Franklin Electric Co., Inc. (NASDAQ:FELE) has reported a decrease in sales for the second quarter of 2024, attributing the dip to macroeconomic challenges and adverse weather conditions in the United States. Despite the sales decline, the company achieved near-record earnings and experienced margin expansion.
The Water Systems segment set a new record for operating income, even with a drop in sales volume. Franklin Electric's new CEO, Joe Ruzynski, emphasized the company's growth potential in various areas, including adjacent markets and mergers and acquisitions (M&A). The earnings per share (EPS) guidance has been revised downward, although full-year sales expectations remain unchanged.
Key Takeaways
- Franklin Electric's Q2 2024 sales fell by 5% year-over-year, mainly due to project delays and reduced sales of large dewatering equipment in the US.
- The company's Water Systems segment reported an all-time quarterly record for operating income despite a decline in sales volume.
- Gross profit and gross profit margins reached record levels, displaying the company's ability to expand margins.
- Full-year sales guidance is unchanged, but full-year EPS guidance has been lowered to a range of $4.16 to $4.34.
- Franklin Electric's cash balance stood at $58 million, with $35 million in net cash flows from operating activities in the first half of 2024.
- The company announced a quarterly cash dividend of $0.25, payable on August 15.
- CEO Joe Ruzynski is focusing on growth opportunities in adjacent markets, data and analytics, global expansion, and robust M&A activity.
Company Outlook
- Franklin Electric expects improved weather conditions to benefit the Distribution business in the second half of the year.
- The Water Systems segment is anticipated to perform well, except for the large dewatering sector in the US.
- Fueling Systems segment order entry has improved and is expected to continue to do so.
Bearish Highlights
- Distribution sales suffered due to wet weather, which also led to lower volume and higher operating expenses.
- Commodity price pressures have impacted the business.
Bullish Highlights
- The company has maintained backlogs at normal levels and anticipates orders to increase in the latter part of the year.
- Growth in water treatment, surface pumping, and groundwater drove strong performance in the Water Systems segment.
Misses
- The company reported a decrease in net cash flows from operating activities, down to $35 million in the first half of 2024 from $43 million in the same period of 2023.
Q&A Highlights
- D.A. Davidson analyst Matt Summerville inquired about the Distribution business's revenue and operating profit decline, which was explained by lower volume, core business downturn, and increased operating expenses.
- The margin performance of the Water Systems segment was strong, attributed to growth in specific areas and improved manufacturing productivity and utilization.
InvestingPro Insights
Franklin Electric Co., Inc. (FELE) has demonstrated resilience in its financial performance despite the challenges outlined in the recent quarterly report. According to real-time data from InvestingPro, the company's market capitalization stands at a solid $4.6 billion, with a Price/Earnings (P/E) ratio of 24.45, which is slightly adjusted to 24.31 when looking at the last twelve months as of Q1 2024. This valuation metric suggests that investors are willing to pay about $24 for every dollar of FELE's earnings, indicating a recognition of the company's steady earnings potential.
InvestingPro Tips reveal that Franklin Electric's commitment to shareholder returns remains strong, as evidenced by its impressive track record of raising its dividend for 31 consecutive years. This consistent dividend growth, coupled with the fact that cash flows can sufficiently cover interest payments, highlights the company's financial stability and prudent cash management. Moreover, the firm's liquid assets exceed short-term obligations, providing it with the flexibility to navigate through uncertain economic times.
While three analysts have revised their earnings downwards for the upcoming period, it's important to note that Franklin Electric operates with a moderate level of debt and is expected to remain profitable this year. The company's profitability over the last twelve months and a strong return over the last five years paint a picture of a business that has been effectively weathering market fluctuations.
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Full transcript - Franklin Electric (FELE) Q2 2024:
Operator: Hello, and welcome to the Franklin Electric Reports Second Quarter 2024 Sales and Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Chief Financial Officer, Jeff Taylor.
Jeff Taylor: Thank you, Andrew, and welcome, everyone, to Franklin Electric's second quarter 2024 earnings conference call. With me today are Joe Ruzynski, our Chief Executive Officer; and Gregg Sengstack, our Executive Chairperson. On today's call, Gregg will review our second quarter business highlights, I will provide additional details on our financial performance, and then Joe will share some initial thoughts on his first few weeks with Franklin. 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 and 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 Gregg.
Gregg Sengstack: Thank you, Jeff, and thank you all for joining us. Our second quarter results were solid, but fell below the record levels reached in the prior-year period. Macroeconomic challenges and wet weather across the US continued to pressure sales, but our performance held up well as we delivered near-record-high earnings during the quarter. Further, strong execution by our global teams, along with the diversity of our product lines, geographic presence, and customer base demonstrated the resilience of our business as we drove margin expansion on lower sales. The second quarter represented a sequential step-up in sales due to seasonal factors. However, this impact proved to be a bit softer during the quarter as compared to prior years. Consolidated sales were down 5% or $26 million compared to our second quarter 2023, reflecting the ongoing challenge of project delays, in part due to adverse weather, particularly in the United States and within our Distribution segment. Similar to the first quarter of 2024, one of the main factors pressuring sales was a decrease in large dewatering equipment sales in the US to our fleet rental customers, coming off record sales activity in the prior year, during which our customers built up substantial inventory. Outside of these lower large dewatering volumes in the US, the rest of our US Water Systems business delivered solid growth. Outside the US, excluding the impact of foreign currency translation, we saw a positive performance in Water Systems, including robust growth in Asia Pacific and steady demand in EMENA and the Southern Hemisphere. The strength in our manufacturing business, however, was offset by order softness and distribution in the United States. As we mentioned before, we are experiencing some of the wettest weather patterns on record in the US, which negatively impact sales. We achieved strong margin performance in the quarter, led by our Water and Fueling Systems manufacturing segments. Consolidated operating margin was 14.6%, representing an improvement of 40 basis points overall compared to the prior-year period. We're encouraged by the increased productivity across our operations and stabilizing input costs. Turning to our segments. Water Systems' second quarter sales declined 2%, but operating income increased 23% to set an all-time quarterly record for the segment. As mentioned, much of the sales decline can be attributed to a continuation of lower volumes due to the cyclical nature of our large dewatering business. However, our residential groundwater and surface pump businesses continue to grow and we're gaining wallet share with both new and existing customers. Overall operating margins of Water Systems improved to 19.7%, up 390 basis points versus prior year, driven by favorable product mix as well as operational efficiencies and lower freight expenses. Fueling Systems sales and operating income decreased 9% and 3%, respectively, versus the prior year, driven by lower volumes. However, in the second quarter of last year, the team worked through a close to $10 million of backlog. With backlogs at normal levels, orders entered in Q2 of 2024 were actually up about 5% over Q2 of last year. This supports what we are hearing from major marketers. The build season has progressed largely as expected outside of weather-related delays, which is encouraging for the back half of the year. Despite softer sales, Fueling Systems' operating margin was an all-time quarterly record of 35.6%, representing an increase of 240 basis points compared to the prior year. Margin improvement was a favorable -- was a result of favorable product and geographic mix. Sales in the Distribution business decreased 1% from the prior year, primarily due to the continued negative impact of wet weather across the US that has delayed contractor installations. Starting in June, the weather began to dry up in the Western US and order rates increased commensurately. Operating margin was 5.1%, a 410 basis point decline versus the prior year due to higher overhead costs. At the end of the quarter, we took actions to reduce our operating and SG&A expenses within the Distribution segment. We expect to financially benefit from these actions in the back half of the year. Overall, global inventory levels are favorable compared to the prior-year period, though higher sequentially, which is typical for the second quarter as we build inventories for the busier summer season. We are mindful that after a rather historic post-pandemic multi-quarter decline in channel inventory levels, we need to be positioned to respond to any surge in demand as channel inventories continue to settle out. That said, we continue to forecast our free cash flow will again exceed our net income for the year. With that, I will now turn the call back over to Jeff. Jeff?
Jeff Taylor: Thanks, Gregg. Overall, our second quarter was solid. While sales were below the record sales levels of last year, we were able to improve our gross profit margins to record levels. Our fully diluted earnings per share were $1.26 for the second quarter for 2024 versus $1.27 for the second quarter 2023, the second best quarterly EPS in the company's history. Second quarter 2024 consolidated sales were $543.3 million, a year-over-year decrease of 5%. The benefits to sales from our 2023 acquisitions were more than offset by lower volumes and the negative impact from foreign currency translation. Water Systems sales in the US and Canada were down 5% compared to the second quarter of 2023, due entirely to volume declines in the sales of large dewatering equipment, which decreased 44%. All other major product lines increased, with sales of water treatment products increasing 12%, sales of all other surface pumping equipment increasing 11%, and sales of groundwater pumping equipment increasing 6% compared to the second quarter of 2023. Water Systems sales in markets outside the US and Canada increased by 3% overall. Foreign currency translation decreased sales by 4%. Outside the US and Canada, sales in the second quarter of 2024 increased in all major regions, EMEA, Asia Pacific, and South and Latin America, excluding the impact of foreign currency translation. Water Systems operating income was a new record for any quarter at $62.3 million in the second quarter of 2024, up $11.5 million or 23% versus the second quarter of 2023. Operating income margin was 19.7%, a year-over-year increase of 390 basis points. The increase in operating income and improved margin was due to improved manufacturing productivity, favorable product mix shifts and cost management. Distribution's second quarter sales were $190.5 million versus second quarter of 2023 sales of $193.1 million, a 1% decrease. Continued wet weather through the second quarter dampened sales, notably in the West, Northeast and Midwest regions of the US. The Distribution segment's operating income was $9.8 million for the second quarter, a year-over-year decrease of $8.0 million. Operating income margin was 5.1% of sales in the second quarter of 2024 versus 9.2% in the prior year. Income was negatively impacted by lower sales and higher SG&A costs. Fueling Systems sales in the second quarter were $73.1 million. Sales decreased $7.3 million or 9% in the second quarter of 2024. Fueling Systems sales in the US and Canada decreased 4% compared to the second quarter of 2023. The decrease was across all major product lines. Outside the US and Canada, Fueling Systems revenues decreased 7%, primarily due to lower sales in EMEA and Asia Pacific. Fueling Systems operating income was $26 million compared to $26.7 million in the second quarter of 2023. The second quarter of 2024 operating income margin was 35.6% compared to 33.2% of net sales in the prior year. Operating income margin increased primarily due to improved manufacturing productivity, price realization and cost management. Franklin Electric's consolidated gross profit was a record $199.8 million for the second quarter of 2024, a 6% year-over-year increase. The gross profit as a percentage of net sales was 36.8% in the second quarter of 2024, up 370 basis points versus 33.1% of net sales in the prior year. The gross profit margin was favorably impacted in 2024 by improved manufacturing productivity and utilization, with fewer supply chain disruptions, lower freight costs, cost management across the company, and a favorable product mix shift. Selling, general and administrative, or SG&A, expenses were $120.6 million in the second quarter of 2024 compared to $107.4 million in the second quarter of 2023. The increase in SG&A expense was due to the incremental expense from recent acquisitions, higher compensation costs, and increases in advertising and marketing expenses. Consolidated operating income was $79.1 million in the second quarter of 2024, down $1.8 million or 2% from $80.9 million in the second quarter of 2023. The decrease in operating income was primarily due to the Distribution segment. The second quarter 2024 operating income margin was 14.6% versus 14.2% of net sales in the second quarter of 2023, driven by strong operating margins in our manufacturing businesses. The effective tax rate was 23% for the quarter compared to 19% in the prior-year quarter. The company purchased about 379,000 shares of its common stock in the open market for approximately $37 million during the second quarter of 2024. At the end of the second quarter of 2024, the remaining share repurchase authorization is approximately 460,000 shares. The company ended the second quarter of 2024 with a cash balance of $58 million and generated $35 million in net cash flows from operating activities during the first six months of 2024, versus $43 million in the first six months of 2023. The company is focused on improving its cash flow and working capital requirements through improvements in customer and vendor terms in addition to managing inventory levels. Earlier this week, the company announced a quarterly cash dividend of $0.25 that will be paid August 15 to shareholders of record as of August 1. Looking ahead, despite ongoing macroeconomic pressures and, what we believe to be transient, weather-related challenges, we hold an optimistic view for the underlying demand in our core markets. We're maintaining our full year sales guidance to be in the range of $2.1 billion to $2.17 billion. However, we are lowering our full year EPS guidance to between $4.16 and $4.34, which incorporates our first half performance and our outlook for continued solid execution in the second half while maintaining strong margins similar to the first half. I will now turn the call over to Joe.
Joe Ruzynski: Thank you, Jeff. Thank you, Gregg. And good morning, everyone. I would first like to express my deep gratitude to Gregg Sengstack for his exceptional leadership and contributions to Franklin Electric over these past 35 years and the past ten years as CEO. Under Gregg's stewardship, Franklin Electric has achieved remarkable growth and maintained a strong reputation in our industry. I'm excited to build on this legacy and lead Franklin forward. From this strong foundation established by Gregg and the entire Franklin team, I'm confident in our ability to capitalize on numerous opportunities ahead of us to drive differentiated growth as a global leader of water and energy systems. As I've joined and spent time with our team, I'm particularly excited about the opportunity to bring our expertise and solutions to adjacent, faster-growing markets, our use of data and analytics to increase our ability to bring new products to market with velocity, our strong global footprint to take advantage of the biggest needs around the world for clean water and a robust M&A pipeline. I also see that we're in a great position to accelerate productivity to fuel and to fund our growth opportunities. I look forward to closely working with our talented team and stakeholders to continue to deliver value to our shareholders and meet the incredible demand for water and energy around the globe. This concludes our prepared remarks. And we will turn the call over to Andrew for questions. Andrew?
Operator: Thank you. [Operator Instructions] And our first question comes from the line of Mike Halloran with RW Baird.
Unidentified Analyst: Hi. Good morning, everyone. This is [Pez] (ph) on for Mike. Gregg, I just wanted to take a second and congratulate you on a fabulous career and tenure, and thank you for all the help that you've provided over the years.
Gregg Sengstack: Thank you.
Unidentified Analyst: Maybe -- yeah, absolutely. Maybe, Joe, I want to kind of touch on the comment you made at the end there. You talked about numerous opportunities to drive differentiated growth, talked about pivoting towards higher-growth markets, implementing data and analytics in a robust M&A pipeline and funnel. Obviously, all that sounds fabulous. Maybe talk a little bit about how you see Franklin down the line? Maybe talk a little bit more about your vision for the business as it stands today, and maybe some of those avenues for differentiated growth that you see as you're stepping into the role?
Joe Ruzynski: Yeah. Thanks, [Mike] (ph). One nice thing about starting when I have is during the strategy cycle. So, I see a lot of the seeds for those opportunities and growth, already that the teams are working on. But I look maybe a couple examples in wastewater and mining as really good examples of new products and recent acquisitions we've made around the world for faster-growing markets. And I think, can give us some good natural hedges to some of the weather and the other things that we're seeing in the world today. Some of those opportunities for acquisitions are taking advantage of Franklin's tremendous channel, and I think bringing products that we see needs for locally that we acquired globally and getting those to our customer. The comments on data and analytics, a tremendous system architecture and a very clean look at data here. I think Franklin Electric's opportunity to use data end-to-end, the intimacy we have in our end markets through our distribution channel, as an example, really gives us that opportunity to understand our customers, what they're looking for and to respond faster than anyone else in the industry. So, I think really a lot of nice opportunities, and I look forward to working with the team to develop and execute.
Unidentified Analyst: No, that's excellent. Thank you. And we look forward to hearing more about that and working with you in the future. Switching gears to the quarter, obviously, a healthy performance here. I want to kind of dial in on the margin and price cost. Maybe could we touch on price cost across the three segments? And how are we thinking about that Fueling margin? Anything one time that we should be thinking about as we move into the back half and start thinking about next year?
Jeff Taylor: Yes. Thanks, Pez. I appreciate the question. I mean, really strong performance in the business this quarter from a margin perspective, certainly, focused on the manufacturing businesses within Water and Fueling, and Fueling set a record operating margin for the quarter this year. So, we have really good manufacturing costs as supply chains have settled down. We've gotten stability in input costs for the most part. The team has been able to really take a lot of the uncertainty out of the manufacturing environment and we're seeing that improvement in our manufacturing cost. That's certainly a piece of it in both Water and Fueling, I would say. Also, within Fueling, we're seeing, while volumes are down year-over-year, the mix is still pretty positive and pretty favorable as we continue to focus on higher-value technology products. That's continuing to drive our business. But also we have -- our business is a little heavier this quarter in the US than it is outside the US, and that's typically favorable for our business on the margin side as well. When we look at price, Fueling is getting good fair price in the market. So, they're in that kind of low- to mid single-digit price improvement. And they're also, like I said, their volumes are down year-over-year. But we've seen -- we're starting to see improvement in order patterns, as Gregg talked about in his prepared remarks. So, we're optimistic there on the back half of the year. For Water, price is low single-digits. Markets have -- kind of the competitiveness has increased in the markets, but we're holding price there and still getting positive price. We have a negative volume in Water, that's entirely driven by our large dewatering business, which we talked about as well. And so, all of our other major product lines have positive volume and really nice growth, and that includes both inside and outside of the US. Let me stop there and see what other questions you have.
Unidentified Analyst: No, I don't want to bogart the start of the call, so I'll pass it along and hop back in line. Thanks, gentlemen.
Jeff Taylor: Thanks, Pez.
Operator: Thank you. One moment, please, for our next question. Our next question comes from the line of Walter Liptak with Seaport Global.
Walter Liptak: Hey, good morning, guys. Great quarter, and nice to meet you, Joe, over the phone. With the weather headwinds, it seem to be really pretty brutal, and some of the commodity prices seem to be pretty brutal. And I think what you guys are saying is that in the Water Systems part of the business, you had volume growth, not just price. Is that right, or were you seeing volume declines in some of the farmer-related products?
Gregg Sengstack: So, Walter, this is Gregg. What we'd say is that from the NOAA data is, they look back to last 130 years. We're in the 90th percentile for rain across the country. And it's really broad-based. It wasn't kind of -- it started in the West and then it moved to East and just hit all of our key markets. So, certainly, that put pressure on volumes. Although, we did see -- in our prepared remarks, you'll see that our groundwater business was up and leaning more heavily to the small pumping systems for residential, whereas more replacement market. You don't turn on systems, as you know, in ag markets when it's raining, and so, that's where, as you point out, we had some pressure on the volume side. And that's where we felt like we were seeing it drying out in the West starting in June. And as soon as it dries out here, we saw it in Europe, orders start coming in. So, that's why we're looking at the back half on a more positive basis. The volume decline is, as Jeff and I both mentioned, really relates to the cyclicality of the large dewatering pump market, which is more of a capital cycle exposure. These rental companies -- they bought a lot of products last year catching up from the pandemic and just had challenges getting it out in the field. And so, it's just been a delay there. They'll work through that. We still see strong indicators from the end markets that construction going to do well. But that's what addressed that piece of the market. But related to the ag piece, that was under some pressure because of just the wet conditions in Q2. And again, if we move to the back half census, things will dry out. If you follow El Nino and La Nina, it should be saying we're going to move to mild La Nina, it's generally favorable for us, but I'm not a weather predictor. So, I don't go any farther than that. I mean, Jeff may want to add on the margin side here. Jeff?
Jeff Taylor: Well, I was going to add that in the dewatering business that is concentrated in the US with our fleet customers outside the US where our business is up in our dewatering business. So, I think that supports the -- what we're seeing in our business today.
Walter Liptak: Okay. Great. So, if I'm understanding the outlook, the idea is that, yeah -- with this drying out, the weather is going to be hotter, I think, in the Midwest, maybe not as much rain. So, as some of these irrigation systems get turned on, you might get better pull through into the third quarter and throughout the rest of the year. Is that the way we're supposed to read it?
Jeff Taylor: Yeah, I think that's consistent with the guidance and the outlook that we have, Walt, and that is that we'll see some improvement in weather, certainly, in the back half of the year. That'll pull through on our Distribution business, and hopefully be helpful in the second half of the year. So that's a part of it. Strong execution in Water Systems. Water Systems, as you know, is performing very well in all areas except for that large dewatering in the US. And I would tell you that our view on large dewatering for the back half is probably going to look similar to the first half, but I also expect the rest of the business to perform well in the second half. And so that's good solid outlook for Water Systems. And in Fueling Systems, as we commented, we've started to see improvement in order entry there and we're expecting some improvement in the back half there as well.
Walter Liptak: Okay. Yeah, that sounds great. When you talk about the La Nina part of it, Gregg, that's interesting because that does, I think, bring in...
Operator: I'm sorry, it looks like we lost Walter's line. One moment, please. Our next question comes from the line of Matt Summerville with D.A. Davidson.
Matt Summerville: Thanks. And, of course, congrats, Gregg. Just a quick question on the Distribution business. I think revenue was down a couple million bucks year-on-year, yet operating profit dollars fell by a materially higher amount. So, can you help kind of parse out the main operating income drivers on a year-over-year basis for Distribution during the quarter?
Jeff Taylor: Yeah, Matt, the Distribution business, I think I had a line on this in my comments, but the Distribution business is obviously on lower volume. If you -- they had an acquisition at the end of last year, and so that was additive to their overall revenue, but their core business was down by that amount plus the miss. So, volume is a driver. They also have higher operating expenses in the quarter. We do have investments in the business where we've added what I'll say are new locations, some greenfield sites. It takes those greenfield sites about two years to get up to speed into a normal operating performance. And so, we do have some higher operating expenses because of some of those investments that we've made overall. And then, we continue to see commodity price pressure in the business. And so, commodities were down about 4% in this quarter. We are starting to see that stabilize, but it continues to be a headwind for us in the business.
Matt Summerville: Got it. And then, with respect to the Water Systems and the margin performance there, any unusual sort of benefits beyond mix? It sounded like volume was maybe a touch down a bit, obviously, dewatering-driven. But help me understand the big ramp we've seen in Water margins and how we should think about sustainability given your historical kind of long-term target for that segment? Thank you.
Jeff Taylor: Yeah, we saw really solid performance in the Water business in the quarter, but in the first half of the year both. And so that business is doing really, really well with the exception of the large dewatering. So, strong growth in our water treatment business, strong growth in our surface pumping product lines that we have in that business, and then growth in groundwater. And that all contributes to having a favorable mix. But they also benefited from having a nice step-up in manufacturing productivity and utilization in the quarter. And so, as I commented earlier about those improvements, that certainly benefited the Water business the most because they're the biggest -- they operate the biggest manufacturing footprint in the company. And so, we got really good manufacturing productivity throughput. I would say nothing is popping in my head in terms of unusual or one-time items that would have driven that strong performance. It's really mix-driven, productivity-driven, and volume-driven in all product lines except for large dewater.
Matt Summerville: Got it. Thanks, Jeff.
Jeff Taylor: You're welcome. Thank you.
Operator: Thank you. Now I'm showing no further questions. So with that, I hand the call back over to CEO, Joe Ruzynski, for any closing remarks.
Joe Ruzynski: Thanks, Andrew. Well, we want to thank everyone for your time today and your interest in Franklin Electric. We are excited about our future, and look forward to speaking with you all at our next earnings call. Thank you.
Operator: Thank you for participating. This concludes today's program, and you may now disconnect.
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