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. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Chief Financial Officer, Jeff Taylor.

Thank you, Andrew, and welcome, everyone, to Franklin Electric's 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.

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 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 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 the 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 correspondingly. 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.

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 of 2024 versus $1.27 for the second quarter of 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.

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 in 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, and 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.

Thank you. And our first question comes from the line of Mike Halloran with RW Baird.

Hi. Good morning, everyone. This is Pez 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.

Thank you.

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?

Yeah. Thanks, Mike. 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 at a couple of 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 there are really a lot of nice opportunities, and I look forward to working with the team to develop and execute.

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?

Thank you for the question. We had a strong performance this quarter in terms of margins, particularly in our manufacturing segments within Water and Fueling. Fueling achieved a record operating margin this quarter. Our manufacturing costs have improved as supply chains have stabilized and input costs have remained steady. The team has successfully mitigated a lot of the uncertainties in the manufacturing environment, leading to better manufacturing costs for both Water and Fueling. In Fueling, even though volumes have decreased year-over-year, the product mix remains positive as we continue to concentrate on higher-value technology products, which are driving our business. Additionally, our US business has been slightly stronger this quarter compared to international markets, which usually benefits our margins. In terms of pricing, Fueling has seen good pricing in the market, showing some low- to mid-single-digit improvements. Although volumes are down, we are starting to observe better order patterns, giving us optimism for the latter half of the year. For Water, pricing is in the low single digits. While competition in the market has increased, we are maintaining our prices and securing positive pricing. The decline in volume in Water is mainly due to our large dewatering business, which we've discussed before. However, all other major product lines are experiencing positive volume growth, both domestically and internationally. I'll pause here to take any further questions you may have.

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.

Thanks, Pez.

Thank you. One moment, please, for our next question. Our next question comes from the line of Walter Liptak with Seaport Global.

Hey, good morning, guys. Great quarter, and nice to meet you, Joe, over the phone. With the weather headwinds, it seems 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?

So, Walter, this is Gregg. From the NOAA data, looking back at the last 130 years, we are currently in the 90th percentile for rain across the country, which is widespread. It began in the West, moved East, and affected all our key markets. This definitely impacted our volumes. However, as mentioned in our prepared remarks, our groundwater business saw an increase, particularly in small pumping systems for residential use, while more was focused on replacement markets. As you know, in agricultural markets, systems are not activated during rainy periods, which contributed to the volume pressure. We began noticing improvements as the weather started to dry out in the West around June, and once conditions improved, we saw order inflows from Europe. Hence, we have a more optimistic outlook for the latter half of the year. The decline in volume is, as Jeff and I mentioned, mainly due to the cyclical nature of the large dewatering pump market, which is more exposed to capital cycles. Rental companies purchased a lot of inventory last year to catch up from the pandemic but faced challenges getting it into the field, resulting in delays. They will eventually resolve these issues. We still see strong indicators from the end markets that construction activities will be robust. The agricultural segment experienced some setbacks due to wet conditions in Q2, but we're hopeful for improvement in the latter half of the year. Based on predictions related to El Nino and La Nina patterns, we should transition to a mild La Nina, which is generally favorable for us, though I won't speculate beyond that. Jeff, do you want to add anything regarding margins?

I wanted to mention that in the dewatering business, which is primarily focused in the US, we are seeing growth among our fleet customers outside the US. This indicates positive trends in our business today.

Okay. Great. So, if I understand the outlook correctly, the idea is that with the drying trend, the weather is expected to be hotter in the Midwest, possibly with less rainfall. As some of these irrigation systems are activated, there should be improved demand in the third quarter and for the remainder of the year. Is that the correct interpretation?

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 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 a 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.

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...

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.

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?

The Distribution business is currently experiencing lower volume. They had an acquisition at the end of last year, which contributed positively to their overall revenue, but their core business declined by that amount plus additional shortfalls. Volume is a significant factor. Additionally, there were higher operating expenses during the quarter due to our investments, including new locations and some greenfield sites. It typically takes about two years for those greenfield sites to reach standard operating performance, which has resulted in increased operating expenses. We are also facing ongoing pressure from commodity prices, which were down approximately 4% this quarter. While we are beginning to see some stabilization, commodity pricing remains a challenge for the business.

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.

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 operate the biggest manufacturing footprint in the company. 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 dewatering.

Got it. Thanks, Jeff.

You're welcome. Thank you.

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.

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.

Thank you for participating. This concludes today's program, and you may now disconnect.