Q1 2022 Franklin Electric Co Inc Earnings Call
Good day and thank you for standing by welcome to the Franklin Electric reports first quarter 2022 sales and earnings conference call.
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Sorry zero I would now like to hand, the conference over to your Speaker today, Jeff Feeler, Chief Financial Officer. Please go ahead.
Thank you Kim and welcome everyone to Franklin Electrics first quarter 2022 earnings Conference call with me today is Gregg <unk>, our chairperson and CEO .
On today's call Gregg will review, our first quarter business highlights.
We will review, our first quarter financial results in more detail.
When we went through we will have 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 and 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 based on information currently available.
And except as required by law the company assumes no obligation.
Any forward looking statements.
And 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.
Me up right, where we left off in 2021, we again delivered record results, which included the highest consolidated net sales operating income and EPS for first quarter by segment Franklin Electrics history.
I'd like to take this moment to thank our teams across the globe for their relentless commitment to our customers ushering in another great quarter.
Demand remains high for our products across the business with considerable strength in all end markets, resulting in our manufacturing open order balance increasing materially from your end or.
Our open order balance grew from 175 million at year end to approximately $290 million at the end of the first quarter, which included an approximate $50 million increase for large dewatering pumps and water systems.
Increases in other water systems and fueling systems products.
This strong demand signal and open order balance gives us confidence in our outlook for 2022, our expectations for robust demand throughout the remainder of the year.
Furthermore, we expect to increase the throughput in our facilities to meet the normal seasonal demand increase during the second and third quarters.
Worked down our open order balance.
With healthy demand at our backs we are executing on our strategy to grow Franklin is a global provider of water fuel systems.
That being said throughout the first quarter supply chain constraints continue to impact our results.
Which our team has navigated very well despite the difficulty of predicting where and when the next issue will arise.
Although we anticipate these challenges to persist throughout the year and will likely impact different materials and geographies. Our team has adapted to the situation and demonstrated durability to remain nimble to ensure we are meeting the needs of our customers.
As we discussed on our last call. We are intentionally elevated our inventory levels in the short term to mitigate supply and logistics challenges.
It is important that in this environment, we are supporting the resiliency of the supply chain. We feel we are well positioned to meet the strong demand from our customers.
At the same time inflationary pressures have also persisted, resulting in increased material labor and freight and transportation costs.
As a result, we continued to execute our pricing strategy.
Offset these higher costs.
Funded additional pricing actions across all our businesses throughout the quarter with a focus towards maintaining the integrity of our margin profile.
However, the effects of inflation compressed our margins water system fueling systems during the first quarter as higher costs were realized before pricing actions were fully affected.
Turning to our segments.
Water systems, we experienced overall revenue growth of 38% for the first quarter, reflecting strong demand record backlog and a contribution from strong acquisition for us.
The segment also reported operating income growth of 6% and operating margins of 12, 2%.
Water systems and markets demonstrated continued strength during the quarter driven by strong commodities and crop prices.
Brian whether in the U S and other regions of the globe and increased demand for housing in rural U S. In.
In the U S groundwater pumping system revenue increased 45% during the quarter supported by strong growth in our core market.
Overall organic growth in the U S for Washington's was 29%.
Outside the U S water systems organic growth was 25% the solid demand recovery and growth in EMEA and Latin American regions.
Our fueling systems business also had a solid quarter producing overall revenue growth of 28% operating income growth of 19% and operating margins of 24, 4%.
These results reflect inflation and higher costs offsetting by pricing robust volume growth was strong pent up capital demand for infrastructure build out, which we see extending throughout the year. In addition, we.
We continue to expect a greater focus on vapor recovery management and monitoring countries outside the U S driving additional growth for our fueling business as the pandemic subsides.
We're also seeing accelerated investment in additional fueling infrastructure in India, which we expect to foster growth as projects in that region were initiated in the first quarter are expected to gain momentum throughout this year.
Our U S distribution business again delivered a strong quarter with overall revenue growth of 41% alongside operating income rose, 370% and operating margin, 7% continuing to highlight the segment's role as a growth engine.
This outstanding growth remains supported by sustained demand across the country over recent quarters.
Switching gears, let me provide a quick update on our strategic acquisitions, we announced at the end of 2021.
During the first quarter the integration of these acquisitions progressed as planned in a bolt on acquisition in our industries has been fully integrated as a reminder, that acquisition expands our presence in the southwestern U S water treatment market and our acquisition of Blake group professional groundwater distributor in northeast United States further extends our geographical footprint and in New York.
In new England regions within the distribution segment, a key catalyst for long term growth.
Overall, our recent acquisitions have performed well we're pleased with the performance and we will continually assess new opportunities as they arise.
Our capital allocation strategy remains unchanged, we will continue to invest in our company both organically and Inorganically, while at the same time, returning cash to our shareholders as evidenced in our share repurchases and dividends distributed during the quarter, we have been prudent and efficient with our approach to capital allocation. We remain focused on driving returns for our shareholders.
Touching on our outlook, although we have maintained the strong momentum built throughout 2021, we're mindful that the challenges we are facing are likely to persist at some level for the remainder of 2022. The result, we are currently not raising the guidance ranges, we established last quarter.
Before turning the call back over to Jeff I wanted to take a moment to recognize Franklin and our employees for being named to Newsweek's list of America's most responsible companies of 2022.
The work, we do with Franklin and advances our goal to expand the availability of clean water across the globe and to address safety and most total cost of ownership around fueling stations. We continue to make significant investments in research and development to increase the efficiency and sustainability of our products.
And launched a number of initiatives to eliminate waste and reduce consumption across a number of our global facilities.
I would like to thank the Franklin team for their efforts in building a sustainable future and I'm proud of all that you do.
Now I'll turn the call back over to Jeff.
Thanks Gregg.
Overall, it was a record first quarter performance for the company and our operating segments. We established new first quarter Company Records for consolidated revenue operating income and earnings per share.
Fully diluted earnings per share were a record for any first come first quarter in the company's history and 63.
In the first quarter of 2022 versus <unk> 59.
For the first quarter of 2021.
First quarter EPS before the impact of restructuring expenses was <unk> 64, compared to 2021 first quarter EPS before restructuring and 59%.
Restructuring expenses in the first quarter of 2022 or 700000 and resulted in a one cent impact on earnings per share for the first quarter of 2022.
First quarter 2022, consolidated sales were a record $451 5 million compared to 2021 first quarter sales of $333 million an increase of 36%.
The increase from acquisition related sales was $48 2 million.
Unit growth contributed 25%.
Sales revenue decreased by $13 1 million or about 4% in the first quarter of 2022 due to foreign currency translation.
Water systems sales in the U S and Canada were up about 38% compared to the first quarter 2021, due to acquisition related sales price and volume.
In the first quarter of 2022 sales from businesses acquired since the first quarter of 2021 were $32 1 million.
Water systems sales in the U S and Canada grew 29% organically in the first quarter.
Sales of groundwater pumping equipment increased by about 45% and sales of all surface pumping equipment increased by about 21% all due to strong end market demand.
Yeah.
Water systems sales in markets outside the U S and Canada increased by about 14% overall.
Sales revenue decreased by $12 4 million or approximately 13% in the first quarter of 2022 due to foreign currency translation.
Outside the U S and Canada water systems organic sales increased by about 25%.
Given primarily by higher sales in Latin America, Europe , the Middle East and Africa markets, partially offset by lower sales in the Asia Pacific market.
Water systems record operating income was $33 2 million in the first quarter 2022, compared to $31 3 million in the first quarter 2021, while operating margin decreased by 360 basis points compared to the prior year quarter.
The decline in operating margin was due to inflationary pressures and supply chain challenges, which the company continues to work to offset with pricing and to some degree and unfavorable product mix in the quarter.
Distribution achieved record first quarter sales and $134 9 million this year versus first quarter 2021 sales of $95 7 million.
In the first quarter of 2022.
Sales from businesses acquired since the first quarter of 2021 were $14 3 million the.
The distribution segment organic sales increased 26% compared to the first quarter of 2021.
Revenue growth was primarily price driven on continued strong demand in all regions and product categories.
The distribution segment operating income was a record for the first quarter at $9 4 million compared to the first quarter of 2021 operating income of $2 million.
Operating income margin was 7% of sales and distribution, primarily because of revenue growth and improved operating leverage.
Fueling systems sales were a record of $72 5 million in the first quarter of 2022 and increased 28% versus the first quarter of 2021.
Sales revenue decreased by 700000 or approximately 1% in the first quarter of 2022 due to foreign currency translation.
Fueling system sales in the U S and Canada increased by about 33% compared to the first quarter 2021.
The increase was broad based across virtually all product lines.
Beside the U S and Canada fueling systems revenues increased by about 2% and.
Sales increases of 4% and the rest of the world outside of China were offset by lower sales in China.
Fueling systems operating income in the first quarter was $17 7 million, a new first quarter record compared to $14 9 million in the first quarter 2021, driven by higher sales.
First quarter 2022 operating income margin was 24, 4% compared to 26, 2% of net sales in the prior year.
Operating income margin in the first quarter decreased in fueling systems, primarily due to inflationary pressures and supply chain challenges, which the company continues to work to offset with pricing and to some degree and unfavorable product mix.
The company's consolidated gross profit was $145 3 million for the first quarter of 2022, an increase from the first quarter 2021 gross profit.
$115 five nine.
The gross profit as a percentage of net sales was 32, 2% in the first quarter of 2022 versus.
Versus 34, 7% in the first quarter 2021.
We experienced significant cost inflation in materials components labor freight and tariffs.
But you're all which we are all recovering with pricing, but not fully maintaining our historical margins.
We expect further price improvement versus cost going forward as we work down and open order balance.
Fast price actions become fully effective.
Selling general and administrative or SG&A expenses were $104 7 million in the first quarter of 2022.
Compared to $81 6 million in the first quarter 2021.
SG&A expenses from acquired businesses were about $12 4 million.
Excluding acquisitions SG&A expenses were higher by $10 7 million or about 10% due to higher variable performance based compensation expenses and increased spending to support sales growth.
Although SG&A expense in dollars as higher SG&A as a percent of sales is lower by 130 basis points for the company overall.
All business segments are lower as well.
The effective tax rate for the first quarter 2022 was about 20%.
Before the impact of discrete events was about 21%.
The effective tax rate for the first quarter of 2021 was about 14% and before the impact of discrete events was about 20%.
The increase in the effective tax rate was primarily a result of higher net favorable discrete events recorded in the first quarter 2021.
The effective tax rate for the full year 2022 is projected to be about 21% before the impact of discrete events.
Yesterday, the company announced a quarterly cash dividend of $19 five that will be paid.
Shareholders on May 19th.
A record on May five.
The company purchased approximately 180 187000 shares of its common stock in the open market for about $15 6 million during the first quarter 2022.
At the end of the first quarter of 2022. The total remaining authorized shares that may be repurchased is roughly 544000.
This concludes our prepared remarks, and we'll now turn the call back over to Kim for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
The standby, while we compile the Q&A.
Our first question comes from the line of Mike Halloran from Baird. Your line is now open.
Hey, good morning, gentlemen.
Maybe first just on the demand side of things Gregg just to give us a little bit more detail on how you're thinking about the end markets as we move forward probably most most interested in the residential U S landscape and then the egg cumulative land landscape.
Sure Mike.
Yes.
We just continue to see strong demand and pent up our contractors, having a lot of work in front of them.
Anecdotally I was at a couple of contractor trips and.
In February and where you'd think about contractors, maybe having work out to four weeks, maybe a little bit longer six to eight weeks, maybe some bigger contractors I talked to one and obviously I'm talking to some of the larger contractors that is already booked throughout the entire 2022 and that was back in February .
And recent update from art.
Our distribution distribution, our headwater leaders.
We're seeing again strong backlogs of demand for contractors.
Throughout the country.
That's going to be promoted by some.
Some of the housing moves both just increase in housing construction as well as more rural housing construction.
Favorable weather conditions.
And to your point about AG side again with higher AG prices. It allows contract allows farmers to cash flow pivots, we'll invest in that.
Using their pumps more frequently.
That also you'll drive replacement demand because we have this large replacement market.
That's just and again the U S market is our largest one but we're seeing that demand lift.
More broadly across the globe and again because of the strong Doc drive on commodity prices and then that gets in the mining.
So that's also lifting some of the demand for our larger products.
Thanks for that and then.
You know the water margins, obviously spent a lot of it's been enough time in the prepared remarks talking about the.
Timing pressure from inflation, there so as you're thinking about the guidance and on a forward basis and those water margins. Obviously, you had elevated dewatering.
Orders, which probably rollout this year, which maybe hurt the mix a little bit going forward, but how do you look to capture.
<unk> and the timing of that rolling through and kind of the margin range, we should be thinking about it on the water system side.
Yeah. Good morning, Mike This is Jeff.
I think you hit on some of the key points there as we you know as.
As we think about the guidance.
On a go forward basis.
First quarter was generally in line there.
You know as we see.
On a go forward basis, I would say our pricing is as you know.
Generally a couple of months behind due to the backlog and that backlog flows through then it'll pick up the price actions that we've that we took in either late Q4 early Q1. So we do expect to recover some margin over the next two quarters I would say one to two quarters.
And then along the lines that we are seeing some pressure on the mix in.
And the water systems business, obviously, having strong demand in the in dewatering.
<unk> is a big piece of that as you've commented we.
We expect that will continue as we fulfill our app.
Log that we have in that product line.
So on the fueling side, we're seeing some mix flow through and it's generally on.
The electronic components, where we're continuing to see.
Inflationary pressure in supply chain challenges so.
The area of controls and drives and some fuel management system.
We're seeing some mix effect from that product line being down year over year and that.
As that recovers and we'll benefit from that on a go forward basis, but it's probably going to be later in the year before we see significant recovery there.
Really appreciate it thank you.
You're welcome.
Our next question comes from the line of Matt Summerville from D.
Your line is now open.
Thanks I was.
Was wondering if you guys could comment on how much price you realized in Q1 and how much price you expect to realize for the full year 2022.
Yes, Thanks, Matt and good morning.
So in terms of.
Q1, I think that's probably the easier part of your question in terms of how much price, we realize and I would say across the company.
Were in be.
You know in the double digit range in the 18% to 25% range overall.
On a year over year basis.
We have pricing actions that we've taken in the first quarter the apparent up become fully effective at this point in time.
<unk> the company in the first quarter, we've announced generally between.
Yeah, I would say five and about 20% increases depending on.
The region the location the product line between water and fueling.
Some areas or need to catch up a little more than other areas. So that's the general range, but generally.
First quarter increases are in the low double digit range.
We will continue to monitor additional price actions that we need to take.
We evaluate inflation going forward.
We do expect to take additional price actions in the second quarter. Some of those have already taken place.
As for our forecast on the full year I think it's just going to be dependent upon where.
Prices go for materials components, right supplies, and thinking and such and so.
But it should be strong double digit range by the end of the year.
Yeah, those are big numbers.
When you think about that open order balance.
Quickly are you fully turning that balance because I would imagine there are some things that come into that ship immediately so I'm curious as to how quick you're turning it in the context of how much unabsorbed inflation is sitting in that.
Unfilled backlog at any given point in time.
Well I would say in terms of turning the inventory our goal is to turn that inventory as quickly as possible, but from the fourth quarter to the first quarter, our open order balance increased.
Sequentially. So we have a lot of work to do there.
<unk>.
You know the 290 million open order balance.
<unk> commented 50, 50 ish million of that is for large dewatering pumps.
So you have about.
$240 million over the remainder.
It's hard to say exactly how quickly we're going to we're going to turn that it's going to be dependent upon.
How quickly supply chains can recover in the key components that are constraining us at this point in time.
<unk> become available.
But I think generally you know we're a couple of months behind on the pricing lag versus when we're seeing costs come through.
And the driver of that is the open order balance.
When you think about what you've observed.
Since the end of the year and supply chain.
Is your sense that things are getting worse sort of the same and I guess I want a little bit of context around that.
These lockdowns that have been happening across parts of China, if you've seen a discernible change in your supply chain environment as a result of that.
Yes, so that.
But.
What we're seeing is that what I would say is that I think things bottomed in let's call. It August of 'twenty one.
We've seen modest improvements.
That is part of why we were able to.
We have substantial increase in inventory.
Now, we get a hold of product we've been bringing it in unfortunately, when you have a.
You are building a product and you have 100 components Yulia <unk> 99 of them in stock then that's the one that's missing is the challenges. So that's the one that everyone's chasing.
So again, I'd say that we're seeing modest improvement in supply chain from the bottom of last summer.
In the quarter.
I would say that we had more challenge of rent and we had some challenges around labor availability as <unk>.
Underground went through facilities.
Including our U S, Mexico and other parts of the globe.
Restrictions got tighter in Europe during the first quarter, particularly the first half of the first quarter.
That seems to be behind us now.
Now as you pointed out China has gone through their challenges has been focused on Shanghai, you may recall, our facility in Suzhou as a couple of hours out of Shanghai and currently hasnt been affected in a material way and our suppliers continue to come out of China.
Regular basis supporting our factories here so the Shanghai incident has not impacted our production.
Or our supply chain in a material way, but want to see if this rolls through other parts of China.
They change that answer.
Got it thank you Gregg Thanks, Kevin.
Sure.
Our next question comes from the line of Walter Liptak from Seaport Global Your line is now open.
Hi, Thanks, Good morning, guys.
Good morning.
Wanted to ask about the dewatering business and.
The application that's going into.
And if if you think this was sort of a one time increase or are we at the beginning of staying more dewatering orders.
And Walter again most of that.
Increases for lease rental.
So they're going to it's going to go into the suites of various equipment rental companies.
And we're seeing that in the U S and Canada and we're also beginning to see some interest.
Growing interest in the European market as well.
Oftentimes those rental pumps are going into.
Oil and gas.
Applications, particularly bringing water to the well site for fracking, we don't make pumps for fracking, but getting water to the well site. So to the degree that natural gas pricing is up is generally good for us the degree that well.
And is up is showing good for that business, but they're also used in a number of other applications as the pioneer brand is getting stronger recognition and municipal bypass construction dewatering.
And then also in mining so we just see that again.
The buoyant economy.
The investment in infrastructure higher commodity prices is generally good for that business, but it is a it is a business that does ebb and flow.
More with the again, it's a capital more capital intensive business. So it does have more ebbs and flows and say the residential replacement market for water pumps, which as you know.
Much.
Much more predictable.
<unk> and our in sales.
Okay, great. Thank you that helps.
In the distribution segment.
I Wonder if with the recent rise in U S mortgage rates.
Or for whatever reason, if he saw any sensitivity to that.
Just like in the most recent weeks for residential products.
Alright, and I guess I'll answer it.
Oh, that's flowing them happening okay.
No no.
I mean to cut you off there so.
Yeah. The the distribution business is probably not probably it is our best leading indicator for the U S groundwater business because its interfacing directly with the contractors are installing the product.
So when you look at it.
Rising rates.
For new construction also for replacement business, that's tied to the impacted near term because.
Large amount of our contract of work is as replacement product, but for drilling of new wells as I pointed out earlier, you manage contractors are out weeks and months and commitments. So we expect that you know those are for committed for homes that have already been permitted brought in older homes that have already been financed and so to the degree that there.
There is a slowdown in rural housing.
Mindful that there may be a slowdown in housing and urban areas, but there is a split out of rural housing we might see that we will see that effect out months from now, but again, because we have such a large replacement component.
The contract mix is also towards.
We have a large portion of our sales are in AG and in other applications. Besides rosy.
We're not expecting a significant impact that stream, but at least we will have a florida indication with our distribution business.
Okay great.
And then the last one just a follow on on the pricing.
You indicated some of the pricing measures that you've taken to offset inflation had been.
Pretty significant.
Hi.
So I wonder how your customers are doing with.
With the pricing as everybody kind of in the same boat and accepting.
The price increase is pretty rapidly are they is there any kind of pushback to it yet.
Yeah, right now and keep in mind some of these higher numbers that Jeff put out we saw some commodity straight through distribution will sell steel pipe classified.
Bought on a spot basis sold on a spot basis.
As cable wire cable and so on so there's something there is.
Passing through the increase in.
Right now everyone is focused on availability.
And so we're seeing a little.
Pushback on pricing because.
It's well documented that the inflation is out there you can pick up the paper and read about it.
And contractors and customers across the globe, we're looking for availability of product.
So that's the Paramount issue over price today.
Okay, Great alright, thank you.
Our next question comes from the line of Chris Mcginnis from Sidoti. Your line is now open.
Hi, good morning, Thanks for taking my questions nice quarter I, just wonder if you can comment on expectation for cash flow per year, given the investment in inventory in Q1. Thanks.
Yes, good morning, Chris.
Glad you are able to get through this quarter, sorry, we had an issue last quarter, but.
It's <unk>.
The connect today in terms of cash flow for the full year, we do have a significant investment that we've made in inventory currently so we're carrying.
Higher level of inventory than we normally would.
The good news is as our turns are still remain and generally in check there. So we're not.
Totally out of line with the inventory that we have.
We do expect by the end of the year that we'll be able to turnover.
That inventory and recover that.
Net working capital, which will be a favorable impact on our free cash flow for the year.
I would say at this point in time our.
Our goal for for free cash flow and free cash flow conversion, which would still be at 100% free cash flow conversion and that is.
Honestly highly dependent on the ability to turnover portion of that inventory and recover by the end of the year.
But thats still the target that we're shooting for and our expectation going forward.
Okay I appreciate that and then just maybe just to comment maybe on the outlook for M&A, just kind of given the.
I guess to talk earlier around how well the integration has gone in the recent months. Thanks.
Third we continue to look at opportunities there.
As a number of <unk> that we get to look at.
And when it makes sense, we'll move forward.
The pricing and the strategy of strategic fit makes sense. So we're going to continue to look at M&A, but we.
We don't typically pay chase deals.
And many of the deals we do are with.
Private.
The project companies held by families and where and when they decide to sell is really up to them.
Maintain close contact and little bit of the.
The phone and give us a call.
Okay I appreciate it thanks again for taking my questions and good luck in Q2.
Thank you. Thank you.
There are no further questions at this time I will now turn the call back to Greg.
We thank you for joining us this morning for our conference call and look forward to speaking to you after the next quarter end.
Have a great week.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Okay.
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Sure.