Franklin Electric(FELE) - 2019 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company's fully diluted earnings per share (EPS) for Q1 2019 was $0.19, down from$0.45 in Q1 2018, reflecting a significant decline [16] - First quarter sales were $290.7 million, a decrease of 2$295.6 million in Q1 2018, with foreign currency translation contributing to a $12.9 million revenue decline [17] - Consolidated gross profit was$89.5 million for Q1 2019, down from $99 million in Q1 2018, with gross profit as a percentage of net sales decreasing from 33.5$188.4 million in Q1 2019 from $192.6 million in Q1 2018, with organic sales increasing by 2$60.2 million in Q1 2019, up from $58.6 million in Q1 2018, marking a record for any first quarter [19] - Distribution sales fell to$53.3 million in Q1 2019 from $56.2 million in Q1 2018, with organic sales down about 10$2 million in orders pushed to Q2, while groundwater pumping sales declined by 5% [7] - Internationally, revenue from water systems decreased by 11% due to weakening currencies, with better growth in Brazil and Asia Pacific partially offsetting weak conditions in Europe and Central America [6][7] - The company noted a significant impact from extreme weather on the distribution segment, leading to compressed margins and increased losses [10] Company Strategy and Development Direction - The company aims to achieve consolidated organic growth of 4% to 6% for 2019, with expectations for a strong recovery in the distribution business as weather normalizes [14] - Management is focused on cost actions to offset lower profit realization, including reevaluating pricing and input cost inflation expectations [15] - The company is optimistic about the U.S. surface pump business and is expanding its customer base in the de-watering segment [12] Management's Comments on Operating Environment and Future Outlook - Management indicated that business conditions deteriorated in the North American groundwater market, leading to a year-over-year operating income decline of over 40% [6] - The outlook for the U.S. surface pump business is positive, while the European water market is expected to remain soft in the first half of the year [12] - Management reaffirmed 2019 earnings guidance of $2.37 to$2.47 per share despite a challenging first quarter [15] Other Important Information - The company ended Q1 2019 with a cash balance of $54.4 million, down$4.8 million from the end of 2018, but improved operating cash flow by $24 million compared to the previous year [28] - The company adopted a new lease standard, recognizing additional operating liabilities of about$25 million, which is non-cash in nature [29] - The company purchased approximately 58,000 shares of its common stock for about $2.5 million during Q1 2019 [30] Q&A Session Summary Question: Discussion on ramp from Q1 to Q2 - Management expects a bigger ramp from Q1 to Q2 due to normalization of weather and delayed construction activity [31][32] Question: Will the Q1 shortfall be recovered in Q2? - Management cautioned that not all of Q1's shortfall will be recovered in Q2, but they expect some recovery through Q2 and Q3 [35] Question: Long-term margin outlook for distribution and water segments - Management expects distribution margins to be between 4% to 6%, while water segment margins could be in the range of 15% to 17% [36][39] Question: Actions taken to address cost issues - Management is implementing various cost actions, including personnel reductions and sourcing strategies, to improve margins [41] Question: Clarification on maintaining EPS guidance - Management maintains the EPS guidance despite a challenging Q1, believing they can recover a portion of the shortfall in the remaining quarters [44][46] Question: Market conditions in North America for water stations - Management noted that both residential and agricultural markets were down in Q1, but early signs in April are encouraging [60][61] Question: Performance in Brazil and China - Management expressed cautious optimism about Brazil's recovery and noted that China is expected to recover in Q2 [69][75]