on our inorganic strategy as well we completed a small acquisition in Australia mine tough, which has a line of electric submersible pumps, principally used in mining construction site dewater.
<unk> tend to manufacture and distribute these pumps across our global footprint.
With mine tough we've completed three water segment acquisitions. This year. The other two are in the U S water treatment market.
Speaking of water treatment the integration of our recently announced water treatment acquisitions, <unk> and Aqua systems is progressing according to plan.
Within water treatment, we are making steady progress on our goal of establishing a leading position in the U S and Canada as the market continues to consolidate and we believe the marketplace is recognizing our enhanced capabilities in this space.
Our U S distribution to those headwater delivered record performance for any third quarter in Franklin's history with overall revenue growth of 43% operating income growth of 92% and operating margins of eight 8% continuing to underscore the segment's role as a catalyst for future growth of our company.
The tremendous growth has been anchored by sustained demand over recent quarters, reflecting headwater superior product and service offerings.
We've just established leadership position in the marketplace will drive future success and opportunity.
Our fueling systems business, followed suit in the third quarter, producing overall revenue growth of 18% operating income growth of 26% and operating margins of 29, 5%.
This growth was led by sustained strength in the U S continued improvement in Latin America, and Asia Pacific outside of China.
And favorable mix as well.
Across the globe growth in the Middle class leads to increased use of motor vehicles growing demand for energy and energy infrastructure recognizing.
Recognizing this opportunity our fueling team is leveraging and extending our success in monitoring the critical assets are fueling station tomorrow to monitor other critical assets, including electric utility Transformers Circuit Breakers and rail Telco server farm battery backup systems.
During the third quarter, we maintain our strong free cash flow generation.
Bind with our strong balance sheet. This allows us to proactively reinvest capital back into our business while at the same time, returning cash to shareholders.
Additionally, we are continuously evaluating new M&A opportunities that will enhance our portfolio through product line extensions and geographic expansion building upon our ongoing organic growth across all of our segments.
Looking forward overall demand continues to be strong as evidenced by our record third quarter performance and significant open order balance.
Open orders at the end of the third quarter were approximately $145 million of.
Significantly from a typical $35 million pre COVID-19 run rate.
Turning to our outlook for the fourth quarter.
As I mentioned earlier, we expect global supply constraints logistics issues and inflation to continue into 2022.
However, based on how we've managed through these challenges we are updating and increasing our current 2021 earnings per share guidance.
Our new 2021 full year earnings per share before restructuring guidance is $2 99 says $3 <unk> per share, reflecting an increase in the midpoint of our prior range of $2 95.
Her current range with a midpoint of $3 three.
I will now turn the call back over to Jeff.
Thank you Gregg.
Our fully diluted earnings per share were a record for any quarter in the company's history at 98 for the third quarter of 2021 versus <unk> 82 for the third quarter of 2020.
Third quarter earnings per share before the impact of restructuring expenses was also <unk> 98, compared to the 2023rd quarter EPS before restructuring of <unk> 83.
Restructuring expenses in the third quarter of 2021 were zero point $1 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 third quarter of 2020 zero point $4 million and were primarily related to various manufacturing realignment activities in the water segment and resulted in a <unk> <unk> impact on earnings per share in the third quarter of 2020.
Third quarter 2021, consolidated sales were a record $459 million compared to the 2023rd quarter sales of $351 2 million, an increase of 31% year over year.
The increase from acquisition related sales was $47 4 million, while organic growth contributed 17%.
Sales revenue increased by $1 1 million or less than 1% in the third quarter of 2021 due to foreign currency translation.
Water systems sales in the U S and Canada were up approximately 41% compared to third quarter 2020, due to acquisition related sales volume and price.
In the third quarter of 2021 sales from businesses acquired since the third quarter of 2020 or $33 7 million.
Water systems sales in the U S and Canada grew 10% organically in the third quarter.
Sales of groundwater pumping equipment increased by about 12% and sales of dewatering equipment were up about 60% both due to strong end market demand.
Sales of surface pumping equipment increased by about 3% versus the third quarter of 2020 as supply constraints with certain utility pumps and lower overall sales of sump pumps limited our ability to grow at a faster rate.
Water systems sales in markets outside of the U S and Canada increased by about 12% overall.
Foreign currency translation had essentially no impact on sales in the quarter.
Outside the U S and Canada water systems organic sales increased by about 12% driven primarily by higher sales in Latin America, Europe, the middle East and Africa markets.
Water systems operating income was $36 8 million in the third quarter 2021, compared to $36 6 million in the third quarter of 2020.
While operating margin decreased by 390 basis points compared to the exceptionally strong margin in the prior year quarter.
The decline in operating margin was due to higher SG&A expenses, primarily higher variable compensation and other operating expenses related to increased commercial activity.
Additionally, we experienced cost inflation in materials components freight and tariffs all of which we strive to fully offset with pricing.
As well as a higher mix of water treatment sales at a lower margin also contributed to the lower operating margin.
Distribution achieved record third quarter sales of $142 million this year versus the third quarter 2020 sales of $98 million.
In the third quarter 2021 sales from businesses acquired since the third quarter of 2020 were $13 2 million.
The distribution segment organic sales increased 30% compared to the third quarter 2020.
And revenue growth was driven by broad based demand in all regions and product categories.
The distribution segment operating income was a record for the third quarter at $12 3 million compared to the third quarter of 2020 operating income of $6 4 million.
Operating income margin increased to eight 8% of sales in distribution, primarily because of revenue growth and improved operating leverage but was negatively impacted in the quarter by higher SG&A costs, which included variable compensation and other operating expenses.
Fueling system sales were a record $81 million in the third quarter 2021, and increased 18% versus the third quarter 2020, which was entirely organic growth.
Fueling systems sales in the U S and Canada increased by about 27% compared to the third quarter 2020.
The increase was due to higher demand for fuel management systems piping and pumping systems.
Outside the U S and Canada fueling systems revenue decreased by about 1%.
As sales increases of 11% and the rest of the world outside of China were offset by lower sales in China.
Fueling systems operating income in the third quarter was $23 9 million, a new record for any quarter compared to $18 9 million in the third quarter 2020, driven by higher sales.
The third quarter 2021, operating income margin was 29, 5% compared to 27, 6% of net sales in the prior year.
Operating income margin in the third quarter increased in fueling systems, primarily due to higher sales volumes favorable product and geographic sales mix.
The Companys consolidated gross profit was $163 1 million for the third quarter of 2021, an increase from the third quarter 2020 gross profit of $124 3 million.
The gross profit as a percent of net sales was 35, 5% in the third quarter 2021 versus 35, 4% in the third quarter of 2020 and was essentially flat due in most part to material costs.
Material inflation costs that were offset by price increases.
Selling general and administrative expenses were $106 4 million in the third quarter of 2021 compared to $75 5 million in the third quarter 2020.
SG&A expenses from acquired businesses were approximately $12 million.
Excluding acquisitions SG&A expenses were higher by $18 $9 million about $11 million of which is variable compensation expense and commissions on higher sales.
The effective tax rate for the third quarter of 2021 was 18% essentially flat with the prior year quarter at 17% the.
The effective tax rate for the full year 2021 is projected to be between 18.0 to 18, 5%.
The company ended the third quarter of 2021 with a cash balance of about $76 million in.
And generated $93 9 million of net cash flow from operations. During the first nine months of 2021 versus $133 7 million in the same period of 2020.
The decrease was primarily due to higher working capital requirements in support of higher revenues, including higher inventory to compensate for supply issues.
Yesterday, the company announced a quarterly cash dividend of $17 five that.
That will be paid November 18th to shareholders of record on November 4th.
The company purchased about 98000 shares of its common stock in the open market for about $7 9 million during the third quarter of 2021.
At the end of the third quarter. The total remaining authorized shares that may be repurchased is roughly 742000.
As previously disclosed in our SEC filings the company's fourth quarter results will include an estimated 12 cent EPS gain related to an approximately $6 million one.
One time income gain on a bargain purchase price transaction that will be presented in the income statement on the other income and expense section.
Although it is our practice to not call out items as non-GAAP adjustments in our reported results. We are mentioning this gain due to its size and since we do not consider it to be operational in nature.
This 12 cent EPS gain is not included in our updated EPS guidance.
As Gregg mentioned the company is raising its guidance for full year earnings per share before restructuring expenses to a range of $2 99 to $3 seven.
This concludes our prepared remarks, we will now turn the call over to Mary for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question question.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Jake <unk> from Baird. Your line is open.
Good morning, everyone got Jake here filling in for Mike.
Morning.
Yeah, I guess first question would be.
On the price cost cadence here moving forward I guess, one can you kind of remind us or quantify how much price you have gotten in the quarter year to date, and then how youre thinking of.
Pricing implementation going into next year, I mean, how much inherently carries over I guess that if you can kind of cadence outfits quantitatively if that helps.
Yes, Jay let me start that and then Gregg can certainly chime in here so.
In terms of our pricing actions. So we have been active throughout the full year as you know we started price increases.
Late last year, we've continued those throughout this year there have been multiple price increases.
Across both of our manufacturing businesses as well as distribution throughout the year at this point in time, we've had three or four or more price increases.
And all of those businesses, we did have price increases in water and in fueling which both took effect in the third quarter.
If we look at the current third quarter versus <unk>.
Prior year prices up in the low double digit range. So we're seeing the effects.
The cumulative effect of the price increases that we have.
Implemented throughout the year up to this point.
<unk>.
We're also evaluating and working on additional price increases as we continue to see inflate.
Inflationary pressure flow through for the fourth quarter and will continue to monitor that as we move into 2022 as well.
Yes, J P. You may recall from our second quarter that we try to get price to offset inflation in the first quarter. We were ahead second quarter, we got a little behind in third quarter, a little bit of that again, but we're mindful that the.
The inflation tsunami continues to roll forward here and we're mindful of that but at the same time when we do price changes. They do take some time to get to that effect. So we should see some additional price lift here going forward, but we're mindful that we're also going to see continued inflation going forward as well.
Great.
And then focusing again on water systems here.
It looks like now dewatering.
Now, it's starting to come back.
Against an easy comp so I guess remind us how how mix works in that segment.
Going forward it would appear.
Stronger residential groundwater, we'll start to give way to some of the industrial and dewatering exposures you have I guess a reminder, on how that flows through from a mix perspective.
And is it meaningful or is that something we should be keeping in mind. Thanks.
Sure Jake I'll give a qualitative response and just and we're in a little bit more on the quantitative side. So you may recall that with the groundwater systems, that's where we're most vertically integrated so that's where we see typically a higher margin profile.
To your point dewatering.
Because we are buying larger components in assembling them.
And the packages.
We'll typically see a slightly lower margin profile.
And so you are correct that to the degree that dewatering.
Particularly the larger watering pumps become a larger proportion of our business that will put some are some <unk>.
Profit pressure on the mix.
But overall, we have done well the team has done well.
Getting to.
<unk> fixed cost base and our <unk>.
Large dewatering pump business, so that has helped offset.
Some of the lower gross profit margin, we would see so it's still kind of blends through I believe yeah, we've talked about margins.
15% to 17% range for water certainly the current pressure relates also to the fact that we were having more of a of a drag related to water treatment. Because these are businesses that have lower profit profiles. Currently we expect over time that will get up to more of the median of our water business, but that takes a little time. So that's I think the work can be more.
Near term drag on an oi than Mrs.
Certainly the large dewatering pumps.
Great very helpful I'll jump back in the queue.
Thank you Jake.
Our next question comes from the line of Matt Summerville from D. A Davidson your line is open.
Thanks couple of questions just sticking with water for a second when you look at year over year, all in revenue I'm rounding a little bit, but $60 million flat I know you mentioned, maybe some dilution from treatment, but I guess I'm curious as treatment not profitable then help me understand on a year over year basis, why youre not.
Any incremental dollar flow through on all of that revenue, especially if youre a little bit ahead on the price cost side of things.
Yeah. Thanks.
Thanks, Matt and.
The quick answer to the first part of that is as water treatment is profitable, but the operating margins are slightly below the operating margins, we would see for the core business given the growth that we've seen in water treatment and.
How it's grown to be a bigger portion of the overall segment. There then it's having to having a bigger impact on a weighted basis. So.
<unk>, reaching a similar if not better margin profile than the overall business, but we've recently completed those acquisitions, we're going through that integration phase we want to continue to grow that business and for the time being that it's meeting our expectations, but it is pulling down the overall segment margins a little bit.
And then how about maybe talking through on an old <unk> dollar basis again, why we're not seeing any inc income.
Dollar fall through on a $60 million revenue increase.
Yes, I would say overall when you look at segment margins in total.
Those margins are are down about 390 basis points on a year over year basis. So let me just kind of walk through that that bridge. If you will first thing I'd say is is that 18% margins that we saw last year were exceptionally high margins.
Certainly some of the highest margins we've seen in recent history. I think you have to go back almost seven years to see margins that were in that range. So the third quarter of last year, we were getting strong demand recovery coming out of.
The Covid lockdowns in the pandemic.
That period was also before we saw a lot of the inflation that has flowed through to us.
So we had certainly exceptional margins than in the prior year quarter.
That's.
That's certainly a piece of it and as I said, we would expect normal water systems margins to be in the 15% to 17% range.
At 14%.
So when you look at the bridge.
SG&A is up on a year over year basis, that's certainly a significant piece of it that's about 50% of the overall impact on the operating margin that's driven largely on variable compensation bonus as you know the business is performing well.
On a year over year basis growth is nice profitability is up and as the business performs well then typically variable compensation follows that in addition, we also have higher business activity and commercial activity there it's related to.
We were locked down pretty much third quarter last year, there wasn't a lot of travel entertainment there weren't a lot of shows that activity is beginning to resume we're seeing more activity and trade shows more customer visits as a result, we're investing more in marketing and advertising dollars and that's also contributing to the higher year over year SG&A.
And then if you look at the remainder of the.
The change in operating income for the for the year over year comparison is really split between some inflationary cost pressure that we're seeing.
In the water segment.
They are working really hard to keep up with that on a pricing basis, but they have seen some inflation flow through versus price and so they've got some pressure there and then the other piece of it is the mix piece from the water treatment that we've talked about already.
Got it and then just one follow up Gregg I think you mentioned in your prepared remarks here.
Backlog as you referred to it as open orders stood at a 145 million how does that compare on a sequential basis and at what point do you think youll be able to start.
Biting into that number or do you see it still increasing sequentially for the time being.
No Matt I appreciate the follow up.
It's down from Q2, I recall that in Q2 was about $170 75, 175, so flat on the fueling piece.
Fueling demand and the recovery of the North American market has been really strong and we see it continuing that way as there is further consolidation in the industry and investment by a major marketers water piece, we knocked down probably about.
What about $30 million.
So we're beginning to dig into that on the water side as we speak.
And I think fueling will come along with further long just because of the strong end market demand.
Got it thank you guys.
Thank you Matt Thank you.
Our next question comes from the line of Walter Liptak from Seaport Global Your line is open.
Hey, Thanks, good morning, guys.
Good morning, I wanted to ask one from 50000 feet.
With the talk of selling price increases and more coming is there any <unk>.
Demand destruction, that's coming in like how long do these conversations going with customers there.
Is everybody just in the same boat.
Or.
At some point do you think youre going to get more pushback.
Well Walter as you know, it's tough to talk about the future.
Great clarity, but I will say right now is that people need the product.
As quickly as we can get it through the supply chain and get it through our facilities and get it out the door.
The demand is there.
So there's not a whole lot of conversation about.
Pricing right now its all about availability.
And until you see some abatement in supply chain and material costs I suspected that.
Continued focus on availability is going to be it was top of mind for customers.
Okay that sounds great and then Kevin thank.
That when you look at the distribution business how much of that is the volume growth is that.
Organic growth is.
Is volume versus price.
Again, just looking at that.
One of these things, where we continued to price to the market some of our products that we get by pipe and others are more commodity based and so it spot pricing.
And the.
The price cost mix and.
Distribution quite as clear as it is on the manufacturing side of it we've got some additional thoughts yes, we're seeing we're seeing strong pull through on pricing in.
In the second half of the year on a year to date basis I would estimate that the balance there is about 50 50 between price and volume.
Okay Alright, great.
It's great to see the profitability come up again in the headwaters business.
Yes.
Is this something that's sustainable though or is it just that youre getting good SG&A leverage I guess, maybe.
Maybe the best.
Better way to ask it is Howard gross margins looking.
And are those gross margins going to be sustainable.
Well your question, Yes look rising tide lifts all ships and right now I think distribution and generally not only Franklin Butler distributors that are publicly traded where we've got information. We're all seeing some lift in our numbers because of strong demand and margins are holding.
We're getting some operating leverage we had a couple of charges in the quarter.
Reduced sequentially from Q2.
But I'd say generally right now does.
Distributions business is robust and we've got and so therefore, we're getting.
Good financial performance, you may recall that our original.
Our goal is to get this business in the four to six range. You know there is some seasonality. So we're doing better in the second and third quarters in that.
We are performing.
Function better than where we were in <unk>.
Prior years.
Okay.
Okay.
Yes.
I guess the question is do we think that that is there something structurally that's changed or do we think that 4% to six range is is where that we should think about this business over the long term.
I think we've reached a new level of maturity of the business, where it would be at the upper end of that range, maybe a little bit higher.
Okay great.
And if I could switch over to fueling systems, one of your competitors reported and they have a little bit of.
Slow down.
In their business.
During the quarter and had some margin pressure.
You guys need to come through right. Okay, I Wonder if you could give us a little bit more color on what's going on.
Fueling systems with the rollout from the major <unk>.
Fueling retailers thanks.
Sure Walt again being mindful that the two public companies that are fueling.
Both volunteer in Dover are bolt into dispensing side of the business we are not.
There's been this multiyear upgrade of the <unk>.
The upgrade in dispensers I think they both.
I've called out that they were going to maybe face some headwinds from my memory, there because of the pretty much completion of that upgrade in the first quarter of this year.
We operate principally in the below ground equipment with also with the brands of the outfit the tank age in the back office and with dollars now freed up by major marketers.
We're seeing those dollars potentially being redeployed in areas that we benefit from it.
And also.
We may be getting some share gains so that's always difficult to discern, but we are marketers are building and they're investing with Franklin.
Okay that sounds great. Thank you.
Thank you.
Yes.
Our next question comes from the line of Chris Mcginnis from Sidoti <unk> Co. Your line is open.
Good morning, Thanks for taking my questions and nice quarter.
I was just wondering if you could thank.
Thank you.
I was wondering if you could just maybe digging a little bit on the recent acquisitions and around water treatment, just maybe the growth rates.
May have missed that you did talk about earlier.
Wonder how theyre being integrated in the organic growth you have seen from that business. Thanks.
Sure Chris from a qualitative point of view, we didn't discuss it earlier in detail but.
The bar treatment.
Ganic growth profile from what we've seen in the industry and what we've learned over the last couple of years. When we first stepped into this business with our acquisition of first sales.
A couple of years back is that the organic growth rate looks to be higher than say the growth rate of water generally.
Youre seeing housing demand recovering youre seeing people.
Not only just in United States, but across the globe being much more focused on water quality and so that's lending to.
A higher growth rate the other opportunity for Franklin is that while we bought well established businesses.
One in California, and one in Canada, and one here in the Midwest, which are strong.
Markets hard water markets.
That these businesses were fairly regional and we now have given the capital and resources to go national.
I think that's another.
The good thing for Franklin is that we've got businesses that have.
Relatively small footprints that can grow relatively quickly just by expanding their business models across the U S. And then we're going to look outside of the United States as well the margin profile.
And the water treatment business I think gives you cover other significant public companies or companies that have significant investments in water treatment. There is certainly kind of mid teens margins.
It would be or even better, but we're sub 10% right now in those businesses because of with acquisition costs and amortization costs, which we don't break out so, but we expect those operating margins to increase with operating leverage and with consolidation.
Into our Franklin business overtime. So currently the dilutive to our operating margins for water, but we expect them to be equal to or potentially accretive over time as we get these businesses digested and they can get operating leverage from expanding across the U S and then.
To a larger footprint globally.
Great. Thanks for taking my questions. Good luck.
Q4, great.
Great. Thank you Chris Thank you.
We have no further questions at this time now I will turn the call back over to Gregg Zantac.
We appreciate your joining us on this conference call and look forward to speaking to you. After the end of the year with our full year results have a great week.
This concludes today's conference call. Thank you everyone for participating now disconnect.
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