Q3 2024 Franklin Electric Co Inc Earnings Call
Hello and welcome to the Franklin Electric Report's third quarter, 2024, sales and earnings conference call. At this time, all participants are an illicit only mode.
Speaker Change: Here, an automated message advising that your hand has been raised so enjoy your question. Please press star one again, please be advised that today's conference is being recorded.
Speaker Change: Now my pleasure to introduce <unk>, Chief Financial Officer, Jeff Taylor.
Jeff Taylor: Thank you Andrew and welcome everyone to Franklin Electrics third quarter 2024 earnings Conference call with me today is John Burzynski, Our Chief Executive Officer.
On today's call John will review, our third quarter business highlights.
Jeff Taylor: I'll provide additional details on our financial performance.
Jeff Taylor: I will make some final comments, we will then take questions.
Jeff Taylor: 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 1990.
Jeff Taylor: And wide portfolio of products.
Our investments in new products commercial teams integration of reshape recent acquisitions and some one time costs have led to higher SG&A expense impacting our bottom line.
Jeff Taylor: We expect to see the benefit of these investments and normalization of costs as we enter 2025.
Jeff Taylor: Moving to page three of the slide deck.
Jeff Taylor: I'd like to give a few updates on our CEO transition process.
Speaker Change: One of my goals when I first took the role was to listen and to learn.
Speaker Change: I've had the opportunity over the last three months to spend time with our global teams, our customers and our investors I would like to start the call by sharing some of these learnings that support my optimism for our future.
Speaker Change: First we have a passionate and committed team.
Speaker Change: This is evident in the external recognition, we've received which I will touch on shortly.
Speaker Change: I'm also incredibly pleased to consistently see our team's commitment to our culture.
And that has translated into a pride in service that is being noticed by our customers.
Speaker Change: Our customers and distributors have shared that they view, our clear commitment to service as a differentiator and they place a high value on our customer intimacy, our leading products and quality of service are reasons. Why we have continued to develop customer trust and in turn expand our business over the long term.
Speaker Change: Over the last few years, our commitment to meeting customer to meeting demand for water, where it is most critically needed has led to nyx two exceptional global growth in the face of disruptions tariffs and other uncontrollable events.
Our ability to maintain a strong track record and healthy balance sheet, while executing in a challenging market is what sets us apart.
Speaker Change: Our focus moving forward is to increase enterprise efficiency, as we accelerate innovation and growth.
Speaker Change: Our team has great ideas and great new products and is implementing our strategy we.
Speaker Change: We are putting an emphasis on addressing critical water needs and growing markets, providing industry, leading service to our customers with a strong distribution channel focusing on faster growing verticals and delivering productivity with our Franklin operating system.
Speaker Change: Im excited about where we will go from here.
Speaker Change: Moving to slide four.
Speaker Change: Going forward, we will share our quarterly updates highlighting achievements that showcase our culture and our commitment to delivering long term value for all stakeholders as I mentioned, a moment ago. One thing I've seen in my early days here as CEO is the pride of our workforce and commitment we have to our employees our customers and community.
Speaker Change: Parents that Franklin has received from Newsweek USA today.
Speaker Change: Indiana Chamber of Commerce, and others again show that others are recognizing this commitment.
Speaker Change: <unk> is a great place to work in a company that delivers on its promises and we're excited to build on this reputation.
Speaker Change: Moving to slide five to address our results.
Speaker Change: Consolidated third quarter sales of $531 million declined 1% with growth both in water and distribution segments offset by continued pressure in our fueling business, while we've seen a pullback in our U S suite business for large dewatering products the broader demand environment remains healthy across our core businesses as we continue to.
Speaker Change: Comparable periods of strong sales from pent up demand in higher backlogs due to supply chain constraints.
Speaker Change: Overall demand this year didn't offset the elevated backlog conversion we enjoyed in 2023, however order patterns across most of our businesses are positive, giving us confidence as we head into 2025.
Due to labor constraints and interest rate pressure, while order activity has accelerated we expect a moderate start to fourth quarter in line with seasonal trends.
Speaker Change: In the U S business is strong supporting margins from a mix perspective early commentary, we hear from our major marketers supported an expected improvement in builds for 2025 compared to this year. So we expect interest rates will continue to play a role in capital investment decisions for our major markets.
Speaker Change: Outside of that.
Speaker Change: For vapor recovery products were seeing good opportunities in China and elsewhere, we see solid activity in Mexico, we see significant potential in India, where we have a strong relationship with the customer executing a multiyear build project in.
Speaker Change: In Q3 orders for our fueling segment were also up year over year in the high single digits.
Sales in our distribution segment were slightly were up slightly sequentially and year over year, while weather conditions have improved the change was not material enough to generate pull through demand we had anticipated.
Speaker Change: Given the wetter weather in the west earlier this year customers have balanced drilling with accessing surface water.
Speaker Change: We're also continuing to face commodity pressures in this segment that have persisted over the last five quarters largely around plastic pipe where prices have decreased primarily due to supply dynamics rather than raw material costs. Despite.
Despite these headwinds we improved our operating margin on slightly higher sales due to strong execution from our distribution team.
Speaker Change: Just to briefly touch on the recent hurricanes affecting the southeastern U S. We did not see a material impact in the quarter, though there were some temporary store closures for our distribution business and we expect some customer projects to be delayed.
Speaker Change: Very proud of our overall team in helping customers address clean water needs and supporting wastewater challenges through our relief support and ongoing efforts to help our customers.
Speaker Change: In our communities.
Speaker Change: As a result of lower than anticipated sales during the quarter and normalized demand expectation, we are lowering our full year guidance, which Jeff will provide more details on in his comments.
Speaker Change: With that I will now turn the call back over to Jeff.
Jeff Taylor: Thanks, Joe.
Jeff Taylor: Overall, our third quarter was solid but below our expectations. The water systems segment set new third quarter records, beating last year's record third quarter.
Jeff Taylor: Distribution delivered sales and operating income growth versus last year and sequentially.
Jeff Taylor: While fueling segments result in minor SGA cross costs across the company for the overall results.
Jeff Taylor: Our fully diluted earnings per share were $1 17 for the third quarter of 2024 versus $1 23 for the third quarter of 2023.
Jeff Taylor: Moving to slide seven.
Jeff Taylor: Third quarter 2024, consolidated sales were $531 4 million a year over year decrease of 1%.
The sales decline in the third quarter was primarily due to lower volumes largely in our international fueling business and large dewatering equipment to U S fleet rental customers and the negative impact of foreign currency translation, partially offset by pockets of growth price realization and the incremental sales.
Impact from recent acquisitions.
Jeff Taylor: Franklin Electric's consolidated gross profit was $189 7 million for the third quarter of 2024.
Jeff Taylor: 2% year over year increase the.
Jeff Taylor: Gross profit as a percentage of net sales was 35, 7% in the third quarter 2024 up 110 basis points versus 34, 6% in the prior year.
Jeff Taylor: The gross profit margin was favorably impacted in 2024 by improved manufacturing productivity and utilization with fewer supply chain disruptions lower freight cost cost management across the company and a favorable product mix shift.
Jeff Taylor: Selling general and administrative or SG&A expenses were $116 zero 1 million in the third quarter 2024, compared to $107 7 million in the third quarter 2023.
Jeff Taylor: The increase in SG&A expense was primarily due to higher employee compensation costs, including incremental expenses associated with the company's CEO transition and the incremental expense impact from recent acquisitions.
Jeff Taylor: <unk> operating income was $73 5 million in the third quarter, 2024 down $4 6 million or 6% from $78 1 million in the third quarter 2023.
Jeff Taylor: The decrease in operating income was primarily due to higher SG&A costs.
Jeff Taylor: Third quarter 2024, operating income margin was 13, 8% versus 14, 5% of net sales in the third quarter of 2023.
Jeff Taylor: Moving to segment results on slide eight.
Jeff Taylor: Water systems sales in the U S and Canada were up 1% compared to the third quarter 2023.
Jeff Taylor: Sales of groundwater pumping equipment increased 13%.
Jeff Taylor: Sales of water treatment products increased 9% and the sales of all other surface surface pumping equipment increased 5% all compared to 2023.
Jeff Taylor: Partially offsetting the increase sales of large dewatering equipment decreased 31% compared to third quarter of 2023.
Jeff Taylor: Water systems sales in markets outside the U S and Canada increased by 4% overall.
Foreign currency translation decreased sales by 4%.
Jeff Taylor: Outside the U S and Canada sales in the third quarter of 2024 increased in all major markets EMEA Asia Pacific and Latin America, excluding the impact of foreign currency translation.
Jeff Taylor: Water systems operating income a new third quarter record was $52 8 million up <unk> 1 million versus the third quarter of 2023.
Jeff Taylor: The increase was primarily due to price realization cost management, and a favorable product and geographic sales mix shift.
Jeff Taylor: Operating income margin was 17, 5% a year over year decrease of 30 basis points.
Jeff Taylor: Distributions third quarter sales were $198 million versus third quarter 2023 sales of $189 2 million an increase of 1%.
Jeff Taylor: The distribution segment sales increase was driven by incremental sales impact from our recent acquisition, which favorably impacted net sales by 2%, partially offset by the negative impact of commodity pricing declines and unfavorable weather.
Jeff Taylor: The distribution segment's operating income was $12 2 million for the third quarter, our year over year increase of $1 5 million.
Jeff Taylor: Operating income margin was six 4% of sales in the third quarter 2024 versus five 7% in the prior year.
Fueling systems sales in the third quarter were $69 7 million, a decrease of $8 million or 10% compared to the third quarter 2023.
Jeff Taylor: Fueling systems sales in the U S and Canada decreased 4% compared to the third quarter of 2023.
Jeff Taylor: Outside the U S and Canada fueling systems sales decreased 22%.
Jeff Taylor: These declines were due to lower volumes across most major product lines. As we continue to have tougher sales tougher sales comparisons in 2024 versus 2023 sales in 2023 benefited from working off a very large sales backlog.
Jeff Taylor: Fueling systems operating income was $24 1 million compared to $25 8 million in the third quarter of 2023.
Jeff Taylor: The third quarter 2024, operating income margin was 34, 6% compared to 33, 2% of net sales in the prior year.
Jeff Taylor: Operating income margin increased primarily due to improved manufacturing productivity price realization and cost management.
The effective tax rate for the company was 23, 6% for the quarter compared to 22% in the prior year quarter.
Jeff Taylor: This affected this change in the effective tax rate had an impact on EPS of approximately five.
Speaker Change: Moving to the balance sheet and cash flows on slide nine.
Speaker Change: The company ended the third quarter of 2024 with a cash balance of $106 3 million and no borrowings outstanding under our revolving credit agreement.
Speaker Change: We generated $151 1 million and net cash flows from operating activities. During the first nine months of 2024.
Speaker Change: Versus $198 6 million in the first nine months of 2023.
Speaker Change: We are focused on improving cash flow and working capital requirements through managing inventory levels. In addition to improvements in customer and vendor terms.
Speaker Change: Our priorities for capital allocation are covered on slide 10.
Speaker Change: Aligning with that strategy. The company purchased about 92000 shares of its common stock in the open market for approximately $8 7 million during the third quarter of 2024.
Speaker Change: At the end of the third quarter, the remaining share repurchase authorization is approximately 370000 shares.
Speaker Change: Yesterday, the company announced a quarterly cash dividend of <unk> 25.
Speaker Change: That will be paid November 21 to shareholders of record as of November seven.
Speaker Change: Moving to slide seven taking into account our performance through the first nine months and specifically our third quarter results as well as our typical seasonal sales pattern in the fourth quarter and higher expected SG&A SG&A expenses through the end of the year for the reasons described earlier the company is lowering its full year sales guidance.
Speaker Change: 2024 to be approximately $2 billion.
Speaker Change: And reducing this EPS guidance for the full year 2024 to be in the range of $3 75 to.
Speaker Change: The $3 85.
Speaker Change: Italy as Joe mentioned, we are currently taking actions to reduce cost across the company, including efforts to accelerate productivity.
Speaker Change: These restructuring activities are not complete at this time, but we expect to have better visibility by the end of the year for which we expect one time restructuring charges could range between three and $5 million for the fourth quarter.
Speaker Change: This estimate for restructuring charge is not included in the full year guidance previously provided.
Speaker Change: Now I will turn the call back to Joe for some closing comments.
Speaker Change: Thanks, Jeff and.
Joe: In summary, while the results were lower than expectations. We're pleased with our team's performance and the resilience of the business. We're confident in our ability to overcome macroeconomic headwinds like those we encountered this year and deliver solid results.
Joe: We're optimistic about our future and as we execute our strategy maintain our industry, leading service and bring the highest quality Franklin products with faster growing verticals.
Joe: Our future looks bright and thank you all for joining us today and I'd now like to turn the call back over to Andrew for questions Sir.
Joe: Certainly.
Speaker Change: As a reminder to ask a question. Please 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. Please for our first question.
Joe: Yes.
Speaker Change: Our first question comes from the line of Bryan Blair with Oppenheimer.
Bryan Blair: Thank you Ross.
Bryan Blair: Good morning, good morning.
Speaker Change: And that should help us level set Paris.
Bryan Blair: I was hoping you could offer a little more detail on Q4 expectations by segment.
Segment, and recognizing you haven't provided 2025 guidance we have offered.
Bryan Blair: I guess some of the bread crumbs too.
Bryan Blair: Can you help us bridge the outlook, perhaps offer a little more color high level perspectives on it.
Bryan Blair: Prospects in related puts and takes cross water systems distributions and fueling.
Looking to next year.
Speaker Change: Okay. It was lots of impact there, Brian Let me, let me start with our outlook for the fourth quarter, which is contained in our outlook for the full year.
Speaker Change: Obviously, we've we've adjusted our guidance down for the full year.
Speaker Change: The factors that are coming into play there obviously in.
Speaker Change: In the third quarter results, which which we've discussed some at this point.
Speaker Change: But as we moved into the second half of the year, we had a very wet first half of the year. When we talked about it was an exceptionally wet year across the U S.
Speaker Change: Because of that we expected some pent up demand.
Speaker Change: It would potentially push into the second half of the year.
Speaker Change: And we'll pull through with improved weather as we moved into the second half of the year.
Speaker Change: We did see a slight improvement in weather as we moved into the third quarter, but certainly not materially different from what we had seen earlier in the year.
Speaker Change: The third quarter statistics, when we look at data for our <unk>.
Speaker Change: Precipitation across the U S. It was the 102nd.
Speaker Change: <unk> third quarter of 100, and last 129 years. So we continue to see wet weather, there and that pent up demand.
Speaker Change: Just didn't see a pull through and so that's that's what drove third quarter results.
Speaker Change: As we look ahead at the fourth quarter results I think fourth quarter, and we expect will be similar.
Speaker Change: Similar to what third quarter was.
Speaker Change: And on a year over year basis for the third quarter was comparable to the prior year. Our view is the four corners.
Speaker Change: You got to have a similar dynamic for it and that's what's built into our outlook for the business.
Speaker Change: I mean, when you look at the individual segments. Thanks.
Speaker Change: There is really consistent with the view for the overall company.
Speaker Change: We've got.
Speaker Change: Strength in our U S businesses.
Speaker Change: We're seeing a little bit more pressure outside the U S.
Speaker Change: Those economies are holding up as good as the U S. Economy is we certainly are continuing to see foreign currency translation come at us outside the U S Thats continuing.
Speaker Change: To bills within water systems are large dewatering business has been a very big headwind for us. This year as we look as large dewatering equipment sales this year versus prior year.
Speaker Change: On a full year basis is going to be down somewhere in the range of $60 million to $70 million on a year over year basis. So that's.
That's a very significant headwind for the business to overcome they've been doing a fantastic job in all of the other parts of the business to offset that and to overcome that.
Speaker Change: And as you saw in the third quarter, our sales were up slightly about 1% and that's overcoming that are very material headwind there.
Speaker Change: And large dewatering equipment, primarily to the U S fleet customers.
Speaker Change: In that business. The other parts of the business have been performing very very nicely stable, they're solid they're up on a year over year basis, not up as much as we had expected and hoped but theres still still in.
Speaker Change: Healthy territory.
Speaker Change: I think for fueling their year over year comp from the fourth quarter of last year is a much better a much better comparison to what it was the first three quarters of this year. So.
Speaker Change: Appealing business in our view as normalized and.
Speaker Change: In terms of where those sales are they worked through those year over year comps, where we're pulling down significant backlog in 2023, and so we think that businesses.
Speaker Change: Positioned to hold steady.
Speaker Change: We'll see where it goes in 2025, Joe can talk about some of the outlook for 2025, and I think our customers with major marketers there has been generally positive.
Speaker Change: High level, we talked about some of the higher SG&A cost in the company. We've certainly got higher costs from CEO transition. This year that impactful will only be at 2024 impact we also have.
Speaker Change: Two acquisitions that have added some SG&A into the business.
Speaker Change: For the year.
Speaker Change: <unk> lap itself after the fourth quarter as well and then lastly, I'll just make a comment on from the total company as we are seeing a higher tax rate this year than in.
Speaker Change: In 2023.
Speaker Change: This year, it's going to be approximately 23% for the for the tax rate for the year, that's related to higher global minimum tax as well as fewer discreet step would benefit us, which we which we saw in the prior year.
Speaker Change: So tax rate, 23% this year versus about 20% in the prior year.
Speaker Change: Yes, maybe Brian just a couple of thoughts on 2025, obviously, we're not sharing guidance at this point, but I mentioned upfront.
Speaker Change: Some of the headwinds in terms of.
Speaker Change: Housing sales housing starts challenged with weather and working through working through a year that that didn't didn't make it easy for us the business still performed relatively well.
Speaker Change: The teams are working hard on some new products.
Speaker Change: Our acquisitions integrated and bringing those products to our customers around the world and I would say our expectation outlook for next year definitely there are some trends that we see we obviously commented on some order rates here in the back half that are that are pointing to continued strong activity I think if some of those those macroeconomic headwinds.
Speaker Change: And a few other areas.
Speaker Change: Provide us of our leaf.
Speaker Change: We're cautiously optimistic about 2025, so maybe I'll just stop there.
Speaker Change: Understood I appreciate all the color.
Speaker Change: And obviously your balance sheet is in.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Very solid shape.
Speaker Change: They are in excess of 20% of your market cap and deal basketball.
Speaker Change: How is the <unk>.
Speaker Change: How is your M&A pipeline.
Speaker Change: How are you thinking about the businesses.
Speaker Change: That you are manageable in terms of readiness to deploy capital where it is there some self help needed versus.
Speaker Change: Readiness is as of now to move forward with.
Speaker Change: Inorganic.
Speaker Change: Good morning.
Speaker Change: Good question and we.
Speaker Change: We're happy to have a healthy balance sheet I think it puts us in a strong position as we look to 2025 that our pipeline we feel good about from an inorganic standpoint.
Speaker Change: Our focus right now and our thoughts are bringing more great products to our customers. The fact that we've got we've got strong channel and good customer intimacy I think puts us in a good position to do that.
Speaker Change: And that focus on bringing those value added products to our customers is there.
Speaker Change: Look at some of the new products that we're developing in some of the ideas. We have from an inorganic standpoint, and I have referred to a few times moving us if some faster growing verticals, which we can see today in the residential commercial and industrial space I would say, we've got some great ideas. We're.
Speaker Change: Well in process of assessing and working on those and we're excited about the position and the strength of our balance sheet, you afford us that opportunity.
Speaker Change: Understood. Thank you guys.
Speaker Change: Thank you thanks, Brian.
Speaker Change: Our next question comes from the line of Ryan Connors with Northcoast research.
Good morning, gentlemen.
Speaker Change: Hey, Ryan good morning.
Ryan Connors: So I wanted to actually come at this a little bit from maybe the order board perspective, because it seemed to me that the.
Ryan Connors: So in the press release, there was some more cautious commentary about about order boards tempered order activity I know that there is seasonality.
Ryan Connors: Caveat there but.
Ryan Connors: But it seems like Joe your commentary on the order.
Ryan Connors: Patterns seem much more favorable on the call here. So I'm just wondering if you could unpack that for us a little bit.
Ryan Connors: Obviously, there is seasonality in <unk>, but presumably that would have been known in July with the last guidance was set so something must be incrementally worse than expected. So just trying to get some more color on the order patterns that you're seeing across the businesses and how it boils down to the guidance, but yet gives you is still for some good optima.
Speaker Change: Some into next year, Yeah, no. Good question, Ryan I think one thing is Jeff covered as well.
Speaker Change: Q4 last year order rates definitely slowed down as we got into the fourth quarter and the end of the third quarter. So I think that benefit there as we look at year over year order rates.
Speaker Change: Clearly that comp.
Speaker Change: It's a good thing or is helping us this year.
Speaker Change: But given the lower order rates last year, we did have the benefit of a backlog that would still built up and were working through it as we work through 2023. So some of those those order rates as they accelerate arent showing up necessarily for each business into increased revenue. So thats the balance that we're working through between now and the end of the year I think just in terms.
Speaker Change: Order rates overall.
Speaker Change: As most companies in the industrial space work through some of the overhangs of channel normalization backlog normalization et cetera, we like looking at those just to make sure that we're getting a sense for trends in the business and an indicator, which is why we mentioned them today.
Speaker Change: Obviously, they're not it's not enough to provide a big offset given the comps like I said from the backlog brought on last year.
Speaker Change: But as we look at trends in parts of our business that we want to be prepared for some nice growth going into next year. Those are really good indicators for us.
Speaker Change: Yes, that's very helpful. Now the other thing was at least within our model here. The SG&A was a big Delta. So what are you kind of dig into that a little bit too I know that the two factors you got the acquisition and the leadership transition.
Speaker Change: Again, presumably the leadership transition stuff.
Speaker Change: Stuff would be I would assume pretty well no nothing in the three months would really change there. So just curious if you can quantify those.
Speaker Change: The relative impact of those two things and then as we look into next year.
Speaker Change: It seems like what Youre.
Speaker Change: The key message I'm getting is that really are going to normalize back down. This is a short term blip in SG&A.
Speaker Change: But yeah, when we say SG&A is going to normalize does that mean, we kind of stabilize or do we really large back down just like were lurching up here in <unk> in the second half.
Speaker Change: Yes, Thanks, Ryan couple of a couple of comments there on SG&A overall for the company from them.
Speaker Change: For the full year.
Speaker Change: The two pieces you mentioned, there the CEO transition and the incremental acquisitions.
Speaker Change: The CEO transition and the full year impact on 2024 is going to be in that three to $3 $5 million range total cost overall.
Speaker Change: <unk>.
Speaker Change: We we didn't incur much of that very little in Q2 that will be a Q3 and Q4 impact for us for 2024, and then that will that will normalize in 2025 for.
Speaker Change: Through the acquisitions, we're seeing about.
Speaker Change: About 151 6 million in the third quarter was additional SGA that came from those acquisitions and so if you. If you just annualize that youre going to be somewhere around $6 million of additional SGA pick up.
Speaker Change: North of $6 million for that the other increases we've seen in the SG&A part of that is just coming from normal inflation.
Speaker Change:
Speaker Change: We've got to continue to be competitive in compensation expenses for employees across the globe. Some economies outside of the globe, we're seeing much higher rates of inflation than what we're seeing here in the U S.
Speaker Change: Certainly those those numbers are coming coming through as well hopefully somewhat offset by.
Currency translation, but not fully not fully covered by that.
Speaker Change: Are there and then.
Speaker Change: We are continuing to make some strategic investments in areas, where we want to grow in Melbourne, and we expect that those.
Speaker Change: Investments will start to come through in 2025, and maybe Ryan just to build on that I think those investments largely.
Ryan Connors: We've executed so we're working on digital tools to make it easier to do business with we're working on some website. It has since working on a number of things that largely will be behind us as we go into 2025, So I think.
Ryan Connors: Where we didn't get the growth, which makes SG&A stand out a little bit more to your point most of these were known.
Ryan Connors: Some of the other ones in terms of managing our shorter term cost actions and just making sure we get that in line. So we can reinvest in 2025 those efforts are well underway and to Jeff's point, we have some work to do in Q4 to fully realize those.
Yes.
Speaker Change: Very helpful color. Thanks for your time.
Ron: Thank you Ron.
Speaker Change: Our next question comes from the line of Mike Halloran with Baird.
Mike Halloran: Hey, good morning, everyone.
Speaker Change: Maybe Mike Mike.
Mike Halloran: So a couple here first.
Just can you talk to two things here inventory levels through the water channel.
Mike Halloran: Similar to how you're thinking about pricing to the water channels, both on the headwater side and on the.
Mike Halloran: More traditional product side.
Speaker Change: Yes, we can we can Mike I would tell you that I think the inventories.
It's been a good spot it's normalized.
Speaker Change: We have opportunities to continue to bring inventory down and we'll do that through the fourth quarter as we typically do consistent with the seasonality that we see in the company and that'll that'll generate some good cash flow free cash flow in through the through the end of the year.
Speaker Change: Our free cash flow through three quarters.
Speaker Change: 83%.
Speaker Change: Free cash flow conversion, we expect that that's going to be north definitely north north of a 100% at the end of the year. So.
Speaker Change: Inventory levels are generally normalized in the channel.
Speaker Change: In the in the water systems business in the distribution business.
Speaker Change: Also think that they've taken their inventory levels down.
Speaker Change: To be consistent with where we are obviously the improvements in supply chain and fewer supply disruptions and availability of product.
Speaker Change: And helped provide the ability to rationalize and normalize.
Speaker Change: Inventory.
Speaker Change: On pricing.
Speaker Change: Water systems obviously.
Speaker Change: As a global business and so there's a little bit of.
Speaker Change: If you kind of have to take each part of the.
Speaker Change: Business individually, but overall, we're getting positive pricing.
Speaker Change: Our water business getting positive pricing in our distribution business for engineered products or high value added products pumps motors drives and controls.
Speaker Change: In distribution, we do have unfavorable negative pricing on commodity products.
Speaker Change: Plastic pipe being the big driver there, Matt those price decreases or kind of low mid single digits quarterly and have been for several quarters and so.
Speaker Change: What we're what we're doing there to try to manage through that.
Speaker Change: Bringing our inventory down turn that inventory faster. So we don't have it in there and our warehouses as much as.
Speaker Change: As long as we did previously so that should help lessen the impact, but we're still seeing an unfavorable pricing there in that business and maybe just to comment how we're thinking about that environment here as we go into next year. Our general view is price and productivity offset inflation will probably lean heavier on productivity next year I think pricing is a more normalized type environment.
Speaker Change: Inflation settles, a little bit, but we still expect labor inflation.
Speaker Change: Other challenges obviously, we're in.
Speaker Change: Interesting global time, so we're looking at those levers, but probably a more normalized environment with some.
Some more measured price increases as we go into 2025.
Speaker Change: Makes sense I appreciate that and then Jos heard your early comments on kind of first impressions, but question is you inherited a company that was good.
Speaker Change: Good spot organizationally, and so where is the focus for you from an iterative change perspectives.
Speaker Change: Or where do you think different emphasis Mike.
Speaker Change: As you think about where.
Speaker Change: The early days of the company and what might shift a bit.
Mike Halloran: Yes, no. It's a really good question and you're right I mean, I'm very thankful to have come into a very strong and well performing company.
Mike Halloran: It's been it's been fun to go through the summer and spend time with Greg and travel around the world that visit the team I can tell you what I when I think of and we just we just came through a great review with our board.
Reviewing our strategy I think the seeds of those opportunities.
Mike Halloran: Are there right now and I look at some of our new products and the innovation that we're bringing to market. One thing thats exciting to me is is.
Mike Halloran: Given the close touch we have with customer and the new products. If you look at the electrification and the focus on efficiency some of our new variable frequency drives for for industrial and residential are tremendous at some of these on the market today like our our Q drive.
Are coming to market like our <unk> drive other things in terms of different Iot solutions or some of the markets that I talked about before where frankly it is demonstrated.
Mike Halloran: We're compared to some of our peers are younger pump company and the presence and the recognition in the groundwater space is through just a ton of hard work ton of great products and a ton of customer intimacy I think some of those other verticals really affords us the opportunity to build that same reputation in <unk>.
And industrial and other spaces that residential so for me a little bit there is to work towards I'd, probably use more than my team.
Mike Halloran: Or they are tired of hearing which is about focus and velocity, which is let's focus on some of the needle movers and let's really get them moving and moving quickly. So some great feeds and great innovation and ideas are there and I think that's going to be my start.
I would mention that and I think for those that know my background growing up running running operations and supply chain I think the ability with data and digital and digital tools to further integrate the business improved planning improved forecasting improved visibility.
Mike Halloran: Those are some areas that we're going to focus on as well just to make sure that that as the markets do turn and some of them we expect.
Mike Halloran: Will come faster than most.
Mike Halloran: Most predict.
Mike Halloran: End to end Franklin <unk> ability to manufacture to produce and distribute is very unique. So I think it gives us a nice opportunity.
Speaker Change: Great really appreciate that thank you.
Mike Halloran: Okay.
Mike Halloran: Thank you Mike.
Speaker Change: And our next question comes from the line of Walter Liptak with Seaport Research.
Walter Liptak: Hi, Thanks, Good morning, Joe and Jeff Good morning.
Walter Liptak: I wanted to ask about the fueling business and you talked a little bit Joe about.
Walter Liptak: Major retailers the projects are looking for next year I Wonder if you could provide maybe a little bit more detail.
Walter Liptak: Or are they looking.
Walter Liptak: Us versus international.
Walter Liptak: The risks.
Walter Liptak: Risks.
Walter Liptak: Some of your competitors are talking about labor risks and some other things that.
Walter Liptak: Could impact.
Walter Liptak: Fueling.
Speaker Change: Yeah, No I think it's a good question the U S. It's been I think we mentioned this a few times times has been relatively stable. Some of the pullback has been a little bit more in our international business, but maybe just starting in the U S. One thing as a manufacturer.
Walter Liptak: Big user of labor ourselves around the world.
Walter Liptak: Labor constraints have been a challenge in terms of some of the build outs from our major marketers.
Walter Liptak: It's hard to predict whether that temporary but I think what you're finding is the labor market, that's a little bit less less volatile right now going into 2025 years, we've seen post COVID-19.
Walter Liptak: So that gives us some confidence that I think gives our marketers some confidence as well as we've talked about before interest rates in a rising environment definitely make it more challenging for bigger capital deployed.
Walter Liptak: We don't know what the fed's going to do no one does but I think the expectation that that tempers, a little bit as well I think both of those indicators.
Walter Liptak: Are generally positive and some of this is just feedback in terms of we've got great partners. The major marketers we work with we worked closely with.
Walter Liptak: As they see those opportunities we are ready to serve them. So in general I would say North America, we feel we feel.
Walter Liptak: Pretty good about I think international is a little bit harder just given.
Walter Liptak: Some of the other disruptions that we see around the world, but I wouldn't call out.
Walter Liptak: And just make this case Franklin to commitment.
Walter Liptak: Two manufacturing and serving customers around the world I think youll see the benefits of that result, and I think thats, a little unique to our business our growth in Latin America, our growth in Europe, our growth in APAC, we feel good about those and finding the right opportunities to be able to grow the business fueling has those opportunities as well, which is why we have.
Walter Liptak: Highlighted those specifically in the call today.
Walter Liptak: Okay.
Walter Liptak: Okay, great. Thank you.
Walter Liptak: And.
Speaker Change: Wanted to switch over to just the $3 million to $5 million of restructuring that you guys are doing.
Speaker Change: I don't really recall you guys doing.
Speaker Change: Restructurings in the past so I wonder if you could just provide some detail.
Speaker Change: Somehow across the board or is it strategic to.
Speaker Change: Different parts of the business.
Speaker Change: Just any color you can provide there.
Speaker Change: Yes, Thanks will.
Let me, let me give a little additional color there.
Speaker Change: As I indicated in the prepared remarks.
Speaker Change: I can't get too deep into the into the details here or is it still a work in progress and were still working through some of the some of the things we're looking at opportunities, but some of the key key areas. We're focusing on are.
Speaker Change: Certainly in the near term.
Speaker Change: We're focusing on lowering them.
Speaker Change: Creasing, our discretionary cost in the company.
Speaker Change: So we got to tighten the belt a little bit given.
Speaker Change: Given where we are from a topline perspective manage cost.
Speaker Change: These are primarily I would say across the company, it's not there's not a heavy focus on a more heavy focus on one area or another.
Speaker Change: Certainly holding back on.
Speaker Change: We're adding additional costs for new cost into the company.
Speaker Change: And areas, except where they are absolutely critical.
Speaker Change: Generally that's.
Speaker Change: Including head count along with it but the big focus on managing cost leader, we are evaluating some footprint optimization projects I would say those are across the manufacturing and distribution parts of our business.
Speaker Change: And I can't say much more about that because we're really working through what those options and details would look like at this point in time.
Speaker Change: And then just another parts of the business look infrastructural improvements, where we can take cost out.
Speaker Change: Atwood.
Speaker Change: That would impact our bottom line as we move into 2025 and.
Speaker Change: So at a high level I would say those are.
Speaker Change: Primary areas of focus.
Speaker Change: Okay, great. Okay, and then just the last one for me.
Speaker Change: Different topic altogether, Joe you brought up the Hurricanes and <unk>.
Speaker Change: Not you Didnt see an impact did you mean that you didn't see an impact in the third quarter or you Didnt see an impact in the fourth quarter. Two yes, sorry, if that wasn't clear I think in Q3, we didn't see much material just given the timing Jeb.
Speaker Change: Generally for something like that.
I would just I would say we deal with Hurricanes every year make what was unique about this one was how one obviously helane pushed inland. So one comment I made is our team did a great job with some good volunteer service and good supportive of local customers and the communities to make sure that we're bringing our products there for us.
Speaker Change: From an impact standpoint, generally a hurricane will slow revenue down immediately and then provide us some opportunities as recovery efforts happen. So I think right now what we would say is as we came into Q4 some of that slowing down definitely was there, but we think thats a push to the right and largely for this year for us.
Speaker Change: It won't have a significant impact.
Speaker Change: Okay, Great alright, thank you.
Speaker Change: You got it.
Speaker Change: Next question is a follow up from Ryan Connors with Northcoast research.
Speaker Change: Yes.
Ryan Connors: Yeah. Thanks, Thanks for the follow up just a clarification on housekeeping.
Ryan Connors: So the three to 5 billion in.
Speaker Change: Restructuring I think you mentioned, Jeff that that is not.
Speaker Change: Not contemplated in the guidance so the guidance is effectively.
Speaker Change: non-GAAP figure then we would be $3 million to $5 million lower than that on the GAAP net income is that.
Speaker Change: Our operating income is that the right way to think about that.
Correct Ryan based on Okay, just wanted to clarify.
Speaker Change: Based on what actions we ended up taking yes.
Speaker Change: Got it okay. Thanks again.
Speaker Change: Youre welcome. Thank you for the follow up.
Speaker Change: Thank you.
Speaker Change: I'll now hand, the call back over to Chief Executive Officer, Joe Brzezinski for any closing remarks.
Joe Brzezinski: Thanks, Andrew I want to thank everyone for joining us today, we hope you all have a great week, we look forward to some good progress and to see you all again after the fourth quarter. Thanks, everyone.
Speaker Change: Ladies and gentlemen, thank you for participating this does conclude today's program and you may now disconnect.
Speaker Change: [music].
Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].