Franklin Electric Co., Inc.

Good morning, ladies and gentlemen, and welcome to the Franklin Electric Reports second quarter 2021 sales and earnings conference call. At this time, all the participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would like to hand the conference over to your host, Jeff Taylor, Chief Financial Officer.

Thank you, Whitney, and welcome everyone to Franklin Electric's second quarter 2021 earnings conference call. I'm excited to be joining you on my first call as Franklin Electric's Chief Financial Officer. With me today is Greg Singstack, our chairperson and CEO, and John Haynes, our former Chief Financial Officer. On today's call, Greg will review our second quarter business highlights, and I will review our second quarter financial results in more detail. When we're through, we'll have some time for questions and answers. Before we begin, let me remind you that as we conduct this call, we'll 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 the call are based on information currently available, and if 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 Sengstad.

Thank you, Jeff, and thank you all for joining us. We are very pleased with our robust performance in the second quarter. From a financial perspective, we delivered record sales, operating income, and EPS for any quarter in the history of Franco Electric, driven by strong organic sales growth across all of our segments. We continue to benefit from the sustained momentum that has delivered record earnings for the last four quarters thanks to a strong demand environment. At the end of the second quarter, we had record open-order balances. We continue to capitalize on inorganic opportunities as well. In the second quarter, we completed acquisitions of two water treatment companies, Chironix and NuAqua, growing our water treatment position in the U.S. and Canada. We now believe that this platform has reached critical mass, worth of $150 million in annualized revenues, establishing a meaningful foothold in the growing North American water treatment market. As the water treatment market continues to consolidate, our focus on our key factors will help us to stand out among the pack as we continue to build upon our position and have a runway to do so, leveraging our expertise to manufacture and distribute complete water systems from the well to the faucet. Despite supply chain and COVID-related headwinds facing much of the globe, we have reached new records and delivered value for our shareholders, customers, and other valued stakeholders. We are confident that our current strategy will take us far, as we continue to grow as a global provider of water and fuel systems through geographic expansion and product line extensions by leveraging our global platform and competency in system design. Our water systems business had record revenue for any quarter, generating overall revenue growth of 39% and organic revenue growth of 23%. In the U.S., strong housing and agricultural demand combined with continued dry weather drove a 16% increase in groundwater pumping systems revenue in the quarter. Overall, organic growth in U.S. water systems was 17%. Demand continues to be strong across the globe as well, thanks to a recovery in global commodity prices and robust demand in developing regions. Outside U.S., organic water systems growth was 30%, led by our businesses in Latin America, Europe, and the Middle East, all of which continue to see pandemic recovery demand. Despite our record revenues, our water system segment had an unprecedented amount of open orders at the end of the second quarter, in total over $130 million. This compares to about $40 million at the end of the second quarter of 2020 and about $25 million at this time in both 2019 and 2018. Our U.S. distribution business also delivered record performance for any quarter of Franklin's history, producing overall revenue growth of 57% and organic revenue growth of 41% underscoring this segment's role as a catalyst for future growth for our company. Headwater operating income reached $16 million in the second quarter. Quarter after quarter, throughout the pandemic, Headwater's top line has grown and profitability improved. When faced with the same supply chain constraints facing much of the global economy, we leveraged our expertise in the space to build a stronghold that will translate current success into further opportunity over the long term. Our fueling systems business saw increased momentum in the second quarter as well, producing overall revenue growth of 29% and organic revenue growth of 27%. This growth was led by strong performance in the U.S. and Canada, with revenue up 40%, along with sustained strength in Armenia and Latin American markets. We have a strong business in developing regions and have positioned ourselves to capitalize upon the post-COVID recovery as it occurs in those regions. At the end of the quarter, open orders increased to about $45 million from less than $10 million at the end of the last three second quarters. Looking forward, joint systems and grid solutions will continue to play a vital role in many regions across the globe over the coming years thanks to growing energy demand and the build-out of the electrical grid globally. Throughout the quarter, we generated strong free cash flow that will allow us to capitalize on many opportunities that will emerge while continuing to maintain our strong balance sheet. enabling us to reinvest capital in our business. To that end, we see organic and inorganic opportunities across every one of our segments. We look forward to continually growing our presence and updating you on future development. I am extremely proud of our global team for this outstanding performance, especially considering the significant headwinds and challenges we've faced. The global supply chain is still recovering from the post-COVID demand surge. Availability of raw materials and other components is a critical issue for us, and it appears it will remain so through the balance of the year. Additionally, we continue to see rapidly increasing input costs, both for materials and components, and also for freight, which has skyrocketed in the current environment. Jeff will address these issues more in a moment, but our water systems business, in particular, was not able to fully offset the inflation we experienced with price in the quarter. This, in part, explains our water systems operating income margin decline. In response, we have announced additional price increases to be effective in the second half of the year. For some of our business units, this is the third increase in price so far in 2021. Despite the robust demand environment, we are maintaining our current year earnings guidance of earnings per share before restructuring in the $2.85 to $3.05 range, given the rapid increases in cost and supply chain uncertainties. Looking forward, we are excited about the strong foundation we have built by staying rooted in Franklin's five key factors for success, quality, availability, service, innovation, and cost. We continue to see customers return due to the elevated experience and superior products we deliver. We are also excited to position ourselves for success over the long term, providing innovative products for customers and bringing more sustainable practices to the industry. We believe that our ESG initiatives, outlined in our recently updated sustainability report, are integral to our future success. We look forward to continually involving our stakeholders in our sustainability journey and providing further updates on our progress over the long term. Before I turn to Paul and Jeff, I want to go a little bit off script here and just recognize John Haynes. John has been noted as retiring from the company. John started with Franklin Electric in 2008, right before the financial crisis. He steered us through that as our CFO through a number of acquisitions. the creation of our headwater distribution segment, the stand-up of a new water treatment business, and a number of other acquisitions as well across our segments. And most recently, John has navigated us through the global pandemic. And so I just want to take a moment to say thank you to John. A number of you on this call have been following us with John over the years, so I think I'm saying thanks for you all as well. And so I just wanted to do that before I turn the call over to Jeff. So thank you again, John. Thank you, Greg. Jeff.