Franklin Electric Co., Inc.

Good day and welcome to the Franklin Electric Reports first quarter 2023 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 one one on your telephone. You will then hear an automated message advising that your hand has been raised. To lower your hand, press star one one again. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Vice President of Finance and Investor Relations, Sandy Statzer.

Thank you, Andrew, and welcome everyone to Franklin Electric's first quarter 2023 earnings conference call. With me today is Greg Stenstack, our Chairperson and Chief Executive Officer, and Jeff Taylor, our Vice President and Chief Financial Officer. On today's call, Greg will review our first quarter business highlights, then Jeff will provide additional details on our financial performance. We will then take questions. 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 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 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 Greg Sinsek.

Thank you, Sandy, and thank you all for joining us. The Franklin team delivered a strong start to the year and solid results by achieving first quarter records for sales, operating income, and earnings per share. Global demand for our manufactured products and distribution offerings remains healthy. All three of our segments delivered higher top line sales driven by elevated demand across many of our end markets, increased volume in our water and distribution businesses, and pricing all more than offsetting foreign exchange headwinds. We do, however, expect the year-over-year impact of pricing will moderate as we progress throughout the year. Further, we continue to see sequential improvements in our supply chain, giving us greater predictability and enabling us to increase shipments. While our open-order balance remains elevated at approximately $230 million, The past due portion of this backlog has been reduced $60 million since the peak in the summer of 2022. Our record first quarter performance benefited from operating leverage inherent in our business that drove enhanced operating margins for the quarter on a consolidated basis. Inventory for the quarter is up sequentially, in line with normal seasonal patterns, but still higher than we'd like. We were focused on reducing inventory over the course of the year by increasing shipments, continuing backlog conversion, as well as decreasing safety stock to more normal levels. Turning to our segments, water systems delivered record first quarter sales and operating income, with revenues growing 12 percent and operating income increasing 48 percent, driven by significantly higher volumes in large-view watering pumps, as well as steady demand for groundwater and surface pumping equipment. Large-view watering pump sales volume and supply chain stability drove favorable operating leverage results and a 380 basis point improvement in operating margin to 16% per quarter. Fueling systems similarly delivered record first quarter sales in operating income with revenue up slightly year over year on top of the 28% year over year revenue increase realized in Q1 last year. Operating income grew 18% driven by strong end market demand in most of our key markets including the U.S., Latin America, and India. Fueling Systems' first quarter operating margin came in at 28.6%, an increase of 420 basis points compared to the prior year period, despite ongoing supply chain headwinds related to the availability of chips and other components. Looking ahead, we do not anticipate any major changes to the planned investments of major fueling marketers in the U.S. We expect the business to continue to grow across product lines in the favorable Indian market. Although distribution delivered record first quarter sales, the segment was impacted by unfavorable weather across many parts of the United States that delayed the start of contractor installations, commodity prices declining, and some order patterns being reset to correspond to improved supply situations and shorter lead times. Sales increased 6% from prior year despite the increased headwinds for the business, while operating income decreased about 50% due to the significant decline in the price of certain commodity-based products. Operating margin of 3.3%, which is 370 basis point lower than last year, was similarly impacted by those commodity-based products and higher operating expenses as the business continued to invest in growth via the six new branch locations announced in fiscal 2022. Even with the cost of these investments, we are encouraged that the operating margin for distribution increased sequentially 140 basis points from Q4 2022 on seasonally lower sales. Our sales team has line of sight to our contractor, customers, project pipelines, and as a result, we feel confident that we will see improving performance in sales and margin as the weather improves and we enter the groundwater drilling season. We remain committed to a balanced capital allocation strategy. We continue to make internal investments focused on bringing additional production in-house and enhancing the integrity of our supply chain. We are also actively monitoring the M&A market, are well-positioned to take advantage of our opportunities as they present themselves. And finally, we remain committed to returning capital to our shareholders for the regular dividends and opportunistic share repurchases. Looking ahead to the remainder of this year, we are mindful of the continued macroeconomic and geopolitical pressures we may have to contend with. However, given the results in the first quarter, we are increasing our full-year 2023 sales guidance to be in the range of $2.15 billion and $2.25 billion and raising our EPS guidance to between $4.25 and $4.45. Before turning the call back over to Jeff, I would like to take a moment to recognize Franklin Electric and our employees for being named in Newsweek's 2023 list of America's most trustworthy companies for the second consecutive year. The work that we do is essential to people's lives, advances global access to clean water, and improves the safety and availability of fuel worldwide. I'm also proud of the culture this management team has stewarded, one that balances focus across efficiency, sustainability, and reliability with the well-being of our employees. I encourage you to explore our 2023 sustainability report when it is made available in approximately a week for an update on the progress you've made and what we are still working to achieve. I will now turn the call back over to Jeff.