FRANKLIN ELECTRIC CO INC Q4 FY2024 earnings call

• Joe Ruzynski noted the team delivered a solid close to a challenging year, working through restructuring and focusing on faster-growing markets, with international business growth aided by the global portfolio. - The fueling systems segment was renamed energy systems, with about 25% of its revenues from critical asset monitoring and grid solutions. - Highlighted team recognition in 2024. - Discussed segment performances including water systems (flat in Q4, full-year with certain market trends), energy systems (Q4 growth, full-year results), and distribution (Q4 growth but margin decline). - Mentioned strategic acquisitions: a water systems business in Australia specializing in submersible pumps for mining and industrial sectors, and a definitive agreement for a company in Latin America (Barnes De Colombia) expected to close in early March.

Consolidated fourth quarter sales totaled $486 million, up 3% from the prior year. The water systems business remained flat, while growth in distribution and energy systems segments drove the performance. For the water system segment, in the fourth quarter, sales were flat compared to the prior year. In the US and Canada, water system sales were down 2% compared to the fourth quarter of 2023, but sales of water treatment products increased 12%, groundwater pumping equipment increased 6%, and all other surface pumping equipment increased 4%, while sales of large dewatering equipment decreased 36%. Outside the US and Canada, water system sales increased 2% overall, with foreign currency translation decreasing sales by 6%. For the energy systems segment, fourth quarter sales were up mid-single digits, driven by favorable pricing and higher volumes, and it achieved a record operating margin for 2024. The distribution segment grew mid-single digits in the fourth quarter, driven by favorable volumes and an acquisition, but margin declined during the quarter due to cost reduction actions and seasonality.

• The company expects full-year 2025 sales, including the impact of recent acquisitions, to be in the range of $2.09 billion to $2.15 billion. - GAAP EPS is expected to be in the range of $4.05 to $4.25. - Initiating a process to terminate the primary US pension plan, with no impact assumed in the 2025 guidance yet.

• Challenging global foreign exchange headwinds. - Continued pricing pressure. - Unfavorable geographic and product mix in the water systems segment. - Over $3 million of restructuring charges in the fourth quarter.

Q: Can you maybe give a little more color on the groundwater business in terms of what you're seeing in both residential and ag markets? Not only for the fourth quarter, but what your overall sort of expectation might be embedded in your guidance for that piece of the business in 2025?

A: Yeah. Thanks, Matt. Good morning. You know, our expectation for next year is probably a year that the market is gonna be fairly similar to 2024. You know, I think you know, we commented on this, but our ability to grow, we think, is driven by products and, you know, some share gain and really working to make sure that we get our products and serve our customers as well or better than anyone. I think from an ag standpoint, you know, that outlook clearly with prices and some of the other challenges there. It's a little bit less clear to us and a little bit smaller part of our business. You know, that residential side is bigger. But, you know, just we always have to say, finish that up, the replacement market is really the biggest part of our groundwater business, and we see that as a good market this year. So, you know, flattish to not getting a ton of help from the market, you know, but a year that we continue to build on as we did in 2024.

Q: I didn't hear anything in the prepared remarks, but just what's your thoughts on how Franklin Electric Co., Inc. would be positioned from an overall tariff standpoint. And then, Jeff, if you could just provide a breakout in terms of where that restructuring charge maybe fell at the segment level, that would be helpful. Thank you.

A: Yeah. I think good question, Matt. I think we, like most industrial companies, have a pretty dedicated team to understanding the changes in tariffs and then what our reaction needs to be. So that team is well structured. I think our understanding of tariffs, you know, if and when some of them hit, it's really a combination of a few things. One is, I think, with a strong brand and the ability to control some pricing, you know, if tariffs continue to escalate, we would have to accommodate that through some pricing. But also, you know, with the global footprint, supply chain actions, manufacturing efficiency, and potential redundancies in terms of where we pull that product are all opportunities that Franklin Electric Co., Inc. has. Our exposure to China is not that significant. There was some exposure, you know, that we had to take into account, which is included in the AOP related to what else could happen in the US, Mexico, Canada. We're ready for it and prepared to take action, but, you know, I guess we'll wait and see what the next weeks and months bring.

Q: I'd like to ask a, I guess, a level-setting question on renamed energy systems. You mentioned about 25% of the mix being critical asset monitoring and grid solutions. Can you offer recent rates of growth or decline for the newer energy systems revenue relative to legacy fueling applications and also remind us of the respective margin profiles of the business?

A: Yeah. You know, on the critical asset monitoring and some of the grid-related products, the first three quarters of last year were slower than some of the growth that we saw in 2023 and 2022. That picks up momentum as we exited 2024, and we expect a good year in 2025. I think you see it if you look at some of the utility other companies that, you know, there was definitely a softer spot thereafter, a really hard pull in 2022 and 2023. But we see that business, you know, continuing to be robust and to grow. So in addition to that, you know, some of the smarter solutions that we offer, and I think I mentioned this, we bring to the legacy customers, the major marketers. So if you think of a service station and some of the smart products that we offer there, you know, we have that opportunity to leverage some of the monitoring, sensing, and other technology across that entire energy system segment. And the margins for that business in the grid or the power monitoring maintenance asset monitoring, the margins are very good.

Q: A follow-up to that. Could you just round out then the composition of how you're thinking about the growth for the year? What FX is? What the organic is? And then how are you thinking about sequentials embedded in guidance and if there's any improvement fundamentally in numbers or underlying demand trends or relatively stable expectations from where we sit here today adjusting for seasonality as you work through the year?

A: Yeah. Yeah. Last time I'm back there, Mike. So we'll try to get as much of that as we can. Let me start with maybe walking through some of the guidance assumptions that we have. And, obviously, you know, we're gonna start 2025 effectively the way we finish 2024, and I think it's human nature to effectively think things at some level will continue the way they've been going. So we see, you know, moving into Q1 similar to what we saw in Q4. Although, you understand the seasonality of our business and you know that the first quarter is typically the lowest quarter of the four quarters in a calendar year. And so we expect to see that normal seasonality in all year profile of the business. Without giving quarterly guidance, what I would say is this, you know, the first half is typically a little wider than the second half. Think if you like, historically, it's around 48% in the first half and 52% in the back half of the year. Is how that seasonality shapes that first half to second half. But, you know, as we sit here today, we see, you know, economic conditions are reasonably stable yet with certain, you know, with some level of uncertainty out certain areas. And, obviously, you know, interest rates, tariffs, inflation are three big factors. But, you know, interest rates as we sit here today appear to be flattish, probably more likely that interest rates would go up in the future than go down, at least, you know, based on our read of what we're hearing from the Fed and other economists. You know, our view is effectively flat at least, you know, going into the year. Housing market has been challenged. We expect that the housing market's gonna stay somewhat depressed. I mean, you know, as we move into 2025, potential for the housing market to improve in the back half of the year, but certainly, you know, as we're moving into the first part of the year, that housing market has some, you know, has some pressure on it. Inflation has moderated at some level. It's excluding the impact of tariffs. And the impact of tariffs is Joe's already commented on it. It's kinda yet to be determined what's gonna hold and how long-term or short-term tariffs are gonna be. We feel like our team is well prepared to manage through whatever situation comes through, both in the short term and in the long term.