Franklin Electric Co Inc
NASDAQ:FELE
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Franklin Electric Co Inc
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Hello and thank you for standing by. Welcome to the Franklin Electric Reports Second Quarter 2022 Sales and Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce Chief Financial Officer, Jeff Taylor.
Thank you, Andrew and welcome everyone to Franklin Electric’s second quarter 2022 earnings conference call. With me today is Gregg Sengstack, our Chairperson and CEO. On today’s call, Gregg will review our second quarter business highlights and I will review our second quarter financial performance in more detail. When we are through, we will have time for questions and answers.
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 in 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 forward-looking statements.
With that, I will now turn the call over to our Chairperson and CEO, Gregg Sengstack.
Thank you Jeff, and thank you all for joining us. We gained momentum in the second quarter leveraging strong demand around the globe in a normal seasonal uptick resulting in record results including the highest consolidated net sales, operating income and EPS for any quarter in Franklin Electric’s history. It requires tremendous teamwork and commitment to deliver these results, and I want to thank our global team whose execution and dedication drove these results. Let me cover a few highlights for the quarter before I talk about each business segment.
First, demand remains strong across the company’s markets with all three businesses experiencing strong double-digit topline growth organically, which reflects the growing need for our Water and Fueling System products. Our backlog has remained elevated at approximately $290 million essentially flat in the prior quarters.
Another bright spot this quarter and adjustment to our team’s discipline was the sequential margin improvement we delivered with operating margin expanding in all three businesses as a result of price catching up with inflation, improved operating leverage and the team’s relentless focus on the cost controls especially in SG&A.
Free cash flow improved during the second quarter driven primarily by higher net income as working capital stabilized. As mentioned in previous calls, we are purposely carrying higher levels of inventory to mitigate on-going supply issues and longer lead times. We're planning to reduce our inventory levels by year end is holding a greater cash conversion in the back half of the year.
Turning to our segments. In Water Systems, we experienced overall revenue growth of 26%, operating income growth of 42% and operating margin of 15.8% for the second quarter. Organic growth was 27% lead by pricing actions in strong end market demand across all major product lines and groundwater pumping, surface pumping water equipment and water treatment.
In the U.S. organic growth for Water Systems was 30%. Outside the U.S. Water Systems organic growth was 23% with strong growth in all regions of the world. End markets for Water Systems remain strong driven by strong commodity and crop prices, dry weather in the United States and other regions of the globe, food scarcity, driving growth in agriculture, and a secular trend created from the population migration to rural areas within the U.S.
We have not experienced a noticeable decline in U.S. residential demand to date, but we are monitoring this end market close. We believe these positive trends combined with the stability of Water Systems, due to the high level replacement demand will continue to drive the business going forward. We reached the one year anniversary of the Puronics and Aqua System acquisitions in the Water Treatment during the second quarter.
Our integration activities are going well. We have successfully integrated our U.S. water treatment business on our common ERP system, operational integration activities continue on schedule. The performance of the water treatment business is exceeding our expectations and there's more opportunity to grow and optimize this business.
Our Fueling Systems business also had a solid quarter producing overall revenue growth of 19%. Operating income growth of 41% and operating margin of 30.3%. Organic growth was 21% due in part to robust demand for infrastructure built out in the U.S. Looking forward we expect continued strong demand in the U.S. as major markers invest in new locations and industry consolidation progresses. Outside the U.S. we expect future investment, new locations in developing regions, as well as a greater focus on wafer recovery, environmental management and monitor. Specifically our revenue and India's growing with what we believe will be a multiyear wafer recovery and fuel station infrastructure build out.
Globally, geopolitical tensions have highlighted the need for expansion of agriculture, mining and energy infrastructure, as pressures arise recent conflicts have impacted food material and energy supplies. As a result, we believe we will continue to see strong demand within both our water and fueling segments.
Our U.S. distribution business delivered another strong quarter with overall revenue growth of 32% operating income growth of 46% and operating margin of 12.2% driven by solid demand in the U.S. groundwater water market, price realization and the acquisition of Blake Equipment at the beginning of the year. The distribution team continues to deliver superior results underscoring the segment's roles and major growth driver for our company.
Our capital allocation strategy remains unchanged. We will continue to invest in our business organically and inorganically while at the same time returning cash to shareholders for share repurchases and dividends. However, given we are always actively looking for strategic targets; the strengthening U.S. dollar may make investment opportunities outside the U.S. more attractive. We will continue to remain prudent and efficient in our approach to capital allocation will stay focused on driving returns for our shareholders. The operating environment for a company remains stable during the second quarter now much better and not much worse, but continues to offer challenges with supply perspective.
Additionally, inflationary cost pressures persistent and a team is actively managing all of these. We foresee these headwinds continuing at some level throughout the year depending on material input and geography. However we expect the supply chain to begin to improve in the back half of the year.
Turning now to our outlook. We expect to carry the momentum from our strong first half and the second half of the year. Our open order balance for the backlog remains high and we continue to experience strong demand globally in our core markets. As a result, we are updating and raising our 2022 revenue and earnings per share guidance. Our new 2022 full year revenue guidance is $2 billion to $2.15 billion. Our new earnings per share before restructuring is in the range of $4 to $4.20 per share, reflecting an increase in the midpoint of require range of $3.63 for our current range of the midpoint of $4.10.
I will now turn the call back over to Jeff.
Thanks, Gregg. Overall, it was a record second quarter for the company and our operating segments. We have fabulous new quarterly company records for consolidated revenue operating income and earnings per share. Our fully diluted earnings per share for record for any quarter in the company's history and $1.26 for the second quarter of 2022 versus $0.83 for the second quarter of 2021.
Consolidated sales were a record $551.1 million compared to 2021 second quarter sales of $437.3 million, an increase of 26%. The increase from acquisition related sales was $34.4 million, while organic growth contributed 23%. Sales revenue was negatively impacted by $19.4 million or about 4% in the second quarter of 2022 due to foreign currency translation.
Water System sales in the U.S. and Canada were up about 38% compared to the second quarter of 2021, due to acquisition related sales, price and volume. In the second quarter of 2022, sales from businesses acquired since the second quarter of 2021 were $12.9 million.
Water System sales in the U.S. and Canada grew 30% organically in the second quarter. Sales of groundwater pumping equipment increased by about 38% and sales of all surface pumping equipment increased by about 22% all due to strong in market demand.
Water System sales in markets outside the U.S. and Canada increased by about 9% overall. Sales revenue decreased by $17.1 million or about 16% in the second quarter of 2020 due to foreign currency translation. Outside the U.S. and Canada, Water Systems organic sales increased by about 23% driven primarily by higher sales in the Europe, Middle East and Africa markets. The company also had higher sales in the Latin America and Asia Pacific market.
Water Systems record operating income was $49 million in the second quarter of 2022 up $14.4 million, or about 42% versus the second quarter of 2021 and operating income margin was 15.8%, an increase of 180 basis points. The increase in operating income was primarily due to higher sales. Operating Income margin improved due to leverage on fixed costs from higher sales, price realization and cost management.
Distribution achieved record second quarter sales of $191.1 million this quarter versus second quarter 2021 sales of $144.8 million. In the second quarter of 2022, sales from businesses acquired since the second quarter of 2021 were $19.6 million. The distribution segment organic sales increased 18% compared to the second quarter 2021.
Revenue was from higher selling prices in strong demand in all regions and product categories. The distribution segment operating income was record for the second quarter, at $23.3 million compared to the second quarter of 2021 operating income of $16 million. Operating Income margin was 12.2% of sales and distribution primarily because of revenue growth.
Fueling system sales were record $86 million in the second quarter of 2022 and increased 19% versus the second quarter of 2021. Sales Revenue decreased by $1.5 million or about 2% in the second quarter due to foreign currency translation. Fueling system sales in the U.S. and Canada increased by about 20% compared to the second quarter of 2021. The increase was primarily in pumping systems and piping.
Outside the U.S. and Canada fueling systems revenues decreased by about 6% and sales increase of 3% and the rest of the world outside of China, were not offset by lower sales in China. We're not enough to offset lower sales in China.
Fueling systems operating income in the second quarter was $26.1 million, a new quarterly record compared to $18.5 million in the second quarter of 2021 driven by higher sales. The second quarter 2022 operating income margin was 30.3% compared to 25.6% of net sales in the prior year. The increase in operating income was primarily due to higher sales. Operating Income margin improved due to leverage on fixed costs from higher sales, price realization and cost management.
The Company's consolidated gross profit was $189.3 million for the second quarter of 2022 an increase from the second quarter of 2021 gross profit of $152.2 million. Gross profit as a percentage of net sales was 34.3% in the second quarter of 2022 versus 34.8% in the second quarter 2021. The gross profit increase was primarily due to higher sales.
In the second quarter of 2022, the gross profit margin percent was nearly flat, down 50 basis points as realized price actions are more than offsetting inflationary costs increases. However, supply disruptions are causing higher transportation and manufacturing costs.
Selling, general and administrative expenses were $108.3 million in the second quarter 2022 compared to $100.5 million in the second quarter of 2021. SG&A expenses from acquired businesses were about $7.6 million. Excluding acquisitions SG&A expenses were basically flat to last year. SG&A expense as a percent of sales is lower by 330 basis points due to great cost control across the company.
In the second quarter 2022, we have unfavorable discrete events of about 2.5 million, reducing income below operating income. These events primarily related to an indirect tax dispute settlement in a foreign jurisdiction, and a change in income tax rate for a local jurisdiction. The effective income tax rate for the second quarter of 2022 was about 22%, and before the impact of discrete events was about 21%.
The effective tax rate for the second quarter of 2021 was about 19%. And before the impact of discrete events was about 20%. The increase in the effective tax rate was primarily a result of net unfavorable discrete events recorded in the second quarter as compared to net favorable discrete events recorded in the prior year quarter, primarily from tax benefits on share based compensation.
The effective tax rate for the full year 2022 is projected to be about 21% before the impact of discrete events. We recognize the majority of our peer companies report adjusted earnings, while we continue to report GAAP earnings, both before and after restructuring expense, as defined by GAAP. However, as our annual non-cash amortization has increased significantly, over recent years due to the increased level of intangible assets coming mostly from an acquisition in the water treatment space, we're providing additional information on this incremental expense. For 2022, non-cash amortization of acquisition related intangibles is approximately $17 million or $4.3 million per quarter.
Moving to return of capital to shareholders, yesterday, the company announced a quarterly cash dividend of $19.5 that will be paid August 18, to shareholders of record on August 4. Additionally, the company purchased about 130,000 shares of its common stock in the open market for about $9.8 million during the second quarter 2022. At the end of the quarter, the total remaining authorized shares that may be repurchased is approximately 424,000.
This concludes our prepared remarks. I will now turn the call back to Andrew, for questions.
Thank you.[Operator Instructions] And our first question comes from the line of Matt Summerville with D.A. Davidson.
Thanks. Good morning, maybe first, Jeff, Gregg organic growth across each of the three businesses obviously very impressive. I was hoping maybe you could parse out a little bit, when you look across the three how much is being driven by volume and price. And then whether or not in the second quarter you were in parity with sort of price cost or whether maybe you actually had begun to realize a favorable spread there. And then I have a follow up.
Yes. Good morning, Matt. And thanks for thanks for the question. I think on the first part in terms of price volume, let me just give price volume in general in aggregate versus splitting it out for each of the businesses. So we had strong double digit organic growth, in all three segments leading to strong double digit organic growth for the company as a whole. Price is certainly the bigger factor there and I would say it's in that 60-40 price volume to two thirds, one third price volume in general. So price is leading the way, but we have strong volume growth as well.
And then, Jeff, I had a second part to that question, whether or not at this point in the second quarter you are frankly sort of seeing price cost parity or whether maybe you now begin to realize a favorable spread there?
Yes. Matt, I think in the second quarter, we actually gained some ground on the price versus cost equation. It fluctuates a little bit quarter-to-quarter, As you know, we were a little bit behind in the first quarter. I think we caught them up in the second quarter on our price versus our inflationary costs overall for the company, so gained a little ground.
Matt, to Jeff's earlier prepared remarks; we saw just a point of where price got ahead of material input costs. But relative to the logistics costs and operational costs of having interruptions at the factory due to supply chain issues, those costs have not been covered yet. We're covering that through the strong growth and operating leverage we're getting both above and below the gross margin line.
Got it. And then I think, Gregg, you maybe mentioned in your prepared remarks that you think some of the supply chain issues you've been dealing with maybe starts to get better in the second half of the year. Can you talk about what you're maybe seeing kind of day-to-day that's leading you to that conclusion?
Yes. We have this backlog, which, again, historically, up until a year ago, we really didn't talk about backlog. We've talked more about open orders at the end of the quarter, but we also have what we [Indiscernible] the past due and all of that backlog, which is a sizable portion of it. And we're seeing where the past due has peaked out in, say, in the May time frame and June, and we're beginning to see some positive directionally positive move on our past due. And I think that's some indication that we're beginning to get critical components, that we could build out products. We've got 99 to 100 pieces you need for a particular product, and we're getting starting to get that 100th piece. So that gives us cause for optimism.
We're also mindful of, Matt, and I think maybe this where you might be headed is that we talk about the availability of electronic components and the good news is that we're now down only 50-week lead times. So I mean, it's still tremendous lead times on some key components, and that's going to carry into its 50-week lead time. It's going to carry into 2023. But we generally are seeing a little bit more positive than negative surprises coming out of the supply chain at this point.
Matt, Let me just add a little bit there in terms of -- it's an opportunity to give some credit to our operations and supply chain teams and in the work that they're really doing to manage through all of these issues that are arising on a daily or weekly basis. And really, they've been working to build resiliency in the supply chain. They've been working on securing supply with existing suppliers. We've been qualifying second suppliers in some cases for critical materials and all of that effort is over time working to hopefully improve our situation in the supply chain business. It's really a lot of hard work and effort that's being put in by those operations and supply chain teams to get that accomplished. And that doesn't mean that we're still not without risk in the second half of the year. We still have areas where we need improvement, but we're working on those very aggressively as well.
Understood. Thanks, Jeff.
Thank you. And our next question comes from the line of Mike Halloran with Baird.
Hey good morning guys, it’s Paz [ph] on for Mike.
Good morning.
Quickly, I was hoping we could double click in on Water Systems. Could you maybe talk about the trends separately across groundwater, surface pumps, sub pump and treatment, please?
Yes. I think you heard in our prepared remarks that we have very strong growth in groundwater. We've seen that continue in not only in the second quarter but in the first half. I would tell you that we're seeing that in all of the key end markets there. Residential continues to be strong. Agricultural continues to be strong in the groundwater space, on the surface pumping space, I'm going to include our large dewatering pioneer pumps in that.
We've seen very strong demand in large surface pumps in the first half of this year. That continues. The backlog for our Pioneer business increased in the second quarter over the first quarter. So that's certainly a strong driver there as we also see strong demand in other surface pumps.
In the sub-sewage and affluent, some of the condensate pumps, those have been challenged from a supply chain perspective. So they continue to be strong and demand continues to be strong. We're working through improvement on our supply issues there to improve that overall.
Excellent. That's really helpful. And maybe lastly, just a quick note on treatment.
Yes. The -- again, the Water Treatment, we've stood up all the U.S. businesses on our common ERP platform, that gives you great business. It gives us our team great visibility across and being to do better analytics. We have our Canadian operation yet to do. Of course, we got slowed down by COVID, but now that's opened up, we got that scheduled to happen in the back half of this year. The treatment business is doing well. It's ahead of its margin profile as we get these businesses onto one system, and we can continue to grow the top line and we get that leverage that we've seen across all of our segments in the quarter. So we're very pleased with the platform, very pleased with the progress, and we look forward to continued growth both organically and inorganically in that space.
Great. Thank you. I'll jump back in queue.
Thank you. And our next question comes from the line of Walter Liptak with Seaport Global.
Hey thanks, good morning everyone and great quarter. I want to follow up a little bit on Matt's questioning about the gross margin and maybe just to go one step further. It sounds like with the electronics still 50 weeks out and some supply chain issues. I guess, in the back half of the year, do you get the gross margin? The gross profit margin's kind of flat year-over-year. And then at what point do we start seeing improvement to gross margin? Do we have to get the supply chain logistics issues behind it?
Well, I think my first response to that is, Matt, we just delivered a record quarter. It's one of the highest gross margins we've seen in the company in years. And so we want to some extent, we want to enjoy the moment here. But certainly, we look at the back half of the year. There's a lot of factors that come into play in the back half of the year. And many of those we've talked about. These were all built into the guidance that we gave for the full year, which really leads to the second half.
But we do expect supply chains to see some slight improvement in the second half of the year. We also expect to see strong demand continue across our businesses. We've seen very robust broad-based demand up to this point, and we expect that, that will continue.
On the inflation and price side, I mean, we still have inflation coming through as well, we have price that's coming through as well with -- that are both built into our backlog. Other factors there in the second half of the year that could come into play on the margin. And certainly, there's a mix component to it. If we see improvement on the electronics side, that should be favorable overall to our margin profile. But the offset to that is as the large dewatering pumps for Pioneer will offset that because those are generally slightly -- margins are slightly below what I would call the segment average. So multiple factors playing in there. We think we've -- at least for where we are today, we've got a good view in the second half, and we're optimistic that demand is going to continue strong, and we're going to deliver a strong second half of the year.
Okay. All right. Great. Yes. I wasn't trying to take away from the record results. But the supply chain issue inflation that's been quite a headwind. And I guess it's -- hopefully, at some point, it's through the system.
And so understanding that demand is strong across the board that's great. How -- maybe I can ask you this one. How do you guys think about the monetary tightening that's going on and how that might impact your businesses, especially around resi? Do you think that tightening is going to moderate some of the demand out into the future? How do you think that will play out?
Walter, not an economist. But having been around Franklin for three decades, you think about -- I think what you're getting at is in new housing starts and new installations. Being mindful that in the space of groundwater, if you haven't -- just to make the math simple, if you have 1.5 million new housing starts, maybe you're going to get a couple of hundred thousand new starts with wells. But there are 13 million, 14 million wells installed in the United States. So new starts relative to the overall installed base is 2%.
So at the margin, is there definitely no question that it's a lift when we see new housing starts, it's going to help us, and it's going to be a lift also in our residential subfacility business. But from the standpoint of this large installed base, which is potentially getting utilized more actively now as people are moving into more rural settings, people will be more work from home is using their systems more so they do were out. They last for a long time as they do we're out. So I think that no question that if there's a slowdown, we'll be impacted like everybody else. But we have this resiliency because of our installed base in the U.S. in the residential side.
And also with commodity price lift, if you expect that's going to continue, that's going to be good for our ag business. It's also good for mining to the degree that you're seeing higher sustained oil prices. There's going to be more investment. Carbon's not going away. It's going to be more investment in oil sources with the try to move away from the -- of Russia as a source for carbon.
So we see a number of offsetting lift even if there's a -- we see a slowdown in the United States now, again, geopolitical we're getting product like everybody else, but we're in pretty resilient markets, probably the largely water being the most kind of capital dependent where you see capital cycles and the residential probably being lease correlated.
Now on the Fueling side, we're seeing continued consolidation and investment by major markets, two major markets, many of them are public companies, others are a private equity behind them. The returns on having a C-store is looking at a forward curve with gasoline as the returns are compelling, and they invest in technology, and that's good for us.
And then with the case of our distribution business here, which is very much U.S.-centric. And therefore, your question is very appropriate from that point of view. Certainly, the -- our leader in distribution have looked at other areas to expand in be it turf, treatment, be it at wastewater and be it commercial to, again, growing beyond a residential focus. At the same time, we're talking to contractors and contractors, you would often hear with they have worked out the line of sight for a month or two. We're talking to contractors we were committed for a year or two.
Now can that disappear if economy trends? Sure. But it's -- there's real underlying demand for their services and our products that we're seeing here, which gives us a level of confidence and again, a non-economist. It gives us a level of confidence that like we have in the past, it will weather any slowdown or weather a slowdown and if it occurs in a good way.
Okay. Great, okay thanks very much.
Thank you Walter. Appreciate your support.
Thank you. And our next question comes from the line of Kar [ph] Handers with North Coast Capital.
Good morning. Thanks for taking my question. Gregg, I hate to have you keep the economist hat on because I'm certainly not one either. But I wanted to kind of follow Walter's question with a similar question, more on the resource and mining side. I mean I know you cited tailwinds there, which -- we're on board with that, I guess, dewatering does see some tailwinds with the resource tightness. Interesting cycle and that some of that resource tightness is geopolitical driven and shortages and so forth, but we are kind of also at a point where the Fed's hiking and maybe tuck-in recession. So it's not sort of your typical mining resource cycle from a timing standpoint, how does that impact your outlook for dewatering?
Ryan [ph] you follow us for a number of years. And again, a view is that this is a supply. Inflation is coming to its supply constraint or some people who take an analogy back to the end of World War II coming back in the United States. There just wasn't enough supply as opposed to demand or -- and also the -- go back to the OA prices when the whole basis for the housing expansion was more financially driven, not economically driven. But we have a real shortage in housing. And then turning to your question about resources that to the degree that we're going to be moving more to an electrified world, is that we're going to need more mining.
And it's -- as you know, that's a real long cycle play. We saw that back in the earlier part of last decade, and we did really well in the environment. Now when oil dropped in 2014 through the floor, so did our large dewatering business. And we've made some changes there to reduce our breakeven points so that we could weather the capital cycle because we're not so much a capital cycle business, and we got into it when we got into de-watering -- and learned to deal with that. But I think in a little better way.
But as underlying is that to the degree that we're going to be doing more -- less resource dependency on countries that are less maybe favorable to the west and to the degree that we're going to be investing in electrification across the globe. That's going to be mining, and I think that's a multiyear situation irrespective of what may happen short term in the United States with the Fed and interest rates and the economy.
Got it. Okay. That's helpful. And then my other 1 was kind of big picture, Gregg. It has to do with your treatment business and your sort of channel-to-market strategy. I'm just curious if you can brief us on how that's working out. I know some of the peers in that business have really talked up their partnerships with some of the big box home improvement players and so forth and said that that's really the key to unlocking that market. Can you just talk about how you guys are going about penetrating that market and what your strategy is there?
Sure, Ryan. We have a multichannel strategy. So one thing when you look at treatment and you look in the United States, really the well driller installer is the first person that's going to touch a pumping system. Many of them do not get into treatment. They enjoy, and they realize a good living off drilling and installing. But some have found where treatment gives them repeat revenue. It gives them business in the off season. It's less -- maybe less ups and downs. So they're finding that interesting, and we have access to that channel.
Now we have the access to the channel through our own distribution through other distributors. And our own distribution has other suppliers of water treatment products and we respect the fact that our distribution business has to decide what's best interest for them. Being mindful they're owned by Franklin but on the other hand, that they're going to have other suppliers that are going to support. So that's a channel.
The other channel too of supporting plumbers and other installers and in small treatment systems, and that trend has also been established. But then with the Aqua systems go-to-market strategies, in between the idea of having the sales individual necessarily going out to your house and selling in a system and/or going to big box and then having to find somebody to install the system because I don't know about you, but I'm not maybe so inclined to try to install a more treatment system even as lively straightforward in my own home. I'm going to hire a contractor.
Aqua systems make that all seamless and very transparent. You can go -- the advertiser is clearly on the website, everything is right there. You can pick and choose what you want. And we make that transaction as seamless to the customer as possible. And that's really the niche we're operating in. The reason is it's a big part of Aqua systems business. That's really what we're focused on is making it a really easy transaction for the consumer, the customer to put it in.
They don't have to worry about going a big box and finding an installer and they don't and necessarily have to invite somebody in their homes to install systems. So that's what we have with Aqua. With Puronics is we have more of a model more like maybe call again our Connecticut model. But the Aqua model is one we think we can repeat in new markets as well.
Hey that's really helpful. It gives a better understanding of the business. Hey thanks again for your time.
Thank you, Ryan.
Thank you. And with that, I will now hand the call back over to CEO, Gregg Sengstack for any closing remarks.
We thank you for joining us this morning, and we look forward to speaking to you after the end of the third quarter. Have a good week.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.