Franklin Electric Co Inc (FELE) Q4 2020 Earnings Call Transcript

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Franklin Electric Co Inc (FELE 0.46%)
Q4 2020 Earnings Call
Feb 16, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Franklin Electric Reports Fourth Quarter 2020 Sales and Earnings Conference Call. [Operator Instructions] After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference to your speaker today, John Haines, our Chief Financial Officer. Please go ahead, sir.

John J. Haines -- Vice President, Chief Financial Officer

Thank you, Joel. And welcome everyone to Franklin Electric's fourth quarter 2020 earnings conference call. With me today is Gregg Sengstack, our Chairperson and CEO. On today's call, Gregg will review our fourth quarter and full-year business highlights, and I will review our fourth quarter financial results in more detail. When I'm through, we'll have some time for questions-and-answers.

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 risk 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 in 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 our Chairperson and CEO, Gregg Sengstack.

Gregg C. Sengstack -- Chairman of the Board and Chief Executive Officer

Thank you, John. Thank you all for joining us. As I noted in our press release, I am extremely proud of the dedication and execution of our global team as we continue to operate during these difficult times. And I want to publicly thank our employees for their continued laser focus on serving their customers, while negotiating the inherent challenges of the pandemic.

Turning to our results. We ended 2020 in a strong position, delivering record sales and earnings in the fourth quarter. Our Water Systems business continued to rebound from the pandemic slowdown in the second quarter, hosting 4% organic growth; record operating income and operating income margin in the quarter. In addition our Distribution business grew net sales organically 21% and was profitable in the fourth quarter for the first time in its history.

On a consolidated basis, earnings per share increased 36% to $0.57 in the fourth quarter, a record for any fourth quarter. For the full-year, our net sales declined by about 5%, but our operating income increased by 3% versus 2019. Our earnings per share before restructuring expenses was $2.18, a 5% increase versus 2019 and the full-year 2020 free cash flow from operations was a record $189 million, approximately 187% of our 2020 net income or about $4.06 per share.

We gained momentum throughout the back half of 2020, and are poised to capitalize on the strong tailwinds that have materialized in the Water end markets we serve. We also completed two strategic acquisitions: one on the water treatment space in Canada and the other a key groundwater distribution business in Central Texas. We are confident that each offers a great new growth platform for 2021 and beyond.

Our strategy to grow as a global provider of Water and Fuel Systems through geographic expansion and product line extensions; leveraging our global platform and competency in system design is working. Favorable weather and some catch-up demand from earlier in the year continued to drive strong US Water Systems results, which continue to bear the brunt of lower dewatering pump sales. Organic growth in the US Water Systems was 7%, when you exclude the dewatering pumps impact. Outside the US and excluding our large dewatering pumps growth was 4%, led by our businesses in Latin America, Africa and the Middle East.

Our Water businesses continue to benefit from price actions we have taken to offset inflation. Overall, we achieved about 340 basis points of price in the fourth quarter. And as I mentioned set a fourth quarter record for both operating income and operating income margin in our Water Systems segment. This price achievement in addition to new actions we will take in 2021 are necessary for us to maintain margins in the face of increasing raw material prices globally.

Our US distribution business has a lot of momentum, favorable weather in most of the US, some indications of recovery in agricultural commodity prices and the continued catch-up of well installations, due to the pandemic are all factors driving the underlying market favorability. We see this momentum continuing in early 2021, and are also incurred by the completion of the Gicon Pump acquisition late December. Gicon provides seven new distribution outlets in Central, West Texas with a strong market position and a very important groundwater end market and is a great fit for Headwater.

Finally, Headwater achieved profitability in the fourth quarter for the first time in its history, and more importantly through their 2020 full-year operating income margin before restructuring charges by 200 basis points. So if you look forward to 2021, our core [Phonetic] Water and Distribution markets in the US were strong in both our own and measurable customer backlogs remain high for this time of the year. Outside the US, we also see strong demand, most notably in Latin America and Asia Pacific. As a result, we expect mid single-digit organic growth in our Water Systems and Distribution segments in 2021.

Our Fueling Systems business revenue declined about 15% in the fourth quarter, slightly worse sequentially than we saw in the third quarter. As we have pointed out in the past, we believe this business will recover more slowly from the pandemic in the Water Systems business. Overall sales in the US and Canada declined about 13% and our business in China declined about 66% versus the fourth quarter last year, slightly worse than the decline we saw in the third quarter.

Despite these revenue declines Fueling Systems achieved a record operating income margin of 28.7% in the fourth quarter, due to intense focus on fixed costs. Even with tight expense controls, our fueling team continues to innovate and introduce compelling new products for our customers, including the new corrosion control system that mitigates corrosion causing water build up in underground fuel storage tanks. Despite the tough year, we see no indicators that we are not winning our fair share of global fuel station equipment [Indecipherable].

We are confident, our Fueling Systems business will recover more completely in 2021 and are expecting 6% to 7% organic growth. Although, we do not expect much recovery in China, we have solid opportunities for organic growth in Latin America, Africa and India and we will capitalize on this year. We expect US and Canada will grow in the 5% to 6% range based on the view that major retailers will continue station build outs this year is favorable economic and market factors continue to make retail fueling facilities attractive targets for new capital.

For the company, we believe 2021 revenue will grow approximately 10% and our 2021 earnings per share will be in the range of $2.50 and $2.75. We also expect to generate significant free cash flow, due to working capital improvements. We expect free cash flow conversion of net income to be greater than 115% in 2021 and coupled with our strong balance sheet provides us the opportunity to continue to grow inorganically as well. We see many growth opportunities ahead of us and look forward to continuing to drive strong performance in the years ahead.

I will now turn the call back over to John. John?

John J. Haines -- Vice President, Chief Financial Officer

Thank you, Gregg. Our fully diluted earnings per share were a record for any fourth quarter in the company's history at $0.57 for the fourth quarter of 2020 versus $0.42 for the fourth quarter of 2019. Fourth quarter EPS before the impact of restructuring expenses was $0.57, compared to 2019 fourth quarter EPS before restructuring of $0.43.

Restructuring expenses in the fourth quarter of 2020 were $0.3 million and were related to various manufacturing realignment activities in the Water segment and had no impact on earnings per share in the fourth quarter of 2020. Restructuring expenses in the fourth quarter of 2019 were $0.8 million and were also related to various manufacturing realignment activities in the Water segment and resulted in a $0.01 impact on earnings per share in the fourth quarter of 2019. Fourth quarter 2020 sales were $321.1 million, compared to 2019 fourth quarter sales of $320.1 million. Sales revenue decreased by $8.9 million or about 3% in the fourth quarter of 2020, due to foreign currency translation.

Water Systems sales in the US and Canada were up about 2%, compared to the fourth quarter 2019, primarily due to acquisition-related sales. Sales of groundwater pumping equipment increased by about 11% and sales of surplus pumping equipment increased by about 2% versus the fourth quarter 2019, due to strong end market demand. These increases were offset by lower sales of dewatering equipment, which were down by about 33%, due to lower sales in the rental channel.

Water Systems sales in markets outside the US and Canada decreased by 1% overall. Foreign currency translation decreased sales by 10%. Outside the US and Canada, Water Systems organic sales increased by 9%, primarily driven by higher sales in Latin America, Europe, the Middle East and Africa markets. Water Systems operating income was $30.4 million in the fourth quarter of 2020, compared to $24.5 million in the fourth quarter 2019, driven by price realization, product sales mix and cost management.

Distribution sales were a record at $77.9 million in the fourth quarter of 2020 versus fourth quarter 2019 sales of $64.4 million. The Distribution segment organic sales increased 21%, compared to the fourth quarter of 2019. Favorable weather conditions versus the fourth quarter last year, contributed to the revenue growth. The Distribution Segment operating income was $0.5 million in the fourth quarter of 2020, compared to an operating loss of $2.5 million in the fourth quarter of 2019.

Fueling System sales in US and Canada decreased by about 13%, compared to the fourth quarter of 2019, the decrease was in all product lines and due to declining demand for new filling station. Outside the United States and Canada, Fueling Systems revenues declined by about 21%, driven by lower sales in Asia Pacific, primarily China.

Fueling Systems operating income was $18.8 million in the fourth quarter of 2020, compared to $20.2 million in the fourth quarter of 2019, driven almost entirely by lower revenues. However Fueling Systems operating income margin increased by 260 basis points as lower revenues were offset by better sales mix and aggressive fixed costs management.

The company's consolidated gross profit was $111.4 million for the fourth quarter of 2020, an increase from the fourth quarter of 2019, gross profit of $101.3 million. Gross profit as a percentage of net sales was 34.7% in the fourth quarter of 2020 versus 31.6% in the fourth quarter of 2019 and improved by 300 basis points, primarily due to better price realization, product sales mix and cost management.

Selling, general and administrative expenses were $76.7 million in the fourth quarter of 2020, compared to $71.9 million in the fourth quarter of 2019. SG&A expenses were higher, primarily due to variable compensation expense, partially offset by foreign currency translation.

In the fourth quarter of 2020, our effective tax rate net of discrete events was about 16%, up from about 13.5% in the fourth quarter of 2019, due to the net result of favorable discrete events in 2019. The 2021 effective tax rate net of discrete events is estimated to be 18.5%.

The Company ended the fourth quarter of 2020 with a cash balance of $130.8 million and generated a record $189 million of free cash flow from operations in 2020 versus free cash flow in 2019 of $157 million. The Company's total incremental borrowing capacity was $606 million on December 31st, 2020.

Last month, the company announced a 13% increase in our quarterly cash dividend to $0.175 per share, that will be paid February 18th to shareholders of record on February 4th. The Company made no purchases of its common stock in the open market during the fourth quarter 2020. At the end of the fourth quarter 2020, the total remaining authorized shares that may be repurchased is about 934,000.

This concludes our prepared remarks, and we would now like to turn the call over for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Matt Summerville with D.A. Davidson. Your line is now open.

Matt Summerville -- D.A. Davidson -- Analyst

Thanks. Good morning, couple of questions. First in the fourth quarter, it sounded like you had very strong price realization, up almost 350 basis points year-over-year. Should we be thinking about something similar in magnitude for the entirety of '21? And if so, will that be enough to offset the inflationary pressure we're seeing particularly in things like copper and steel?

John J. Haines -- Vice President, Chief Financial Officer

Hey, Matt. Good morning. Second part of that, we do expect to offset inflation in 2021, but part of the achievement in the back half of 2020 was an anticipation of what's going on -- and what we expect to happen on the inflation side in 2021. So I don't think the actual 2021 price achieved will be at that same level, but when we consider the carryover impact from 2020 to 2021, and then the incremental inflation that we expect in 2021, we still think we're going to come out ahead. But we -- but part of the 2020 actions, of course were to get in front of the 2021 inflation.

Matt Summerville -- D.A. Davidson -- Analyst

Got it. And then I think it was in perhaps Gregg's remarks talking about the International Fueling business seem some activity in Latin America, Africa and India. Maybe, if you could expand upon that a bit, number one? And then number two, sticking with fueling where we're at with this next wave of -- government-related environmental mandate activity in China? Thank you.

John J. Haines -- Vice President, Chief Financial Officer

Sure, Matt. What we believe is that Latin America, we're seeing more stations build out generally; Southern Africa there has been a couple of significant programs that have been pushed to the -- that are right for a couple of years now that we believe are going to go into the ground; and then India, there is a joint venture BP with Reliance, they look to be under way with those -- station build out in India, which we plan to participate in.

With China, as indicated, it's little opaque, we expect that, that -- there is still some legacy double wall piping initiative to build out last year for any number of reasons not all related to COVID actually, because trying to get back to work pretty quickly, but related to weather and some other factors, we didn't see that we are seeing some life in that program. The ISD program in China less clear. So we're just going to -- we need to -- we're ready, we're there, our systems are approved, but it's a question about when they turn the spigot on in China.

Matt Summerville -- D.A. Davidson -- Analyst

And then just one final follow-up. Embedded in your organic assumption for Water and Distribution. What would the outlook be for your North America residential versus ag markets embedded in that? Thank you.

John J. Haines -- Vice President, Chief Financial Officer

Yes. So we're thinking about Water and Distribution organic growth in '21 to be right in the 5% range, maybe slightly better than that, Matt. And we embedded in that is the expectation that residential will continue to be strong for both segments. We're seeing some -- this will sound, we're seeing some green shoots on the ag side couldn't resist that, but the reality is, is that we're not real -- we're not over-the-top ready to say that ag is back, I know that some folks like Valmont and Lindsay have been pretty fired up about ag. But the reality is that we think ag will have some tailwind and be positive, but the bulk of what we're thinking of is, continuing residential strength; continuing groundwater strength; and then just incremental share pickups that we can get in different parts of North America.

Matt Summerville -- D.A. Davidson -- Analyst

Great. Thank you, guys.

Operator

Thank you. Our next question comes from Chris McGinnis with Sidoti & Company. Your line is now open.

Chris McGinnis -- Sidoti & Company -- Analyst

Good morning. Thanks for taking my questions and nice quarter and guidance.

Gregg C. Sengstack -- Chairman of the Board and Chief Executive Officer

Chris, your question [Phonetic] is very weak.

Chris McGinnis -- Sidoti & Company -- Analyst

Does this help?

Gregg C. Sengstack -- Chairman of the Board and Chief Executive Officer

Yes. That's better, Chris. Good morning.

Chris McGinnis -- Sidoti & Company -- Analyst

Great. Good morning. Thanks for taking my questions and nice quarter and guidance. Can you maybe just talk a little bit about the Distribution acquisition and just how that strengthens the market for you and obviously it's been a very good year for Distribution. So how does that change the landscape? And then maybe can you just talk maybe a little bit about synergies within how they should come through? Thanks.

John J. Haines -- Vice President, Chief Financial Officer

Sure. So, Chris if you go back 2014 and our decision to move away from a large distributor it shows a national footprint preferred and [Indecipherable] and their decision to move away from us and Central United States. So we have -- we've had a long-standing relationship with Gicon, that preceded that change. But we just felt that we had not fully recovered. Our share in the Texas market, which is probably the largest groundwater market in the country. We maintained contact with the owners of Gicon, four of the five owners were not active in the business. We saw the Gicon footprint is being a really solid footprint for us, they had made a lot of progress with Franklin product generally in those markets. And then when the owners decided to -- reside for them to liquidate your position, we were here and ready to support that position.

Along with those -- that company comes in industrial business or line shaft turbine business, which complements the acquisition we may have CPS pumps, a product when we acquired about a year ago. And so we see this is being a natural outgrowth for the Headwater business and for Franklin is a synergy between the acquisition that we did a year ago and the line shaft business that's within Gicon. And then given that knowledge base within Gicon, the ability to leverage the platform, the Headwater has across the country of multiple locations across the country it will be able to have more local representation with municipalities and larger pump system customers leveraging the Gicon knowledge and CPS pump acquisition and the Headwaters platform. So that's the synergistic side of the business.

Of course on the -- bringing in another business and to have [Indecipherable] more and more scale and more opportunity on the cost side as well, but those were the principal location -- reasons scanning, recovering share in Texas, a build out on the line shaft business and operational efficiency improvements.

Chris McGinnis -- Sidoti & Company -- Analyst

Okay, thanks for that. And then -- could you just maybe talk about given the strength of the balance sheet just the -- your outlook for your additional M&A and what you're seeing in the marketplace?

John J. Haines -- Vice President, Chief Financial Officer

Yes. So the M&A view has not changed, Chris, it's the number one place that we would like to apply our free cash flow. Strategically, geographic expansion and product line extensions continues to be what we're trying to achieve in our acquisitions. I would say we have a fairly robust pipeline of opportunities and are continuing to pursue those across all segments, and we will continue to pursue them across all segments and you know, kind of, review these on an opportunistic deal by deal basis for how much sense they makes for Franklin [Technical Issues]. So we're pretty confident that the deal flows will continue to come out us and we'll have some good looks.

Chris McGinnis -- Sidoti & Company -- Analyst

Great. And then just one last question. Just within Fuel Systems you talked about really controlling the cost structure there. Does anything change if that recovery picks up in terms of keeping the cost structure the same from the savings you have this year? Thanks.

John J. Haines -- Vice President, Chief Financial Officer

Yes. I think when you look at the SG&A base of growth, this is kind of both fueling and water. What you see in 2020 were big take outs around like travel, Chris, and advertising and trade shows and maybe some of the customer activity that we would normally do. If things come back and start to pick up, of course, that is a good part of that is going to return. Gregg mentioned earlier, there is a fair number of international opportunities around station growth that's happening in different parts of -- mostly the developing world. And those we need to be prepared for commercial and we will be prepared for, but that's going to mean that we got to have the right people there, we got to have the right engagement with our customers and we need to make sure that those customers feel like they're being served well by Franklin during the decision process to choose equipment, but then more importantly afterwards. So those are the kind of, costs that we're not going to skimp on and we're going to make sure we are prepared to capitalize on these international opportunities as they present themselves.

Chris McGinnis -- Sidoti & Company -- Analyst

Great. Thanks for taking the questions and good luck in Q1.

Gregg C. Sengstack -- Chairman of the Board and Chief Executive Officer

Thanks, Chris.

John J. Haines -- Vice President, Chief Financial Officer

Thanks, Chris.

Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Gregg Sengstack for closing remarks.

Gregg C. Sengstack -- Chairman of the Board and Chief Executive Officer

We appreciate you joining us this morning for our conference call and look forward to speaking to you after the end of the first quarter with our first quarter results. Have a great week.

Operator

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

John J. Haines -- Vice President, Chief Financial Officer

Gregg C. Sengstack -- Chairman of the Board and Chief Executive Officer

Matt Summerville -- D.A. Davidson -- Analyst

Chris McGinnis -- Sidoti & Company -- Analyst

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