Franklin Electric Co., Inc.

Good day, and thank you for standing by. Welcome to the Franklin Electric Reports 4th Quarter 2021 Sales and Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your host today, Jeff Taylor, Chief Financial Officer. Please go ahead.

Thank you, Michelle, and welcome, everyone, to Franklin Electric's fourth quarter and full year 2021 earnings conference call. With me today is Greg Singstack, our chairperson and CEO. On today's call, Greg will review our fourth quarter and full year business highlights, and I will review our fourth quarter and full year financial results in more detail. When we're finished, 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 as 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 chairperson and CEO, Greg Singstack.

Thank you, Jeff, and thank you all for joining us. While this call with shareholders is to review our company's performance, I would like to start by taking a moment to publicly congratulate and thank the entire team at Franklin Electric for a record year. It takes a team effort to deliver outstanding results, despite the many challenges we faced in 2021. For the fourth quarter, sales, operating income, and EPS were records for any fourth quarter in our history, and the fourth quarter closed out the highest performing year in Franklin's history as we established new all-time full-year records for sales, operating income, and earnings per share. Demand across the business remains strong with continued strength in all end markets, fueling additional growth and a robust open order balance. Our results substantiate our strategy as we capture the healthy demand across our end markets and advance Franklin as a global provider of water and fuel systems. Supply chain constraints continue to affect our industry and we expect them to continue at least through the first half of 2022. most likely through the balance of 2022 in the case of some input materials in geographic regions. Our team navigated these ongoing challenges and is well prepared to handle future volatility. Our current inventory levels are intentionally elevated when compared to the fourth quarter of last year in preparation for future volatility and in response to strong demand. Inflationary pressures continued in the fourth quarter, increasing material, freight, transportation, and labor costs. In response, we continue to implement our pricing strategy to offset these higher costs and are committed to maintaining margin discipline across the business. Turning to our segments, in water systems, we delivered overall revenue growth of 36%, with organic revenue growth contributing 23%. As I've mentioned in prior quarters, demand has continued to be driven in large part by a robust housing market in the U.S., strong crop prices, dry weather in some regions of the U.S. and globally, in addition to ongoing strong demand in developing regions. In the U.S., groundwater pumping system revenue increased 34% in the quarter, supported by strong residential and agricultural demand. And overall, organic growth in the U.S. for water systems was 26%. Outside the U.S., water systems organic growth was 20%, with solid demand recovery and growth in all regions led by Asia Pacific and EMEA. Our fueling systems business also delivered a strong quarter, producing overall revenue growth of 21%, operating income growth of 18%, and operating margin of 28.1%. These results were supported by a strong pent-up capital demand for infrastructure build-out in the U.S., which we see continuing through 2022. As the pandemic subsides, we expect greater focus on vapor recovery, management, and monitoring in countries outside the U.S. as well, driving additional growth for fueling. Our U.S. distribution business again delivered outstanding results, with overall revenue growth of 50%, alongside operating income growth of 1,000%, and operating margins of 4.8%, continuing to highlight the segment's role as a growth engine for our company. This growth has been supported by sustained demand across the country over recent quarters. Looking ahead, we will integrate our recent acquisition and focus on growing our market share in the U.S. groundwater space. We are focused on developing and using proprietary technology to both improve availability and reduce working capital in this business. We also will continue to thoughtfully increase our geographic footprint. 2021 was a decisive year for strategic acquisitions, particularly in the water treatment space. During the fourth quarter, we completed a small but strategic bolt-on acquisition, B&R Industries, which was our third water treatment acquisition for the year. This latest acquisition is in the southwestern United States, which is a key water treatment market. At the end of the year, we also announced the acquisition of Blake Group, a professional groundwater distributor with 14 locations throughout the northeast United States. As I mentioned, the distribution segment is a key catalyst for long-term growth, and with the integration of Blake, we expand our geographical footprint into New York and the New England markets. I want to welcome our new employees from BNR and Blake to the Franklin team. During the year, we maintained our strong free cash flow generation but delivered less than 100% conversion as we battled through inflationary pressures and invested in working capital to support the strong growth we are experiencing. As we look to the future, we believe we are well positioned to drive strong cash flow consistent with our past performance. Our capital allocation strategy remains unchanged. We will continue to invest in organic and inorganic growth while at the same time returning cash to shareholders. To that end, last month we announced an 11% increase in our quarterly dividend, which marked the 30th consecutive year that Franklin has increased its dividend. This increase is a testament to the efficacy of our capital allocation strategy, our confidence in the outlook of the business, and our historical commitment to deliver increasing returns to our shareholders. Turning to our outlook, after experiencing significant growth in our business in 2021, we expect continued strong demand in our core markets and a preference for our products as we deliver value to our customers by leveraging our five key factors. At the same time, the challenges of global supply and labor constraints, logistics challenges, and inflation remain. While we have entered 2022 with considerable momentum, we expect these challenges to persist at some level for most of the year, and as a result, we are initiating our 2022 full-year revenue guidance in the range of $1.9 to $2.05 billion, with EPS in the range of $3.50 to $3.75. In summary, 2021 was a pivotal year for Franklin. We were well positioned to capture the pent-up demand while at the same time building on our own strong foundation through strategic acquisitions to expand our core offerings in geographic reach, particularly in water treatment, distribution, and our grid solutions businesses. As we look to carry this momentum into 2022, our outlook is based on our five key factors for success, quality, availability, service, innovation, and cost. Our goal is to become an indispensable partner to our customers while ultimately expanding the availability of clean water on a global scale addressing safety and lowest total cost of ownership in the maintenance and operation of fuel stations globally. I will now turn the call back over to Jeff.