Earnings Call Transcript
FRANKLIN ELECTRIC CO INC (FELE)
Earnings Call Transcript - FELE Q4 2025
Operator, Operator
Hello, and welcome to the Franklin Electric Reports Fourth Quarter 2025 and Full Year 2025 Results Conference Call. Please be advised that today's conference is being recorded. It is now my pleasure to introduce Director of Investor Relations, Dean Cantrell.
Dean Cantrell, Director of Investor Relations
Thank you, Andrew, and welcome, everyone, to Franklin Electric's Fourth Quarter 2025 Earnings Conference Call. Joining me today is Jennifer Wolfenbarger, our Chief Financial Officer; and Joe Ruzynski, our Chief Executive Officer. On today's call, Joe will review our fourth quarter and full year business highlights. Then Jennifer will provide additional details on our financial performance, and Joe will make some additional comments related to our key growth and value drivers, along with our outlook. 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. During this call, we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the appendix of our earnings presentation. 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. Earlier today, we published a slide deck to accompany our prepared remarks. The slides can be found in the Investor Relations section of our corporate website at www.franklin-electric.com. With that, I will now turn the call over to Joe.
Joseph Ruzynski, CEO
Thanks, Dean, and good morning, everyone. Thank you for joining today's call. I'm excited to share the outcome of a year of great progress, transformation, and strong results. Let's start with Page 2. We had a strong Q4 and impressive full year results across all segments. Sales increased by 5.4% and segment operating income grew by 9.6% for the full year, marking high points for Franklin in both areas. Our solid Q4 results showed sales up 4.4% and operating income up 9.2%. We saw volume growth for the year, achieved strong price realization, and navigated a sometimes challenging global market with focus. Our order book and backlog are healthy as we look ahead to 2026. Our cash conversion rate was 126%, marking our third consecutive year of cash conversion above 120%. Our balance sheet remains strong despite completing about $120 million in acquisitions and $160 million in share buybacks. We have made significant changes in 2025 and are well-positioned for 2026. Moving to Slide 3, I want to discuss some of these efforts. In 2025, we made considerable progress, and I want to take a moment to thank our team for their focus, execution, and leadership during this time of change. We want to highlight a few key initiatives that may not be reflected in our overall financial results. Starting with our priority to accelerate growth, we have seen strong results in each segment as we serve our customers globally in dynamic markets. We concentrated on our biggest opportunities and gained market share in numerous areas. We believe that innovation and new products are critical for growth and have introduced over 35 products expected to generate over $160 million in revenue by year three. We are positioning Franklin as a company focused on innovation and growth, and our team is prepared for this journey. Regarding our margins, I want to underscore the excellent advancements in our Water Treatment and Distribution businesses. Our Water Treatment business is a crucial component of our Water segment, having achieved $200 million in sales since its initiation five years ago. More impressively, we have streamlined this business to better serve our customers, reflecting in a substantial sales growth and an improvement of over 400 basis points in operating margin in 2025. Our Distribution business, which we started in the late 2010s, has grown to over $700 million, supported by services like our on-site inventory program and advanced portal technology for seamless ordering and communication. In 2025, we concentrated on efficient service in this business while introducing new solutions to the market, resulting in a 210 basis point improvement in operating margin. To further our focus on margins, we introduced our Value Acceleration Office in 2025, where we are leveraging smart AI and process engineering to enhance our portfolio, simplify internal systems, and manage costs more effectively. We anticipate significant contributions to our margins in the coming years based on this encouraging start. Regarding capital investments, while we are recognized for our excellent cash conversion and strong balance sheet, there is more we aim to accomplish. We completed two major acquisitions in 2025 and added several smaller key deals at the year-end. Our focus will be on expanding our position in vital markets and regions. We repurchased about 1.8 million shares, as we believe in our bright future. Additionally, we have increased our capital expenditures to ensure our investments align with this growth. Lastly, in terms of talent, our robust culture emphasizes treating our employees and customers the best in our industry. Our commitment to attracting exceptional talent and building our future engine will foster collaboration, innovation, and speed in our daily practices as we prepare for a rapidly changing world. Our team is strong and ready for growth, and we are increasing our resilience every day. With that, I will turn the call over to Jennifer to discuss the financial results in greater detail.
Jennifer Wolfenbarger, CFO
Thank you, Joe. Moving to Slide 4. Our full year 2025 fully diluted earnings per share was $3.22 versus $3.86 for 2024. Diluted earnings per share for 2025 was negatively impacted by the pension settlement charge of $41.5 million, net of tax benefit or $0.91 of EPS, as well as $0.01 of restructuring charges in the year. Adjusted diluted earnings per share was $4.14 in 2025 versus adjusted 2024 of $3.92, an increase of 6%. The full year effective tax rate was 23.6% compared to 21.7% in the prior year. The change in effective tax rate was due to a mix of foreign earnings taxed at rates different from the U.S. statutory rate, as well as less favorable discrete items. Moving to Slide 5. Fourth quarter 2025 consolidated sales were $506.9 million, a year-over-year increase of 4.4%. The sales increase in the fourth quarter was due to the incremental sales impact from recent acquisitions and favorable pricing. Franklin Electric's consolidated gross profit was $171.5 million for the fourth quarter 2025, up from the prior year's gross profit of $164.2 million. The gross profit as a percentage of net sales was 33.8%, unchanged in the fourth quarter 2025 compared to the prior year as we offset the impact of higher costs from tariffs with additional price in the market, as well as volume growth in our Energy and Distribution segments. Moving on to SG&A expenses, we have seen a 70 basis point improvement in our SG&A as a percent of sales metric from year-over-year as a result of cost improvement actions taken in the last year. SG&A expenses were $119.6 million in the fourth quarter of 2025, compared to $117.8 million in the prior year. The increase in SG&A expense was primarily due to the additional expense impact of our 2025 acquisitions. Absent acquisition-related SG&A expense, the company experienced a decrease in SG&A expense year-over-year of approximately $3 million or 3%. Consolidated operating income was $51.6 million in the quarter, up $8.6 million or 20% from $43 million in the prior year. The increase in operating income was primarily due to price, productivity, and SG&A cost management. Operating income margin was 10.2%, up from 8.9% from the prior year. The effective tax rate was 18.7% for the quarter, compared to 15.8% in the prior year quarter. The change in effective tax rate was due to a mix of foreign earnings taxed at rates different from the U.S. statutory rate, as well as less favorable discrete items. Moving to Slide 6. We will review our 2025 full year results. Full year 2025 consolidated sales were $2.1 billion, a year-over-year increase of 5.4%. This was driven by favorable price, organic volume growth in Energy and Distribution, and the incremental sales impact of recent acquisitions. Franklin Electric's consolidated gross profit was $755.9 million for the full year 2025, up from the prior year's gross profit of $717.3 million. The gross profit as a percent of net sales was 35.5%, unchanged in 2025 compared to the prior year as we offset the impact of higher costs from tariffs with additional price in the market as well as productivity savings. Full year SG&A expenses improved 50 basis points on a year-over-year basis, including the impact of acquisitions. Absent the impact of acquisitions, SG&A improved 130 basis points year-over-year, driven by structural cost actions taken in our Distribution and Energy businesses in the past year. Consolidated operating income was $269 million in 2025, up $25.3 million or 10%, from $243.6 million in the prior year. The increase in operating income was primarily due to price, productivity, and cost management. Operating income margin was 12.6%, up 50 basis points from the prior year. Moving to Q4 segment results on Slide 7. Global Water Systems sales were up 4.3% compared to the fourth quarter 2024, driven by strong price and additional volume from our recent acquisitions. Water Systems in the U.S. and Canada were down 4% compared to the fourth quarter 2024, driven by softer HVAC markets in Q4. Water Systems sales in markets outside the U.S. and Canada increased 15% overall. Excluding the impact of acquisitions and foreign currency translation, sales in the fourth quarter of 2025 decreased 1%, led by higher sales in the European region, more than offset by sales declines in Latin America and Asian regions. Global Water Systems operating margin was $41.8 million, up $6.2 million or 17% versus the prior year. The increase in operating income was primarily due to higher sales and price offsetting inflation. The fourth quarter operating income margin was 14.3%, an increase of 160 basis points from 12.7% in the fourth quarter of 2024. Energy Systems sales were $74.7 million, an increase of $5.9 million, or 9% compared to the fourth quarter 2024. Energy Systems sales in the U.S. and Canada increased 6% year-over-year. Outside the U.S. and Canada, energy sales increased 19%. Energy Systems operating income was $22.6 million in the fourth quarter, compared to $24.7 million in Q4 2024. Operating income margin was 30.3% compared to 35.9% in the prior year, a decline of 560 basis points. Operating income margin decreased primarily due to the unfavorable geographic mix of sales and the impacts of tariffs. Distribution fourth quarter sales were $161.6 million versus fourth quarter 2024 sales of $157.2 million, an increase of 3%. The Distribution segment sales increase was primarily due to higher volumes and price realization. The Distribution segment's operating income was $5.3 million for the fourth quarter, a year-over-year increase of $4.8 million. Operating income margin was 3.3% of sales in the fourth quarter, an improvement of 300 basis points versus the prior year, driven by higher volumes, positive price realization, and improved margins as a result of margin and structural cost improvement actions taken in the last year. Moving to the full year segment results. Global Water Systems full year sales increased by 6% compared to 2024, driven by strong pricing and the contributions from our two acquisitions made in early 2025. Sales in the U.S. and Canada rose by 3% compared to 2024. Specifically, sales of large dewatering equipment grew by 7%, groundwater pumping equipment by 1%, and water treatment products by 6%, while sales of all other surface pumping equipment saw a decrease of 1% compared to 2024. Sales in international markets outside the U.S. and Canada increased by 10% for the full year. The impact of foreign currency translation was negligible on sales, and recent acquisitions contributed approximately 10% to sales. Excluding the effects of acquisitions and currency translation, sales for 2025 saw a modest increase, led by strong performance in Europe, although this was partially offset by declines in Latin America and Asia due to weak market conditions. The operating income for Global Water Systems for the full year was $207.2 million, reflecting an increase of $9.3 million, or 5.2%, compared to the previous year. This rise in operating income was attributed to higher pricing and productivity that countered inflation. The full year operating margin was 16.5%, down 20 basis points from 16.7% in 2024, primarily due to costs associated with acquisitions. Moving to Slide 9. Full year Energy Systems sales were $299 million, an increase of $25 million or 9% compared to 2024. Energy Systems sales in the U.S. and Canada increased 8% year-over-year. The increase was broad-based and across most product lines, driven by strong investment in retail fueling stations. Outside the U.S. and Canada, Energy Systems sales increased 13%, led by increased sales in India and European markets. Energy Systems full year operating income was $99 million compared to $93.6 million, an increase of $5.4 million, or 6% versus 2024. Operating income margin was 33.1%, compared to 34.2% in the prior year, a decline of 110 basis points. Operating income margin decreased primarily due to an unfavorable geographic mix of sales, investments for growth in SG&A for new products and markets, and the impact of tariffs in the year. Moving to Slide 10. Distribution's full year sales were $700.7 million versus 2024 sales of $685.5 million, an increase of 2%. The Distribution segment sales increase was primarily due to higher volumes and price realization. The Distribution segment's full year operating income was $39.8 million, a year-over-year increase of $15.5 million, or 64%. Distribution operating margins expanded 210 basis points full year from 35.5% in 2024 to 5.7% in 2025, driven by margin enhancement initiatives as well as structural improvements made within the last year. Moving to the balance sheet and cash flows on Slide 11. The company ended 2025 with a cash balance of $99.7 million and with $30 million outstanding under its revolving credit agreement. We generated $239 million in net cash flows from operating activities during 2025 compared to $261 million in 2024. The company repurchased approximately 350,000 shares of its common stock in the open market for roughly $34.3 million during the fourth quarter of 2025. At the end of the fourth quarter, the remaining share repurchase authorization is approximately 0.8 million shares. On January 26, the company announced a quarterly cash dividend of $0.28. The dividend will be payable February 19 to shareholders of record on February 5. This represents a 5.7% increase from the prior quarterly dividend. This dividend will mark the 34th consecutive year that Franklin Electric has increased its dividend, demonstrating its commitment to returning cash to shareholders and confidence in the outlook of our business. Now I will turn to Slide 12, where I will share insight on our full year 2026 guidance. Beginning with 2026, we will provide guidance on an adjusted EPS rather than GAAP reported EPS. We believe these forward-looking non-GAAP measures more closely align with how management evaluates the business, reflect ongoing operational performance, and provide investors with additional useful information regarding our expected financial results. These non-GAAP measures will be presented in addition to, and not as a substitute for, the most directly comparable GAAP measures. Reconciliations to the corresponding GAAP measures will accompany our guidance disclosures. Turning to our full year guidance. The company expects its full year 2026 sales to be in the range of $2.17 billion and $2.24 billion, and an adjusted EPS to be in the range of $4.40 to $4.60. This puts our midpoint sales growth at just over 3% and our midpoint EPS at approximately 9%, reflecting commercial and operational momentum, and our commitment to continue to grow the business and expand earnings per share. Now I will turn the call back to Joe.
Joseph Ruzynski, CEO
Thanks, Jennifer. Please turn to Slide 13. Before we turn it over for questions, I want to share our view of the Franklin portfolio and position, and why we're positive about our future. We are in great businesses. As a flow control company focused on Water and Energy, our strategy starts with a clear view of the markets and where we can win. We see attractive markets where we can focus and grow faster. Our Water business is a leader in groundwater and water treatment, and we are positioned to capitalize on urbanization, the desire for high-quality water, increasing mineral demand and the exponential growth of computing power. Our Distribution business has built a reputation for delivering the highest quality products and a wide offering in groundwater, water treatment and wastewater. Our differentiation is the technology, service and support in how we execute every day. We use proprietary tools to manage inventory and information and our on-site inventory, or OSI programs, to ensure our service doesn't diminish to the farthest reaches of our regions. Our Energy business started with a focus on managing fluids, but has grown by harnessing data, information and energy in the most creative and simple-to-use ways in our industry. Our leading solutions like EVO and OVERSITE give our customers the confidence to run their business more efficiently and to get the best value out of their operations. Franklin has a long history of innovation, and we are investing and accelerating this. Our new product pipeline will more than triple these next few years, and we see this as a catalyst for growth. As efficiency and data requirements increase, we will be on the forefront with our solutions. Our opportunity to increase our return is significant, using our Value Acceleration model and our Value Acceleration Office, and Franklin Operating System, we are working through some key transformations that will continue this path of expanded and resilient margins. Our strong balance sheet enhances our ability to produce strong returns to our shareholders while supporting our attractive list of M&A opportunities and investments. And finally, when you walk in the door at a Franklin site, or spend time with our team in the field, you will see a team that cares and a culture that values our employees as we work to grow, innovate and serve. We are an attractive business with some great room to grow and improve. I'd like to turn it back to Andrew for questions now before we have some closing comments.
Operator, Operator
Our first question comes from Matt Summerville with D.A. Davidson.
Matt Summerville, Analyst
I was hoping, maybe first, you could talk about when you look at kind of the revenue guide for the year, what type of organic outlook across the three segments would be implied in that guide? And of that, how much is volume versus price? And then I have a follow-up.
Joseph Ruzynski, CEO
Yes. For the Water business, we're anticipating growth in the range of 3% to 5%. This includes some carryover from recent acquisitions, as those deals were finalized at the end of Q1 last year. There's a healthy mix of volume and price contributing to this. Across all our segments, we decided not to implement standard price increases early in the year, which has helped us realize better numbers. For the Energy business, we expect growth to exceed 3%, similarly reflecting a balance of slightly more volume than price. However, we did increase prices to recover from the tariff pressures we encountered last year. In Distribution, we've seen price declines from various commodities in recent years, but we shifted to effective price realization last year, resulting in a growth mix of roughly 50-50 price in 2025. We project a similar spread next year, with growth rates anticipated in the 3% to 4% range for that segment.
Matt Summerville, Analyst
Got it. And then maybe just looking at it specific to Water, maybe dimensionalize it a little bit differently and do a bit of a walk around the key end markets and product lines within Water, and add a little bit of geographic overlay as far as demand expectations this year.
Joseph Ruzynski, CEO
Yes, good question. As we finished last year, we noticed two weak areas in our Water business. Overall, we are set for good volume growth. However, the RSS business, valued at about $150 million, faced HVAC weakness in the U.S. during the fourth quarter, but that seems to have stabilized, partly due to channel destocking. We’ve started this year positively and anticipate growth in the U.S. similar to the overall rate I mentioned. The other weak spot was the Mexican market, which also appears to have stabilized. There was some pressure in that market last year, but those rates have improved. We expect more typical volume in the Northern Latin America region. Globally, we have seen solid underlying growth in the U.S. and Europe, with particularly strong performance in Southern Latin America. We do not foresee any areas of significant weakness. We experienced robust growth, aided by some recent acquisitions in the South Asia and Pacific region. While Asia remains relatively small for us, we expect it to be quite stable. There’s really nothing alarming that we perceive will continue. In the U.S., I would highlight that the groundwater business, residential business, and the dewatering business are all on track as we begin the year. Looking ahead, we don't see any indicators of weakness. We have not incorporated any housing recovery into our projections, just to mention that.
Operator, Operator
And our next question comes from the line of Ryan Connors with Northcoast Research.
Ryan Connors, Analyst
Jennifer, you mentioned HVAC as a headwind in fourth quarter. And if I heard you right, drove, I think, a 4% decline in U.S., Canada in Water in Q4. Can you just unpack that for us a little bit, specifically what that is, and how long that's expected to last?
Jennifer Wolfenbarger, CFO
What we observed was primarily a temporary issue that occurred at the end of Q4. There was a similar trend noted in parts of the HVAC industry, which also experienced softness towards the end. We anticipate that this situation will stabilize, and we are already starting to see signs of that stabilization in January. We believe this issue was mostly confined to the conclusion of last year.
Ryan Connors, Analyst
Got it. Okay. And then, Joe, you mentioned just there the outlook for large dewatering still very solid heading into 2026 here. But 7% was the growth rate you cited in the fourth quarter. That was coming off a pretty easy comp from a year ago. I think it was down 30-some percent in the prior year. So any color around why a little bit of a deceleration there in Q4 in large dewatering?
Joseph Ruzynski, CEO
Yes, part of it is due to it being a capital expenditure, which typically causes a slight pause at the end of the year. We experienced this in 2024 and noticed a bit of a slowdown in 2025. However, the orders for this business look strong for 2026, and we have visibility on the orders further out compared to some of our other segments. The backlog remains healthy. Last year was a strong rebound for us, and as we've mentioned before, this tends to follow 18- or 24-month cycles. Although we won't see the same level of growth as last year because of its strong performance, the outlook for the dewatering fleet business appears positive.
Ryan Connors, Analyst
Got it. Okay. And then just one last one for me. On Energy, you talked about the tariff pass-through being a bit of a headwind, or a big contributor, I guess, to the headwind in margins for Energy Systems. Any color around why that's proven more difficult in that business than elsewhere and the outlook there as well for '26?
Joseph Ruzynski, CEO
In the fourth quarter, the Energy business had two key factors affecting margins. One factor is the nearly 20% growth in international markets mentioned by Jennifer. We have been implementing a growth strategy in Europe, India, and other regions. Part of the margin changes were due to this mix. Regarding tariffs, we intended to follow our price increase strategy. We raised some prices at the end of the first quarter and beginning of the second quarter for shorter-term tariffs, and then we did another increase in December. We anticipated some timing challenges, which were evident in the fourth quarter. For the Energy business, we expect to see price increases of about 1.5% to 2% this year, benefiting from some carryover from last year. The market has largely accepted these changes, and we anticipate margins will improve. We expect Energy margins to rise slightly this year compared to last, getting back on track towards mid-30 margins as we progress through the year.
Operator, Operator
And our next question comes from the line of Bryan Blair with Oppenheimer.
Bryan Blair, Analyst
I was hoping you could offer a bit of color on Barnes and PumpEng integration, how the deal plans are progressing there? How your team is thinking about incremental P&L contribution in 2026? And then how your M&A pipeline overall looks entering the new year?
Joseph Ruzynski, CEO
Yes. To begin with Barnes and PumpEng, the PumpEng deal is progressing well and is ahead of schedule. The mineral and dewatering sectors have been strong growth areas for us, albeit a small part of our overall portfolio. The integration process has been relatively smooth, and there is a high demand for those products. As we've expanded our portfolio in certain regions for dewatering, we've identified additional opportunities. We're optimistic about our backlog, and we believe 2026 will be a strong year. Regarding the Barnes deal, we feel good about the integration progress, the company fits well with our operations, and we appreciate their products and regional presence. Their second-largest market is Mexico, and we have experienced some delays due to the recessionary conditions in that market during the latter half of last year. However, things seem to have stabilized as we moved from December into January, alleviating some of the challenges we faced previously. As for the overall M&A pipeline, many of our peers have noted that the market appears to be active this year. There seems to be a bit more stability, and while uncertainties remain, we are optimistic about the prospects. We are evaluating our portfolio and assessing opportunities where we can enhance our presence, whether through expanding our channels, geography, or specific products that can accelerate our growth. We have some promising ideas and are in a strong position from a balance sheet perspective. Our Business Development team is very engaged, and we anticipate making significant progress. We've completed some smaller deals recently, but we are focused on pursuing opportunities that can provide a greater impact in 2026.
Bryan Blair, Analyst
Understood. I appreciate that information. I would like to hear more about the Value Acceleration Office. I find the name appealing. That said, since these are CI type initiatives, some of the framework should already be established. When was the program or office established? How much near-term impact can we anticipate from Quad 4 actions regarding 80-20 implementation? Over time, is there a plan to provide specific targets for transformation savings or margin levels?
Joseph Ruzynski, CEO
Yes, that's a great question. We established the Value Acceleration Office by identifying opportunities during our strategic development process starting in the middle of last year. We approached transformation from multiple angles. While it involves continuous improvement, it's more comprehensive than that. Considering a company like Franklin, which has grown through acquisitions over the past decade, we identified many chances for traditional process reengineering and back-office alignment. We want to ensure that as we launch products globally, everything runs smoothly and we meet our deadlines and budgets to serve the market effectively. We emphasize scale and speed, along with a growth aspect in the Value Acceleration Office that may not be present in typical continuous improvement transformation efforts. We're pleased with this initiative. We have already started several projects, and some are completed. We anticipate reporting on these this year and have included projections for expanded earnings per share in our plans, but we also see additional opportunities ahead. We're enthusiastic about this initiative, which is now fully staffed, including a new AI director who joined us in the first quarter, as well as a leader for the office. It has a somewhat internal foundation, and given my background and that of some colleagues, we're satisfied with how it has been established. Many people are eager to get involved, which is exactly the response we want. We'll have more updates on this, and we expect positive results both this year and going forward.
Jennifer Wolfenbarger, CFO
I want to highlight a crucial point that Joe mentioned about value acceleration. This term is important because it encompasses more than just cost improvement, which is usually seen in the 80-20 model. It involves utilizing technology and identifying opportunities to enhance both leverage and growth, which is essential. This approach certainly sets us apart from what is typically found in the 80-20 space.
Operator, Operator
And our next question comes from the line of Mike Halloran with Baird.
Michael Halloran, Analyst
Just a quick follow-up to that. Where do you see the most opportunities when you look across your product segments, across the three segments, but more at the product line level as you're implementing the strategy?
Joseph Ruzynski, CEO
The opportunity to make some improvements or the opportunity to grow?
Michael Halloran, Analyst
Yes, it was related to Bryan's last question, right? So when you adopt this value-driven approach, where do you see the most opportunities at a product line level to really drive value? Whether it's commercially at the margin line, specifically what do you see as the most opportunity?
Joseph Ruzynski, CEO
Yes, there are a couple of areas to consider. In our core submersible business, we are manufacturing motors, pumps, and assemblies across all regions. There is some overlap in our portfolio, allowing us to consolidate products that perform the same function, reducing the number of SKUs and locations we're currently utilizing. For instance, we are making investments in our facilities in Turkey and India to combine similar SKUs into common platforms, enabling us to serve broader regions more efficiently. There's also room for growth in our recent acquisitions like PumpEng and Minetuff, where we need to clarify the applications and products for our customers, creating alignment that will enhance efficiency, margin, and productivity in our operations. On another note, in our Water Treatment and Distribution business, we have focused on improving customer service efficiency through streamlined logistics. We have worked closely with our partners to not only meet our customers' needs but to do so in the most effective way possible, minimizing handling and transportation distances. Recent efforts in rooftop consolidation following our past acquisitions have led to record fulfillment rates and on-time service metrics. We see additional opportunities to enhance services in both product offerings and customer support.
Michael Halloran, Analyst
I have two quick questions related to guidance. First, following up on Matt's original question, how do the sequential patterns unfold throughout the year in relation to normal seasonality? Is there any nuance to consider? Secondly, you mentioned slight improvements in margins for the fueling segment. What can you share about how the other segments are performing in terms of margins within your guidance?
Jennifer Wolfenbarger, CFO
Yes. In terms of seasonality, we expect the usual patterns in our business throughout the year. As you review our guidance, we anticipate growth from strong price realization and volume growth in all quarters, while still following the typical seasonal trend of being lighter in the first and fourth quarters, with peak periods in the second and third quarters.
Joseph Ruzynski, CEO
But there has been growth across all quarters. There is no back-end or front-end load in terms of our performance. I would describe it as normal seasonality, but with consistent growth across all quarters.
Michael Halloran, Analyst
And the margin question. You gave some guidance on fueling up year-over-year? How should I think about the other two segments on the margin line this year?
Jennifer Wolfenbarger, CFO
Yes, similar across all of our segments, we're projecting growth, margin expansion across each of the segments, including Energy. We had said, kind of, we landed the year last year with energy in the low 30s. We expect some growth in that space in our energy business in terms of margin expansion year-over-year, but still kind of maintaining that low to mid-30s, as Joe mentioned earlier.
Joseph Ruzynski, CEO
And you're going to see, Mike, a continued focus on that Distribution business. Obviously, they took a nice step forward last year. There's a number of underlying initiatives to get those efficiencies, some of which we talked about is related to the VAO, but probably margins expanded a little bit more there. Energy and Water may be slightly less than that in that space.
Operator, Operator
Our next question comes from the line of Walter Liptak with Seaport Research.
Walter Liptak, Analyst
I'll try addressing 80-20 as well. I recall a presentation on 80-20 from about five years ago, delivered by one of your leaders. It seems like you have been implementing this for some time now. Could you share what stage you're currently at with 80-20, which segments have made the most progress, and what your next focus will be?
Joseph Ruzynski, CEO
Most of the significant opportunities for us exist in the Water Systems business due to its design, manufacturing capabilities, and global operational footprint. In the Energy sector, it is a more specialized business with a streamlined portfolio. The additions in that area are primarily focused on launching new products. In the Water sector, regarding the 80-20 analysis, we are in the early stages, similar to the first few innings of a baseball game, indicating there is still much to accomplish. The initial work has involved identifying smaller products that have limited sales. We’ve worked to ensure our portfolio is efficient, allowing us to address challenges with smart drives and variable frequency drives, rather than having too many motor sizes and pumps. While we have made good progress, there is still more to tackle. Over the past couple of years, we've emphasized new products, such as our new in-line spec pack and VR spec pack, as well as advancements in boosting technology while upgrading our product offerings post-acquisition. This process has taken some time; rather than simply cutting products, we have focused on launching new ones and cleaning up our portfolio simultaneously. I believe we have a solid set of opportunities ahead of us to realize more benefits in the next few years.
Jennifer Wolfenbarger, CFO
Distribution is making great progress, and we see significant opportunities to further expand margins into 2026 due to the work we've done on SKU rationalization. Our focus on better purchasing and spending will enhance performance within that business.
Joseph Ruzynski, CEO
Yes. To add to that, I think the distribution aspect is something not many companies discuss, but we have dedicated the last two years to normalizing our part numbers. This effort ensures that comparable parts with similar applications are consolidated, which benefits us in a couple of ways. One, it aids in inventory management and product movement; two, it enhances our negotiations with suppliers to secure the best prices. Although this process has taken some time, especially with our recent acquisitions, we reached an important milestone in October this year by aligning those part numbers and advancing our work upstream.
Walter Liptak, Analyst
The fueling outlook looks pretty good for this year. However, one of your competitors mentioned that the growth rate is higher than what you've presented. Could you discuss the differences between above ground and below ground, as well as the timing and visibility of projects?
Joseph Ruzynski, CEO
Yes, I think the build schedule looks promising this year. While I won't comment on our competitors' outlooks, we are closely monitoring two key aspects. First, the build schedules of most of our major partners appear positive, indicating a potential growth rate. We exceeded our projected growth rate for 2025, and we see opportunities ahead. Given the fluctuating capital market and sometimes unpredictable deployment timelines, we remain cautious. The international market shows strong performance, as does the U.S. market. Therefore, the mid-single-digit growth rates we expect for Energy suggest it should be another solid year for that segment. Regarding below ground versus above ground, I would note that the new products we've launched recently, like OVERSITE and EVO ONE, indicate that above ground may perform a bit better. Additionally, the grid business, although small, is also expected to have a good year due to some new products and expanding channels.
Operator, Operator
I'm showing no further questions. So with that, I'll hand the call back over to CEO, Joe Ruzynski, for any closing remarks.
Joseph Ruzynski, CEO
Thanks, Andrew. And if you could please turn to Slide 14. 2025 was a strong year, and our outlook for 2026 is positive. We look to build on our momentum of transformation, innovation, and growth to address our best opportunities in 2026. We're confident in our strategy, and we like the businesses we're in. Thanks, everyone, and have a great week.
Operator, Operator
Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.