Franklin Electric Co., Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Franklin Electric Reports Second Quarter 2020 Sales and Earnings Call. At this time, all participants are in listen-only mode. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you would like to ask a question, you need to press star 1. And I would now like to turn the call over to Mr. John Hines. are chief financial officer. Sir, please go ahead.

Thank you, Rainn, and welcome everyone to Franklin Electric's second quarter 2020 earnings conference call. With me today is Greg Singstack, our chairman and CEO. On today's call, Greg will review our second quarter business results and the impacts our company is experiencing from the global pandemic, and I will review our second quarter financial results. When I'm through, we'll have some time for questions and answers. 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. A discussion of these factors may be found in the company's annual report on Form 10-K and in today's earnings release. All forward-looking statements made during this call are based on information currently available and except as required by law, the company assumes no obligation to update any forward-looking statements. With that, I will now turn the call over to our Chairman and CEO, Greg Singstack.

Thank you, John. Thank you all for joining us. Similar to last quarter, I am going to cover four topics in my prepared remarks. First, I would like to address the health status of our employees. Second, I will review the results of our second quarter. Third, I will review the current state of our business. And fourth, give you our current thinking about how we see our business for the balance of the year. So first, the status of our employees' health. We continue to monitor our facilities globally. Our global product supply leadership and facilities teams have done a great job maintaining protocols to keep our people safe. We continue to follow the guidelines from the U.S. Center for Disease Control, the CDC, other global health authorities, and national, state, and local government requirements and guidelines. I will now review the second quarter 2020 results. No one wants to report sales and earnings declines, but given the environment, I'm very proud of everything our team accomplished during the growing global pandemic. The product supply organization worked thoughtfully to keep the supply chain, factories, and distribution moving while maintaining a safe workplace under guidelines that were changing frequently. Sales, marketing, finance, IT, and other support functions continue to operate often remotely. It's been quite a journey for us and for all of you on this call. It's not over. but the Frank Electric team is even more nimble in its response to the challenges we have been presented. Turning to the quarterly results, similar to the first quarter, our second quarter results were better than our expectations we had at the time of our last conference call on April 28th. While manufacturing revenue was down double digits, improved mix, margins, and reduced operating expenses produced operating income that was higher than our expectations. Our distribution segment revenue was ahead of expectations and second quarter sales and operating income were a record. You may recall that due to COVID-19 essential work restrictions in several states, distribution segment revenue was down 4% in April as compared to last year. However, with more normal weather and a relaxation of most restrictions, our distribution segment finished a quarter up 6% compared to last year. In the second quarter, our water systems revenue declined organically. The primary driver of this was the continued low level of sales of large dewatering pumping equipment to mostly equipment rental companies in the U.S. It was exacerbated by the decline in oil prices. These pumps are also used in mining, municipal, and other industrial applications. The decline in dewatering pump sales was the primary factor leading to the sales decline in our U.S. and Canada water business. Sales in the plumbing channel were also lower. However, from our channel checks, we believe most, but not all, of this decline is due to inventory destocking. Groundwater equipment sales in the US and Canada grew organically in the quarter. Outside the US and Canada, water system sales in our major end markets of Asia, Pacific, Amina, and Latin America grew 9% organically. These end markets represent 40% of our global water system sales. Unfortunately, revenue in India and Southern Africa which accounted for approximately 3% of our water system sales in the quarter, was down about one-third due to those countries basically being shut down for about a month. The fueling business revenue decline in the quarter is pretty much in line with what we expected. The business in the U.S. slowed dramatically, and outside the U.S., business continued to be soft. Business in China continues to be down about 60% from last year's levels. During the quarter, on a consolidated basis, we continued our focus on the reduction of working capital. The ratio of working capital to trailing 12-month net sales improved from the second quarter last year. This improvement, along with other factors, improved our free cash flow materially. With our seasonality, free cash flow is typically negative for the first six months of the year. I'm pleased to report that for 2020, our year-to-date free cash flow exceeded net income. As we reviewed with you at the end of last quarter, the global pandemic has primarily impacted our 2020 revenues in four areas. In water systems, demand for our largely watering pumps sold into a variety of industrial applications has diminished. This in large part to the sale of this equipment to rental companies that support oil and gas production primarily in North America. As we have seen historically, this is one of the most cyclical areas of our water systems business. Our efforts to grow our large dewatering pump sales through geographic channel and in-market diversification has mitigated this situation somewhat, and we expect sales in the back half of 2020 to improve sequentially. Also in water systems that are consistent with what we experienced in the financial crisis of 2008 and 2009, we have seen our customers significantly reduce purchases from their suppliers to bring down their existing inventories in response to the uncertainty of future demand and to preserve cash. We see this is particularly true with our larger U.S. customers who buy surface pumping equipment for wholesale and retail distribution and to a lesser extent in our groundwater channel. We believe the impact of this destocking is mostly behind us. The third area of end market disruption is in our fueling system segment. With reduced miles driven in the U.S. and the commensurate reduction in store traffic earlier in the second quarter, several large C-store marketers deferred or canceled plans for new station builds and upgrades. However, with gasoline consumption recovering, some of these marketers have decided to move forward with their original or a reduced plan. Additionally, although we see some signs of recovery in our fueling revenues in China, we knew 2020 would be a transitionary year between regulatory mandates there. Our current thinking is that our 2020 China fueling revenue will be about half of 2019. Finally, the strengthening of the U.S. dollar versus many global currencies hurts our year-to-date translation of foreign-denominated sales and earnings. John will give more details on this in a moment. Looking forward, as we enter the third quarter of the year, our global supply chain is operating near normal. Supplier lead times have come down and are similar to the fourth quarter of 2019. To give some sense of our current revenue, during the first weeks of July, our distribution segment sales were up 8% over the same time last year. Water system sales are up 11% over last year. Fueling system sales are down 16% as compared to last year. Last quarter, we withdrew our earnings guidance. We had developed several scenarios. However, the range of our outcomes was so large and the uncertainty so great, we did not believe it appropriate to provide guidance. In looking back, our team delivered better than what we considered our, quote, most likely, unquote, scenario. With this outcome, we are reinstating guidance. This guidance is based on our internal forecast, which we routinely update in June. Since then, however, the growth in positive COVID-19 cases in the U.S., Brazil, and other countries has accelerated and uncertainty has increased. Therefore, while we are reinstituting guidance, we have expanded the range of our guidance to reflect this greater level of uncertainty. We currently believe that we will achieve 2020 earnings per share before restructuring expenses of between $1.75 and $1.90. We also believe that our 2020 free cash flow conversion will be north of 130% of net income. I will now turn Over the call, back to John. John.