Q1 2023 Franklin Electric Co. Inc. Earnings Call
Okay.
Good day and welcome to the Franklin Electric reports first quarter 2023 sales and earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session you will need.
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It is now my pleasure to introduce vice President of Finance and Investor Relations Sandy stats there.
Thank you Andrea and welcome everyone to Franklin Electrics first quarter 2023 earnings Conference call with me today is greatest in stack, our chairperson and Chief Executive Officer.
And just tailor, our vice President and Chief Financial Officer.
On today's call Grateful hard to you our first quarter business highlights and Jeff will provide additional details on our financial performance. We will then take questions before we begin let me Mike let.
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 1995. These statements are subject to various risks and uncertainties many of which can be cost.
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 today's 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 Greg Stemm thick.
Thank you Sandy and thank you all for joining us with Franklin team delivered a strong start to the year and solid results by achieving first quarter records for sales operating income and earnings per share.
Global demand for manufactured products and distribution offerings remains healthy.
All three of our segments delivered higher topline sales driven by elevated demand across many of our end markets.
Increased volume in our water distribution businesses and pricing all more than offsetting foreign exchange headwinds.
We do however, expect a year over year impact of pricing will moderate as we progress throughout the year.
Further we continue to see sequential improvements in our supply chain.
Giving us greater predictability and enabling us to increased shipments.
All of our open order balance remains elevated at approximately $230 million and pass through a portion of this backlog is the reduced $60 million.
Peaks in the summer of 2022.
Our record first quarter performance benefited from operating leverage inherent in our business that drove enhanced operating margins for the quarter on a consolidated basis.
Inventory for the quarter is up sequentially in line with normal seasonal patterns, but still higher than we'd like your.
We are focused on reducing inventory over the course of the year by increasing shipments continuing backlog conversion as well as decreasing safety stock to more normal levels.
Turning to our segments water systems delivered record first quarter sales and operating income with revenues growing 12% and operating income increasing 48% driven by significantly higher volumes and large dewatering pumps as well as steady demand for groundwater and surface pumping equipment.
Large dewatering pump sales volumes and supply chain stability drove favorable operating leverage results in a 380 basis point improvement in operating margin to 16% for the quarter.
Julian system. Similarly delivered record first quarter sales and operating income with revenue up slightly year over year on top of the 28% year over year revenue increase realized in Q1 last year.
Operating income grew 18% driven by strong end market demand in most of our key markets, including the U S Latin America and India.
Julian Systems' first quarter operating margin came in at 28, 6%.
Increase of 420 basis points compared to the prior year period, despite ongoing supply chain headwinds related to the availability of chips and other components.
Looking ahead, we do not anticipate any major changes to the planned investments of major fueling marketers in the U S. We expect the business to continue to grow across product lines in the Indian market.
Although distribution delivered record first quarter sales segment was impacted by unfavorable weather across many parts of United States.
A latest startup contractor installations commodity prices declining and some order patterns being reset to correspond to improve supply situations and shorter lead times.
Sales increased 6% from prior year, despite increased headwinds to the business.
Operating income decreased about 50% due to a significant decline in the price of certain commodity based products.
Operating margin of three 3%, which is 370 basis points lower than last year was similarly impacted by those commodity based products and higher operating expenses. This business continue to invest in growth you had a six new branch locations announced in fiscal 2022.
Even with the cost of these investments we are encouraged that the operating margin for distribution increased sequentially 140 basis points from Q4 2022 on seasonally lower sales.
Our sales team has line of sight to our contractor customers project pipelines and as a result, we feel confident that we will see improving performance in sales and margin as the weather improves and we enter the groundwater drilling season.
We remain committed to a balanced capital allocation strategy, we continue to make internal investments focused on bringing additional production in house and enhancing the integrity of our supply chain.
We're also actively monitoring the M&A markets are well positioned to take advantage of our opportunities as they present themselves.
Finally, we remain committed to returning capital to our shareholders through regular dividends and opportunistic share repurchases.
Looking ahead to the remainder of this year, we are mindful of the continued macroeconomic and geopolitical pressures, we may have to contend with.
However, given the results in the first quarter, we are increasing our full year 2000 22023 sales guidance.
And be in the range of $2, one 5 billion and $2 two $5 billion and raising our EPS guidance to between $4 25, and $4 45.
Before turning the call back over to Jeff I would like to take a moment to recognize Franklin electric and our employees for being named in Newsweek's 2023 list of America's most trustworthy companies for the second 278 consecutive year.
The work that we do is essential to People's lives advances global access to clean water and improves the safety and availability of fuel worldwide.
I'm also proud of the culture of this management team is steward, one that balances focus across efficiency sustainability and reliability with the wellbeing of our employees.
Encourage you to explore our 2023 sustainability report when it was made available in approximately a week.
For an update on the progress you've made what we still we're still working to achieve.
I will now turn the call back over to Jeff.
Thank you, Greg and good morning, everyone.
Overall, it was a record first quarter for Franklin electric.
We established new first quarter records for consolidated sales gross profit operating income and earnings per share.
Our fully diluted earnings per share were <unk> 79 for the first quarter 2023.
Versus 63 for the first quarter 2022.
First quarter 2023, consolidated sales were a record $484 6 million a year over year increase of 7%, even with a 3% headwind due to foreign currency translation.
Water systems sales in the U S and Canada were up 21% compared to the first quarter of 2022 due to price and volume.
Foreign currency translation decreased sales by 1%.
The sales growth in the U S and Canada was led by sales of large dewatering equipment, which increased 144% say.
Sales of groundwater pumping equipment increased 6% and sales of all other surface pumping equipment increased 7% versus the first quarter 2022 due to strong end market demand.
Water systems sales in markets outside the U S and Canada were flat overall.
Foreign currency translation decreased sales 12%.
Outside the U S and Canada, excluding the impact of foreign currency translation sales increases in EMEA and Latin America more than offset sales declines in the Asia Pacific markets.
Water systems operating income was $49 million in the first quarter 2023.
$15 8 million or 48% versus the first quarter of 2022.
Operating income margin was 16% a year over year increase of 380 basis points. The increase in operating income was primarily due to higher sales.
Operating income margin improved due to fixed cost leverage from higher sales price realizations and cost management.
Overcoming weather related headwinds during the quarter distributions first quarter sales were a record $143 million versus the first quarter of 2022 sales, but $134 9 million a 6% increase.
The distribution segment's operating income was $44 7 million for the first quarter a year over year decrease of $4 7 million.
Operating income margin was three 3% of sales in the first quarter 2023 versus 7% in the prior year.
The distribution segment income was negatively impacted by weather.
Income was also negatively impacted by margin compression from lower pricing on commodity based products sold through the vessels.
Fueling systems sales for a first quarter record of $72 7 million in 2023.
Foreign currency translation decreased sales by 1% for the quarter.
Fueling systems sales in the U S and Canada increased 4% compared to the first quarter of 2022 with strong sales and fuel management and pumping systems.
Outside the U S and Canada fueling systems revenues decreased 10% due primarily to the divestiture of a small above ground storage tank business in 2022 and lower sales in China.
Fueling systems operating income was $20 8 million, a first quarter record driven by favorable product and geographic mix of net sales compared to $17 7 million in the first quarter 2022.
The first quarter 2023 operating income margin was 28, 6% compared.
Compared to 24, 4% of net sales in the prior year.
Operating income margin increased primarily due to price realizations and a favorable product and geographic sales mix.
Franklin Electric's consolidated gross profit was $162 3 million for the first quarter of 2020 through a 12% year over year increase.
The gross profit as a percent of net sales was 33, 5% in the first quarter.
Versus 32, 2% in the prior year.
The gross profit increase on a dollar basis was primarily due to higher sales.
In the first quarter 2023, gross profit margin was up 130 basis points due to price realization cost management and operating leverage on higher sales.
Selling general and administrative or SG&A expense was $109 9 million in the first quarter of 2023 compared to $104 7 million in the first quarter 2020 carriers.
The increase in SG&A expense was largely due to higher spending in marketing selling and engineering to support higher sales growth.
SG&A cost as a percent of net sales decreased to 22, 6% in the first quarter of 2023 from 23, 2% in the first quarter 2020 states.
Consolidated operating income was $52 6 million in the first quarter 2023 up $12 7 million or 32% from $39 9 million in the first quarter 2022.
Despite an unfavorable foreign exchange translation headwind of approximately $3 million.
The increase in operating income is primarily due to higher sales.
The first quarter 2023 operating income margin was 10, 9% versus eight 8% of net sales in the first quarter 2022 <unk>.
The increase in operating margin was primarily due to leverage on higher sales volumes and SG&A spending.
Other non operating expenses were higher in the first quarter 2023 compared to the prior year.
First interest expense was higher due to higher average debt outstanding and higher interest rates.
Foreign exchange losses were higher primarily due to the stronger U S dollar and our operations outside the U S, particularly in Turkey and Argentina.
The effective tax rate was 21% for the quarter compared to 20% in the prior year quarter.
Yeah.
The company purchased approximately 162000 shares of its common stock in the open market for about $14 1 million during the first quarter 2023 at.
At the end of the first quarter the remaining share repurchase authorization is approximately $1 1 million shares, including the recent increase to our stock repurchase program.
Last week, the company announced a quarterly cash dividend of $22 five.
That will be paid on may 18th to shareholders of record as of May four.
This concludes our prepared remarks, we will turn the call over to Andrew for your questions.
Thank you as a reminder to ask a question you will need to press star one one on your telephone.
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Please.
Our first question comes from the line of Bryan Blair with Oppenheimer.
Thank you and good morning, everyone.
Right.
Good morning, it doesn't it doesn't sound like there is there is.
Much to call out here is anything but I'm.
I'm wondering if you if you would note any any real changes in macro assumptions channel inventory and any other critical factors.
Relative to a few months ago, and then if there is anything to call out there how that influences any any kind of pivot in strategy your positioning for the remainder of the year.
Brian This is Jeff I don't see any real shifts in our view there from a macro economic perspective.
Overall as we look at 2023.
Our view is pretty consistent with where it was just one quarter ago when we.
<unk> initiated our guidance for the year.
And obviously, we've reflected the strong first quarter performance and our updated guidance, but.
As we look at the remainder of the year I think our view is pretty consistent.
Okay understood.
Hi, I was wondering if we could drill.
Drill down on the water treatment results in Q1, you had called out a little bit of caution there at least over the near term given more new resi exposure and intend macro sensitivity.
The business just wondering how that first quarter shook out what youre seeing in order patterns into the early part of Q2.
What sales expectations are for the full year.
Yes, Brian this is Greg.
The back half of last year when rates started to rise new housing permits start to fall off we saw the business demand fall off some.
It looks like Thats pretty much behind us I would say that as we are.
Entering Q2 that there is a sense of what you see in.
Thats the business now is moving forward with and we will be growing.
And that's our expectations for the balance of the year.
Okay good to hear.
Sticking with water treatment.
Is the outlook still for.
Margin expansion.
You've owned the assets for for a while so integration with the heavy lifting.
It is behind you you've called out here on that front.
I'm just wondering if you can speak to run rate profitability and how your team is thinking about operating leverage going forward.
Yes, Brian when we when we first.
But that business together through multiple acquisitions the business was running at margins.
Slightly less than the water systems segment average error in the high single digits. When we initially started in over the last year year and a half.
Now those margins up to low low double digits low teens.
About 10% operating margin.
I think as we move forward our expectation is that we will continue to.
Rather those margins, having said that we will invest in the business.
We're looking for expansion of our footprint, there as well as development of new products and so that will put a little bit of pressure on the operating margins, but we do expect it to stay in that in that low double digit range I believe for the year as we as we go through this growth we expect.
Okay.
Understood I appreciate the detail thanks again.
Thank you Brian .
Thank you.
When it comes from the line of Matt Summerville with D. A Davidson.
Okay.
Thanks, Greg I was wondering if you could put a little more commentary and color around the weather impact that you experienced in Q1, maybe adding a geographic overlay to an extent did that impact the manufacturing business or just distribution and as we're sitting here.
One month into the second quarter is your sense that that picture is getting better for Franklin electric.
Matt Good morning, and answer your first question is yes, both manufacturing and distribution distribution, probably took a more on the churn.
Just from the standpoint that yes.
Contractors were able to get into the field.
We saw a delay this year in a slowdown because if you compare to first quarter last year, which was dry warm.
This year, it's been wet cold weather.
The other challenge.
The weather should obviously come across the western United States and in the northern parts of the United States.
And so it's.
Minor.
We are a seasonal business.
If we are seeing it improve.
We're talking about this just earlier this week.
Davis, who runs our.
Our headwater distribution company was talking about how contractors getting out the key order inflows.
Order demand picking up so.
Patients seasons getting underway.
That's certainly a positive for us.
And then manufacturing side again.
Likely to put a little bit dampening impact on the from our other distributors.
Restocking.
But overall the biggest impact was on was on distribution.
And then cliff.
As a follow up with respect to pricing maybe can you talk about.
Year over year realizations in the first quarter on where you see that moderating valley team.
We move throughout 2003, and I would just I would assume that's just a function of when we put in price increases in last year and the absolute price isn't coming down per se, but the magnitude of incremental realization of decelerating do I have that correct.
Yes, good morning, Matt This is Jeff.
We have seen year over year pricing in the first quarter I would say generally in the mid single digit range too.
No.
We have locations, where it's it's approaching high single digits.
Those are before the impact of FX. When you include foreign exchange there it really really puts us in that mid single digit range, just like high single digit range on that.
<unk> seen there.
As we go through the year, we're going to we're going to again.
Going to lap a lot of those price increases that we did last year and so that'll that'll moderate the year over year price impact that we see but we continue to see it to be positive and we expect it to be kind of low to mid single digits.
Get to the back half of the year.
Got it and then just maybe one final question.
Can you guys comment on what Youre seeing from an M&A standpoint, specifically as it pertains to the Buildout you've been doing in water treatment, you've been pretty quiet on that front since the end of 2021.
Remember correctly.
Yes.
Challenge you have in the M&A environment inventory get us from other companies you cover us.
Price expectations from sellers and buyers like us are willing to pay as.
As you can imagine from middle of last year, when everything was getting so pretty hard to know.
Yes.
Separation.
And we would need to be a readjustment of expectations of sellers.
As you get deals done as interest rates have risen.
And as general macro environment has been a little bit more on steady or at least people's concern about that study.
We're interested we're active we have the <unk>.
Capital to do it.
But it also has to be.
Willing seller as well so we'll continue to look through opportunities. We continue to believe there are opportunities out there and continue to talk to people.
I suspect that we will be able to continue our acquisitions or treatment and elsewhere.
Certainly looking at expanding our water.
Hum.
All product lines and also looking at acquisitions.
We're looking at a critical asset monitoring equipment. So we will continue to look but serve you well.
But I think because of private sellers may resume a little bit of a gap in expectations going on right now.
Got it thank you guys.
Thank you.
Yes.
Thank you.
Our next question comes from the line of Mike Halloran with Baird.
Hey, good morning, everyone.
So.
So can we start on the water system margins.
Really strong, particularly for our first quarter call.
Commentary about.
Strength in dewatering and some of the mix side of things feels like.
That makes it might've been a headwind for you. So it makes those margins maybe look even better maybe talk through some of the puts and takes on that side what drove the strength and also.
As we think about the remainder of the year is there anything that in that number that we can't just kind of build the normal seasonal margin progression.
Yes, good morning, Mike This is Jeff.
I'd say a couple of comments about water systems margins obviously.
Strong sales in the in the business.
And we get.
Nice flow through of leverage when we have <unk>.
<unk> sales.
Despite having high sales of large dewatering equipment, which we typically say.
On the low end of water systems margins when when sales are as strong as they are that drives strong operating leverage through through the business for us. So that's certainly a piece of it.
Had nice sales in the groundwater and other surface pumping equipment. So.
<unk> contribute and are accretive to the overall margin pattern, we've had nice pricing on a year over year basis.
And the water systems business and so that's.
And that's been favorable overall.
I would say that as we move through the back half of the year, we continue to expect water systems margins.
Strong must be in the normal range that we expect and we've said for a while that our systems margins are expected to be in that 15% to 17% range.
The other thing I would point out in terms of the year over year improvement. There I think it was 380 basis points as last year's operating margin was very low for us and so.
We're comparing to a very low number from where we were last year.
The operating margin in the 12 to 12, 5% range. So.
It was a pretty easy comp when you when you look at it from that perspective as well.
Yes, it's true, but also very very strong for you from a first quarter perspective so.
If you think about the demand perspective on the water system side, maybe some of the more traditional <unk> products on the on the submersible pumps surface pumps, maybe talk about what youre seeing from an underlying trend perspective on that side.
It sounds like channel inventories in a reasonable spot.
But we'd like to understand how you think about cadence from here what kind of visibility backlog gives you any kind of nuance.
Yeah, Mike so.
Our.
Past due is getting better its still not zero. So we have some work to do there so that will be.
Some.
A bit of a tailwind.
Because of our visibility in the U S groundwater business through our headwater distribution company again out the door sales for them looks good and is picking up as it would seasonally and contractors from talking.
Talking to our headwater team, we've got plenty to do and so we see a good year there in the us with commodity prices up in metal prices up we expect that.
Deep water groundwater, Andy watering pumps will be good kind of across the globe and industrial and mining applications.
Yes.
The surface pump business.
Somewhat supply constrained more last year than may.
Maybe our other businesses so to your point about channel inventory has been I think fairly soon.
As our supply chain continues to improve I think that business should do well the balance of the year. The RG watering pumps that mentioned.
Just a couple of seconds ago.
Again, we're seeing robust demand and we're not you may recall back in the middle of last decade, when oil prices collapsed, we took on the churn in our pioneer product line, but now.
When we were probably two thirds exposed to oil and gas reward.
Seven eight years ago now it's flip flopped. So we're much more exposed to municipal industrial and there's pretty good capital flowing into that.
The government.
Yes.
Inflation relief Act and so on so we're seeing that to be good and then also in United States.
I think European through them.
Year end and the winter a little better than I think people were expecting.
On the margin we're seeing.
<unk> flowing back into Egypt, which is a small market is important for us and it's showing that cash is moving a little bit better.
Latin America is certainly went through a shock with a couple of changes of government in particular, Brazil seems to be settling down now and we would expect.
Those markets to return.
Southern Africa is good we haven't tagged a little bit of southeast Asia.
I think there has been a little bit of share loss on.
On availability and also.
With the economy being tough people move into maybe some more product coming out of China, but as his availability improves.
We will recover some of the share loss in southeast Asia. So thats generally kind of the view on the water business across the globe and unless I missed something for you.
So that was great. Thanks, Greg Thanks, Jeff.
Thank you thank you Mike.
Thank you.
And our next question comes from the line of Ryan Connors with Northcoast research.
Great. Good morning, Thanks for taking my question sure.
Yes, so I wanted to actually talk about distribution for a moment.
You called out a couple of times in the release and on the call here.
Commodity based products kind of.
Bigger in the mix and that hurting the margin can you give any more granularity on what exactly that is in terms of what types of product lines.
Sure So Brian .
<unk> pass through product for distribution in this end market as pipe. This is Bo.
<unk>.
Plastic pipe fiberglass and that is also <unk>.
Steel pipe.
And that's one that.
Goes through this channel and it is one that has a lot of price volatility to it.
It had big availability challenges.
So where contractors are loading up last year in distribution was able to get price, we only get price on that now.
Now it is just the opposite has happened so now.
The supply chain is a true IP available most commodity prices are coming down.
And so that gives us if you are holding inventory to get margin compression and inventory that would be separate from say.
The non commodity price was redefined would be motors pumps.
Tanks filtration equipment.
That type of value add product distribution delivered so.
It is interesting and quickly rising inflationary environments distributions does well not just Franklin those distribution and.
And manufacturing probably suffers a bit and then as you see price stabilization.
Fly improve manufacturing business, they're a little bit.
Typically on distribution gets.
Squeezed on margin for until it kind of works its way through the system.
Yes.
Backer of this distribution segment.
No that's very clear thanks for that.
And then I wanted to ask a quick one on fueling.
The U S. Canada strength was it that come as a positive surprise, what where is that coming from is that still sort of these.
The convenience store build outs with some of the suburban development or is that.
Refitting of existing equipment or what exactly is driving that North America U S, Canada strength and fueling.
Brian The short answer is yes.
The longer answer is a couple of things.
One is that.
Back up 25 years ago.
And there were the initiatives replace all the underground tanks as the vast majority of underground tanks in the United States through EPA mandate to double wall construction.
So there was a massive upgrade across the U S and 90 1990 790 899.
Trickle into 2000.
So all of that from his 25 years old and amortization lives.
95, 2030 years, we've kind of got to do something with the station youre going to do some level of upgrade.
Stationary you're potentially going to to your point youre going to close the station to rebuild a new station as populations move during that 2500. So that's kind of a business that going on I think in the background or.
The other thing is is that <unk>.
Station ownership has changed over the last couple of decades.
It used to be you would say that majority of stations and the ice.
It's you can more that I can see about United States, maybe not so much by Canada.
Were owned by single store.
Our operators have operated 123 stores something like that.
Those stations are now being bought up by major.
Marketers and those locations are being bought for those people are closing those single store operations are being closed as I pointed out just from an aged and new stores have been replacing him nearby by these major markets.
<unk> many of them are several of them are publicly traded.
There is private equity coming in here because of the real estate play and so what Youre seeing is.
Estimate in this industry because of the returns.
And that's I think driving kind of a secular growth in the market.
And we are also working hard to gain share on product lines that we've developed for this market over the years.
And we have a good reputation in this market. So I think that's helping us as well so it's just a.
It's a good market to be good returns on capital.
<unk> available and people are investing.
Got it thanks for your time.
Alright, thank you.
Thank you I would now like to hand, the call back over to CEO , Greg <unk> for any closing remarks. Thank.
Thank you Andrew we appreciate you all listening.
And on our call today, we look forward to speaking to you in July after our second quarter results release every two week.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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