Franklin Electric Co., Inc.

Hello and thank you for standing by. Welcome to the Franklin Electric Report's second quarter 2022 sales and earnings conference call. At this time, all participants are in 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 1 1 on your telephone. It is now my pleasure to introduce Chief Financial Officer Jeff Taylor.

Thank you, Andrew, and welcome everyone to Franklin Electric's second quarter 2022 earnings conference call. With me today is Greg Singstack, our chairperson and CEO. On today's call, Greg will review our second quarter business highlights, and I will review our second quarter financial performance in more detail. When we are through, we will have time for questions and answers. Before we begin, let me remind you that as we conduct this call, will be making forward-looking statements within the meaning of the Private Securities Litigation and 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 our 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 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. We gained momentum in the second quarter, leveraging strong demand around the globe in a normal seasonal uptick, resulting in record results, including the highest consolidated net sales, operating income, and EPS for any quarter in Frank Electric's history. It requires tremendous teamwork and commitment to deliver these results, and I want to thank our global team, whose execution and dedication drove these results. Let me cover a few highlights for the quarter before I talk about each business segment. First, demand remains strong across the company's markets, with all three businesses experiencing strong double-digit top-line growth organically, which reflects the growing need for our water and fueling system products. Our backlog has remained elevated at approximately $290 million, essentially flat for the prior quarter. Another bright spot this quarter and a testament to our team's discipline was the sequential margin improvement we delivered, with operating margins expanding in all three businesses as a result of price catching up with inflation, improved operating leverage, and a team's relentless focus on the cost controls, especially in the SG&A. Free cash flow improved during the second quarter, driven primarily by higher net income as working capital stabilized. As mentioned in previous calls, we are purposely carrying higher levels of inventory to mitigate ongoing supply issues and longer lead times. We're planning to reduce our inventory levels by year-end, resulting in greater cash conversion in the back half of the year. Turning to our segments, in water systems, we experienced overall revenue growth of 26%, operating income growth of 42%, and operating margin of 15.8% for the second quarter. Organic growth was 27%, led by pricing actions and strong end market demand across all major product lines of groundwater pumping, surface pumping, the water equipment, and water treatment. In the U.S., organic growth for water systems was 30%. Outside the U.S., water systems organic growth was 23%, with strong growth in all regions of the world. End markets for water systems remain strong, driven by strong commodity and crop prices, dry weather in the United States and other regions of the globe, food scarcity driving growth in agriculture, and a secular trend created from the population migration to rural areas within the U.S. We have not experienced a noticeable decline in U.S. residential demand to date, but we are monitoring this end market closely. We believe these positive trends combined with the stability of water systems due to the high-level replacement demand will continue to drive the business going forward. We reached the one-year anniversary of the Puronix and AquaSystem acquisitions in the water treatment during the second quarter. Our integration activities are going well. We have successfully integrated our U.S. water treatment business on our common ERP system. Operational integration activities continue on schedule. The performance of the water treatment business is exceeding our expectations, and there is more opportunity to grow and optimize this business. Our fueling systems business also had a solid quarter, producing overall revenue growth of 19%, operating income growth of 41%, and operating margin of 30.3%. Organic growth was 21%, due in part to robust demand for infrastructure build-out in the U.S. Looking forward, we expect continued strong demand in the U.S. as major marketers invest in new locations and industry consolidation progresses. Outside the U.S., we expect future investment in new locations and developing regions, as well as a greater focus on vapor recovery, environmental management, and monitoring. Specifically, our revenue in India is growing with what we believe will be a multi-year vapor recovery and fuel station infrastructure buildup. Globally, geopolitical tensions have highlighted the need for an expansion of agriculture, mining, and energy infrastructure as pressures arise from recent conflicts have impacted food, material, and energy supplies. As a result, we believe we will continue to see strong demand within both our water and fueling segments. Our U.S. distribution business delivered another strong quarter with overall revenue growth of 32%, operating income growth of 46%, and an operating margin of 12.2%. driven by solid demand in the U.S. groundwater market, price realization, and the acquisition of Blake equipment at the beginning of the year. The distribution team continues to deliver superior results, underscoring the segment's role as a major growth driver for our company. Our capital allocation strategy remains unchanged. We will continue to invest in our business organically and inorganically, while at the same time returning cash to shareholders through share repurchases and dividends. However, given we are always actively looking for strategic targets, the strengthening of the U.S. dollar may make investments opportunities outside the U.S. more attractive. We will continue to remain prudent and efficient in our approach to capital allocation. We will stay focused on driving returns for our shareholders. The operating environment for our company remains stable during the second quarter, not much better and not much worse, but continues to offer challenges from a supply perspective. Additionally, inflationary cost pressure is persistent, and a team is actively managing all of these. We foresee these headwinds continuing at some level throughout the year, depending on material input and geography. However, we expect the supply chain to begin to improve in the back half of the year. Turning now to our outlook, we expect to carry the momentum from our strong first half into the second half of the year. Our open order balance or backlog remains high, and we continue to experience strong demand globally in our core markets. As a result, we are updating and raising our 2022 revenue and earnings for share guidance. Our new 2022 full-year revenue guidance is $2 billion to $2.15 billion. Our new earnings per share before restructuring is in the range of $4 to $4.20 per share, reflecting an increase in the midpoint of our prior range of $3.63 for our current range of the midpoint of $4.10. I will now turn the call back over to Jeff.