Hello, and welcome to the Franklin Electric Reports First Quarter 2024 Sales and Earnings Conference Call. Please be advised that today's conference call is being recorded.

Thank you, Andrew, and good morning, everyone. Welcome to Franklin Electric's First Quarter 2024 Earnings Conference Call. With me today is Gregg Sengstack, our Chairperson and Chief Executive Officer. On today's call, Gregg will review our first quarter business highlights, then I will provide additional details on our financial performance. We will then take questions. Before we begin, let me remind you that as we conduct this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which could cause actual results to differ materially from such forward-looking statements. A discussion of these factors may be found in the company's annual report on Form 10-K and today's earnings release. All forward-looking statements made during this call are based on information currently available and, except as required by law, the company assumes no obligation to update any forward-looking statements. With that, I will now turn the call over to Gregg Sengstack.

Thank you, Jeff, and thank you all for joining us. Our first quarter results were slightly below our expectations while the business generally performed as expected. The Franklin team executed well and managed cost during the quarter despite much wetter weather and expected and continuing commodity price pressures. As we have previously communicated, the first quarter is seasonally our slowest quarter as it relates to demand. However, underlying activity in our core markets remains healthy. Comparing to our record first quarter 2023, net sales were down $24 million or 5%. We had an exceptional start to 2023, particularly from large dewatering equipment and fueling systems, which made for a tougher year-over-year comparison. The largest contributing factors were the decrease in large dewatering equipment sales in the U.S. to our fleet rental customers, which accounted for approximately two-thirds of the decrease, and lower sales in Fueling Systems as demand and order patterns have normalized. Even with more moderate demand, we delivered improved gross margin versus the prior year, driven by favorable mix and continued cost control. As expected, SG&A expenses were higher than prior year due to inflationary pressure, investments in recent water treatment and Distribution acquisitions, and the addition of new Distribution branch locations. Turning to our segments, Water Systems first quarter sales and operating income declined 7% and 4%, respectively. As I previously mentioned, volumes were lower in large dewatering equipment, creating a difficult year-over-year comparison against the first quarter record sales in 2023. Additionally, demand in the U.S. for our groundwater pumping systems was impacted by continued unfavorable weather patterns. Operating margin improved to 16.4% and was up 40 basis points versus prior year and 60 basis points versus the fourth quarter of 2023. This was driven by favorable product mix and lower freight expenses. Fueling Systems' sales and operating income decreased 15% and 10%, respectively, versus the prior year. We are encouraged to see that the destocking activity, which impacted the business in the back half of last year, has mostly diminished at this point in time. As with large dewatering equipment, Fueling Systems' record first quarter of fiscal '23 created a difficult year-over-year comparison. That said, Fueling Systems' first quarter operating margin came in at 30.3%, an increase of 170 basis points compared to the prior year. Improved margin was a result of favorable product mix and operating expense management. Sales in the Distribution business increased 3% from the prior year primarily due to the incremental sales impact from our 2023 acquisition. The business, similar to the Water Systems, was negatively impacted by unfavorable weather across many parts of the United States, delaying the start of contractor installations. Operating margin was 1.2%, a 210 basis point decline versus the prior year due to lower margins on commodity-based products as well as increased operating expenses from continued investment and growth via the recent acquisition of new branch locations announced in 2023. Considering the impact of these investments, we are encouraged to have achieved a 50 basis point sequential improvement in operating margins for Distribution for the fourth quarter of 2023 on seasonally lower sales. Our sales team maintains line of sight to our contractor customers' project pipelines. As a result, we are confident we will see improving performance in sales and margin as weather improves as we enter the groundwater drilling season. Our continued focus on the management of working capital has resulted in more normalized inventory levels with our March inventory balance at $532 million, close to $70 million lower than the same period in the prior year, although up from the end of the year in anticipation of normal seasonal demand. Consequently, our cash flow improved approximately $10 million in the first quarter of 2024 compared to the prior year. We remain committed to a balanced capital allocation strategy. We continue to make internal investments focused on bringing additional production in-house, enhancing the integrity of our supply chain. We are also actively monitoring the M&A environment, where we have seen an uptick in activity. We've invested approximately $0.5 billion since 2017 to build on our Distribution business and our water treatment platform. We will continue to build these businesses through bolt-on acquisitions while we are actively looking to grow in a couple of other areas. The first is manufacturers of larger pumping systems with a focus on commercial and industrial end markets globally. The second is to add to our critical asset monitoring capabilities in the grid business as the demand for electricity continues to grow. With effectively no net debt, we are well positioned to take advantage of opportunities as they present themselves. Finally, we remain committed to returning capital to our shareholders through regular dividends and opportunistic share repurchases. Looking ahead to the remainder of this year, we are mindful of the continued macroeconomic and geopolitical pressures we have to contend with. However, given the results in the first quarter and our current outlook, we are maintaining our full-year 2024 sales guidance to be in the range of $2.1 billion to $2.17 billion in sales, and our EPS guidance remains between $4.22 and $4.40. Before turning the call back over to Jeff, I'd like to take a moment to recognize Franklin Electric and our employees for being named in Newsweek's 2024 list of America's Most Trustworthy Companies for the third consecutive year. I would also like to refer you to our recently published 2024 sustainability report, detailing the company's efforts to positively and responsibly impact our communities over the past year. The work that we do is essential to people's lives, advances global access to clean water, and improves the safety and availability of energy worldwide. I'm also proud of the culture this management team has stewarded, one that balances focus across efficiency, sustainability, and reliability with the well-being of our employees. I will now turn the call back over to Jeff.

Thanks, Gregg. Overall, our first quarter was largely in line with our expectations as Gregg highlighted. While we started off the first quarter with sales down from our record levels last year, the Franklin team executed well with a focus on delivering for our customers and cost management, which resulted in an improvement in our gross profit margins. Our fully diluted earnings per share were $0.70 for the first quarter 2024 versus $0.79 for the first quarter 2023. First quarter 2024 consolidated sales were $460.9 million, a year-over-year decrease of 5%. The benefit to sales from our 2023 acquisitions was more than offset by lower volumes in Water Systems and Fueling Systems. Water Systems sales in the U.S. and Canada were down 12% compared to the first quarter of 2023 due to volume declines. Sales of large dewatering equipment decreased 50% compared to record quarterly sales in the prior year quarter and sales of groundwater pumping equipment decreased 8%. These sales declines were partially offset by the incremental sales impact from our recent water treatment acquisition. Sales of all other surface pumping equipment were flat compared to the first quarter 2023. Water Systems sales in markets outside the U.S. and Canada increased by 4% overall as sales increased in all major markets, Latin America, EMEA and Asia Pacific. Water Systems operating income was $47.1 million in the first quarter of 2024, down $1.9 million or 4% versus the first quarter 2023. Operating income margin was 16.4%, a year-over-year increase of 40 basis points. The decrease in operating income was primarily due to lower sales. Operating income margin improved due to favorable product mix shifts and lower freight expenses. Distribution's first quarter sales were $147 million versus the first quarter 2023 sales of $143 million, a 3% increase. The Distribution segment's operating income was $1.8 million for the first quarter, a year-over-year decrease of $2.9 million. Operating income margin was 1.2% of sales in the first quarter of 2024 versus 3.3% in the prior year. Income was negatively impacted by margin compression from continued lower pricing on commodity-based products and investments in new branch locations. Fueling Systems sales in the first quarter of 2024 were $62.1 million. Sales decreased $10.6 million or 15% compared to the prior year. Fueling Systems sales in the U.S. and Canada decreased 11% compared to the first quarter of 2023. The decrease was across all product lines as customer buying patterns have normalized after record first quarter sales in 2023. Outside the U.S. and Canada, Fueling Systems sales decreased 16% due primarily to lower sales in Asia Pacific. Fueling Systems operating income was $18.8 million compared to $20.8 million in the first quarter of 2023. The first quarter 2024 operating income margin was 30.3% compared to 28.6% of net sales in the prior year. Operating income margin increased primarily due to price realization, lower freight costs, and a favorable product sales mix shift. Franklin Electric's consolidated gross profit was $163.6 million for the first quarter of 2024, a 1% year-over-year increase. The gross profit as a percentage of net sales was 35.5% in the first quarter of 2024, up 200 basis points versus 33.5% in the prior year. The gross profit margin was favorably impacted in 2024 by product mix and lower freight costs in Water Systems and Fueling Systems, partially offset by margin compression from unfavorable pricing of commodity-based products from the Distribution business. Selling, general and administrative, or SG&A, expenses were $115.6 million in the first quarter of 2024 compared to $109.5 million in the first quarter of 2023. The increase in SG&A expenses was due to the incremental expense from recent acquisitions, new branch locations in Distribution, and higher compensation costs. Consolidated operating income was $47.9 million in the first quarter of 2024, down $4.7 million or 9% from $52.6 million in the first quarter 2023. The decrease in operating income was primarily due to lower sales. First quarter 2024 operating income margin was 10.4% versus 10.9% of net sales in the first quarter of 2023. Below operating income, higher foreign exchange expense primarily due to hyperinflation in Argentina and Turkey was partially offset by lower interest expense, which equates to a decrease of approximately $0.02 in earnings per share. The effective tax rate was 22% for the quarter compared to 21% in the prior year quarter. The company purchased approximately 78,000 shares of its common stock in the open market for about $7.4 million during the first quarter of 2024. At the end of the first quarter, the remaining share repurchase authorization is about 839,000 shares. Last week, the company announced a quarterly cash dividend of $0.25 that will be paid May 16 to shareholders of record as of May 2. This concludes our prepared remarks. We'll now turn the call over to Andrew for questions.

And our first question comes from the line of Bryan Blair with Oppenheimer.

I was hoping you could offer a little more color on how orders trended through the quarter and into Q2 and how your team views the relative puts and takes or upside/downside drivers versus the reiterated full year guidance at this point.

Yes, I mean, from how it trended during the quarter, I think it trended as pretty much as we would have expected with the normal seasonal profile. Typically, it's going to start slow and then build as we move through the quarter, so lower in January and then finishing stronger in March. I believe we saw that. The puts and takes there, the one thing that I think impacted the business more than we had expected was the weather. We continued to see much wetter weather in the U.S. and that impacted us certainly in the western part of the U.S. And so that was a factor that was worse than we had forecast or expected. And then the other is the commodity prices, particularly for pipe, continue to be under pressure. That market has to stabilize at some point, Bryan. We've been waiting for that for a couple of quarters now, but we continue to see pricing pressures there. That's more than four quarters in a row that we've seen those pricing pressures on commodities. So when you look at it from a year-over-year impact, it does have an impact.

Understood, appreciate the color. If we could dig into Fueling Systems trends a bit, what was the growth in critical asset monitoring in the quarter? And at this point, how mix-accretive is that build-out? Obviously, the segment margin came in, at least relative to our model, ahead of expectations and the optics are quite favorable there.

Yes. I would say that the grid solutions business performed pretty much in line with the way the fueling business did in terms of it was down on a year-over-year basis. While that business has been growing strong double digits and we expect it to continue to grow strong double digits, I think it went through some of the same dynamics that we saw on the fueling side, where people have built up inventory destock. Now with supply availability, lead times improve, people are waiting. They're not placing their orders as early as they did in the prior year. So we saw a year-over-year decline in grid solutions.

Okay, understood. And one last one, if I may. Any color on the integration of Action Manufacturing and commentary on the M&A pipeline? It seems optimistic. Any color you can offer on the opportunities over the near-term potential Action ability, whether in water treatment, distribution, the typical focus areas for you or you called out a couple of new potential areas for investment as well?

Yes, Bryan, the integration of Action is progressing as planned. We're bringing them onto our ERP system tomorrow. We’re managing both distribution and water treatment effectively and can integrate businesses swiftly while aligning them with our practices and layouts. Action is actually performing slightly ahead of our expectations in terms of revenue and profit. We have the necessary platform to operate in both distribution and water treatment. As others exit the market, we are positioned to acquire their businesses and will continue to do so. We are also approaching opportunities more strategically now that there is a clearer understanding of valuations in the current high-interest rate environment, leading to increased deal flow in manufacturing assets. At our core, Franklin is a manufacturing company, and our distribution efforts complement our leadership in the U.S. groundwater market. We are exploring acquisitions of larger pumps to enhance our established reputation in residential and agricultural markets. We are being deliberate in this approach, ensuring that our expansions in adjacent markets make logical sense regarding distribution and shared customers. We have indeed observed a noticeable increase in deal flow over the last few months compared to a year ago.

And our next question comes from the line of Walter Liptak with Seaport Research.

So considering the slightly weaker-than-expected first quarter and related to the wetter weather, you maintained the guidance for the full year. Can you talk about your confidence levels, what has to go right in the second quarter and the back half to get to your guidance?

Yes, we are maintaining our guidance and feel confident about the range we have provided. Although the first quarter was slightly below our expectations, it is still generally in line with what we anticipated. Factors such as wetter weather and commodities pricing impacted us, but we expected 2024 to begin similarly to how 2023 ended. We indicated that business would start strong and build throughout the year, and we believe that's still the case. While we don't predict economic trends, we don’t foresee a recession, but we do expect interest rates to remain elevated, which could have some effect on the housing market, particularly in areas like water treatment. Overall, our outlook for the full year guidance remains consistent. We are still aligned with historical business performance regarding the first and second halves of the year, and we feel optimistic about our guidance through the year's end.

Okay, great. As we look ahead to the second quarter, you mentioned that the destocking in fueling appears to be behind you. Are you experiencing increased sell-through as we approach the construction season?

Yes, I would say we're right at the beginning of the groundwater drilling season. I think we are seeing a pickup in activity. But we're on the front end of it at this point in time. There’s still a ways to go. As we said, the first quarter was impacted by weather in some key areas, the West Coast, Texas, and other parts of the U.S. We've started to see some improvement there, but it's hard to predict the weather. We take what we get when we talk about the weather impact on the business overall. But we expect a normal seasonal pickup in the second quarter, so our business is pretty consistent from that regard.

Okay. And how about related to the fueling part of the business? Are you seeing better sell-through for fueling and equipment now that the destock is over?

Yes, I think the conversations that we have with our customers in fueling are indicative that they expect to have a more normal year this year. I think we're also on the front end of that curve as well. The indication at this point is that we'll see fueling pick up as we move through the middle part of the year. Like I said, those customer conversations are positive at this point but reflective of really a more normal level, not an increase in stocking, not a destocking environment. So that's where we are in fueling.

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

So just a couple here. One, when you think about the pricing dynamics in the marketplace on the water side, anything of note? I know the commodity pricing was mentioned in the prepared remarks, just more thinking competitively. And then similarly, any thoughts on the inventory levels on the water side?

Mike, the last part of your question broke up. Could you please repeat that?

Yes. Similarly, any thoughts on the inventory levels on the water side in the channel?

Yes, Jeff will provide additional details. Regarding pricing, it is reflecting a more pre-COVID situation with increased promotional activity in groundwater. The pricing in the residential RSS channel is fairly stable. We discussed the strong performance of Franklin's business globally at our conference last November, highlighting our presence in various channels. However, there are ongoing challenges with the cyclicality of the dewatering business which has affected pricing competitiveness during slower periods. Despite this, we've managed to maintain our margins, as shown in our results. Interestingly, outside the U.S., we are successfully raising prices in light of inflation, particularly in EMEA, while in high inflation markets like Turkey and Argentina, we set prices in dollars or euros to help insulate ourselves. In terms of inventory levels, we view Headwater as a key indicator for the groundwater channel. They have reduced their inventory compared to last year, and our overall inventories are down approximately $70 million, partly due to improved distribution and shorter lead times. We believe that most distributors in the channel are likely doing the same. While we are not seeing extreme destocking, inventory appears to be at appropriate levels. Jeff and I discussed that we need to be aware of the changing conditions in the U.S. where the climate is drying, and while we've had a wetter year with 120 in the first half compared to 110 last year, weather is unpredictable. With the drying conditions, we anticipate an increase in demand for agricultural pumps. So, specifically regarding channel inventory, I believe it is in good standing—not too high or too low. Jeff, do you have anything else to add?

No, I think you've hit it right on, Gregg. The business as a whole, water, fueling, and distribution, we are getting positive pricing. As Gregg mentioned, in water, we're a little more favorable outside the U.S., generally low single digits, more of a return to normal from what we saw several years ago and less frequent price increases than when we were in a high inflation environment. Distribution is getting good price on what I would call the core products, pumps, motors, drives, and controls. The commodity piece continues to be negative price in the current environment. So that's what we're seeing across the business.

Great. And then the second one, just on the margins for the water side, good seasonal margins there. Obviously, you mentioned in the prepared remarks that mix was a benefit. How do you think about what the run rate looks like or how to think about modeling that for the rest of the year?

Yes, I believe we have a favorable mix, especially due to the decrease in large dewatering, which is at the lower end of the Water Systems margin range. With a reduced percentage of large dewatering in the overall mix, this will positively influence our mix impact. We anticipate that large dewatering will remain down year-over-year as we progress through 2024. The best approach to model this, Mike, is to maintain our current mix moving forward and then assess it as it develops. However, I should mention that large dewatering will be variable this year, with significant fluctuations from quarter to quarter.

And our next question comes from the line of Matt Summerville with D.A. Davidson.

Can you maybe talk about kind of embedded in your guidance for the year, what sort of organic outlook you're assuming for water, distribution and fueling in '24 relative to '23? Just maybe a little bit more segment granularity there and then I have a follow-up.

Yes. A little more organic outlook. I think for the guidance overall on a full-year basis, we're kind of low to mid-single digits top line growth. In Water Systems, I think we expect pretty normal organic growth for the business, excluding the impact from large dewatering, which we know is going to be down on a year-over-year basis. That will be in the normal range that we talked about, in that 3% to 5% range. Fueling, I think fueling will be slightly lower this year, still net positive overall. But they've come off of a really strong year in 2023, and we're seeing a bit of a normalization in terms of demand in that market, so still positive overall. Then Distribution, Distribution on an organic basis, I think, is similar to what we see in Water Systems and possibly some upside in Distribution as the market picks up as we come into season.

Got it. And then just a follow-up on kind of water and distribution. If you look at U.S., Canada, how did your business perform in terms of residential versus ag? And how are you thinking about the organic outlook there for '24 relative to '23?

Yes, interesting question. In the first quarter on a year-over-year basis, residential was down slightly, I would say, low single digits. That's reflective of our groundwater business, which was somewhat impacted by weather during the quarter. Ag was down a little more in the quarter. Ag was down mid-single digits for the quarter on a year-over-year basis. I also believe weather was a factor that impacted ag overall.

And then Matt, our other residential surface pump business is essentially flat.

With respect to dewatering, given I think that business is coming off of a record year in '23 and it is going to be a top line headwind this year, how much of a decline do you expect in large dewatering pumps on a revenue basis in '24 relative to '23 as we kind of think about modeling that in with Jeff's comments on the overall organic outlook for water excluding that business?

Yes, Matt. Let me break that down a bit. There are a few components to consider. We have a significant global dewatering business, and then there's a segment focused mainly on the U.S. and Canada, where we sell to fleet rental companies. We're experiencing a notable decline in this segment in the U.S., with a year-over-year drop of about 50% in the first quarter. Overall, our global business also saw a 50% decline in the U.S.; however, Canada experienced a 10% increase, leading to a global year-over-year decline of around 40%. The pressure this year is mainly from the large fleet rental business in the U.S. and Canada. Overall, we anticipate our business will be down in the mid-teens for the full year after achieving a record $200 million in sales in 2023.

Thank you. I will now turn the call back over to CEO, Gregg Sengstack, for any closing remarks.

We thank you for joining us this morning on our conference call, and we look forward to speaking to you in July with our second quarter results. Have a good week.

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