Operator: Hello, and welcome to Franklin Electric reports Q3 2026 sales and earnings conference call. At this time, all participants are on a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand has been raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Director of Investor Relations, Dean Cantrell.
Dean Cantrell: Thank you, Andrew, and welcome everyone to Franklin Electric's Q3 2026 earnings conference call. Joining me today is Jennifer Wolfenbarger, our Chief Financial Officer, and Joe Ruzynski, our Chief Executive Officer. On today's call, Joe will review our Q3 business highlights. Jennifer will provide additional details on our financial performance, and then Joe will make some additional comments highlighting our Energy Systems segment and recent acquisitions. We will then take your questions. A replay link of the webcast will be archived for 7 days, and a transcript and audio version of this call will be available on our website tomorrow. 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.
Dean Cantrell: These statements are subject to various risks and uncertainties, many of which could cause actual results to differ materially from such forward-looking statements. A discussion of these factors may be found in the company's annual report on Form 10-K and today's earnings release. During this call, we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the appendix of our earnings presentation. 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. Earlier today, we published a slide deck to accompany our prepared remarks. The slides can be found in the investor relations section of our corporate website at www.franklin-electric.com. With that, I will now turn the call over to Joe.
Joe Ruzynski: Thank you, Dean, and good morning, everyone. Thank you for joining today's call. We had a very busy quarter, and I am pleased to share our progress with you today. Let's move to slide three. We had a very solid Q3. I am proud of our team's performance in light of a sometimes challenging global backdrop. Not just executing for our customers every day and operating in a challenging environment, but bringing new products to market, growing our business, optimizing our footprint, and executing our strategy. Our strategy discipline remains strong and our balance sheet healthy. We saw some market softness localized in Eastern Europe, in the Middle East, and in South America, as the Brazilian elections are providing some headwinds during the quarter. Excited to share today that we have found some great additions to our portfolio in Cat Pumps and now Challenge Pumps.
Joe Ruzynski: We will talk about this later during the call, but both of these deals are aligned with our strategy of a portfolio pointed towards faster-growing markets, where our legacy channel and expertise can help us integrate and grow these acquisitions. As we expect in the future, acquisitions will play an important and balanced role in our growth. The first month of Cat Pumps was a great start, and our teams are excited about the future. Moving to slide four. Our business was up 9% in revenue, with nearly 5% of our growth coming from our legacy business. We did see some pressure on our gross margins as we worked through some operational headwinds during plant moves and dealt with a more inflationary environment throughout the quarter. We delivered adjusted OI growth of over 11%, and we delivered 15% growth in EPS during the quarter.
Joe Ruzynski: We are very satisfied with our overall performance as a company. As we exited the quarter, our order rates remain healthy, our inventory positions are balanced in the channel, and our team continues to find great opportunities to win. We continue to work on pricing and productivity to offset this pressure and have implemented some important restructuring efforts to ensure our business is positioned well from a cost perspective. Jennifer will give some detail to these efforts shortly. Importantly, these efforts and some other recent consolidation and value chain repositioning efforts will bring productivity in 2027. If we can move to slide five, I would like to share our progress on some of our strategic priorities. Our strategy is clear. We are focused on markets that are growing faster, supported by wider macro trends while diversifying our end markets.
Joe Ruzynski: We are adding new channels and customers by bringing innovation and our leading services to broader end markets. In Q3, we saw strong growth again from new products, delivering over $28 million in new sales year to date, accelerating our growth and showing the desire for new Franklin Electric innovations. We continue to expand our reach and saw strong dealer adds in water treatment, and our recently deployed OSI containers helped us to achieve $32 million of sales in the quarter and increases in our share with current customers. As we add muscle and focus to our productivity with our new Chief Supply Chain Officer and Value Acceleration Office, we are building and executing on a sizable funnel as we enter 2027. As a company with a healthy balance sheet and strong cash generation, we are excited about our recent deals and their performance.
Joe Ruzynski: We are announcing a new and exciting one with Challenge Pumps today. That puts us in the operating cycle of the fast-growing mineral extraction market, adding to two great deals we have done in the past few years in this space. As talent and culture are Franklin's bedrock, we are excited to announce Luciana Amaro as our new Chief Human Resources Officer. She brings a strong history of helping companies grow globally and will be a great addition to our team and help us with key integration of the new additions to our Franklin team. Finally, and most importantly, we are focused not only on building the strongest team in our industry, but growing a company that attracts, develops, and retains this great talent. Thank you to our Franklin team for your tireless support of our customers and execution of our strategy.
Joe Ruzynski: I would like to turn it over now to Jennifer to review our financials in more detail.
Jennifer Wolfenbarger: Thank you, Joe. Please turn to slide six. Our fully diluted earnings per share was $1.35 for Q3 2026, versus $0.37 for Q3 2025. Q3 adjusted diluted EPS was $1.50, a new Q3 record, compared to our 2025 Q3 adjusted diluted EPS of $1.31. The 15% year-over-year expansion in our adjusted diluted EPS was primarily driven by the expansion in our adjusted operating income year-over-year as a result of volume growth above market, price discipline, and cost management. This is a continued demonstration of our commitment to expand the earnings power of our business and our dedication to delivering durable earnings even in challenging market environments. In the quarter, we recorded $5 million in acquisition-related costs, $300,000 in water system segment, and $4.7 million in the energy system segment.
Jennifer Wolfenbarger: In addition, we amortized in cost of sales $3.6 million from the impact of marking up acquired inventory to fair value as part of acquisition accounting for our most recent acquisitions, $500,000 in water systems and $3.1 million in energy systems compared to $1 million in the prior year Q3. There were $300,000 in restructuring costs related to continued site consolidation work in Q3 2026 compared to $100,000 in the prior year Q3. The effective tax rate was 24.4% for the quarter compared to 26.9% in the prior year quarter. The decrease in effective tax rate was primarily due to a mix of foreign earnings taxed at rates different than the US statutory rate. Moving to slide 7. Q3 2026 consolidated sales were $633.6 million, an increase year-over-year of 9%.
Jennifer Wolfenbarger: The sales increase in Q3 was primarily driven by organic price and volume growth, the incremental sales impact from recent acquisitions, followed by favorable foreign currency translation. Franklin Electric's consolidated gross profit was $224 million in Q3 2026, up from prior year's gross profit of $208.7 million. The gross profit as a percentage of net sales was 35.4% in Q3 2026 compared to the Q3 2025 gross profit margin of 35.9%, a decrease of 50 basis points compared to the prior year. The gross profit margin was unfavorably impacted in Q3 2026 by inefficiencies driven by recent manufacturing site moves, inflationary material and freight costs, as well as the previously mentioned impact of purchase accounting associated with marking up acquired inventory.
Jennifer Wolfenbarger: The work that we are doing in terms of site consolidation and restructuring will result in productivity that will read out nicely in 2027. Selling general and administrative expenses were $137.2 million in Q3 2026 compared to $123.5 million in Q3 2025. The increase in SG&A expenses was primarily due to the incremental impact of acquisitions in the past year. SG&A as a percentage of net sales was 21.7% in Q3 2026 and 21.2% in Q3 2025. Without the incremental impact of acquisitions and the additional acquisition-related deal costs, our SG&A as a percentage of the net sales was 20.7%, an improvement year-over-year of 50 basis points. Consolidated operating income was $86.5 million in Q3 2026, up $1.4 million or 2% from $85.1 million in Q3 2025.
Jennifer Wolfenbarger: The increase in operating income was primarily due to favorable price and higher sales volumes in Q3. As previously mentioned, there were $5 million in acquisition-related costs and $3.6 million from the impact of marking up acquired inventory to fair value as part of acquisition accounting and $300,000 in restructuring costs in Q3 2026. The prior year Q3 had $1 million from the impact of purchase accounting associated with marking up acquired inventory and $100,000 in restructuring costs. Excluding those items, consolidated adjusted operating income was $95.4 million in Q3 2026, up $9.2 million or 11% from $86.2 million in Q3 2025. The Q3 2026 adjusted operating income margin was 15.1% versus 14.8% in Q3 of last year, a 30 basis point improvement year-over-year. Moving to the segment results starting on slide 8.
Jennifer Wolfenbarger: Global Water System sales were up 5% compared to Q3 2025, driven by additional volume from our recent acquisitions, strong price, and favorable currency exchange on sales. Water System sales in the US and Canada were up 7% compared to Q3 2025. The sales increase was led by sales of residential products, including water treatment, up 13%, and groundwater pumping equipment into the agricultural market, up 9%. Sales of product into commercial and industrial applications were relatively flat. Water System sales in markets outside the US and Canada increased 2% overall. Breaking down the international growth: foreign currency translation increased by 4%, recent acquisitions added roughly 1%, price added roughly 2%, and organic volume was negatively impacted by nearly 5%.
Jennifer Wolfenbarger: Excluding the impact of acquisitions and foreign currency translation, sales in Q3 2026 increased in Asia Pacific as Latin America and EMEA sales were down year-over-year. EMEA sales volume, specifically in Northern Africa, the Middle East, and Eastern Europe, were negatively impacted by the ongoing conflict in the Middle East. From an end market perspective outside the US and Canada, the sales increase was led by sales of products into mineral extraction applications, which increased 71%. Sales of products into commercial and industrial applications were up 3%, offset by sales of residential groundwater products, which were down 12%. Sales of groundwater application into agricultural markets were relatively flat year-over-year. Global Water Systems operating income was $58.9 million, down $1.3 million versus Q3 2025. The operating income margin was 16.7%, a year-over-year decrease of 120 basis points.
Jennifer Wolfenbarger: There was a $500,000 impact from acquired inventory, $300,000 in acquisition related expenses, and $300,000 in restructuring costs in Q3 2026 in the Water segment. Q3 2025 was impacted by $1 million from the impact of acquired inventory and $100,000 in restructuring costs. The Water Systems adjusted operating income was $60 million, down $1.3 million or 2% from the prior year, with an adjusted operating income margin of 17% compared to 18.2% in Q3 of last year. Adjusted operating margin for our Global Water Systems business was impacted by inefficiencies associated with recent manufacturing site moves and higher material and freight costs driven by inflation. Moving to slide nine. Distribution's Q3 sales were $226.1 million, a new record for any quarter, versus Q3 2025 sales of $197.3 million, an increase of 15%.
Jennifer Wolfenbarger: The Distribution segment sales increase was primarily due to higher volumes from increased market share, acquisition related sales, and price realization. The Distribution segment's operating income was $20.6 million, a new Q3 record, a year-over-year increase of $4.3 million. Operating income margin was 9.1% of sales in Q3, an improvement of 80 basis points versus the prior year. Operating income margin increased primarily due to higher sales volume, strong price realization, and continued cost optimization. Moving to slide 10. Energy System sales in Q3 2026 were $91.7 million, an increase of $11.7 million or 15% compared to Q3 2025. The sales increase was primarily due to acquisition related sales from our recent acquisition of Cat Pumps, higher organic volumes, and strong price realization.
Jennifer Wolfenbarger: Energy System sales in the US and Canada increased 15% compared to Q3 2025. Outside the US and Canada, Energy System sales increased 12%, primarily in Europe and Asia. Energy Systems operating income was $23.7 million, down $1.7 million versus Q3 2025. There were $4.7 million in acquisition related costs and $3.1 million in acquired inventory step-up in Q3 2026 in the Energy segment, compared to none in Q3 2025. The Energy segment's adjusted operating income was $31.5 million, up $6.1 million or 24% from the prior year, with an adjusted operating income margin of 34.4%, up 260 basis points from Q3 of last year. Adjusted operating income increased primarily due to favorable price in our legacy Energy business, organic volume growth, and the contribution from our acquisition of Cat Pumps.
Jennifer Wolfenbarger: Moving to the balance sheet and cash flows on slide 11. We continue to maintain a strong balance sheet and robust cash flow, enabling us to invest in future growth and deliver consistent return to shareholders. The company ended Q3 2026 with a cash balance of $159.1 million and with $125 million outstanding under its revolving credit agreement. We generated $139.2 million in net cash flow from operating activities during the first nine months of 2026, compared to $134.7 million in the first nine months of 2025. On Monday, the company announced a quarterly cash dividend of $0.28. The dividend will be payable 19 November to shareholders of record on 5 November. The company purchased 50,000 shares of its common stock for approximately $4.8 million in the open market during Q3 2026.
Jennifer Wolfenbarger: As of the end of Q3 2026, the remaining authorized shares that may be repurchased is about 0.6 million shares. Moving to slide 12. Our Q3 financial results were in line with our expectations and underlying demand remains. Given our strong performance despite mixed markets year-to-date, we are raising our full-year sales expectations to a range of $2.23 billion to $2.3 billion, and a full-year adjusted diluted EPS to a range of $4.62 to $4.82. The revised guidance does not include last night's announcement of our purchase of Challenge Pumps. We continue to maintain a strong balance sheet and will continue to be disciplined as we deploy our capital resources to drive maximum return on investment. Now I will turn the call back to Joe for some additional comments.
Joe Ruzynski: Thanks, Jennifer. As we've shared the last two quarters, this year we're spotlighting each of our segments to give investors a clear view of our focus, differentiation, and long-term opportunities. These spotlights will also serve as a foundation for deeper strategic discussion we'll have on our Investor Day next March. This quarter, we're highlighting our Energy segment. This business will finish with over $350 million in sales this year and is a market leader in technology, customer intimacy, and returns. We have seen this business grow with smarter, more accretive new products, and recently added a new industrial element to support industrial uptime. Our end market segments are in key markets, such as serving the major players in fueling and convenience industry, energy data infrastructure, and diversified industrial markets where uptime defines their ability to win.
Joe Ruzynski: We have a long history in these markets, starting with our expertise in building the leading variable speed submersible pumps over 25 years ago. We built this business with a promise to solve our customer's most important concern about uptime and reliability while helping them achieve the lowest cost of ownership. We performed a series of strategic acquisitions over the years to bring innovative solutions in controlling and monitoring that help us to manage a series of mission-critical systems for our customers. For a quick view of selected solutions, our EVO line fueling and site management system bring right-size options for any operation. Advanced features, intuitive design, and superior scalability, the EVO series is engineered to evolve with our customer's business. It brings highly accurate inventory management and full-featured compliance monitoring for any size fuel system.
Joe Ruzynski: Our new EVO ONE solution, which we highlighted last year as we launched, is an economical turnkey fuel monitoring solution designed for complete system management. As uptime is critical for our customers, our OVERSITE solution empowers fuel marketers and convenience store operators with the ability to monitor critical site equipment for outages and to perform remote resets, maximizing uptimes across the entire site and in the store by resolving common outage issues before they turn into extended downtime. This has been a critical time and money saver as our major customers have expanded their geography reach. Uptime and remote monitoring are key reasons why our INCON Optimizer circuit breaker monitor is a leader in online continuous performance monitor solutions for high voltage circuit breakers designed to facilitate condition-based maintenance with real-time performance and health data.
Joe Ruzynski: Continuing with this theme, our new acquisition of Cat Pumps helps us to serve the heart of any high-pressure flow solution by providing the highest quality and most trusted high-pressure pump brand. Our systems sit at the core of our customer's business and equipment. In addition to our high quality and most dependable products, our sales, service, and support structure is critical for our success. We collaborate, we innovate, we solve problems, and we help our customers win. Our growth and return on that growth are a testament to our team, our strategy, and our performance every day. In summary, our energy business serves some very attractive growth markets. Our blend of innovation, customer service, and intimacy will keep us growing and solving problems for years to come.
Joe Ruzynski: Turning to slide 14, I would like to briefly discuss our recent deals, starting with Cat Pumps that we announced early in September.
Joe Ruzynski: A welcome addition to our great brands. Cat is known globally as a leader in high-pressure piston and plunger pumps, serving OEMs and contractors with the industry's highest quality pumps. Our customers expect their product to perform, and we sit at the center of this with our wide and highly capable product line. This increases our exposure to attractive high growth end markets across mission-critical applications. We expect this to be accretive to adjusted EPS in 2027 and bring an attractive financial profile with more than $100 million in revenue and EBITDA margins above 35%. On to slide 15. To share a bit more about the Challenge Pumps acquisitions that we announced last night. We have entered into a definitive agreement to acquire Challenge Pumps, a leading provider of underground mine dewatering solutions, headquartered in Perth, Australia.
Joe Ruzynski: The transaction is expected to close following the completion of the target's audit process and the customary closing conditions, which we currently expect to occur later this year. Challenge Pumps is an excellent strategic fit with our Water Systems segment and further advances our strategy of expanding an attractive commercial and industrial water management applications. The company has built a strong position in underground mine dewatering through differentiated technology, application expertise, strong customer relationships, and a significant recurring aftermarket business. More than 55% of revenue over the last three years has been generated from recurring parts and service activity. Combined with our existing dewatering and rugged submersible products, it gives us a complete solution for mine dewatering and services. Revenue for this business is about $52 million, and it is nicely accretive to our base Water segment portfolio.
Joe Ruzynski: We like this large and growing market, supported by the electrification trends and the need for critical minerals globally. We believe Challenge Pumps strengthens our mineral extraction platform by expanding our ability to provide mine water management solutions across the mining life cycle. In addition, we see attractive opportunities to accelerate growth by leveraging Franklin Electric's global commercial footprint, customer relationships, and operational capabilities. I will now turn the call back over to Andrew for questions before closing thoughts.
Operator: Thank you. 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 one again. One moment, please. Our first question comes from the line of Ryan Connors with North Coast Research.
Ryan Connors: Good morning. Thanks for taking my call.
Joe Ruzynski: Morning, Ryan.
Ryan Connors: I wonder if you could provide us more detail on the plant moves and the site consolidations, Joe, that you mentioned a few times as a gross margin headwind in the quarter. Can you give us any color on what exactly those were and where we are in that journey, whether we're complete there, whether there's more of that on the way?
Joe Ruzynski: There's a few of them. Some of these we started planning and executing earlier this year or coming into this year. We're starting to get to the point where we see the end in sight, and the comment you heard Jennifer, I think both of us made it about a tailwind in 2027. There's a site in Mexico that we moved to a bigger campus. We've consolidated our Pioneer production line into Oklahoma. We've consolidated some smaller peripheral distribution sites into some bigger ones to give us leverage, economy of scale, better data visibility. In the water treatment side, which is a part of that water business, as we've acquired companies over the last few years, getting to a more regional assembly production testing type environment, we've completed those moves. Water treatment one is done.
Joe Ruzynski: Those other ones that affect water overall, like I said, the moves are done, but we had to run in parallel, and we have some wind down activity. Should have those wrapped up, those ones that I mentioned there, here this year. We also have some other activity around the world, but I think those are the bigger ones where the ramp down, ramp up is just something that we had all of these things at once in the back half. Not a huge cost, but just something we wanted to call out. Also the lift for next year.
Jennifer Wolfenbarger: I'll just add.
Joe Ruzynski: Sure
Jennifer Wolfenbarger: We'll have a little bit of more of that work in Q4. You'll see a little bit more of that. As Joe mentioned, plan to have that wrapped up for the most part in 2026, then read out as nice productivity going into 2027.
Ryan Connors: Got it. Okay. I want to talk about price cost a little bit. You're getting price across all three divisions, but yet inflation's still cited as a headwind to margins. I know we have some acquisition-related margin headwinds as well, but it did sound like inflation was still a net headwind. Does that mean the pricing actions aren't sticking, or we're behind the curve on rolling those out? I'm just curious how the price cost situation looks. I guess each division might be different.
Joe Ruzynski: Yeah.
Ryan Connors: Any comments there?
Joe Ruzynski: We've been satisfied with price realization. Price has been sticky. We know that as we go into next year, there's going to be some more work to do. I think the inflationary environment not only has held strong, but obviously accelerated through the quarter. Most notably, we have a distribution, getting product to our end customer is important for us. I'd call out fuel as a good one or as a clear example. There definitely was some more pressure there than we saw coming into the quarter. I think we've got good plans for price. We're confident that price productivity are going to more than offset inflation. But definitely was some pressure to call out there. I think just overall, I've mentioned this before, Ryan, but we've got a good funnel, some good activity. We feel good about material productivity and plant productivity going into next year.
Joe Ruzynski: There is good offsets to that material inflation, but we definitely saw a bit of that here in Q3.
Jennifer Wolfenbarger: I will just reiterate, price is reading out very solid across the businesses. On average for the enterprise is about 3% in the quarter. We do feel very good about the price actions that we have taken. Inflation just continues to escalate, and we will maintain really good discipline going forward. As Joe mentioned, productivity heading into next year is going to also provide some additional opportunity.
Ryan Connors: Got it. Okay, and then just one last one from me. Obviously you are not giving 2027 guidance today, but we are almost in November and we are all in print for 2027, so any qualitative color you can give us about how you see 2027 shaping up on the top line especially, just any qualitative comments about where you might steer us would be helpful.
Joe Ruzynski: Yeah. Overall, we feel good about our base business. One thing, and you see this in our theme, Ryan, in terms of the acquisitions and where we are focused, but we are really looking at those markets where there is good macro trends, underlying support. I think Jennifer made the comment about some of these areas, these faster-growing markets, we are seeing a nice return. We know that, hey, we are a global company. We like that. The needs for water, for infrastructure, for energy are kind of all over. Given that there is instability, we need to find those offsets, and we feel good about it. The base business, we feel, is going to be solid and strong as we go into next year. Right now, we feel fairly confident as we go into 2027 on the top line, and then of course, with some of the bottom-line work we are doing.
Joe Ruzynski: Right now, elections are going on. We all read the newspaper. It is a crazy world out there. I think the way that our teams operate, our high replacement business, we have added now with Challenge Pumps, an example to that service and replacement business with those macro trends. We feel pretty good about 2027 here as we get into Q4.
Ryan Connors: Excellent. Thanks for your time.
Joe Ruzynski: Thanks, Ryan.
Jennifer Wolfenbarger: Thanks, Ryan.
Operator: Thank you. Our next question comes from the line of Matt Somerville with D.A. Davidson.
Jennifer Wolfenbarger: Morning, Matt.
Matt Summerville: Thanks. A couple questions. Morning. On a pro forma basis for the Challenge acquisition, which I realize is going to close here shortly, how much revenue will Franklin be generating from critical minerals and mining? Is there any update, Joe, you would be willing to provide on where you are at with your data center initiative as it pertains to the water business? Then I have a follow-up or two. Thanks.
Joe Ruzynski: With this deal from a pro forma basis, it pushes us nicely over $100 million. We will come out and fine-tune that here as we exit the year. We will give those numbers. Matt, we actually had a data center update we were going to share with the team, but we did not want to crowd out here the announcement of Challenge today. So we will come back to that. From a data center standpoint, we still continue to make good progress. We have got some nice wins in flushing and in condensation management and power quality. It is still a sub-$50 million business for us. I think what we are excited about from a data center standpoint is that work being done with end customers and on specs. I have mentioned this before. Right now it is the testing and the operational stand-up.
Joe Ruzynski: I think what we can do, and we can do this as a follow-up, is to share more in terms of what the outlook for 2027 looks like. I am sure you have heard our peers. Anyone that has pumps, motors, and drives is playing in this market. The timing and the predictability is one that we have tried to get a little better dialed in. Still making good progress there and that is still something that from a midterm standpoint, we expect to see nice growth. We will also share, and we will do this in March, but we will probably give a preview of this here as we execute for those faster-growing markets, kind of our midterm expectation in terms of how big we expect these markets to be as a percentage of our revenue. We will give updates on that as well.
Joe Ruzynski: This mineral extraction business is a nice growth lever. You heard Jennifer make the comment of up 70% within the quarter. We definitely see a need. These markets are receiving investments. Just long-term trends of electrification and the need for metals and critical minerals is something we feel good about.
Matt Summerville: I know I would absolutely concur on that. How should we be thinking about the go-forward outlook into Q4, maybe a little bit into next year, specifically for the Water Systems business? If you can add some geographic and end market color to that, because you are seeing some demand, I will call it variability from region to region and across end markets. Maybe a little bit more go-forward looking color would be awesome. Thank you.
Joe Ruzynski: Awesome. I will start out and then I will let Jennifer fill in some of the space here. You are going to see a Q4 for water that looks somewhat like Q3. We see mid to high single digit on the top line. We see some of that additional pressure as we talked about, the operational moves and still some inflation, but really set up well from a performance standpoint as we get into 2027. The soft spots that we saw in Q3, we expect those to still be kind of soft. That is in the numbers that I mentioned. The Middle East, Southeastern Europe, it is definitely a bit slower with inflationary pressure there with conflict. In Latin America, specifically Brazil, is important to us. We saw that stabilize as we exited the quarter, but anytime kind of pre-election, some uncertainty there.
Joe Ruzynski: We see that stabilized, albeit at a softer rate. When we talk about APAC, maybe just to comment there, our center of gravity is more in the PAC, not in North Asia. Really that mine dewatering business, we are looking for those identities within region where we can be known for something, be a top-tier player, and that is definitely starting to read out. We think Asia is going to have a nice finish to the year and a nice start to next year. Then North America, we are sharing a lot of numbers here today, of course, but when you look at still good growth in North America. We see that channel expansion, the innovation, I called that out here, new products that we are launching, even in markets that are not high single-digit markets.
Joe Ruzynski: We still see those mid to high single-digit growth, largely work with the team, adding channel, adding customers, adding new products, and we feel good about the North American market as we go into 2028, 2027 as well.
Jennifer Wolfenbarger: I would just add, year-to-date in the water business, we are at a top line growth of just north of 7% in that business. We expect that to continue as we head into Q4. Really good, continue to see good top line growth. As Joe commented on the regions, a little softer in Latin America. In Brazil, I think, the election has sort of settled. We are anticipating that settles things in Latin America a bit. We are seeing good growth in parts of Latin America, Asia Pacific, particularly the PAC side, and specifically in mineral extraction. EMEA continues to be a little bit of a hard spot that we are making up for it elsewhere within the regions, with good, strong performance in US and Canada, and as you mentioned, Australia and parts of South America.
Matt Summerville: Great. Thank you, guys.
Joe Ruzynski: Thank you.
Operator: Thank you. Our next question comes from the line of Walter Liptak with Seaport Global.
Walter Liptak: Hi, thanks. Good morning, guys.
Joe Ruzynski: Morning, Walt.
Walter Liptak: I wanted to ask a little bit about the acquisitions that both of them carry really nice EBITDA margins. I wondered about adding value. Can you improve EBITDA margins from here? Then, asking you about the sales synergies, I wonder if you can tell us a little bit about the go-to market strategy, as a bigger platform, how does that help you in these markets?
Joe Ruzynski: Maybe just to go through those two quickly. If you look at Cat Pumps, as they go to market, they sell other pumps that they bring into the fold, along with their core product in the piston and plunger pumps. From a sales synergy standpoint, from a channel standpoint, what has been fun for us to do and part of that kind of thesis of this combination is we see and touch some of the same end markets that they do today. As a start, we definitely know of and have found some of these opportunities to both bring their product through, but also to bring our products more closely associated with what they are selling. I mean, you look at that little chart there and some of the different flow opportunities, we are touching some of those flow opportunities today.
Joe Ruzynski: Our commercial and industrial business is a focus for us to grow. I think another just point on Cat is the global opportunity we have and as we talk about Latin America as an example, specifically in Mexico, we see those opportunities today. They are not penetrated in some of the geogs we are, so that channel natural sales synergy is there. Your question in terms of can we improve the EBITDA margins? Most of these two deals, I think growth synergies. Let me just say it this way. If you look at the theme of these deals, it is diversification of end markets, faster-growing markets than our core business, and accretive deals. This is important for Franklin, so we want to start in a strong position from an EBITDA accretion standpoint, but we feel we can do more there as well.
Joe Ruzynski: As we are working on global supply chain sourcing material contracts, we see those opportunities with these acquisitions as well. Maybe just to comment on Challenge. We have a good core mining business in pockets in Franklin today and have, Jennifer called out a growth metric from some of the work we have done here the last few years. But we are seeing these opportunities in our distribution business across the US. We are seeing them in Latin America. We have had a long historical presence in Africa, specifically the southern part of Africa there. Again, it is bringing these products together. I thought that this chart here is a good kind of explanation of that, of bringing this Challenge Pump technology, which is really a piece that we were missing, combined with the rugged submersible, the surface pumps we have today.
Joe Ruzynski: It is everything from gold to copper to gravel to uranium to you name it. These opportunities are there. Bringing these all under one umbrella is a nice lift from a growth synergy standpoint, and we do see opportunity to continue to hold and increase these margins.
Jennifer Wolfenbarger: I would just add, particularly on the Challenge business, actually the Cat Pumps business as well. These are critical applications, high uptime. They are running 24/7 and require high level of service and aftermarket coverage, which is right in our sweet spot. That is where we operate in our current existing businesses. We see a great opportunity to continue to take that forward with our operating model.
Walter Liptak: Okay, sounds great. You called out that big growth in mineral extraction for your core business. Are these acquisitions growing at a similar rate?
Joe Ruzynski: They are actually growing at a rate faster than we expected. That 70% number when you look at just raising awareness throughout our channel and bringing these additional products, some of these companies we have acquired going back three, four years, Minetuff and PumpEng. The opportunities to basically serve a wider need for the specific set of operators in mind, it makes it easier for them. We can now bring a wider portfolio in, and we are seeing that growth accelerate. We expect Challenge to continue to grow at nice rates as well. Not only growing the portfolio, but also accelerating that growth rate overall.
Walter Liptak: Okay, great. Thank you.
Joe Ruzynski: Thanks, Paul.
Operator: Thank you. Our next question comes from the line of Mike Halloran with Baird.
[Analyst] (Baird): Hey, guys. Good morning. This is Trent on for Mike.
Joe Ruzynski: Hey, Trent.
[Analyst] (Baird): Hey. So first question here. Really good performance in the distribution business, particularly as it relates to the growth side here. It would be helpful to kind of unpack what you saw in Q3 from the drivers of that between market expansion, you called out water treatment and wastewater on the slide, market channel share, et cetera, and then the durability of those kind of growth drivers as we exit 2026 and move into 2027.
Joe Ruzynski: Yeah. There are really two themes for that distribution business that that team has focused on here the last few years. One is bringing products that we sell in one region to all regions, so kind of building a national capability and set of products. We call it cross-pollination. It is an internal term, but it is essentially if we see needs or we have access to sell and serve customers in one region, making sure we do that in all. Sounds trivial, but it has actually been a nice growth driver because very productively, we can move those capabilities from regional to national. The second thing is, and I know we have talked about this before when we highlighted distribution, but OSI or on-site inventory is essentially a containerized, great technology support, highly capital efficient way for us to expand our reach, and to better serve.
Joe Ruzynski: It helps us to serve customers that are a little harder to get to. It gives them the ability to see and track and have all of the on-site products that they need on a day-to-day basis. So we are winning more, they are winning more, and the margins and turns are healthier for us, which is why you see it read out not only in growth, but also that is a margin lift for us, too. The market is not up. Their organic number was up 10% or 11%. They had a small acquisition, or they had an acquisition in Q2, but just that organic number, that is a lot of really great work by the team. And making sure that they stay on top of price costs, which they have done a really nice job of, so that is a part of it, too. But yeah, really, we are very pleased with distribution's Q3.
[Analyst] (Baird): Yeah. Thank you. Go ahead.
Jennifer Wolfenbarger: I was going to say, price read out very strong. As Joe mentioned, the organic volume growth. We measure the business on really three big growth initiatives: on-site inventory, cross-pollination, and pull-through, and all of those came in better year-over-year in all three metrics, with OSI and on-site inventory growing about 30% in the quarter. So really nice continued growth there.
[Analyst] (Baird): That's helpful. Then similar conversation on the energy side, just kind of moving the performance between the traditional kind of fueling assets, the critical asset monitoring business, what you see in each of those and kind of trajectory as we move forward here in each of those businesses.
Joe Ruzynski: Well, the midterm outlook for that market, we feel good about. Even though we had nice international growth, one piece that, and we talked about this last quarter, we actually expected it to be more, because we can see the projects and the work being done in places like India and Saudi Arabia and Eastern Europe. Those have slowed down a little bit. We're still growing, not quite at the clip we thought. But I think the bigger story there was, and as we profile that segment, is to talk about the innovation and the technology, the problems that we're solving for our customers, and what we're doing for them. So if you think of major marketers or service stations, convenience stores, gas stations, all of these bigger players are expanding their geog and their reach.
Joe Ruzynski: Our tools basically help them to manage that across wide geogs to have all the data to do it online, from remote resets to monitoring their solutions from inside to outside the service station. We just think that focus on innovation and solving problems has helped us, obviously from an accretion standpoint, because these are more hardware, software, highly technical products. Also, they are new to the market, and we are seeing great response. It is a great end market. The next year or so looks strong, but I think what we are doing in that market continues to increase in value and size. We are very pleased with that progress as well.
[Analyst] (Baird): That is great. Last one for me, just kind of on the balance sheet priorities in the near term here. Obviously, we are still very flexible as it relates to a leverage profile. Have some acquisitions coming in, so if there is any constraints in continuing that in the near term, but just preferences between buyback, continued acquisitions, any comments on the pipeline would be helpful. Thank you.
Jennifer Wolfenbarger: Yeah, I would say, given that we have done two pretty sizable acquisitions, we are going to work to digest those over the next 6 months. That has been a priority. Growth is always going to be our top priority from an investment perspective, whether that be internal growth or acquisition growth, and you can see that through the actions that we have taken. We will continue our trajectory of consistent dividend and return to shareholders through dividend. We will also continue buyback of shares. Looking at that every single quarter. Nothing really changed from a capital allocation perspective, from that perspective, with again, just emphasizing our initial first priority is going to be investing for growth and good returns in that growth.
Joe Ruzynski: Trent, just one final comment. I think you see with these acquisitions, your question on are we still committed to dividends and buybacks? Yes. Are we still committed to investing in the business? I think you see that and you hear that as we talk about some of these plant moves and then serving our customers. We want to see all of these read out. As we have had a healthy balance sheet and good cash generation, we see the size of some of these deals increasing. We are excited about that. It brings us the ability to do all of them and make sure that we are kind of firing on all cylinders.
[Analyst] (Baird): Great. Thank you, guys.
Jennifer Wolfenbarger: Thank you.
Joe Ruzynski: Thanks, Trent.
Operator: Thank you. I am showing no further questions. With that, I will hand the call back over to CEO Joe Ruzynski for any closing remarks.
Joe Ruzynski: Thanks, Andrew, appreciate it. Thank you all for joining us today. We feel very good about our performance and, more importantly, our future. We are very positive about the recent acquisitions. The recently announced deal with Challenge Pumps is exciting for us last night. Franklin is still and always is committed to growing through innovative products, consistent returns, and a strong balance sheet. We see our strategy reading out and are on track for a solid 2026 and have good confidence in our momentum as we look to 2027. Our performance this year represents our progress, and our strategy gives us confidence to continue this trend. We are a company on the move, and we want to give a special thanks to our Franklin team for the leadership and contribution to our performance and results this quarter.
Joe Ruzynski: Thanks, everyone, for joining us today, and have a great rest of your week.
Operator: Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.
