Franklin Electric(FELE) - 2020 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported record fully diluted earnings per share of $0.82 for Q3 2020, compared to$ 0.72 in Q3 2019, marking an increase of approximately 14% [14] - Total sales for Q3 2020 were $351.2 million, a slight increase of 1% from$ 348.4 million in Q3 2019, despite a $10.4 million decrease due to foreign currency translation [15][16] - The gross profit for Q3 2020 was$ 124.3 million, up from $117.6 million in Q3 2019, with a gross profit margin of 35.4% compared to 33.8% in the previous year [20] Business Line Data and Key Metrics Changes - Water Systems sales in the U.S. and Canada were flat year-over-year, with groundwater pumping equipment sales increasing by about 17% and surface pumping equipment by about 8% [16] - Outside the U.S. and Canada, Water Systems organic sales increased by 15%, driven by growth in Latin America, Europe, and Asia Pacific [17] - Fueling Systems sales in the U.S. and Canada decreased by about 5%, while outside the U.S. and Canada, revenues declined by about 27% [18] - Distribution sales reached a record$ 98 million in Q3 2020, up from $87 million in Q3 2019, with organic sales increasing by 13% [19] Market Data and Key Metrics Changes - The company experienced strong demand in Brazil and Turkey, contributing to double-digit organic growth outside the U.S. [8] - The Fueling Systems business is recovering slowly, with revenue down 7% outside of China, and a 5% decline in the U.S. and Canada [9][10] - The U.S. distribution business performed well, with uniform sales gains across the country, except for the upper Midwest [10] Company Strategy and Development Direction - The company is focused on maintaining strong operating performance and improving cash flow, with a forecast for fourth-quarter operating earnings to be up 10% to 15% over the previous year [13] - The management is optimistic about the recovery in the Chinese economy and expects additional upgrades in fuel vapor monitoring systems in gas stations [12] - The company is considering M&A opportunities, particularly in the distribution segment, to enhance geographic presence and consolidate the market [41] Management's Comments on Operating Environment and Future Outlook - Management noted that the operating performance continues to improve despite challenges from the pandemic, with strong demand in groundwater and plumbing HVAC businesses [6][11] - The company anticipates mid-single-digit revenue declines in Water Systems and around 10% decline in Fueling Systems for Q4, while Distribution revenue is expected to increase by about 10% [13] - Management expressed confidence in the sustainability of demand across various markets, with good contractor backlogs and favorable weather conditions [25][26] Other Important Information - The company announced a quarterly cash dividend of$ 0.150, payable on November 19, 2020 [22] - The effective tax rate for 2020 is expected to be between 18% and 20% [21] - The company ended Q3 2020 with a cash balance of $114.5 million and generated$ 118.5 million of free cash flow from continuing operations during the first nine months of 2020 [21] Q&A Session Summary Question: Trends in the fourth quarter for the water side and sustainability - Management indicated that the underlying dynamics from Q3 are expected to continue into Q4, with good demand in both residential and agricultural groundwater markets [25] Question: Inventory levels and early buying - Management noted that inventory levels are not particularly robust due to supply chain struggles, and they cannot comment on early buying trends [27] Question: M&A landscape and cash usage priorities - The company is actively looking at M&A opportunities and remains focused on accretive acquisitions while maintaining a strong cash position [28][29] Question: Fueling margins and scenarios for future performance - Management highlighted that margins are holding up well due to price realization and controlled SG&A expenses, with expectations for future performance dependent on market conditions [31][32] Question: Environmental impacts on Fueling business - Management acknowledged the potential risks from the shift towards electric vehicles but emphasized the continued relevance of liquid fuels and their systems in the market [35][39] Question: Dewatering business revenue outlook - The company expects the dewatering business to generate around $60-$ 65 million in 2020, with cautious optimism for international traction [44] Question: Fueling business in China and environmental mandates - Management projected Fueling Systems revenue in China for 2020 to be between $17 million and$ 20 million, with expectations for stabilization and volume traction in 2021 [49][50]