Q2 2024 Franklin Electric Co Inc Earnings Call
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Speaker Change: Hello, and welcome to the Franklin Electric reports second quarter 2020 for sales and earnings conference call.
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It is now my pleasure to introduce <unk>, Chief Financial Officer, Jeff Taylor.
Thank you Andrew and welcome everyone to Franklin Electrics second quarter 2024 earnings Conference call.
With me today are Joe resumed ski Chief Executive Officer, and Greg <unk>, our executive chair person.
Speaker Change: On today's call Brandi to review, our second quarter business highlights I will provide additional details on our financial performance and then Joe will share. Some initial thoughts on his first few weeks with Franklin.
Speaker Change: 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.
These statements are subject to various risks and uncertainties many of which could cause actual results to differ materially from such forward looking statements.
Speaker Change: A discussion of these factors may be found in the company's annual report on Form 10-K, and today's earnings release.
Speaker Change: 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.
Greg: Thank you Jonathan and thank you all for joining us.
Our second quarter results were solid but fell below the record levels reached in the prior year period.
Macroeconomic challenges and wet weather across the U S continued to pressure sales.
Performance held up well as we delivered near record high earnings during the quarter.
Strong execution by our global teams.
Long as the diversity of our product lines geographic presence and customer base demonstrated the resilience of our business as we drove margin expansion on lower sales.
Greg: The second quarter represented a sequential step up.
All of that due to seasonal factors.
Greg: However, this impact through to be a bit softer during the quarter as compared to prior years.
Consolidated sales were down 5% or $26 million compared to our second quarter.
Greg: 2023, reflecting the ongoing challenge of project delays in part due to adverse weather, particularly in the United States and within our distribution segment.
Greg: Similar to the first quarter of 2020 for one of the main factors pressuring sales was a decrease in large dewatering equipment sales in the U S.
Fleet rental customers.
Coming off record sales activity in the prior year during which our customers built up substantial inventory.
Greg: Outside of these lower larger water volumes in the U S. The rest of our U S water systems.
Greg: Solid growth.
Outside the U S. Excluding the impact of foreign currency translation, we saw positive performance in large systems, including robust growth in Asia Pacific and steady demand.
Greg: And the southern Hemisphere.
The strength in our manufacturing business, however was offset by softness in distribution in the United States.
Greg: As we've mentioned before we are experiencing some of the wettest weather patterns on record in the U S, which negatively impacted sales.
We achieved strong margin performance in the quarter led by our water and fueling systems manufacturing segments.
<unk> operating margin was 14, 6%, representing an improvement of 40 basis points overall compared to the prior year period.
We're encouraged by the increased productivity across our operations and stabilizing input costs.
Turning to our segments water systems second quarter sales declined 2%, but operating income increased 23% to set an all time quarterly record for the segment.
As mentioned much of the sales decline can be attributed to a continuation of lower volumes due to the cyclical nature of our large dewatering business.
However, residential groundwater and surface pump businesses continue to grow.
Getting wallet share with both new and existing customers.
Greg: Overall operating margins in water systems improved to 19, 7% up 390 basis points versus prior year.
Greg: Driven by favorable product mix as well as operational efficiencies and lower freight expenses.
Fueling systems sales and operating income decreased 9% and 3% respectively versus the prior year driven by lower volumes.
However, in the second quarter of last year, the team works through a close to $10 million of backlog.
Greg: With backlogs at normal levels orders entered in Q2 of 2024 were actually up about 5% over Q2 of last year.
This supports what we're hearing from major marketers.
Speaker Change: Adult season has progressed largely as expected outside of weather related delays, which is encouraging for the back half of the year.
Despite softer sales Julie systems operating margin was an all time quarterly record of 35, 6%, representing an increase of 240 basis points compared to the prior year.
Margin improvement was a favorable.
Speaker Change: As a result of favorable product and geographic mix.
Sales in the distribution business decreased 1% from the prior year, primarily due to the continued negative impact of wet weather across the U S, but it's delayed contract or installations.
Starting in June weather began to dry up in the Western U S and the order rates increase commensurately.
Operating margin was five 1% 410 basis point decline versus the prior year due to higher overhead cost at the end of the quarter, we took actions to reduce our operating and SG&A expenses within the distribution segment.
Financially benefit from these actions in the back half of the year.
Speaker Change: Overall global inventory levels are favorable compared to the prior year period due higher sequentially, which is typical for the second quarter as we build inventories for the busier summer season.
We are mindful that after a rather historic post pandemic multi quarter decline in channel inventory levels, we need to be positioned to respond to any surge in demand as channel inventories continue to settle out.
We continue to forecast our free cash flow will again exceed our net income for the year with that I will now turn the call back over to Jeff.
Thanks, Greg.
Overall, our second quarter was solid.
We were below the record sales levels of last year, we were able to improve our gross profit margins to record levels.
Fully diluted earnings per share were $1 26 for the second quarter of 2024 versus $1 27 for the second quarter 2023.
The second best quarterly EPS in the company's history.
Second quarter 2024, consolidated sales were $543 3 million a year over year decrease of 9%.
The benefits to sales from our 2023 acquisitions were more than offset by lower volumes and the negative impact from foreign currency translation.
Speaker Change: Water systems sales in the U S and Canada were down 5% compared to the second quarter of 2023.
Speaker Change: Entirely to volume declines in the sales of large dewatering equipment, which decreased 44%.
All other major product lines increased sales of water treatment products, increasing 12%.
Speaker Change: Sales of all other surface pumping equipment, increasing 11% and sales of groundwater pumping equipment, increasing 6% compared to the second quarter of 2023.
Speaker Change: Water systems sales in markets outside the U S and Canada increased by 3% overall.
Foreign currency translation decreased sales by 4%.
Outside the U S and Canada sales in the second quarter of 2024 increased in all major regions, EMEA Asia Pacific and South and Latin America, excluding the impact of foreign currency translation.
Speaker Change: Water systems operating income was a new record for any quarter at $62 3 million in the second quarter of 2024.
$11 5 million or 23% versus the second quarter 2023.
Operating income margin was 19, 7% a year over year increase of 390 basis points. The increase in operating income and improved margin was due to improved manufacturing productivity favorable product mix shifts and cost management.
Distribution second quarter sales were $195 million versus second quarter 2023 sales of $193 1, million% to 1% decrease.
Continued wet weather through the second quarter dampened sales, notably in the west northeast and Midwest regions of the U S.
Speaker Change: The distribution segment's operating income was $9 8 million for the second quarter of year over year decrease of eight zero million.
Operating income margin was five 1% of sales in the second quarter 2024 versus nine 2% in the prior year.
Income was negatively impacted by lower sales and higher SG&A costs.
Fueling systems sales in the second quarter were $73 1 million sales decreased $7 3 million or 9% in the second quarter of 2024.
Fueling systems sales in the U S and Canada decreased 4% compared to the second quarter of 2023.
The decrease was across all major product lines.
Aside the U S and Canada fueling systems revenue decreased 7%, primarily due to lower sales in EMEA and Asia Pacific.
Fueling systems operating income was $26 million compared to $26 7 million in the second quarter 2023.
The second quarter 2024, operating income margin was 35, 6% compared to 33, 2% of net sales in the prior year.
Speaker Change: Operating income margin increased primarily due to improved manufacturing productivity price realizations and cost management.
Franklin Electric's consolidated gross profit was a record $199 8 million for the second quarter of 2024 to.
Speaker Change: The 6% year over year increase.
The gross profit as a percentage of net sales was 36, 8% in the second quarter 2024 up three.
370 basis points versus 33, 1% of net sales in the prior year.
Speaker Change: The gross profit margin was favorably impacted in 2024 improved manufacturing productivity and utilization with fewer supply chain disruptions lower freight costs cost management across the company and a favorable product mix shift.
Selling general and administrative or SG&A expenses were $120 6 million in the second quarter 2024, compared to $107 4 million in the second quarter of 2023.
The increase in SG&A expense was due to the incremental expense from recent acquisitions higher compensation costs and increases in advertising and marketing expense.
Speaker Change: Consolidated operating income was $79 1 million in the second quarter, 2024 down $1.8 million or 2% from $80 9 million in the second quarter of 2023.
The decrease in operating income was primarily due to the distribution segment.
Second quarter 2024, operating income margin was 14, 6% versus 14, 2% of net sales in the second quarter of 2023, driven by strong operating margins in our manufacturing businesses.
The effective tax rate was 23% for the quarter compared to 19% in the prior year quarter.
Speaker Change: The company purchased about 379000 shares of its common stock in the open market.
Speaker Change: Approximately $37 million during the second quarter 2024.
At the end of the second quarter 2024, and remaining share repurchase authorization is approximately 460000 shares.
The company ended the second quarter of 2024, with a cash balance of $58 million and generated $35 million and net cash flows from operating activities. During the first six months of 2024.
Versus $43 million in the first six months of 2023.
The company is focused on improving its cash flow and working capital requirements through improvements in customer and vendor terms. In addition to managing inventory levels.
Earlier this week the company announced a quarterly cash dividend of <unk> 25 that will be paid August 15th to shareholders of record as of <unk>.
On his first.
Looking ahead, despite ongoing macroeconomic pressures in what we believe to be transient weather related challenges, we hold an optimistic view for the underlying demand in our core markets.
Speaker Change: We are maintaining our full year sales guidance to be in the range of $2 1 billion to $2 $1 7 billion.
Speaker Change: However, we are lowering our full year EPS guidance to between $4 16, and $4 34.
Which incorporates our first half performance and our outlook for continued solid execution in the second half while maintaining strong margins similar to the first half.
I will now turn the call over to Jim. Thank.
Jim: Thank you, Jeff Thank you, Greg and good morning, everyone.
Jim: I would first like to express my deep gratitude to Greg Greg Thanks back pretty exceptional leadership and contributions to Franklin electric over these past 35 years in the past 10 years as CEO.
Jim: Under Greg Stewardship, Franklin Electric has achieved remarkable growth and maintained a strong reputation in our industry I am excited to build on this legacy and lead Franklin forward.
From this strong foundation established by Greg and the entire Franklin team I am confident in our ability to capitalize on numerous opportunities ahead of us to drive differentiated growth as the global leader of water and energy systems.
Because I have Julien and spend time with our team I am, particularly excited about the opportunity to bring our expertise and solutions to adjacent faster growing markets, our use of data and analytics to increase our ability to bring new products to market with velocity.
Jim: Our strong global footprint to take advantage of the biggest needs around the world for clean water and a robust M&A pipeline.
Jim: I also see that we're in a great position to accelerate productivity to fuel and to fund our growth opportunities.
I look forward to closely working with our talented team and stakeholders to continue to deliver value to our shareholders and meet the incredible demand for water and energy around the globe.
Jim: This concludes our prepared remarks, and we will turn the call over to Andrew for questions Andrew.
Andrew: As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Andrew: One moment please.
Andrew: Our first question comes from the line of Mike Halloran with RW Baird.
Hi, Good morning, everyone. This is <unk> on for Mike Hi, Greg just wanted to take a second and congratulate you on a fabulous carrier in tenure and thank.
Thank you for all the help that you've provided over the years.
Maybe maybe.
Absolutely, maybe maybe Joe I wanted to kind of touch on.
Amit you made at the end there you talked about.
Numerous opportunities to drive differentiated growth talk about pivoting towards higher growth markets implementing data and analytics and a robust M&A.
Speaker Change: Pipeline and funnel, obviously all of that sounds Fabulous, maybe talk a little bit about how.
Speaker Change: You see Franklin down the line, maybe talk a little bit more about your vision for the business.
Today.
And maybe some of those some of those avenues for differentiated growth that you see as you're stepping into the role.
Thanks, Mike.
Speaker Change: Just think about starting when I have is during the strategy cycle.
A lot of the seeds for those opportunities and growth.
Already that the teams are working on but I look at maybe a couple of examples in wastewater and mining.
Really good examples of new products and recent acquisitions, we've made around the world.
For faster growing markets and I think can give us some good natural hedges to some of the weather and the other things that we're seeing.
And in the World today.
Some of those opportunities for acquisitions are taking advantage of Franklin tremendous channel.
I think bringing products that we see needs for locally that we acquired globally and getting those to our customer.
The comments on data and analytics.
Speaker Change: A tremendous tremendous system architecture, and a very very clean look at data here I think Franklin electrics opportunity to use data and to end the intimacy we have.
In our end markets through our distribution channel as an example, I'm really gives us that opportunity to understand our customers, what they're looking for and to respond faster than anyone else in the industry. So I think really a lot of nice opportunities and I look forward to working with the team to develop and execute.
Okay.
Speaker Change: No. That's excellent. Thank you and now we look forward to hearing more about that in working with you in the future.
Switching gears to the quarter, obviously, a healthy performance here.
Speaker Change: I wanted to kind of dial in on the margin and price cost.
Maybe could we touch on price cost across the three segments.
How are we thinking about that fueling margin.
Anything one time that we should be thinking about as we move into the back half and start thinking about next year.
Yeah. Thanks Steph.
Appreciate the question I mean really strong performance in the business this corner from us from a margin perspective and certainly.
We're focused on the manufacturing businesses within water and fueling in fueling set a record operating margin further quarter. This this year so.
Speaker Change: We have really good.
Speaker Change: Manufacturing cost is.
Speaker Change: Supply chain to have settled down we've gotten stability.
And input costs for the most part.
Speaker Change: The team has been able to really take a lot of uncertainty out in the manufacturing environment and we're seeing that improvement in our manufacturing cost is certainly a piece of it.
Speaker Change: Both water and fueling I would say.
Also within within purely we're seeing.
Speaker Change: Volumes are down year over year, the mix is still pretty positive and pretty favorable as we continue to focus on.
Higher value technology products Thats, continuing to drive our business, but also we have.
Business is a little heavier this quarter in the U S than it is outside the U S and Thats typically pay interim alternative business.
Arjun side as well.
Speaker Change: Yeah, when we look at price fueling is getting good good fair price in the market. So they're in that kind of low to mid single digit price improvement and they are also like I said, where volumes are down year over year, but we've seen.
Speaker Change: We're starting to see improvement in order patterns as Greg talked about in his prepared remarks.
So we're optimistic on the back half of the year.
Speaker Change: For water.
This is low single digits market center.
Kind of competitiveness has increased in the markets.
Speaker Change: We're holding price, they're still getting positive price, we have negative volume in water that's entirely driven by our large dewatering business, which we talked about as well and so all of our other major product lines.
Positive volume and really nice growth and that includes both inside and outside of.
The U S.
Let me stop there and see what other questions you have.
Speaker Change: No no I don't Wanna Bogart started the call so I'll pass it along and hop back in line.
Speaker Change: Thanks, gentlemen, thanks.
Pam: Thanks Pam.
Thank you.
Speaker Change: One moment please for our next question.
And our next question comes from the line of Walter Liptak with Seaport Global.
Speaker Change: Yes.
Hey, good morning, guys, great quarter and nice.
To meet you Joe over the phone.
With the.
The weather headwinds seem to be really pretty brutal and some of the commodity prices seem to be pretty good on that and I think what you guys are saying is that.
In the water.
Water systems part of the business you had volume growth not just price is that right or are you seeing volume declines.
Some of the pharma related products.
So Walt this is Greg.
Speaker Change: Say is that from the NOAA data as they look back to last 130 years earn a 98 percentile for rain across the country and it's really broad based it wasn't kind of a it started in the west to.
Speaker Change: Keith.
Speaker Change: All of our key markets.
So certainly that that.
Speaker Change: Pressure on volumes, although we do see in our prepared remarks, you'll see that our groundwater business was up.
And.
Speaker Change: Maybe more heavily to the.
Speaker Change: Through the small Ami systems for residential where it's more replacement market you.
Speaker Change: You don't turn on systems as you know in an AG markets when it's raining and so that's where as you pointed out we had some pressure on the volume side.
That's where we felt like.
We are seeing a drawing out in the west starting in June and as soon as it drives out here, we saw it in Europe orders start coming in so that's why we're.
Jeff: Looking at the back half on a more positive basis design decline as Jeff and I, both mentioned really relates to the cyclicality.
Jeff: Larger water market, which is more of a capital cycle exposure.
Speaker Change: Rental companies.
We bought a lot of product last year catching up from the pandemic and.
And just had the challenge is getting it out in the field.
Speaker Change: And so yes, there's been a delay there they'll work through that.
Still see.
Strong indicators for the end markets that construction is going to do well, but.
Yes, that's what address that piece of the market related to the AG piece that was there.
Under some pressure because of just the wet conditions in Q2, and again as we move into the back half sensors things will dry out.
If you follow El Nino on India.
Sandra government mild winding units generally favorable favorable for us, but I'm not a weather predictor. So I don't quite farther than that Jeff do you want to add on the margin side your jets.
I was going to add that in the dewatering business that is concentrated in the U S with our fleet customers outside the U S where our.
Businesses in our dewatering business.
Jeff: I think that supports the.
What we're seeing.
In our business today.
<unk>.
Yes.
Okay, great. So.
Speaker Change: So if I'm understanding your outlook that the idea is that yes.
Speaker Change: With the drying out and the weather is going to be hydro or I think in the Midwest, maybe not as much rain.
So in summary, the irrigation systems get turned on.
You might get better pull through.
In the third quarter and.
Throughout the rest of the year is that the way we're supposed to read it.
Yes, I think thats consistent with the guidance and the outlook that we have.
And that is that we will see some improvement in weather certainly.
In the back half of the year that'll that'll pull through on our distribution business.
And hopefully be.
Helpful. In the second half of the year. So that's a part of our strong execution in water systems water systems.
As you know is performing very well.
In all areas, except for that large dewatering in the U S and I would tell you that view on large dewatering for the back half is it's probably going to look similar to the first half, but I also expect the rest of the business to perform well in the second half and so that's that's.
Speaker Change: Good solid uplift for our water systems, and then fueling systems as we commented leaves.
Starting to see improvement in order entry there.
We're expecting some improvement in the back half there as well.
Okay, yes that sounds great.
Speaker Change: Sure.
Speaker Change: When you talk about the La India part of it Greg.
That's interesting because that does I think bring in.
Speaker Change: Okay.
I'm sorry, it looks like we lost Walters line.
Speaker Change: One moment please.
Our next question comes from the line of Matt Summerville with D. A Davidson.
Thanks.
And of course, congrats Greg.
Just.
Question on the distribution business I think revenue was down a couple million bucks year on year, Yes, It's operating profit dollars fell by a materially higher amount. So can you help kind of parse out the main operating income drivers.
On a year over year basis for distribution during the quarter.
Yes, Matt.
Distribution business I think I had aligned on this in my comments, but the distribution business, obviously on lower volume.
If you.
We had an acquisition at the end of last year, and so that was added to their overall revenue.
Speaker Change: Yes, their core business was down by that amount plus the mess.
So volume is the driver they also have higher operating expenses in the quarter.
Speaker Change: Do have investments in the business, where we are.
And what I will say in a new location some greenfield sites.
Those greenfield sites about two years to get up to speed and to a normal operating performance and so we do have some higher operating expenses because of some of those investments that we've made.
Overall, and then they continue to see.
Commodity price pressure in the business and so commodities were down about 4% in this quarter, we are starting to see that stabilize but it continues to be <unk> for us in the business.
Got it.
With respect to the.
Water.
With some of the margin performance there.
Speaker Change: Unusual sort of benefits beyond mix. It sounded like volume was maybe I'll touch slow down a bit obviously dewatering driven but help me understand the big ramp we've seen in water margins and how we should think about sustainability given your historical kind of a long term target for.
That segment. Thank you.
We saw really solid performance in the water business in the quarter, but in the first half of the year. So that business is doing really really well.
The exception of the large dewatering.
Strong growth in their water.
Water treatment business strong growth in our surface pumping product.
Product lines that we have in that business and then growth in groundwater and that all contributes to have an unfavorable mix.
They also benefited from having.
This step up in manufacturing productivity and utilization in the quarter and so as I commented earlier about those improvements that certainly benefited in the water business.
Most because.
The biggest.
They operate the biggest manufacturing footprint in the company and so we got really good.
Speaker Change: Manufacturing productivity throughput I would say.
So EMEA was popping in my hands in terms of unusual or onetime items that would have driven that strong performance.
It's really mix driven.
Productivity, driven volume driven and all product lines, except for a large deepwater.
Got it thanks, Jeff.
Jeff: Youre welcome. Thank you.
Thank you.
Joe <unk>: And I am showing no further questions so with that I'll hand, the call back over to CEO, Joe <unk> for any closing remarks.
Thanks, Andrew well, we want to thank everyone for your time today and your interest in Franklin Electric we are excited about our future and look forward to speaking with you all at our next earnings call. Thank you.
Jeff: Okay.
Thank you for participating this concludes today's program and you may now disconnect.
Okay.
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Jeff: Okay.
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