Q3 2023 Franklin Electric Co Inc Earnings Call

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Good day and welcome to the Franklin Electric reports third quarter, 2023 sales and earnings conference call.

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I'd now like to hand, the conference over to Vice President of Investor Relations Sandy stopped Sir. Please go ahead.

Thank you Abigail and welcome everyone to Franklin Electrics third quarter 2023 earnings Conference call with me today is Greg sense that our chairperson and Chief Executive Officer, and Jeff Taylor, Our Vice President and Chief Financial Officer on today's call Gregg will review.

Our third quarter business highlights and Jeff will provide an overview of our financial performance. We will then take questions.

Before we begin let me remind you that as we conduct this call we will be making forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 each.

These statements are subject to various risks and uncertainties many of which will 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.

Thank you Sandy.

Third quarter, which is seasonally one of our strongest periods with a solid quarter, but more challenging than we had anticipated as.

As a result, reflecting additional commodity price pressure in our distribution channels.

Further destocking impacting demand during the quarter.

The fueling business was most impacted by Destocking as well as by markers legislation so projects.

Conversely, with our product line breadth the geographic reach our water systems business set third quarter records for sales and operating income with continued strength in Marquis water systems.

Turning product lines impacted by inventory right sizing and destock.

While underlying demand in our core markets remains solid with higher interest rates and shrink cost.

These are more sensitive to inventory levels.

Improved lead times and delivery performance, you have higher confidence in the availability of products when they need them as well.

As a result, just like us they are reducing inventory levels.

Despite these external factors the team executed well and focused on delivering for our customers.

Disciplined cost management allowed us to maintain healthy operating margins in our manufacturing businesses.

Distribution delivered a solid operating margin a market challenge with the deflation commodity products.

We generated strong cash flow in the period in Jersey.

Our cash flow improved by approximately $190 million as compared to last year.

Accelerated shipments of converted backlog during the quarter decreasing inventory by $31 million and reducing our backlog of about $44 million sequentially.

Credibly proud of the Franklin team for their commitment to driving operational excellence.

A little more color on our segments.

Water systems delivered year over year revenue growth on top of a strong third quarter 2022.

With sales increasing by 1% on a reported basis and 5% excluding the impact of foreign currency translation.

And operating income increasing by 16%.

Third quarter Records.

This growth was driven by robust sales of our large dewatering pumps, principally the U S.

Year over year growth in Latin America, and EMEA regions.

Internationally sales of our groundwater products were also strong however, unfavorable foreign exchange along with unfavorable weather and Destocking in the U S. We previously mentioned offset these strong results.

We believe underlying end market demand for surface pumping and groundwater equipment remains healthy.

We recently participated in the annual West Tech conference in Chicago, the customer feedback supported our belief it is healthy demand environment.

Overall water systems operating margin was strong and increased by 230 basis points over the prior year quarter.

These results reflect leverage from sales growth gross margin expansion and focused cost.

To assist with reported revenue and operating income decreased 14% and 10% respectively compared to the prior year period.

Lapping a tough year over year comparison of record revenue and operating income for any quarter in Franklin's history.

Our fueling results were driven by lower volume as inventory Destocking continued in this market.

Higher interest rates, along with labor constraints caused delays in new station builds as well.

Fueling systems third quarter operating margin was 33, 2% <unk>.

The increase of 150 basis points compared with prior year period.

Driven by continued demand for our high margin critical asset monitoring fuel management systems and grid solution products, along with disciplined cost management by the <unk> team.

Cool.

We expect a broader macroeconomic including higher interest rates and availability of construction later labor will continue to weigh on the timing of new station builds into 2024.

Nevertheless, we continue to focus on and invest in our relationships with our convenient store marketers and providing them with innovative products and systems.

We continue to invest in our grid solutions product lines, well underlying demand for our grid products remains robust as well documented stress on your electrical grid driving accelerated investment in our critical asset monitoring.

Yeah.

Distribution sales decreased 2% from the prior year period, driven by lower commodity pricing, primarily tightened and continued wetter than expected weather the land contractor installations across much of the United States.

In addition, the industry is continuing to work through some destocking of channel inventory and supply chain improvements.

Segment delivered an operating margin of five 7% 410 basis points below last year's record third quarter operating margin, which benefits from a strong 2022 inflationary environment.

During the quarter. We also made key investments to expand onsite inventory for large contractors. We now have over 400 OSI containers deployed across the country.

An integral part of our strategy to better serve our customers by making products available when and where our customers need.

As we look forward with our focus on products and systems that move and monitor water fuel electricity. We are confident in the underlying demand in our core markets.

Also cognizant of the impact of increased interest rates or having the end markets, we serve as well as the transitory impact of weather related delays inventory normalization, we and others are experience.

All of which further inflection in demand during the quarter and continue for some time.

As a result, we are revising our full year 2023 guidance. We now expect 2023 full year sales range of $2.05 billion to $2, one 5 billion and earnings per share to be in the range of $4 seven.

$4 17.

With that I'll now turn the call over to Jeff for the financial highlights.

Thanks, Greg.

And good morning, everyone.

Overall as Greg said, it was a solid quarter for Franklin electric despite the challenging operating conditions.

We established new quarterly records in the water segment, while our results were below our expectations in the fueling and distribution segments.

Third quarter 2023, consolidated sales were $538 4 million.

Year over year decrease of 2%.

Excluding the impact of foreign currency translation sales were flat compared to last year.

Our fully diluted earnings per share were $1 23 for the third quarter 2023.

Versus a $1 24 for the third quarter of 2022.

Water systems sales in the U S and Canada were down 1% compared to the third quarter 2022, primarily due to lower sales of groundwater equipment, resulting from channel destocking and wet weather across much of the U S, which was largely offset by higher sales of our large dewatering equipment.

Water systems sales in markets outside the U S and Canada were up 4%.

Foreign currency translation decreased sales outside the U S and Canada by 11%.

Sales increases in Latin America, and the EMEA region more than offset lower sales in the Asia Pacific markets.

Okay.

Water systems operating income was a record $52 7 million in the third quarter 2023.

$7 2 million or 16% versus the third quarter 2022.

Operating income margin was 17, 8% up 230 basis points compared to last year.

The increase in operating income was primarily due to leverage from sales growth gross margin expansion and cost management.

Distributions third quarter sales were $189 2 million versus the third quarter 2022 sales of $193 2, million% to 2% decrease.

The distribution segment operating income was $10 7 million for the third quarter.

The year over year decrease of eight three months.

Operating income margin was five 7% of sales in.

In the third quarter 2023 versus 98% in the prior year.

Distribution segment income was negatively impacted by weather.

Winter weather consistent with our prior comments and margin compression from lower pricing on commodity based products sold through the business.

Fueling systems sales were $77 7 million in the third quarter 2023 versus third quarter 2022 sales of $90 2 million.

<unk> thousand 14% decrease.

As a reminder, the current year represents a tough comparison for the business with third quarter 2022, fueling systems sales represented an all time quarterly records.

Julian system sales in the U S and Canada decreased 14% compared to the third quarter 2022, due to lower demand from Destocking and channel inventory the supply availability and lead times improve.

However, we experienced growth in our fuel pumping systems as well as our grid solutions business during the quarter.

Outside the U S and Canada fueling systems sales decreased 20% due primarily to the divestiture of a tank business in 2022 and lower sales in the Asia Pacific region.

Fueling systems operating income was $25 8 million in the third quarter 2023, compared to $28 6 million in the third quarter 2022.

The third quarter 2023, operating income margin was 33, 2% compared to 31, 7% of net sales in the prior year.

Operating income decreased primarily or primarily due to lower sales, while the margin percentage increased due to a favorable product mix.

Gross margin expansion and cost management.

Franklin Electric's consolidated gross profit was $186 3 million for the third quarter 2023 down from last year's third quarter gross profit of $196 million.

The gross profit as a percentage of net sales was 34, 6% in the third quarter of 2023 versus 34, 5% in the prior year.

Selling general and administrative expenses or SG&A were $107 7 million in the third quarter 2023.

<unk> to $109 4 million in the third quarter of 2022.

The decrease in SG&A expense was largely due to lower incentive based compensation expenses and cost management in the quarter.

SG&A cost as a percent of net sales was 20.0% in the third quarter of 2023 and in line with prior year quarter.

Consolidated operating income was $78 1 million in the third quarter, 2023, and $1 9 million or 2% from 80.0 in the third quarter of 2020 to do.

Due to lower sales and an unfavorable foreign exchange translation headwinds.

The third quarter 2023, operating income margin was 14, 5% flat to the third quarter of 2022.

The effective tax rate was 20% for the quarter compared to 18, 5% in the prior year quarter.

We generated approximately $198 million of operating cash flow in the first nine months of 2023 compared to $7 million of operating cash flow in the first nine months of 2014, an improvement of $191 million.

In 2021, and 2020, we invested in higher levels of working capital to support our growth.

In 2023, working capital has returned to more normal levels, leading to improved cash flows.

The company purchased approximately 56000 shares of common stock in the open market for about $5 million during the third quarter of 2023.

At the end of the third quarter 2023 remaining share repurchase authorization is approximately one 1 million shares.

And yesterday, the company announced a quarterly cash dividend of <unk> 22, <unk> that will be paid November 16th to shareholders of record as of November 2nd.

This concludes our prepared remarks, we will now turn the call back over to Abigail for questions.

At this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

One moment for our first question.

Our first question comes from Matt Summerville with D. A Davidson your line is open.

Thanks.

Couple of questions, just maybe first with respect to water systems margins <unk>.

$17 eight that's the highest level you guys have delivered I believe in three years I think the last time you were up in that ZIP code was third quarter of 2020 can you talk about the factors a little bit more it drove that kind of performance and how you think about sustainability net of normal.

Seasonal factors that impact the business and then I have a follow up.

Yes, good morning, Matt Thanks for the question.

Water systems.

As you pointed out really strong operating margins in the quarter and we had record sales and record operating income.

That business.

Certainly performed very well and I think it's.

As Greg mentioned in his comments, it's a diverse business and our global business and we have strength in different parts of the business, but overall.

Strong top line very good cost management very good delivery.

<unk> during the quarter, we are seeing a little bit of an improvement on our gross margin line is.

<unk> prices.

Copper and steel.

Slowly slowly retreat and thats, providing a low milligram flow through on the margin line as well as.

As well as just overall good mix in the business.

<unk> are typically your stronger margin quarters, and 17 eight kind of the new go forward way to think about based on the commodity pricing environment, where margins should be during the seasonally high period and then similarly, how should we think about an appropriate level in the seasonally.

<unk> lowered period M&A.

Yes, Matt we typically guide water systems operating margin in the 15% to 17% range and so.

I think 17 eight was very very strong we had a really solid strong quarter as our record third quarter Forum seasonally the business does slow down in the fourth order in the first quarter and we expect to see that normal seasonality coming through in <unk>.

Typically there will be a little bit of a.

The margin impact as you get lower leverage on fixed costs and lower volumes. During those couple of slower quarters for us. So we would expect to see that happen, but I think normal operating margins are very strong right now, but in that 15% to 17% range on a go forward basis.

Yes, Matt.

Paul Yes.

And of course on an annual basis of 15 to 17 range.

You may recall back in the Halcyon days back in 12, and 13 and we are driving much.

More centric and groundwater that we had margins above that.

And we've done a lot also with our international operations and then also the cost structure of our large pumping systems to improve margins there by.

Standardizing some of the production from the high runners.

We'll go to Oklahoma plants. So that's also aided us structurally improving our margins.

And for the last several years. So we are we're not necessarily saying, yes, we tend to we want to deliver and then talk about it so.

We certainly are directionally moving in the right way.

We want to make sure we can prove it out over a period.

A couple of years, rather than just talking about a one time thing but.

Clearly we're at a different margin profile there were a couple of years back.

Got it and then just maybe to flip over to kind of the negative things impacting the business can you talk about Destocking you talk about project push outs Greg.

Greg.

<unk> done this for a number of decades, so drawing on your experience how long do you think kind of a down cycle can persist as it pertains to the destocking sort of phenomenon as well as what youre seeing on the project side in both water and fueling thank you.

Yes, Matt you'd think with my experience I get smarter over time.

I would say that.

I thought we were kind of through this and through Q2, but I think with the interest rates and just with the ability of lead times, including our own and our customers.

For background.

The pre Covid normal.

People, who were looking at.

Our seasonal northern hemisphere, and so I think that customers are saying look I don't need to take the stock I don't need to carry the stock I'll, let the math.

Manufacturers' curious.

And then even in our case are on distributions.

Being more reliant on us as a supplier because by about one third of your products.

Look I'd, rather have a curated upstream.

So sorry.

So I think we're kind of getting through that maybe through the end of the year certainly.

The pipe, which is a large portion of the distribution business.

Plastic resident also steel pipe.

That availability was was acutely tight through the pandemic and then it came on in a slide so that's I think maybe exacerbated the situation.

Probably.

<unk>.

But again I think that the discipline of having higher interest rates will help us coming into 'twenty four walls and our competitors in distribution.

Relative to the push outs I think here again.

Continue to exceed post contact with major marketers in the fueling business.

So we have these built programs normally hit their build programs and just seemingly things came went to the ones that are pushing to the right I talked to some contracting companies and.

Late July or early August and they talked about how they still were kind of.

Having trouble getting getting help to build out projects. So.

I think that's everything kind of slowed down a little bit.

I think that we'll see.

The fueling business kind of steadily get.

<unk> and 'twenty four it will be easier comp in the back half.

Certainly the other thing is with our large pumping systems.

We had a large exposure to the rental car.

Customer.

Your eyes on belts and others of the world.

And back in 2014 to 15 when oil prices collapsed, we took it on the chin.

That business, we saw that slowdown again I think it was 19 to 20, but we've done a lot to diversify the customer base. We've got a growing recognition from the pioneer brand. So while we expect to see.

The rental fleet customers are now kind of catching up and maybe that's part of it is going to slow that given the underlying strength in the industrial economy, generally United States and kind of how.

How much <unk> and other conferences.

We're feeling that we can carry through that.

Maybe a little slow there again.

Yes.

Next couple of quarters, as we kind of get adjusted to a new norm, but then we are feeling we are well positioned.

In that space and finally in the groundwater space, we came off of a.

I am really dry a couple of years.

Remember, California record droughts and then we've got record rain in lots of water, which overall bid thing, but certainly in the short term for us it impacts.

And so now we had more Kevin maybe at a more normal year, we certainly got hit with weather on the east coast in the third quarter as well as kind of in the Midwest. It was a decent range quarter. So it just didn't.

Drybulk demand, so we've kind of cycled through that and so I suspect that's.

It will be coming off of a normal year, maybe for next year, so it'll be a little bit of an easier comp in that respect and then outside United States.

Seeing.

South America, I think Europe is going to be kind of tough through the summer image through the winter.

Kind of get through their post Covid situation in Asia has been challenging for us.

I think that Asia private challenging problems as well, we will likely see improvement off the bottom. So that's a very long winded answer to your question, but I thought I'd give you a comprehensive response.

Perfect I appreciate it great. Thank you sure Matt.

Thank you I'm showing no further questions at this time I would like to turn the call back to Greg Thanks, Todd for closing remarks.

We appreciate your following the company and joining us today on our call.

We look forward to speaking to you after the first year with our full year results and everybody have a great week. Thank you for joining us.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect.

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