Franklin Electric Co., Inc.
Q4 2020 Earnings Call Transcript

Published: 16 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Franklin Electric Reports Fourth Quarter 2020 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. Please be advised that today's conference is being recorded. I would now like to hand the conference to your speaker today, John Haines, our Chief Financial Officer. Please go ahead, sir.

[John Haines:]

Thank you, Joelle, and welcome everyone to Franklin Electric's fourth quarter 2020 earnings conference call. With me today is Gregg Sengstack, our Chairperson and CEO. On today's call, Gregg will review our fourth quarter and full year of business highlights and I will review our fourth quarter financial results in more detail. When I'm through, we'll have some time for questions and answers.

[Gregg Sengstack:]

Thank you, John. Thank you all for joining us. As I noted in our press release, I'm extremely proud of the dedication and execution of our global team as we continue to operate during these difficult times. And I want to publicly thank our employees for their continued laser focus on serving their customers, while negotiating the inherent challenges of the pandemic. Turning to our results, we ended 2020 in a strong position, delivering record sales and earnings in the fourth quarter. Our Water Systems business continue to rebound from the pandemic slowdown in the second quarter, hosting 4% organic growth, record operating income and operating income margin in the quarter. In addition, our Distribution business grew net sales organically 21% and was profitable in the fourth quarter for the first time in its history. On a consolidated basis, earnings per share increased 36% to $0.57 in the fourth quarter, a record for any fourth quarter. For the full year, our net sales declined by about 5%, but our operating income increased by 3% versus 2019. Our earnings per share before restructuring expenses was $2.18, a 5% increase versus 2019 and the full year 2020 free cash flow from operations was a record $189 million, approximately 187% of our 2020 net income or about $4.06 per share. We gain momentum throughout the back half of 2020 are poised to capitalize on the strong tailwinds that materialized in the water end markets we serve. We also completed two strategic acquisitions, one in the Water Treatment space in Canada, and the other a key Groundwater Distribution business in Central Texas. We are confident that each offers a great new growth platform for 2021 and beyond. Our strategy to grow as a global provider of Water and Fuel Systems through geographic expansion and product line extensions, leveraging our global platform and competency in system design is working.

[John Haines:]

Thank you, Gregg. Our fully diluted earnings per share were a record for any fourth quarter in the company's history at $0.57 for the fourth quarter of 2020 versus $0.42 for the fourth quarter of 2019. Fourth quarter EPS before the impact of restructuring expenses was $0.57, compared to 2019 fourth quarter EPS before restructuring of $0.43. Restructuring expenses in the fourth quarter of 2020 were $0.3 million and were related to various manufacturing realignment activities in the Water segment and had no impact on earnings per share in the fourth quarter of 2020. Restructuring expenses in the fourth quarter of 2019 were $0.8 million and were also related to various manufacturing realignment activities in the Water segment and resulted in a $0.01 impact on earnings per share in the fourth quarter of 2019. Fourth quarter 2020 sales were $321.1 million, compared to 2019 fourth quarter sales of $320.1 million. Sales revenue decreased by $8.9 million or about 3% in the fourth quarter of 2020, due to foreign currency translation.

[Operator:]

Thank you. Our first question comes from Matt Summerville with D.A. Davidson. Your line is now open.

[Matt Summerville:]

Thanks. Good morning, couple of questions. First in the fourth quarter, it sounded like you had very strong price realization, up almost 350 basis points year-over-year. Should we be thinking about something similar in magnitude for the entirety of '21? And if so, will that be enough to offset the inflationary pressure we're seeing particularly in things like copper and steel?

[John Haines:]

Hey, Matt. Good morning. In the second part of that, we do expect to offset inflation in 2021, but part of the achievement in the back half of 2020 was an anticipation of what's going on and what we expect to happen on the inflation side in 2021. So I don't think the actual 2021 price achieved will be at that same level, but when we consider the carryover impact from 2020 to 2021, and then the incremental inflation that we expect in 2021, we still think we're going to come out ahead. But we - but part of the 2020 actions, of course, were to get in front of the 2021 inflation.

[Matt Summerville:]

[John Haines:]

Sure, Matt. What we believe is that, Latin America, we're seeing more station build out generally. In Southern Africa there has been a couple of significant programs that have been pushed to the - that are right for a couple of years now that we believe are going to go into the ground. And then India, there is a joint venture BP with Reliance, they look to be under way with those - station build out in India, which we plan to participate in. With China, as indicated, it's a little opaque, we expect that there is still some legacy double wall piping initiative to build out last year for any number of reasons not all related to COVID actually, because trying to get back to work pretty quickly, but related to weather and some other factors, we just didn't see that we are seeing some life in that program. The ISD program in China less clear. So we're just going to - we need to - we're ready, we're there, well our systems are approved, but it's a question about when they turn to stick it on in China.

[Matt Summerville:]

And then just one final follow-up. Embedded in your organic assumption for Water and Distribution, what would the outlook be for your North America residential versus Ag markets embedded in that? Thank you.

[John Haines:]

Yeah. So we're thinking about Water and Distribution organic growth in '21 to be right in the 5% range, maybe slightly better than that, Matt. And we embedded in that is the expectation that residential will continue to be strong for both segments. We're seeing some - this will sound, we're seeing some green shoots on the Ag side couldn't resist that, but the reality is, is that we're not real - you know we're not over-the-top ready to say that Ag is back, I know that you know some folks like Valmont and Lindsay have been pretty fired up about Ag. But the reality is, is that, we think Ag will have some tailwind and be positive, but the bulk of what we're thinking of is, you know, continuing residential strength, continuing groundwater strength and then just you know incremental share pickups that we can get in different parts of North America.

[Matt Summerville:]

Great. Thank you, guys.

[Operator:]

Thank you. Our next question comes from Chris McGinnis with Sidoti & Company. Your line is now open.

[Chris McGinnis:]

Good morning. Thanks for taking my questions and nice quarter and -

[Gregg Sengstack:]

Chris, your is very weak.

[Chris McGinnis:]

Does this help?

[Gregg Sengstack:]

Yeah, that's better, Chris. Good morning.

[Chris McGinnis:]

Yeah, great. Good morning. Thanks for taking my questions and nice quarter and guidance. Can you maybe just talk a little bit about the Distribution acquisition and just how that strengthens the market for you and you know obviously it's been a very good year for Distribution. So, you know how does that you know change the landscape? And then maybe can you just talk maybe a little bit about synergies within you know how they should come through? Thanks.

[John Haines:]

Sure. So, Chris if you go back 2014 and our decision to move away from a large distributor it shows a national footprint preferred and, on their calls, and their decision to move away from us in Central United States. So we have - we've had a long-standing relationship with Gicon, that preceded that change. But we just felt that we had not fully recovered our share in the Texas market, which is probably the largest groundwater market in the country. We maintained contact with the owners of Gicon, four of the five owners were not active in the business. We saw the Gicon footprint is being a really solid footprint for us, they had made a lot of progress with Franklin product generally in those markets. And then when the owners decided that it was time for them to liquidate their position, we were here and ready to support that decision. Along with those, that company comes in industrial business or line shaft turbine business, which complements the acquisition we made with CPS Pumps, a product line we acquired about a year ago. And so we see this is being a natural outgrowth for the Headwater business and for Franklin is a synergy between the acquisition that we did a year ago and the line shaft business that's within Gicon. And then given that knowledge base within Gicon, the ability to leverage the platform, the Headwater has across the country of you know multiple locations across the country it will be able to have more local representation with municipalities and larger pump system customers leveraging the Gicon knowledge and CPS Pump acquisition and the Headwaters platform. So that's the synergistic side of the business. Of course, you know, on the - bringing in another business in the Headwater gives Headwater more scale and more opportunity on the cost side as well, but those were the principal location - reasons gaining, we're recovering share in Texas, a build out on the line shaft business and operational efficiency improvements.

[Chris McGinnis:]

Okay, thanks for that. And then I - can you just maybe talk about given the strength of the balance sheet just the - you know your outlook for your additional M&A and what you're seeing in the marketplace?

[John Haines:]

Yeah. So the M&A view has not changed, Chris, it's the number one place that we would like to apply our free cash flow. Strategically, geographic expansion and product line extensions continues to be what we're trying to achieve in our acquisitions. I would say we have a fairly robust pipeline of opportunities and are continuing to pursue those across all segments, and we will continue to pursue them across all segments and you know, kind of, review these on an opportunistic deal-by-deal basis for how much sense they make for Franklin Electric. So you know, we're pretty confident that the deal flows will continue to come at us and we'll have some good looks.

[Chris McGinnis:]

Great. And then just one last question. Just within Fuel Systems you talked about you know really controlling the cost structure there. Does anything change you know if that recovery picks up you know in terms of keeping the cost structure the same from the savings you have this year? Thanks.

[John Haines:]

Yeah. I think when you look at the SG&A base of growth, this is kind of both Fueling and Water. What you see in 2020 were big takeouts around like travel, Chris, and advertising and trade shows and maybe some of the customer activity that we would normally do. You know if things come back and start to pick up, of course, that is - a good part of that is going to return. Gregg mentioned earlier, there is a fair number of international opportunities around station growth that's happening in different parts of - mostly the developing world. And you know those we need to be prepared for commercial and we will be prepared for, but that's going to mean that you know, we got to have the right people there, we got to have the right engagement with our customers and we need to make sure that you know that those customers feel like they're being served well by Franklin during the decision process to choose equipment, but then more importantly afterwards. So, those are the kind of costs that we're not going to skimp on and we're going to make sure we are prepared to capitalize on these international opportunities as they present themselves.

[Chris McGinnis:]

Great. Thanks for taking the questions and good luck in Q1.

[Gregg Sengstack:]

Thanks, Chris.

[John Haines:]

Thanks, Chris.

[Operator:]

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Gregg Sengstack for closing remarks.

[Gregg Sengstack:]

We appreciate you joining us this morning for our conference call and look forward to speaking to you after the end of the first quarter with our first quarter results. Have a great week.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.