Franklin Electric Co., Inc.

Hello, and welcome to the Franklin Electric Report's first quarter 2024 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 11 on your telephone. You will then hear an automated message advising that your hand has been raised. To withdraw your question, please press star 11 again. Please be advised that today's conference call is being recorded. It is now my pleasure to introduce Chief Financial Officer, Jeff Taylor.

Thank you, Andrew, and good morning, everyone. Welcome to Franklin Electric's first quarter 2024 earnings conference call. With me today is Greg Singstack, our chairperson and chief executive officer. On today's call, Greg will review our first quarter business highlights, Then I 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 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 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 Singstad. Thank you, Jeff, and thank you all for joining us.

Our first quarter results were slightly below our expectations, while the business generally performed as expected. The Franklin team executed well and managed costs during the quarter, despite much wetter weather and expected and continuing commodity price pressures. As we have previously communicated, the first quarter is seasonally our slowest quarter as it relates to demand. However, underlying activity in our core markets remains healthy. Compared to our record first quarter 2023, Net sales were down $24 million, or 5%. We had an exceptional start in 2023, particularly for large water equipment and fueling systems, which made for a tougher year-over-year comparison. Largest contributing factors were the decrease in large water equipment sales in the U.S. to our fleet rental customers, which accounted for approximately two-thirds of the decrease, and lower sales in fueling systems as demand and order patterns have normalized. Even with more moderate demand, we delivered improved gross margin versus the prior year driven by favorable mix and continued cost control. As expected, SG&A expenses were higher than prior year due to inflationary pressure, investments in recent water treatment and distribution acquisitions, and the addition of new distribution branch locations. Turning to our segments, Water Systems' first quarter sales and operating income declined 7% and 4%, respectively. As I previously mentioned, volumes were lower in large dewatering equipment, creating a difficult year-over-year comparison against the first quarter record sales in 2023. Additionally, demand in the US for our groundwater pumping systems was impacted by continued unfavorable weather patterns. Operating margin improved to 16.4% of 40 basis points versus prior year and 60 basis points versus the fourth quarter of 2023. This was driven by a favorable product mix and lower freight expenses. Fueling systems sales and operating income decreased 15% and 10% respectively versus the prior year. We are encouraged to see that the destocking activity which impacted the business in the back half of last year has mostly diminished at this point in time. As with large key water equipment, fueling systems record first quarter fiscal 23 created a difficult year over year comparison. That said, fueling systems first quarter operating margin came in at 30.3% an increase of 170 basis points compared to the prior year. Improved margin was a result of favorable product mix and operating expense management. Sales in the distribution business increased 3% from the prior year, primarily due to the incremental sales impact from our 2023 acquisition. The business, similar to the water systems, was negatively impacted by unfavorable weather across many parts of the United States, delaying the start of contractor installations. Operating margin was 1.2%, a 210 basis point decline versus the prior year due to lower margins on commodity-based products as well as increased operating expenses from continued investment and growth via the recent acquisition of new branch locations announced in 2023. Considering the impact of these investments, we are encouraged to have achieved a 50 basis point sequential improvement in operating margins for distribution for the fourth quarter of 2023 on seasonally lower sales. Our sales team maintains line of sight to our contractors' customers' project pipelines, and as a result, we are confident we will see improving performance in sales and margin as weather improves as we enter the groundwater growing season. Our continued focus on the management of working capital has resulted in more normalized inventory levels, with our March inventory balance at $532 million, close to $70 million lower than the same period in the prior year. although up from the end of the year in anticipation of normal seasonal demand. Consequently, our cash flow improved approximately $10 million in the first quarter of 2024 compared to the prior year. 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 environment, where we have seen an uptick in activity. We've invested approximately half a billion dollars since 2017 to build our distribution business and our water treatment platform. We will continue to build these businesses through bolt-on acquisitions while we are actively looking to grow in a couple of other areas. The first is manufacturers of larger pumping systems with a focus on commercial industrial end markets globally. The second is to add to our critical asset monitoring capabilities in the grid business as the demand for electricity continues to grow. With effectively no net debt, we are well positioned to take advantage of opportunities that they present themselves. Finally, we remain committed to returning capital to our shareholders through regular dividends and opportunistic share purchases. Looking ahead to the remainder of this year, we are mindful of the continued macroeconomic and geopolitical pressures we have to contend with. However, given the results in the first quarter and our current outlook, we are maintaining our full year 2024 sales guidance to be in the range of $2.1 billion to $2.17 billion in sales, and our EPS guidance remained between $4.22 and $4.40. Before turning the call back over to Jeff, I'd like to take a moment to recognize Frank Electric and our employees for being named in Newsweek's 2024 list of America's most trustworthy companies for the third consecutive year. I would also like to refer you to our recently published 2024 sustainability report detailing the company's efforts to positively and responsibly impact our communities over the past 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 energy 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 will now turn the call back over to Jeff. Jeff.