Release Date: October 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Franklin Electric Co Inc (FELE, Financial) achieved strong operating margin performance of 13.8% in the third quarter, led by improvements in the Fueling Systems and Distribution segments.
- The Water Systems segment set a new third quarter record for operating income, driven by price realization, cost management, and a favorable product and geographic sales mix shift.
- The company has a strong balance sheet with a cash balance of $106.3 million and no borrowings under its revolving credit agreement, providing flexibility for future investments.
- Franklin Electric Co Inc (FELE) continues to see positive order patterns across most of its businesses, giving confidence as they head into 2025.
- The company is recognized externally for its commitment to service and culture, receiving awards from Newsweek, USA Today, and the Indiana Chamber of Commerce.
Negative Points
- Consolidated third quarter sales declined by 1% year-over-year, primarily due to lower volumes in the international Fueling business and large dewatering equipment sales.
- Higher SG&A expenses, including costs associated with the CEO transition and recent acquisitions, negatively impacted the company's bottom line.
- The Fueling Systems segment experienced a 10% decline in sales compared to the prior year, with lower volumes across most major product lines.
- Franklin Electric Co Inc (FELE) lowered its full-year sales guidance to approximately $2 billion and reduced its EPS guidance due to lower than anticipated sales and normalized demand expectations.
- The company is facing ongoing commodity pressures, particularly in the Distribution segment, with declining prices for plastic pipe due to supply dynamics.
Q & A Highlights
Q: Can you provide more detail on Q4 expectations by segment and offer a high-level perspective on growth prospects for 2025?
A: Jeffery Taylor, CFO: For Q4, we expect results similar to Q3, with strength in US businesses and pressure outside the US. Water Systems faces a significant headwind from large dewatering equipment sales, expected to be down $60-$70 million year-over-year. Fueling Systems has normalized, and we anticipate steady performance. For 2025, we are cautiously optimistic, expecting relief from macroeconomic headwinds and continued strong activity.
Q: How is your M&A pipeline, and how are you thinking about deploying capital?
A: Joseph Ruzynski, CEO: We have a healthy balance sheet and feel good about our M&A pipeline. Our focus is on bringing more great products to our customers and moving into faster-growing verticals. We are assessing opportunities and excited about our position and balance sheet strength.
Q: Can you clarify the order patterns and how they relate to guidance and optimism for next year?
A: Joseph Ruzynski, CEO: Order rates slowed down last year, benefiting this year's comparisons. However, backlog normalization means increased orders aren't fully translating into revenue yet. We monitor order trends as indicators for growth into next year, despite not offsetting current comps.
Q: SG&A was a significant delta; can you quantify the impact of acquisitions and leadership transition?
A: Jeffery Taylor, CFO: CEO transition costs will be $3-$3.5 million for 2024, impacting Q3 and Q4. Acquisitions added about $1.5 million in Q3 SG&A, annualizing to over $6 million. We also face normal inflation and strategic investments, with efforts to normalize SG&A in 2025.
Q: Can you discuss inventory levels and pricing through the water channel?
A: Jeffery Taylor, CFO: Inventory levels are normalized, and we aim to reduce them further in Q4. We're seeing positive pricing in Water Systems and Distribution, except for negative pricing on commodity products like plastic pipe. We expect a more normalized pricing environment in 2025.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
