Franklin Electric Co., Inc.

Hello,

and welcome to the Franklin Electric Report's fourth quarter and full year 2024 results 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 withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Chief Financial Officer, Jeff Taylor.

Thank you, Andrew, and welcome everyone to Franklin Electric's fourth quarter and full year 2024 earnings conference call. With me today is Joe Rosinski, our Chief Executive Officer. On today's call, Joe will review our fourth quarter business highlights, then I will provide additional details on our financial performance, and Joe will make some additional comments related to our key growth and value drivers along with our outlook. 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 10K 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. Earlier today, we published a slide deck to accompany our prepared remarks. The slides can be found in the investor relations section of our corporate website at -electric.com. With that, I will now turn the call over to Jeff.

Thanks, Jeff. Good morning, everyone, and thank you for joining today's call. I'm pleased to share that the Franklin team delivered a solid close to a challenging year. We worked through some restructuring, focused our efforts on some faster-growing markets, and saw the breadth of our global portfolio help us grow our international business. This, coupled with the team's strong execution, proved resilient in a year marked by macroeconomic uncertainty. Order volumes continue to improve throughout the back half of the year, and we're excited about the opportunity that lies ahead in 2025. Before we jump into the quarter, I would like to briefly point out that we've transitioned the name of our fueling system segment to energy systems. The product portfolio within energy systems remains unchanged along with our reporting structure, so this transition is in name only. Over time, we've launched several energy-related products, such as our critical asset monitoring and grid solutions offerings, which now make up about 25% of the segment's revenues. We see the need growing for smart products in this segment, both in our base business, serving major marketers, and wider power applications in utilities, data centers, and grid strengthening. While our historical fueling products remain core to our strategy and have a positive outlook, we believe this change more closely aligns with the nature of the business today and our long-term goals. Moving to page four on the slide deck, I wanna highlight some of the recognition our team has achieved this past year. We believe a company starts with its people and its promise. We take great pride in our culture and our commitment to our customers and the problems we help solve. I wanna thank our team for all of their hard work this past year. Now, turning to our results on slide five, consolidated fourth quarter sales totaled 486 million, up 3% over the prior year period. Growth in our distribution and energy system segments drove this performance, while the water systems business remained flat. Operating margins for the quarter were 9%, and this was down from the prior year. This reflects a more challenging global FX headwind, continued pricing pressure, unfavorable geographic and product mix in the water system segment, and over $3 million of restructuring charges, which we mentioned last quarter. This was partially offset by a notable margin improvement in energy systems for strong UF sales, discipline cost management, and streamlined operations-supported results. We expect our productivity actions, implemented in 2024 to benefit us as we enter 2025. Looking at full year 2024, we faced a challenging macroeconomic environment. Housing starts have yet to rebound and interest rates remain high. Having worked through elevated post-COVID backlogs, we experienced a normalization of demand paired with net neutral impact from weather. I'm proud of our team's efforts in capturing growth throughout various parts of our business, despite a softer demand environment. Our global footprint is a key differentiator of our business, and it can provide important insulation against the challenging environment. Growth in Europe, Latin America, and APAC regions remain strong throughout the year, reinforcing the value of our diversified international presence. While foreign currency translations continues to present headwinds, our book to bill, ratio is favorable, and with healthy order trends, we're looking forward to capitalizing on opportunities in 2025. Now let's take a closer look at our segments performance for the quarter and the full year on slide six. The water system segments delivered flat sales for the fourth quarter compared to the prior year. Favorable volumes and contributions from acquisitions were offset by negative impacts from foreign exchange as underlying demand remains healthy. In the US and Canada, groundwater sales were up year over year, and bright spots within our small surface pumps and large dewatering pumps were encouraging. Outside the US, performance was robust across most regions, so challenges in Argentina, driven by the devaluation of the Argentine peso impacted results. For the full year, the water segment was solid, despite a pullback in our US fleet business for large dewatering products, as we lapped a comparable year of strong sales from pent up demand and higher backlogs, stemming from supply chain constraints. Momentum improved towards the end of the year, and we expect more normal growth as we progress through 2025. I would also like to call out a strategic acquisition that we completed this month. A water systems business in Australia specializing in submersible pumps for the mining and industrial sector, it complements our existing portfolio, aligns well with our growth framework, and underscores our commitment to identifying and executing on opportunities that strengthen our overall business. We've also recently signed a definitive agreement for a company in Latin America with projected close in early March. Barnes-Dade Columbia will bring a very complimentary set of products and a vertically integrated operating footprint to help us grow our strong position in Latin America and beyond. In the energy system segment, sales for the fourth quarter were up mid single digits, driven by both favorable pricing and higher volumes. Performance was particularly strong in the US where demand remained resilient. Looking at the full year, while the energy segment delivered a strong fourth quarter, sales were down 8% as a result through the first three quarters, and as they were up against a challenging year over year comparison due to elevated backlogs and a slower start to the year with new investments. Nonetheless, the segment achieved a record operating margin for 2024, reflecting our disciplined approach to cost management and operational efficiency. The distribution segment grew mid single digits in the fourth quarter with increase driven by favorable volumes and contributions from an acquisition earlier in 2024. Margin declined during the quarter as we worked through cost reduction actions and the sequential lower volume in the fourth quarter from normal seasonality, which impacted the operating leverage. Distribution's full year performance was driven by similar factors, in addition to commodity pricing pressure on results throughout the year. The trend and price decline lasted longer than the historical norm, and we expect to see stabilization in the coming year. While we have little control over commodity pricing environment, we will focus on streamlining our operations, bringing new value added products to our customers and driving structural margin improvements to ensure we continue to deliver profitability irrespective of pricing trends. I'm now gonna hand the call back to Jeff to review our financials in more detail.

Thanks, Joe. Our fully diluted earnings per share were 72 cents for the fourth quarter 2024 versus 82 cents for the fourth quarter 2023. While down from the prior year, we were pleased to deliver results at the high end of our guidance range. Moving to slide seven. Fourth quarter 2024 consolidated sales were 485.7 million, a year over year increase of 3%. The sales increase in the fourth quarter was primarily due to higher volumes across all three segments in the incremental sales impact from acquisitions completed in early 2024, primarily offset by the negative impact from foreign currency translation. Franklin Electric's consolidated gross profit was 164.2 million for the fourth quarter 2024, a 3% year over year increase. The gross profit as a percentage of net sales was .8% in the fourth quarter flat compared to the prior year. Selling general and administrative expenses or SGMA were 117.8 million in the fourth quarter compared to 108.8 million in the fourth quarter of the prior year. The increase in SGMA expense was primarily due to higher employee compensation costs and the incremental expense impact from our 2024 acquisitions. Restructuring expenses were 3.4 million in the fourth quarter 2024, up from 0.4 million in 2023. Restructuring actions in 2024 related primarily to headcount reductions and facility closures to optimize our cost structure. Restructuring costs negatively impacted earnings per share by six cents during the fourth quarter. Consolidated operating income was 43.0 million in the fourth quarter 2024, down 7.8 million or 15% from 50.8 million in the fourth quarter 2023. The decrease in operating income was primarily due to higher SGMA and restructuring costs. The fourth quarter 2024 operating income margin was .9% versus .7% of net sales in the fourth quarter 2023. Moving to segment results on slide eight. Water system sales in the US and Canada were down 2% compared to the fourth quarter 2023. Sales of water treatment products increased 12%. Sales of groundwater pumping equipment increased 6%. And the sales of all other surface pumping equipment increased 4% compared to 2023. Offsetting the increase, sales of large dewatering equipment decreased 36% compared to 2023. Water system sales in markets outside the US and Canada increased by 2% overall. Core and currency translation decreased sales by 6%. Outside the US and Canada, sales in the fourth quarter of 2024 increased in all major markets. The Nia, Asia Pacific, and Latin America, excluding the impact of foreign currency translation. Water systems operating income was 35.6 million, down 8.5 million versus the fourth quarter 2023. The decrease was primarily due to lower gross margin as a result of unfavorable geographic mix in sales and negative foreign exchange impacts. Higher SGMA costs and restructuring expenses. Operating income margin was 12.7%, a year over year decrease of 310 basis points. Distribution's fourth quarter sales were 157.2 million versus fourth quarter 2023 sales of 148.0 million, an increase of 6%. The distribution segment sales increase was primarily due to higher volumes and the incremental sales impact from a recent acquisition in early 2024. Partially offset by the negative impact of commodity pricing declines. The distribution segment's operating income was 0.5 million for the fourth quarter, a year over year decrease of 0.5 million. Operating income margin was .3% of sales in the fourth quarter 2024 versus .7% in the prior year. Recognizing our evolving portfolio and strategy, we renamed our fueling system segment to Energy Systems to better reflect the markets and customers served by this business. Energy system sales in the fourth quarter were 68.8 million, an increase of 3.1 million or 5% compared to the fourth quarter 2023. Energy system sales in the US and Canada increased 10% compared to the fourth quarter 2023. Outside the US and Canada, energy system sales decreased 5%. Energy systems operating income was 24.7 million compared to 19.4 million in the fourth quarter 2023. The fourth quarter 2024 operating income margin was .9% compared to .5% of net sales in the prior year. Operating income margin increased primarily due to improved manufacturing productivity and a favorable geographic mix of sales, price realization and cost management. The effective tax rate was .8% for the quarter compared to .6% in the prior year quarter. The change in the effective tax rate was driven by favorable discrete items and had an impact of EPS on EPS of approximately 2 cents. Moving to the balance sheet and cash flows on slide nine. The company ended the fourth quarter of 2024 with a cash balance of 220.5 million and 41 million outstanding on its revolving credit agreement. We generated 261.4 million in net cash flows from operations activities during 2024. Pre-cash flow conversion was strong at 122% for the year due to continued progress on reducing working capital. The company did not repurchase any shares of common stock in the open market during the fourth quarter 2024. At the end of the fourth quarter, the remaining share repurchase authorization is approximately 1.4 million shares. And last month, the company announced a 6% increase in a quarterly cash dividend to 26.5 cents. This dividend will mark the 33rd consecutive year that Franklin Electric has increased its dividend, demonstrating its commitment to returning cash to shareholders and confidence in the outlook of the business. Moving to slide 10, the company expects its four year 2025 sales, including the impact of our recently announced acquisitions to be in the range of 2.09 billion to 2.15 billion in gap EPS or earnings per share to be in the range of $4.05 to $4.25. Additionally, we are initiating a process to terminate our primary U.S. pension plan, which if successful would impact our 2025 results. We have not assumed any impact from a potential pension termination in our 2025 guidance, and we will provide updates during the year as we move through this process. Now I'll turn the call back to Joe for some additional comments.

Thanks, Jeff. Before we open it up for Q&A, I wanted to share a few thoughts on our valuation framework and our road ahead starting on slide 11. As I continue to spend time with our global teams, customers, and investors, my optimism for Franklin Electric as a compelling investment opportunity has only grown. Our valuation framework centers around four key pillars, growth acceleration, resilient margins, strategic investments, and attracting and retaining industry leading talent. These elements will serve to guide our strategy and decision-making as we strive to deliver value for our stakeholders. We believe we can accelerate growth and drive share gain by leveraging our market leadership position and strong relationships, amplified by our focus on faster growing verticals. With our global network, we have the capability to deliver both legacy products and new innovative solutions to the various geographies and end markets in which we operate and where the needs are greatest. Wherever we are, innovation is at the heart of our business, and we strive to be our customers partner of choice. Our resilient margins are made possible by the Franklin operating system, which we employ across the enterprise to increase productivity and efficiency. Whether it is our continued productivity objectives or portfolio simplification, data is always on the forefront. And I'm excited about our ability to optimize the business with data and digital tools. For our investments, we deploy capital across several priorities that drive growth, create value and strengthen our market position. Our M&A pipeline and the supporting activity is active and aligned with our strategy. I'm gonna touch more on these in just a moment. Finally, putting all these pieces together is our incredibly talented team. The numerous awards we've achieved as an organization are a testament to the commitment to attracting and developing top talent, ensuring that talent feels safe heard and respected in our workplace. Turning to slide 12, we can take a deeper dive on our capital allocation performance and priorities. Starting with the creative M&A, a key lever for delivering value to our shareholders. While the pace of acquisitions has been slower over the past year or so, we're excited about our robust pipeline. Our focus remains on capacity expansion and acquiring profitable and growing product-based businesses that align with our strategic priorities and discipline evaluation framework. While we have historically completed many bulls on acquisitions, our teams are ready and able to execute on a strategic deal if the right opportunity presents itself. Expectations and valuations in the market are normalizing. The market is healthy and it's active. We also see an advantageous position given the health of our balance sheet. We continue to assess opportunities on a -by-deal basis, but our general guideposts

are clear.

Acquisitions must be accreted within two years and able to achieve a target ROIC within three years. On the organic side, we set a compound annual growth rate, which is above market growth, achieved through investments in capacity, innovation, and digital capabilities. Our capital expenditures have been consistent over the years, supporting nearly 30 new product launches in 2024 alone. Reinvesting in our business is critical to our success, helping advance our leadership position in the market and deliver solutions for critical water and energy needs around the globe. Our next priority is managing leverage. We have a very strong track record of paying down debt and with a net leverage position currently well below our target range, Franklin has ample balance sheet flexibility to support our objectives. Finally, we have a commitment to return cash to shareholders through dividends and share repurchases. Franklin has increased its dividend in each of the last 33 years, a long history that showcases the company's consistent execution, strong financial performance, and balance sheet help. With any excess cash, we're always looking to opportunistically repurchase shares where it will be accreted. Moving to slide 13, we wanted to give an example of our focus on investments and growth. We recently purchased, we recently closed a deal with a product-based company called PumpEng with a complimentary submersible dewatering product line that increases our exposure to a number of markets we see as growing faster, namely, up-ex mining, construction, municipal, and sewage bypass along with select industrial markets. Access to critical minerals, investments in infrastructure have seen good growth for us this past year and we see this continuing. We also see opportunities in some newer channels to markets and service business. With a strong balance sheet, we see product acquisitions as a great opportunity for 2025 and beyond. To conclude, we are incredibly excited about the long-term growth potential of Franklin Electric. The portfolio has good exposure and attractive end markets supported by secular growth trends. We're committed to adding products and capacity to high-growth areas and by leveraging our global footprint. We have the ability to introduce products to additional geographic markets and capture further growth. Our strong balance sheet and thoughtful capital allocation strategy supports these endeavors, giving us the flexibility to capitalize and value-add opportunities as they arise. And finally, we're not just looking for growth, but profitable growth. We are committed to driving operational efficiency with the Franklin operating system. As we've demonstrated this year, we're able to accelerate productivity when needed. We will continue to execute on our key initiatives in 2025 and I'm confident in our progress. Between our industry-leading service and innovative products, faster-growing verticals and strong operational execution, there's a lot to be excited about at Franklin. We are optimistic about our future. This concludes our prepared remarks and we will turn the call over to Andrew for questions.

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. And our first question comes from the line of Matt Somerville with VA-Davidson.

Thanks. Excuse me. A couple of questions. First, can you maybe give a little more color on the groundwater business in terms of what you're seeing in both residential and ag markets, not only for the fourth quarter, but what your overall sort of expectations might be embedded in your guidance for that piece of the business in 2025?

Yeah, thanks, Matt. Good morning. You know, our expectation for next year is probably a year that the market is going to be fairly similar to 2024. You know, I think, you know, we commented on this, but our ability to grow, we think, is driven by products and, you know, some share cane and really working to make sure that we get our products and serve our customers as well or better than anyone. I think from an ag standpoint, you know, that outlook clearly with crisis and some of the other challenges there, it's a little bit less clear to us and a little bit smaller part of our business. You know, that residential side is bigger. But, you know, just we always have to say, to finish that up, the replacement market is really the biggest part of our groundwater business, and we see that as another, you know, as a good market this year. So, you know, flattish to not getting a ton of help from the market, you know, but a year that we continue to build on as we did in 2024. Yeah,

and just a little more background. So, Matt, for the fourth quarter and the full year, our groundwater business was up low single digits between 1% to 2% overall. The stronger in Rezzy and a little slower in ag. Ag was also low single digit growth here over here, whereas Rezzy was closer to mid single digits overall for our water business and so in the groundwater space. And so, as Joe pointed out, you know, replacement demand is very stable and we see that stability in the results today. But, you know, we do see some challenges there on the ag side. And, you know, we'll see, we've got that business forecast slightly up for the full year.

Got it. And I didn't hear anything in the prepared remarks, which is what's your thoughts on how Franklin would be positioned from an overall tariff standpoint? And then, Jeff, if you could just provide a breakout in terms of where that restructuring charge maybe fell at the segment level, that would be helpful. Thank you.

Yeah, I think, good question, Matt. I think we, like most industrial companies, have a pretty dedicated team to understanding the changes in tariffs and then what our reaction needs to be. So, that team is well structured. I think our understanding of tariffs, you know, if and when some of them hit, it's really a combination of a few things. One is, I think, with a strong brand and the ability to control some pricing, you know, if tariffs continue to escalate, we would have to accommodate that through some pricing. But also, you know, with a global footprint, supply chain actions, manufacturing efficiency, and potential redundancies in terms of where we pull that product from are all opportunities that Franklin has. Our exposure to China is not that significant. There was some exposure, you know, that we had to take into account, which is included in the AOP, related to what else could happen in the U.S., Mexico, Canada. We're ready for it and prepared to take action. But, you know, I guess we'll wait and see what the next weeks and months bring.

Right. And then part two of your question, Matt, in regards to restructuring, that does get pushed down to our segments. And so in the water business, there was about 2.3 million of restructuring in the quarter. Distribution had about 600,000 or 0.6 million. And energy had about 400,000 or 0.4 million in the quarter. We did have cost improvement activities in our corporate area as well, but they technically didn't hit restructuring.

Understood. I'll get back in Q. Thank you,

guys. Thank you, Matt.

Thanks, Matt. And our next question comes from the line of Brian Blair with Oppenheimer.

Thank you. Good morning, guys.

Good morning, Brian.

I'd like to ask, I guess, a level-setting question on renamed energy systems. You had said about 25 percent of mix being critical assets, monitoring, and grid solutions. Can you offer recent, you know, rates of growth or decline for the newer energy systems revenue relative to legacy fueling applications? And also remind us of the respective market profiles, the size of business.

Yeah. You know, on the critical asset monitoring and some of the grid-related products, the first three quarters of last year were slower than some of the growth that we saw in 2023 and 2022. That picked up momentum as we exited 2024 and we expect a good year in 2025. I think you see it if you look at some of the utility and other companies that, you know, there was definitely a softer spot there after a really hard pull in 2022 and 2023. But we see that business, you know, continuing to be robust and to grow. So in addition to that, you know, some of the smarter solutions that we offer, I think I mentioned this, we bring to the legacy customers, the major marketers. So if you think of service stations and some of the smart products that we offer there, you know, we have that opportunity to leverage some of the monitoring, sensing, and other technology across that entire energy system segment. And the margins for that business in the grid or the power monitoring, maintenance, asset monitoring, the margins are very good. Jeff, I don't know if you wanted to follow up on that.

No, I just think if you look at the last couple of years, you know, that business had its record year in 2022 really driven off of, you know, bent up backlogs from COVID coming into 2022 and then supply chain challenges and constraints in 2023. And so, you know, 2024 was a year where we had really tough comps every quarter in the year. We're effectively past those tough comps in this business. And, you know, the backlogs have now normalized and we see that demand is stabilized and now moving forward, you know, going to start to pick up hopefully.

Brian, one other comment there, just critical asset monitoring, what we like about that from a go-forward standpoint is it replaces some of the manual monitoring that has to happen across the grid and across the power infrastructure. So, you know, as labor gets tighter, as the need for more automated solutions become more important, I think it's going to be a great area for us here going forward.

That all makes sense. I appreciate the color there. It would

be

also great to hear more about Barnes and the strategic fit of the asset. I suppose beginning with the degree of portfolio overlap, we were looking through the website. It's pretty diversified product lineups that Barnes has. So, I'm just curious where you have overlapping technologies versus what's truly incremental to Franklin Offerings and then if you're willing, perhaps, you know, give us the key financial metrics on the deal, price, valuation, anticipated P&L contribution.

Yeah, I'll comment on just strategic alignment and then Jeff maybe overall for the two deals that we talked about today can just give a sense for, you know, that impact. You know, for Barnes, where we have similar products in terms of application or, you know, what those products do, you know, these products are, there's really that commercial, complete commercial line of surface pumps. They've got a number of wastewater products and other things, but they've been built for, they are well attuned to and ready to serve the Latin America market. I think, you know, we mentioned this comment global presence a few times today. You know, our ability to serve within region versus move product around the world, we do that, of course, at times. I mean, we are a global company, but that ability to be efficient and to scale within region is important. Barnes gives us a great opportunity to do that. I think as companies are trying to find how to get their castings to lower cost sources, you know, the fact that Barnes is vertically integrated with the foundry that we can build upon that and be self-reliant, I think is a great position for us here as we go forward.

Yeah, and, you know, really excited to have these two acquisitions, one completed and closed and just to remind everyone the -Stake-Columbia acquisition is we signed a definitive agreement, but we haven't closed yet. So we expect that around March 1st or early March, as Joe indicated in his prepared remarks. So, you know, we do have the impact of these acquisitions built into our four-year guidance because they'll be prorated for 10 months, approximately 10 months of the year. The revenue impact of the two deals combined is going to be approximately $50 million of top-line revenue for us, and that's built in once again into our guidance range. We haven't disclosed the purchase price of either of the deals individually. What I would say is, you know, this will be reported in there, certainly in our first quarter filing. We expect that the combined purchase price of the two businesses will be in the $125 million range. For us, we would expect to finance that effectively through cash on the balance sheet, so not adding any new debt. On an EPS accretion basis, it'll be approximately three cents for the full year for the two businesses. There will be acquisition, accounting, amortization that will get added to the balance sheet or to the income statement, and that'll certainly impact us. But from evaluation, perspective, or margin, we expect the EBITDA margin of each of these businesses to be in the high teams to 20-plus percent range for EBITDA margin. So that's a little background on the

acquisitions. Understood. Appreciate the detail.

You're welcome. Thank you.

Our next question comes from the line of Mike Halloran with Baird.

Hey, good morning, gentlemen. Morning, Mike. A mild follow-up to that. Could you just round out, then, the composition of how you're thinking about the growth for the year, what FX is, what the organic is, and then how you think about sequentials embedded in guidance, and if there's any improvement fundamentally in numbers or, excuse me, underlying demand trends or relatively stable expectations from where we sit here today adjusting for seasonality as you work through the year?

Yeah. Yeah. A lot done back there, Mike, so we'll try to hit as much of that as we can. Let me start with maybe walking through some of the guidance assumptions that we have. And obviously, we're going to start 2025 effectively the way we finished 2024, and I think it's human nature to effectively think things at some level will continue the way they've been going. So, we see moving into Q1 similar to what we saw in Q4, although you understand the seasonality of our business and you know that the first quarter is typically the lowest quarter of the four quarters in a calendar year. And so, we expect to see that normal seasonality in the four-year profile of the business. Without giving quarterly guidance, what I would say is the first half is typically a little wider than the second half. I think if you look historically, it's around 48% in the first half and 52% in the back half of the year is how that seasonality shapes that first half, the second half. But as we sit here today, we see economic conditions are reasonably stable yet with some level of uncertainty out there around certain areas. And obviously, interest rates, tariffs, inflation are three big factors. But interest rates as we sit here today appear to be flattish, probably more likely that interest rates would go up in the future than go down, at least based on our read of what we're hearing from the Fed and other economists. And our view is this effectively flat at least going into the year. Housing market has been challenged. We expect that the housing market is going to stay somewhat depressed as we move into 2025. Potential for the housing market to improve in the back half of the year, but certainly as we're moving into the first part of the year, that housing market has some pressure on it. Inflation is moderated at some level, excluding the impact of tariffs. And the impact of tariffs, as Joe's already commented on, is kind of yet to be determined what's going to hold and how long term or short term those tariffs are going to be. We feel like our team is well prepared to manage through whatever situation comes through, both in the short term and in the long term.

Jeff,

can I?

Yeah, Mike, maybe just a couple thoughts. I think we were obviously you see some of our excitement and optimism for 2025. I think the first half of the year starts a little flatter and slightly up, picking up some momentum through the year. I think what's changed for us and what gives us some confidence, I mentioned order trends are positive, book to bill is positive. I think in just the focus of the organization, we spent a lot of the time the last four or five months of last year really focusing on where should we make these investments and where should we get that key focus that will give us that return. So, we're not sitting back and letting the market dictate our progress here. And I think we're starting to see that readout. So, just a little added commentary to Jeff's comments there.

Yeah, a couple of really quick comments there, just to close out. FX will be a headwind we expect 2025. Currently our view is that's going to be 15 to 20 million dollars. That's about 1% of sales. And an organic growth basis pipeline is in the range of 1 to 4%. So, low to mid single digits, two and a half point mid point. EPS, 3 to 7% organic and then the impact of the acquisitions. We do expect to capture some operating leverage as we get the improvements in productivity and managing costs throughout the year overall. And we didn't comment really on our fleet business. You know, the fleet business in 2024 was down materially on a year over year basis. We see right now that business is effectively flat on a year over year basis in 2025.

Great. Really appreciate it. That was a lot of color there. So, on the M&A side and congrats on the two you just announced, if you think on a forward basis and I heard the prepared remarks, product centricity and fit and everything, how wide of an aperture are you guys thinking? You know, near adjacencies, are you willing to go a little farther afield? And maybe when you think about the focus internally, are there areas that are more interesting than others all at SQL?

Yeah, it's a good question. You know, I think when we look at adjacencies, one of the benefits that we have here at Franklin is we have exposure to those adjacencies in some capacity in some region. So, I think where we see opportunities, you know, for instance, in wastewater or municipal or other industrial, you know, we can add that focus. We can really move our attention to those markets. So, I think from an aperture standpoint, you know, we're not going into something that we have no exposure, no experience and no market awareness. But, you know, for instance, we talked about the new acquisition in Australia. You know, we saw that business in OPEX mining and some of the industrial markets have tremendous growth last year, which is one of the reasons we had confidence to add to that portfolio because we see not only, you know, serving markets within regions, you know, in places like Australia and South Africa and others where mining is growing, but also bringing some of that product and introducing to our strong channel here in North America where we have ready access and have visibility. So, I would say, you know, we've got a lot of good work to do in near adjacencies that we have some exposure to today in wastewater, you know, industrial, other commercial applications. So, I think, you know, longer term, there could be some things that push us a little further from that, but the near term is fairly well known to us. And I think it's an effort of focus and capital allocation.

Great. Thanks, guys. Appreciate it.

Thanks, Mike.

Thank you. And our next question comes from the line of Walter Liptec with Seaport Global.

Hey, thanks. Good morning, guys. Just as a follow on to the M&A discussion, I just want to make sure that I'm understanding that it looks like you're looking at adjacencies and continuing with the smaller bolt-on deals. Were you alluding during your opening remarks to anything transformational, you know, the size of the M&A deal? Can you talk about that?

Yeah. I think, you know, what we're alluding to is that we're making sure that we're ready for something that's more strategic or transformational. And I think those opportunities the last two or three years, there just wasn't a tremendous amount of opportunity in the market. It was a bit frothy and valuations were high. We see that changing. Well, and we want to make sure that for something that's larger than the traditional bolt-on strategy we've had that we're ready for. And we've got a lot of work to prepare for that, to understand the market, and then to make sure that the right deal for us, you know, we're ready to go. So we're open to it. And yeah, you heard that correctly in our comments.

Okay, great. So what is sort of a max size or debt ratio that you think, Brush, want to have too?

I think it's hard to say what a max size would be. But what I would tell you is this. I mean, if you look at, you know, the fact that we have an incredibly strong balance sheet as we exit last year. So really, you know...

Yeah, I mean, we have, you know, with our current balance sheet, we have about a billion dollars of available capacity for transactions. And depending on the deal, you know, you could go beyond that. But obviously, it depends on the specifics of any given deal. We've, you know, we've said in the past, I mean, we've had very low leverage on our balance sheet. You know, it gives us a lot of flexibility and optionality, just like the, you know, the ability to evaluate more strategic acquisitions if the opportunity presents itself. But from a leverage perspective, I mean, our debt covenant can, you know, limit us at three and a half times. We will not be uncomfortable at two and a half times. And certainly, you know, three times we think is something that's very manageable for the business. At three times, you know, we would want to, I think, have a pretty, you know, aggressive plan to pay down debt quickly and get the balance sheet back to below two and a half times. But we're comfortable if, you know, the right opportunity presents itself to add some debt and leverage to the balance sheet. And we'll see what happens.

Okay, great. I appreciate that, Coler and Clardy. And then maybe as a follow on, just thinking about the productivity and the restructurings that you've done, the improvement in 2024. Do you have an idea of what the, you know, the volume leverage is at this point, your operating leverage, and, you know, from the restructuring and other things that you did, you know, how much benefit do you get from productivity in 2025?

Yeah, I think it's, you know, obviously, we've got a diverse business. It's global. There's a lot of factors that come into impacting our operating margin, but certainly from, you know, I think cost control, restructuring activities, we, you know, we're going to see somewhere between 20 and 40 to 50 basis points of improvement.

Well, one thing, though, I just had to just comment, you know, we've got a slightly larger capital plan next year than historically we have. And, you know, our intent is some of those productivity efforts is to invest that in capacity and invest for growth. So it's not going to be an exact clean readout, but we do expect the efforts of last year to pay dividends. We also have, you know, some good ideas in terms of where to deploy that money and our focus.

Okay, great. Did you say what the CapEx is, with the, how much you expect to spend in 2025?

Historically, it's been about 2% of sales. Well, so, you know, at a $2 billion company, it's been 40, 40 plus million. There's 41 this past year. I think it'll be higher than that this year, and it'll be closer to .5% of sales.

Okay, great. Okay, thank you.

Thank you. Thank you. I would now like to hand the call back over to Joe for any closing remarks.

Thank you. And thanks everyone for joining our call today. We appreciate the questions and the conversation. We appreciate the interest in Franklin Electric. We're excited about 2025, and we look forward to talking to you all here in the next quarter. Have a great day.

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.