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spk01: Good morning, ladies and gentlemen, and welcome to the Franklin Electric Reports First Quarter 2021 Sales and Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone requires assistance during the conference, please press star, then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. John Haynes, Chief Financial Officer.
spk03: Thank you, Stacey, and welcome, everyone, to Franklin Electric's first quarter 2021 earnings conference call. With me today is Greg Sangstaff, our chairperson and CEO. On today's call, Greg will review our first quarter business highlights, and I will review our first quarter financial results in more detail. When I'm through, we will 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 is accepted 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 chairperson and CEO, Greg Singstock.
spk02: Thank you, John. Thank you all for joining us. We're very happy with our first quarter results. We see the momentum that was building in the back half of last year continuing and presenting us with robust demand environments for most of the end markets we serve. Our financial results in just about every measure were records for any first quarter in our history, including net sales, gross profit, operating income, net income, and earnings per share. Our strategy to grow as a global provider of water and fuel systems through geographic expansion and product line extension, leveraging our global platform and competency in system design, continued to produce strong results as expected. During the first quarter, we continued to expand our water treatment adjacency in water systems, and the distribution segment achieved tremendous organic growth. Our water system business had a record quarter, generating overall revenue growth of 20% and organic revenue growth of 18%. We see multiple signs of demand strength in the water systems and markets, including a strong housing market, the global recovery of commodity prices, drier weather, and robust demand in developing regions. Our water systems revenues also grew by over 3% from price actions realized in the quarter, which were necessary given the significant raw material inflation we continue to experience. Although our dewatering equipment sales declined by about 4% in the quarter, sequentially this decline is much lower than what we had experienced in 2020, due in part to greater international demand. Although still a headwind, foreign currency exchange translation was a lesser impact in our top line than it has been in recent memory at just over 2%. In the U.S., strong housing and agricultural demand combined with continued dry weather drove a 24% increase in groundwater pumping systems revenue in the quarter. Overall organic growth in the U.S. water systems was 11%. Outside the U.S., organic water systems growth was 26% led by our businesses in Latin America, the Middle East, and Asia Pacific, all of which continue to see pandemic recovery demand, with notable strength in Brazil, Turkey, and Thailand. Our U.S. distribution business had an exceptional first quarter. Favorable weather in most of the U.S., pent-up demand for well equipment, and the GaiCon acquisition we made at the end of last year were all factors that drove overall first quarter revenue growth of 58% and 31% organic revenue growth. The revenue growth and distribution was broad-based across all geographies and product lines. The lowest revenue increase in any one of our legacy distribution businesses in the first quarter was 23% over the first quarter last year. Geico started the year strong and benefited in the quarter from the winter storm in Texas that caused multiple equipment failures and replacements in that state. The GEICON integration is going well, and we've already completed the combination of two branches with those from our legacy businesses. Overall, our distribution customers are experiencing some product shortages, notably pipe and well pacing. That puts a, quote, buy forward, end quote, demand of some of these products. As a result of these revenue achievements, our distribution business made money in the first quarter for the first time in its history, reversing the $2.2 million loss in the first quarter of 2020 to $2 million of operating income in this year's first quarter. Our fueling systems business picked up momentum in the first quarter, growing revenue by 3% overall and 1% organically, a meaningful sequential improvement from the overall fourth quarter 2020 decline of 15%. The fueling growth is being led by end markets outside of North America, notably Europe. The Middle East and Africa were up 30%, and Latin America was up 19%. Sales in the U.S. and Canada were flat to last year's first quarter, and sales in China declined by about 19%. Despite the pandemic-related slowdown in new filling station builds, we believe major marketers continue to see filling stations as good investments and have expressed their intention to ramp up builds in 2021. We also believe environmental challenges like corrosion of underground storage tanks caused by alternative fuels creates new opportunities, especially in developing regions where liquid fuel consumption is increasing and greater protection of the environment is necessary. Even with 3% revenue growth, fueling systems achieved a record first quarter operating income of $14.9 million and an operating income margin of 26.2% because of price achievement and fixed cost leverage. Due to better first quarter earnings and April 1, 2021, completion of the acquisition of Pironix, we're raising our full year 2021 revenue estimates to be in the range of $1.45 billion to $1.48 billion in full year 2021 earnings per share before restructuring expenses within the range from $2.80 to $3. In raising our financial guidance, we have assumed there will be no worsening impacts from the global pandemic, and we will continue to offset raw material cost inflation with price. I will now turn the call back over to John.
spk03: Thanks, Greg. Our fully diluted earnings per share were a record for any first quarter in the company's history at 59 cents. for the first quarter of 2021 versus 23 cents for the first quarter of 2020. First quarter EPS before the impact of restructuring expenses was also 59 cents compared to 2020 first quarter EPS before restructuring of 24 cents. Restructuring expenses in the first quarter of 2021 were 0.2 million and were related to various manufacturing realignment activities in the water. and distribution segments and had no impact on earnings per share in the first quarter of 2021. Restructuring expenses in the first quarter of 2020 were $0.9 million and were primarily related to various manufacturing realignment activities in the water segment and resulted in a one cent impact on earnings per share in the first quarter of 2020. First quarter 2021 sales were $333 million Compared to 2020 first quarter sales of $266.8 million, the sales increase from acquisition-related sales was $23.5 million. Sales revenue decreased by $2.9 million or about 1% in the first quarter of 2021 due to foreign currency translation. Water system sales in the U.S. and Canada were up about 21% compared to the first quarter of 2020 due to volume, price, and acquisition-related sales. In the first quarter of 2021, sales from businesses acquired since the first quarter of 2020 were $7.2 million. Sales of groundwater pumping equipment increased by about 24%. Sales of surface pumping equipment increased by about 10% versus the first quarter of 2020. due to strong in-market demand and in part due to lower sales last year due to the pandemic. These increases were offset by lower sales of the watering equipment, which were down by about 8% due to lower sales in the rental channel. Water system sales in markets outside the U.S. and Canada increased by 20% overall. Foreign currency translation decreased sales by 6%, Outside the U.S. and Canada, water systems organic sales increased by 26%, driven by higher sales in all regions of the world, Latin America, Asia Pacific, Europe, the Middle East, and Africa markets. Water systems operating income was $31.3 million in the first quarter of 2021, compared to $18.8 million in the first quarter of 2020, driven by price realizations product sales mix, and cost management. Distribution sales were a record at 95.7 million in the first quarter of 2021 versus first quarter 2020 sales of 60.4 million. In the first quarter of 2021, sales from businesses acquired since the first quarter of 2020 were 16.3 million. The distribution segment organic sales increased 31% compared to the first quarter of 2020. Revenue growth was driven by broad-based demand in all regions and product categories, the GEICON acquisition, some customer purchase pull-forwards, and the Texas winter storm. The distribution segment operating income was a record for any first quarter at $2 million, compared to a loss of $2.2 million in the first quarter of 2020. Fueling system sales in the United States and Canada increased by about 1% compared to the first quarter of 2020. The increase was due to higher demand for pumping and fuel management systems. Outside the U.S. and Canada, fueling systems revenues increased by about 7%, driven by higher sales in Latin America and Amina. Fueling systems operating income was a record for any first quarter at $1,400. compared to $12.1 million in the first quarter of 2020, driven by price realization and cost management. The company's consolidated gross profit was $115.5 million for the first quarter of 2021, an increase from the first quarter of 2020 gross profit of $90.3 million. The gross profit as a percentage of net sales was $34.5 0.7 percent in the first quarter of 2021 versus 33.9 percent in the first quarter of 2020, and improved by 80 basis points, primarily due to better price realization, product sales mix, and cost management. Selling, general, and administrative expenses were $81.6 million in the first quarter of 2021, Compared to $75.6 million in the first quarter of 2020, SG&A expenses from acquired businesses were $4.9 million. Excluding acquisitions, SG&A expenses were higher by about 1%, primarily due to variable compensation expense, partially offset by foreign currency translation. The effective tax rate for the first quarter of 2021 was about 14%. compared to 19% in the first quarter last year due to larger net favorable discrete events, which include tax benefits from share-based compensation and a deferred tax benefit from a tax election made in a foreign jurisdiction. The tax rate as a percent of pre-taxing earnings for the balance of 2021 is projected to be about 20% before discrete adjustments. As Greg mentioned, the company is raising its guidance for four-year earnings per share before restructuring expenses to $280 to $3, basically on the strength of the first quarter results in the recently announced water treatment acquisitions. We expect revenue in the $1.45 to $1.48 billion range, and our free cash flow conversion will be 115% or better for the full year of 2021. Although in-market demand for most of our products remains strong, ongoing impacts of the pandemic, global raw material and component availability and cost are key factors potentially impacting the balance of 2021 results. The company ended the first quarter of 2021 with a cash balance of $118.3 million and generated a record $5.4 million of net cash flows from operations during the first quarter of 2021 versus a negative $4.7 million in the first quarter of 2020. The increase was primarily due to higher net income and lower net working capital requirements. The company's total incremental borrowing capacity was about $645 million at the end of the first quarter of 2021. Yesterday, the company announced a quarterly cash dividend of 17.5 cents that will be paid May 20th to shareholders' record on May 6th. The company purchased 14,000 shares for about $1.1 million of its common stock in an open market during the first quarter of 2021. At the end of the first quarter, the total remaining authorized shares that may be repurchased is about 919,000. This concludes our prepared remarks. And we'd now like to turn the call over for questions.
spk01: Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. And we'll pause for just a moment. Our first question comes from Mike Halloran from Bayard.
spk04: So, a handful of questions here. First, maybe you could just talk a little bit about underlying supply chain trends, how you're looking at pricing, and how you think price-cost balance is out for the remainder of the year.
spk02: Mike, good morning. This is Greg. The supply chain continues to be in the colloquialism of whack-a-mole. We continue to have challenges around the globe, and the team is responding tremendously admirably to the challenges that are in front of us to keep the supply chain moving. We're seeing in all the headline commodities and semiconductors that everyone else is seeing, so I don't think there's anything new on that front. There continues to be a daily battle on that side. As to the cost, input, and price realization. I'll turn that over to John.
spk03: Yeah, so, Mike, we saw, you know, very significant input raw material inflation in our manufacturing entities in the first quarter. I'll quantify that as twice as high on a percentage basis as any first quarter in the last five years. We are going to respond to that with price actions. This is mostly in the water system segment, although it will impact fueling as well. So, we will respond to that with incremental price actions later this quarter in the U.S., in Europe specifically. And then, when we look at the inflation price on an output basis, that was all on an input basis. When you look at it on an output basis through cost of goods sold because, you know, the input stuff gets hung up on the balance sheet for a period and then flows into cost of goods sold. When you look at it on an output basis, we maintained the spread of price over inflation in the first quarter. However, that spread measured in basis points is lower than what it has been for the last four quarters and was lower than what it was in the first quarter of 2020. So we knew this was coming at us. We took price action late last year, earlier this year in anticipation of that. We saw even more in the first quarter than we had expected in our annual operating plan, and we are now going to respond to that with additional price action. Our guidance assumes that we will continue to maintain this positive spread of price over inflation activity. for the balance of the year, despite the fact that it is narrowing in the first quarter.
spk04: So, that's helpful. And just to clarify maybe Greg's comments, I know you mentioned that Headwater was seeing some product shortages. It felt like non-Franklin Electric Water product shortages. Are you seeing any shortages of supply chain pressures that are impacting your ability to put content into the market? in fueling or water, or is that comment just limited to headwater?
spk02: No, it's across the board, Mike. We're seeing some challenges in the manufacturing space. That's really where my comments responded to is that across the globe, we're just continuing to have challenges with suppliers that get shut down on a temporary basis because of COVID, because of availability of parts. We're expediting a lot of products and components We're dealing with the transport of containers on ships that get stuck off the port of L.A. And just as I said, just pretty much anything you're reading in the top line or the headlines of newspapers, it's impacting us as well.
spk04: So in guidance, from a top line perspective, maybe we could just walk through what's embedded in it as in, Are you assuming pretty normal sequentials from here and improvement, deceleration in any specific markets? Any markets where you think there was some pull forward in the short term, or do you think that there's a lot of more backlog that still needs to be let out? Just some context on what the underlying thoughts are within the guidance.
spk03: Yeah, in manufacturing entities, the backlog might remain very strong. As a matter of fact, when you measure the backlog data, in what we can measure from a backlog perspective, it's basically double at the end of the first quarter 2021 than it was at the end of the first quarter last year. So, we continue to expect, you know, the kind of strong organic growth in both water and distribution, but we're not going to say that we're going to expect as strong organic growth that we saw in the first quarter. We also announced an acquisition in water treatment on April 1st. That estimate for Pironix is in our guidance as well. We see a lot of opportunity and tailwind, but these issues that Greg just described combined with the inflation that comes with them is what's causing us a bit of a a bit of a pause and, you know, want to make sure that we see this play itself out in the second quarter in the manufacturing areas. In distribution, again, as we mentioned, there's a lot of underlying demand strengths. And I'm not sure the kind of organic growth that we saw in the first quarter, 31%. should be expected for the full year. But we're clearly discussing or thinking about, you know, solid double-digit organic growth for distribution as we look at the balance of the year. And then their issues, again, are, you know, they're not issues unique to headwater, but their issues, again, are they're starting to feel some tension from a supply perspective. And we'll have to wait and see how that plays itself out. in terms of their top line. But Headwater's got a lot of momentum, broad-based momentum. GEICON has a lot of momentum. And, you know, we expect strong results from them for the balance of the year.
spk02: And, Michael, on the fueling side, you know, great rebound. And, again, we really didn't start seeing a slowdown outside of Asia Pacific from the pandemic in the first quarter of last year. So strong results outside of North America, outside of China. China's still kind of offline for us for the initiatives we were looking forward to and still look forward to in China on in-station diagnostics. But in the U.S. market, we're feeling it was flat. There is a strong sense that we're going to see the rebound in station builds here in the U.S. Actually, one of the constraints there is that resin supplies for fiberglass tanks is in critical supply, and it may cause a push out of some of these availability for people to deliver tanks. We haven't seen that impact as yet, but we've heard in the marketplace that there is a limited availability of underground tanks on a go-forward basis, which may dampen or push out some revenue. But we still see a robust business in the U.S. for fueling as well.
spk04: Hey, great stuff. Thanks, guys. Appreciate it.
spk01: Thank you, Mike. Your next question comes from Walter Liptack from Seaport.
spk05: Hi. Thanks. Good morning, guys. I wanted to stick with the discussion about the distribution segment, and congratulations on getting the $2 million of profit. And you guys have made a lot of progress with it, but I wonder what does that imply for the full year profits that you've turned the corner in the first quarter with profitability?
spk00: And
spk05: And then, you know, you've owned this business for a while, and I'm just wondering why first quarters tend to be losses. Is it like an overhead absorption thing, or are there front-loaded costs for the year or something that run through distribution?
spk03: Yeah, Walt, so on the full year, as I said, we expect really robust organic growth in headwater production, We've talked about 4% to 6% operating income margins in this business. We've been short of that kind of throughout its history. We expect to be solidly in the middle of that range or better for the full year 2021. Other than some of these supply kind of concerns around certain products, this business, again, has a tremendous amount of momentum going right now. In terms of the first quarter, I think it's more seasonal, really, Walt, than anything. It's not really accounting-driven, per se. It's in the U.S. This is the lowest season. It's winter. The ground's frozen. Some of this work that is necessary is just not able to be done because the wells and work sites can't be reached or can't be accessed because of And that typically is what's driven the lower top line. And then, of course, with the lower top line, you have a lower, you lose leverage on the fixed cost base that we have in the business. So we saw the reverse of that, thankfully, here in the first quarter of 2021. And that's a big driver, the top line growth. And then, of course, the fixed cost leverage that we get on top of that is driving profitability in the first quarter.
spk05: Okay, great. Okay. All right, but for the full year, you're thinking in that range of 4% to 6% operating profit margins?
spk03: Yes, sir.
spk05: Okay. All right, great. And I wanted to ask about the profitability in the fueling systems business. I think you called out the strong $14.9 million in profit as a result of MIX. I wonder if there's – and then you also talked about cost management. I wonder if you could talk about which one of those was more meaningful in the quarter and if some of that is sustainable through the rest of the year.
spk03: Yeah, the fueling systems, as we've mentioned in the past, they've done a really nice job at managing the fixed cost base, the SG&A base. It's a little more flexible there than what you might see in the water in the water system segment, Walt. And, you know, they did a good job in 2020 of lowering that fixed cost base. It's coming back slowly. We continue to want to support, you know, the international growth that we're seeing here. We saw in the first quarter, we will continue to see it. But, you know, the incremental margins here are really, really strong. And it's because, you know, the business doesn't have to add much fixed costs. when their top line grows. So that really is the key formula here. They did achieve price as well. All of our segments achieved strong price, and that was a contributor to their profitability in the first quarter as well.
spk05: Okay, got it. Okay, thank you.
spk01: Your next question comes from Matt Somerville from D.A. Davidson.
spk07: Hey, thanks. A couple questions. First, I want to make sure I'm clear. What was the magnitude of uplift you saw maybe from the Texas weather situation as well as the buy-ahead you referenced in the quarter?
spk03: Yeah, we think both of those things. Matt, we're in the $6 million range in total, $6 to $7 million.
spk02: About half and half, Matt. About half from Texas and about half of the buy-ahead.
spk07: Perfect. And then what exactly, I understand the Texas thing, but what would have prompted the buy ahead? And just in the business overall, what's your assessment of channel inventories currently?
spk02: So, Matt, when contractors need piping to install pumping systems and when supplies get tight, they buy piping. And because if they don't have pipe, they can't install. I mean, you need all the other products as well, but pipe is a critical item. When you get an event like you had in Texas, you get a hurricane, something like that, everyone starts buying up pipe. And so that's what we were seeing. That said, because of generally the supply constraints we're seeing, I don't get a sense that there's a whole lot of channel inventory that is out there. Our working capital actually declined on a trailing 12-month basis at our distribution business at Headwater. What they're buying, they're putting in the ground with the exception of, again, maybe a little buy-forward on the pipe product.
spk07: And then as a follow-up, with respect to North America groundwater, in one of your comments, I think it was mentioned that it was up 24%. Can you attempt to parse out kind of what you're seeing in resi versus ag around that 24% number?
spk03: Yeah, the resi is up more than that. Ag was up about 11%, Matt. So our ag, we isolate certain product categories that we call ag, and when you look at those in North America, they were up about 11%. The residential product categories were up more significantly.
spk07: Got it. And then just maybe two other quick ones. You mentioned, I think in the water business, you took about 300 basis points of price on a year-over-year basis in Q1. A question asked earlier on the call, in order to maintain the price-cost equation you referenced, John, based on where spot prices are for things like steel, copper, resin, aluminum, et cetera, all things you used, in fairly large quantities, how much additional price do you think you need to take in that business?
spk03: Yeah, it depends on that market, Matt. But, you know, the big thing is this inflation exceeding expectation on an input basis in the first quarter. I think it's in the 75 to 100 basis point range or something like that that you know, as we see these FIFO layers start to flow through in the second and third quarter, they're going to have these higher input costs in them, and we need to have more price to offset that. So that would probably be my best estimate on the water system side.
spk07: Got it. And then just lastly, one of you mentioned China fueling down 19%, not necessarily a surprise, but maybe looking for an update on are you starting to see any movement at all on that ISD initiative? Do you think it's sort of a mute issue in 21, not going to happen? What I guess is the right way to think about that?
spk02: Yeah, Matt, that's tough. We're seeing a little bit of activity and a little bit, maybe less than 10% of the market activity. And the challenge you've always had with China is it's been rather opaque. And so when it comes on and how fast it comes on is not clear. evident to us at this point. It's out there, the regs are out there, the needs are out there, but when it turns on and how fast it turns on is not necessarily apparent at this point.
spk07: Got it. Thank you very much, guys.
spk01: Your next question comes from Chris McGinnis from Sidoti & Company.
spk06: Good morning. Thanks for taking my questions in the next quarter. I was just wondering if you could talk a little bit about the Pyronix acquisition, how that adds to the business, and I think that's the third acquisition since November. Can you just talk about the landscape for M&A going forward as well? Thanks.
spk02: Sure, Chris. So, yeah, this is the third acquisition since we got into water treatment now a little over a year ago, and What we're doing is we see an opportunity. It's a very fragmented business. It's also a business that is in a nice adjacency for Franklin because much of the product goes through professional contractors, whether they're water quality dealers, they're plumbing contractors through the plumbing channel, or through our strong position in the groundwater channel. So we just see this as just being a natural and growing adjacency for us. And we've been learning a lot about the space and about the product requirements, and about the key factors for serving the industry, and that's what we've been doing over time. And as you've seen, Franklin, in the past, we'll buy smaller businesses, we put them together, we get operating leverage, we learn about the industry, and that allows us to grow then organically. And you can see it a little bit like what we do with distribution. We've both have bought businesses and put them together, and then once we combine them, we get that operating leverage, and then we get some nice organic growth. So we see water treatment, again, as being an important space, a relatively rapidly growing space, and one, it's a natural adjacency here in North America. And then because we have reached outside of North America and expect that water treatment is going to be, you know, is a demand across the globe, we'll see how we do that over time as well.
spk06: Great. I appreciate that. And I guess just the landscape for additional M&A going forward, you know, is there a good market? Is things starting to rebound? Are you seeing valuations starting to pick back up? Maybe just any color you can add. Thank you.
spk03: Yeah, I think, Chris, the pipeline is fairly robust. I would say that, you know, the expectation, sellers' expectations are high, certainly historically higher than where Franklin is typically transacted. Greg mentioned this water treatment space, which is a targeted adjacency for us right now. It's highly fragmented. We think there's going to continue to be opportunities. We see some opportunities in the water treatment space. Every deal is different, but There's the real possibility that we could continue to see opportunity there. The same is true really on the distribution side. I mean, there's fewer kind of end properties out there right now, we would say, that might be the kind of property we want to own. But there are some. And, you know, we've done a fair number of acquisitions here, so we can be fairly selective. We think we know how to value these properties kind of the right way. But they're out there, and, you know, we continue to look at a handful of those type of properties as well. So I would say generally that, you know, the climate for M&A is not bad right now. you know, we've got a reasonable pipeline and have a look at a few things. And, you know, we expect that to continue. You know, what we saw last year, and I think we may again see this year, is, you know, a lot of these sellers are taking the read on tax law as kind of their indicator of what to do. And, But if the U.S. tax situation moves the way that it is expected to move, we might see more people interested in transacting before those changes take effect. I don't know. But we know that for the kind of sellers that we're talking to, that tends to be a pretty big issue.
spk02: Chris, one additional point is that over the last several years, I think the last 10 deals for Franklin have all been in the U.S. and Canada. And that's not for lack of interest or effort outside the U.S. and Canada, but again, for the properties we're looking for, these are family-held businesses. It needs to be timing for the family or an event. But we continue to look at growing globally and have an appetite to do transactions outside the U.S. as well. We've done many of them in the past and I think we've done pretty good at it. So we continue to look for deals across the globe. It's just been more opportunity for us in the last couple of years than it has been in the U.S. and Canada.
spk06: I appreciate the call. Thanks for taking my questions, and good luck in the future.
spk02: Thank you, Chris. Thank you.
spk01: I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Greg Singstack.
spk02: Thank you, Stacey. We appreciate your joining us today. I look forward to speaking to you in July with reviewing our second quarter results. You all have a good week.
spk01: Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.
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