Q4 2021 Franklin Electric Co Inc Earnings Call
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Good day and thank you for standing by welcome to the Franklin Electric reports first quarter 2021 sales and earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone please be advised today's <unk>.
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I'd now like to hand, the conference over to your host today, Jeff Taylor Chief Financial Officer. Please go ahead.
Thank you Michelle and welcome everyone to Franklin Electrics fourth quarter and full year 2021 earnings Conference call with me today is Gregg <unk>, our chairperson and CEO .
On today's call Gregg will review, our fourth quarter and full year business highlights and Adam will review, our fourth quarter and full year financial financial results in more detail.
When we're finished we will have some time for questions and answers before.
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 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 the ASIC.
And as except as required by law. The company assumes no obligation to update any forward looking statements.
With that I'll now turn the call over to our chairperson and CEO Rick Thanks, Matt.
Thank you, Jeff and thank you all for joining us.
While this call with shareholders to review, our company's performance I would like to start by taking a moment to publicly congratulate and thank the entire team at frankly Walker for a record year. It takes a team effort to deliver outstanding results. Despite the many challenges we faced in 2021.
For the fourth quarter sales operating income and EPS were records for any fourth quarter in our history and our fourth quarter closed out the highest performing your Franklin's history.
We established new all time full year records for sales operating income and earnings per share.
Demand across the business remain strong with continued strength in all end markets.
Additional growth in a robust open order balance.
Our results substantiate our strategy as we capture the healthy demand across our end markets and advanced Franklin as a global provider of water and fuel systems.
Supply chain constraints continued to affect our industry.
<unk> them to continue at least through the first half of 2022, most likely through the balance of 2022 in the case of some end point materials and geographic regions.
Our team navigated these ongoing challenges and is well prepared to handle future volatility.
Our current inventory levels are intentionally elevated when compared to the fourth quarter of last year in preparation for future volatility and in response to strong demand.
Inflationary pressures continued in the fourth quarter, increasing material freight transportation and labor costs. In response, we continue to implement our pricing strategy to offset these higher costs and are committed to maintaining our margin discipline across the business.
Turning to our segments and water systems, we delivered overall revenue growth of 36% with organic revenue growth contributing 23% as I've mentioned in prior quarters demand has continued to be driven in large part by a robust housing market in the U S strong crop prices dry weather in some regions of the U S and globally.
In addition to ongoing strong demand in developing regions.
In the U S groundwater pumping system revenue increased 34% in the quarter supported by strong residential and agricultural demand and overall organic growth in the U S for water systems was 26%.
Outside the U S water systems organic growth was 20% with solid demand recovery and growth in all regions led by Asia Pacific and EMEA.
Our fueling systems business also delivered a strong quarter producing overall revenue growth of 21% operating income growth of 18% and operating margin of 28, 1%. These results.
We're supported by a strong pent up capital demand for infrastructure build out in the U S, which we see continuing through 2022.
As the pandemic subsides, we expect greater focus on vapor recovery management and monitoring countries outside the U S as well driving additional growth for fueling.
Our U S distribution business again delivered outstanding results with overall revenue growth of 50% alongside operating income growth of 1000% and operating margins of four 8% continuing to highlight the segment's role as a growth engine for our company. This growth has been supported by sustained demand across the country over recent.
Looking ahead, we will integrate our recent acquisition and focus on growing our market share in the U S. Groundwater space, we are focused on developing and using proprietary technology to both improve availability and reduce working capital in this business. We also will continue to thoughtfully increase our geographic footprint.
2021 was a decisive year for strategic acquisitions, particularly in the water treatment space during the fourth quarter, we completed a small but strategic bolt on acquisition to be in our industries, which was our third water treatment acquisition for the year.
This latest acquisition is in the southwestern United States. So the key water treatment market.
At the end of the year, we also announced the acquisition of Blake Group.
Special groundwater distributor with 14 locations throughout the northeast United States.
As I mentioned the distribution segment is a key catalyst for long term growth and with the integration of Blake, we expand our geographical footprint into New York in the New England markets.
I want to welcome our new employees from DNR and Blake the Franklin team.
During the year, we maintain our strong free cash flow generation, but delivered less than 100% conversion as we battle through inflationary pressures and invested in working capital to support the strong growth we are experiencing.
As to the future. We believe we are well positioned to drive strong cash flow consistent with our past performance.
Our capital allocation strategy remains unchanged, we will continue to invest in organic and inorganic growth while at the same time, returning cash to shareholders to that end last month, we announced an 11% increase in our quarterly dividend, which marked the 13th consecutive year that Franklin has increased its dividend.
This increase is a testament to the efficacy of our capital allocation strategy, our confidence in the outlook of the business and our historical commitment to deliver increasing returns to our shareholders.
Turning to our outlook after experiencing significant growth in our business in 2021, we expect continued strong demand in our core markets and our preference for our products as we deliver value to our customers by leveraging our five key factors.
At the same time, the challenges of global supply and labor constraints logistics challenges.
<unk> remained.
While we have entered 2022 with considerable momentum we expect these challenges to persist at some level for most of the year. As a result, we are initiating our 2022 full year revenue guidance in the range of one nine to 2.05 billion with.
With EPS in the range of $3 50 to $3.75.
In summary, 2021 was a pivotal year for Franklin.
We were well positioned to capture the pent up demand while at the same time building on our own strong foundation through strategic acquisitions to expand our core offerings and geographic reach particularly in water treatment distribution and our grid solutions businesses as we look to carry this momentum into 2022, our outlook is based on our five key factors for success quality.
Availability service innovation and cost.
To become an indispensable partner to our customers, while ultimately expanding the availability of clean water and our global scale and addressing safety and lowest total cost of ownership and the maintenance and operation of fuel stations globally I will now turn the call back over to Jeff.
Thank you Greg.
Our fully diluted earnings per share were a record for any fourth quarter in the company's history at 85.
The fourth quarter of 2021 versus <unk> 57 for the fourth quarter of 2020.
Fourth quarter earnings per share before the impact of restructuring expenses was <unk> 86, compared to the 2024th quarter earnings per share before restructuring of <unk> 57.
The company's fourth quarter results included an estimated 12, earning per share gain related to a $6 5 million onetime income gain on a bargain purchase price transaction on the income statement in the other income and expense section.
While it is not our practice to callout 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.
Fourth quarter 2021, consolidated sales were a record $432 5 million compared to 2024th quarter sales of $321 1 million an increase of 35%.
The increase from acquisition related sales was $40 million, while organic growth contributed 24%.
Sales revenue decreased by $6 6 million or about 2% in the fourth quarter of 2021 due to foreign currency translation.
Yes.
Water systems sales in the U S and Canada were up about 58% compared to the fourth quarter of 2020.
In the fourth quarter of 2021 sales from businesses acquired since the fourth quarter of 2020 were $29 6 million.
Water systems sales in the U S and Canada grew 26% organically in the fourth quarter.
Sales of groundwater pumping equipment increased by about 34% sales of dewatering equipment were up about 61% and sales of other surface pumping equipment increased by 11%.
Due to strong end market demand.
While the system sales in markets outside the U S and Canada increased by about 15% overall.
Sales revenue decreased by $6 9 million or about 7% in the fourth quarter of 2021 due to foreign currency translation.
Outside the U S and Canada water systems organic sales increased by about 20% driven primarily by higher sales in Europe , the middle East and Africa markets as well as sales growth in the Asia Pacific and Latin America markets.
Water systems record operating income was $34 6 million in the fourth quarter of 2021 compared to $30 4 million in the fourth quarter of 2020.
Operating margin decreased by 200 basis points compared to the margin in the prior year quarter.
The decline in operating margins due to the dilution from water treatment at lower margins higher SG&A and variable compensation and higher inflation cost not entirely offset by price realization.
Distribution achieved record fourth quarter sales at $116 $9 million this year versus fourth quarter 2020 sales was $77 9 million in.
In the fourth quarter of 2021 sales from businesses acquired since the fourth quarter of 2020 were $8 5 million.
The distribution segment organic sales increased 39% compared to the fourth quarter of 2020.
Revenue growth was driven by broad based demand in all regions and product categories.
The.
<unk> segment operating income was a record for the fourth quarter and $5 6 million compared to the fourth quarter of 2020 operating income of zero point $5 million.
Operating income margin was four 8% of sales in distribution, primarily because of revenue growth and improved operating leverage.
Fueling system sales were a record $79 million in the fourth quarter 2021, and increased 21% versus the fourth quarter 2020, which was entirely organic growth.
Fueling systems sales in the U S and Canada increased by about 30% compared to the fourth quarter 2020.
The increase was due to higher demand for fuel management systems.
Pumping systems and piping outside.
Outside the U S and Canada fueling systems revenue.
Net sales increases of 2% in the rest of the world outside of China were offset by lower sales in China.
Fueling systems operating income in the fourth quarter was $22 2 million, a new record for any quarter compared to $18 8 million in the fourth quarter 2020, driven by higher sales.
The fourth quarter 2021, operating income margin was 28, 1% compared to 28, 7% of net sales in the prior year.
Operating income margin in the fourth quarter decreased in fueling systems, primarily.
Due to higher inflation, particularly higher freight cost.
The Companys consolidated gross profit was $145 2 million for the fourth quarter of 2021, an increase from the fourth quarter of 2020 gross profit to $111 4 million.
The gross profit as a percentage of net sales was 33, 6% in the fourth quarter of 2021 versus 34, 7% in the fourth quarter of 2020.
And was lower due in part to higher inflation cost.
We experienced significant cost inflation in materials components freight and tariffs, which were not completely offset with pricing contributed to the lower gross profit margin.
Selling general and administrative expenses were $97 7 million in the fourth quarter of 2021 compared to $76 7 million in the fourth quarter of 2020.
SG&A expenses from acquired businesses were about $10 million <unk>.
Excluding acquisitions SG&A expenses were higher by $12 million due to higher variable performance based compensation expenses and increased spending to support sales growth.
Consolidated operating income was a record $47 2 million compared to the prior year quarter at $34 4 million an increase of 37%.
Effective tax rate for 2021 was approximately 18% essentially flat with the prior year.
The tax rate for the full year 2022 is projected to be about 21%.
Yes.
We ended the fourth quarter 2021, with a cash balance of about $40 million and generated $130 million of net cash flow from operations during 2021.
Versus $212 million in 2020.
The decrease was primarily due to higher working capital requirements in support of higher revenues, including higher inventory to compensate for ongoing supply issues.
Free cash flow conversion was 65% and was below our expectations. We plan on returning to a normal level of free cash flow generation in 2020, as we believe we are well positioned to drive strong cash flow consistent with our past performance.
And as Greg mentioned earlier on January 24th the company announced a quarterly cash dividend of $19 five that.
That will be paid February 17th to shareholders of record on February three this.
This represents an 11% increase from the prior quarterly dividend.
This dividend increase will mark the 30th consecutive year that Franklin has increased its dividend.
Constraining its commitment to returning cash to shareholders and our confidence in the outlook of the business.
This concludes our prepared remarks, we will now turn the call back over to Michelle for questions.
Thank you if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
And our first question comes from the line of Mike Halloran with Baird. Your line is open. Please go ahead.
Hey, good morning, everyone.
So good morning couple of questions here on the guidance first.
Obviously really healthy guidance.
Strong growth year over year, maybe help understand two components of it one volume versus price or at least qualitatively how youre thinking about those two pieces and then secondarily. When you think about trends through the year pretty normal sequential or is there some variance in how youre thinking about that pattern through the year.
Yes.
Yes, good morning, Mike and thanks for the question.
In regard to our guidance, there's a couple of components. There first of all we have the full year acquisitions.
That were completed in 2021 built into our guidance. So that's certainly going to contribute.
So the volume component of it we expect strong demand.
Inorganic growth to continue in our base business.
Greg mentioned ongoing supply chain, and then inflation issues.
Pricing versus volume.
We're seeing inflation in the mid single to high single digit ranges. So we're certainly pricing to offset that level of inflation. So I think we're going to work.
Certainly.
But pricing into cover that and maintain our margin to the greatest extent possible.
Probably a little bit heavier on the price side, but theres strong volume growth.
Guidance that we gave overall in terms of the dynamic of the seasonality. We do expect first quarter first half to be under a little bit more pressure than the second half of the year and so we see inflation.
Probably impacted this greatest and that once again first quarter first half of the year.
And it was at a profitability.
Spots there or was that more just on the revenue line or kind of a combination of both.
On the.
The seasonality yes.
Yes, yes, the front half being more impacted in the back half comment yes.
It will impact our margins more in the first half than it will in the second half.
So that's a good bridge to the next question.
A lot of moving pieces here with the acquisitions, you've brought in with the price cost dynamics inflation timing et cetera, maybe a little directional help on how you're thinking about margins year over year by segment.
Or any kind of variances, we should think about on that side.
Yes so.
Mike I guess.
Quantitatively, we don't we don't give margin guidance by segment so.
But certainly we do see.
If you look implied in the <unk>.
And the guidance range I think if you look at the midpoint you would see that.
Generally we are planning to maintain our margins within the normal ranges that we expect for three business segments.
The lower end of the guidance, you would probably see stronger inflation than what we built into the midpoint and then vice versa on the higher end of that.
Margin guidance, but.
As you look at the as you look at the segments, we would expect them to be in the normal ranges.
Okay. Appreciate it thank you.
Thank you and our next question comes from the line of Matt Summerville with D. A Davidson your line is open.
Yes.
Thanks.
Couple of questions or follow up price cost where would you have been in the fourth quarter and then.
The price increases you're putting into place for 'twenty. Two is that more of a list price increase are there surcharges involved I guess, what I'm trying to understand how permanent or not probably these increases might be for you guys.
Yeah.
Thanks, Matt for the for the so as you look at the full year of 2021 and.
Inflation and pricing has been interesting it's been dynamic as we started out the first half of the year is slower and it seemed to accelerate as we move through the year.
As we kind of move through the quarters, we had.
Second quarter I believe we were slightly below in terms of pricing covering costs, we caught up on the third quarter on the fourth quarter. We were just slightly below on that price cost dynamic for the full year. We were ahead.
So we were able to at least maintain.
On the full year basis.
As you look at moving into 2022, and we're continuing to implement and evaluate additional pricing actions.
And I would say that everything's on the table in terms of what those might be so.
Each business is a little bit different we will see less price increases.
And many of our businesses, where it will be.
The increase in the base price of the product.
Other markets, there may be surcharges to offset specific materials components and offering and so I think it's.
Everything's on the table.
In the past you guys have talked about at least in the recent past what I can't remember if you call. It open orders or backlog, but what does that number look like coming out of the fourth quarter did it increase sequentially relative to Q3.
I guess, maybe one for Greg around.
Relative to your guide for the full year 'twenty, one what surprised so much.
Totally versus your plan for the upside in the fourth quarter.
Good.
So I'll take the latter part first.
Is that just continued strong demand.
Normally we do have some seasonality with the northern hemisphere being no more northern hemisphere weighted.
But as to continued strong demand across all three <unk>.
Segments.
And beyond really.
We're forecasting it.
We don't have a lot of visibility in this business. We are a short cycle business generally with the exception of some of our large pumping systems.
And in fueling we do talk to us a major marketers about your station build plans, but.
This is a short cycle business. So we look at current demand we talked to the people in the marketplace, but.
We're just getting a lift and all in all segments and across the globe and that's so we outperformed on the top line and have been all year relative to internal planning, which has been a struggle for us to keep up.
But we.
Continuing into 2022, and again, we're short cycle, but.
Talking with contractors in the last couple of weeks and looking at our dynamics of our backlog on some of our larger pumping systems looking at our fueling business is at this point, we don't see us slowing down for us.
And 'twenty two.
Given just kind of where the inventory levels are in the marketplace.
Jeff when you give you some more dynamics around our backlog again, it's not something that we typically talk about in the past because we typically don't have one very large one but it's gotten to be sizable and it continues to grow a little bit so Josh.
On the open.
The open order balance or backlog at the end of the year was approximately $175 million for the total company.
That's an increase of about $30 million from the prior quarter. So we did see it grow.
In the fourth quarter and at year end. So we continue to see strong demand.
Across certainly our water systems business, our fueling business and then distributions performance exceptionally well.
Got it thank you guys.
Thank you Beth Thank you Matt.
Thank you and our next question comes from the line of Ryan Connors with Boenning Scattergood. Your line is open. Please go ahead.
Great. Thanks, Thanks for taking my question.
I wanted to.
Come at the distribution business, where just from a big picture standpoint on the margins I mean, it's been tough.
To sort of pin down.
Where those margins shake out any given quarter.
Results have certainly been approved.
On a run rate over time, but still.
Still.
A lot of volatility quarter to quarter. So how do we think about.
Are we closer to where that business gets to a run rate, where it's a little easier to do.
Think about our model and where might that be.
Sure Ryan.
Because I had the history with us I'll give Jeff a break it was.
So if you go back to when we stood up distribution and we said it's going to be we said publicly we were looking at a 4% to 6% Oi range.
The business is seasonal so you may recall the first couple of years I mean, we actually lost money in Q1 and Q4.
It made much more in Q2 Q3 to make up for it.
And this year, we made money in all quarters and.
That's somewhat level maturity business I've looked at some other distribution businesses that are.
Where there is public information and how they've matured over time and saw a similar pattern, where there's a seasonality aspect to it that as the business grows and matures that you begin to while you're still just seasonality and you saw the margin changed quarter to quarter is that.
You begin to make money in Q1, and Q4 and Thats, what we expect.
Going forward so.
We feel great about 7%.
Margin for the overall for the year.
With the strength in Q2 and Q3.
And.
We also declared victory just yet is the first year of doing being above the four to six range, but.
We feel pretty confident that this business is going to continue into 'twenty, two with similar kind of dynamic and kind of a similar seasonality that you saw in Q in 2021.
Got it okay. So yeah the seasonality that's helpful.
The other one just has on fueling.
Does seem like.
We've got a few quarters now where China has been somewhat of a pretty material drag. There. So can you just give us your updated thoughts strategically I mean.
Is that something you see getting better or is there a thought to monetize that piece of it at some point I mean, what are your strategic thoughts about fueling in China.
Yes, definitely not to monetize it.
It is a piece of the business and we have a presence there we have a good brand recognition.
The business is probably at a neighborhood outlets at a run rate.
Wouldn't expect a whole lot of.
The acceleration from where it is today is in the low teens sales wise.
What we are all kind of waiting for us and.
Gilbarco in Dover, and others is for China to start moving towards in station diagnostics in a meaningful way they have approved more local systems, but that said, we haven't seen really any initiative of any substance from the government to initiate that program and it is important in a country like China.
And look there.
And a lot of calls there is a lot of challenges around pollution, but one of the easiest ways to recover.
<unk> is through vapor recovery systems at the gas station and we have a system others have systems that our systems have proven it works in China and so it's just a question of when the government does.
<unk> get more serious about that aspect of their pollution control and it's a pretty opaque.
Area to do business in China.
Don't get a lot of forward visibility when they decided to spend the money they spend it.
What we have to react so right now I chose.
Being a good business is stable and again the low teens. Unfortunately.
And we still see some upside.
Big upside if they get.
She is behind and station diagnostics.
Got it okay. Thanks for your time.
Sure. Thank you Rob Thank you Randy.
Thank you and I'm showing no further questions at this time I would like to turn the conference back over to Craig <unk> for any further remarks.
We appreciate you all joining us today and we look forward to speaking to you. After the end of the first quarter have a good week.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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