Ladies and gentlemen, thank you for standing by, and welcome to the Franklin Electric Reports Second Quarter 2020 Sales and Earnings Call. [Operator Instructions] And I would now like to turn the call over to Mr. John Haines, our Chief Financial Officer. Sir, please go ahead.

Thank you, Rain, and welcome everyone to Franklin Electric's second quarter 2020 earnings conference call. With me today is Gregg Sengstack, our Chairman and CEO. On today's call, Gregg will review our second quarter business results and the impacts our Company is experiencing from the global pandemic and I will review our second quarter financial results. 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 as - 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 Chairman and CEO, Gregg Sengstack.

Thank you, John. Thank you all for joining us. Similar to last quarter, I'm going to cover four topics in my prepared remarks. First, I would like to address the health status of our employees. Second, I will review results of our second quarter. Third, I will review the current state of our business and fourth, give you our current thinking about how we see our business for the balance of the year. So first is status of our employees' health. We continue to monitor our facilities globally. Our global product supply leadership and facilities teams have done a great job maintaining protocol to keep our people safe. We continue to follow the guidelines from the U.S. Centers for Disease Control, the CDC, other global health authorities and national, state and local government requirements and guidelines. I will now review the second quarter 2020 results. No one wants to report sales and earnings declines, but given the environment, I'm very proud of the everything our team accomplished during the growing global pandemic. The product supply organization worked thoughtfully to keep the supply chain, factories and distribution moving, while maintaining a safe workplace under guidelines that were changing frequently. Sales, marketing, finance, IT and other support functions continued to operate, often remotely. It's been quite a journey for us and for all of you on this call, it's not over, but the Franklin Electric team is even more nimble in its response to the challenges we have been presented. Turning to the quarterly results. Similar to the first quarter, our second quarter results were better than our expectations we had at the time of our last conference call on April 28th. Our manufacturing revenue was down double-digits, improved mix, margins and reduced operating expenses produced operating income that was higher than…

Thanks Gregg. Our fully diluted earnings per share were $0.52 for the second quarter of 2020 versus $0.70 for the second quarter 2019. Second quarter earnings per share before the impact of restructuring expenses was $0.54 compared to 2019 second quarter EPS before restructuring of $0.70. Restructuring expenses in the second quarter of 2020 were $0.9 million and were related to various manufacturing realignment activities in the Water segment and resulted in a $0.02 impact on earnings per share in the second quarter of 2020. Restructuring expenses in the second quarter of 2019 were $0.2 million and had no impact on earnings per share in the second quarter of 2019. Second quarter 2020 sales were $308.3 million compared to 2019 second quarter sales of $355.3 million, a decrease of 13%. Sales revenue decreased by $12.2 million or about 3% in the second quarter of 2020, due to foreign currency translation. Water Systems sales in the United States and Canada decreased by 16% overall compared to the second quarter 2019, primarily due to lower sales of dewatering equipment. Sales of dewatering equipment decreased by nearly 70% due to lower sales in rental channels and substantial uncertainty in oil production end market. Sales of groundwater pumping equipment increased by 5% during the second quarter increased by 5% versus the second quarter 2019. Sales of surface pumping equipment decreased by 18% on lower sales of both wastewater and water transfer systems as customers in this channel saw a more uneven demand environment from their customers and lowered their own inventory levels. Water Systems sales in markets outside the U.S. and Canada decreased by 9% overall. Foreign currency translation decreased sales by 12%. Outside the U.S. and Canada, Water Systems organic sales increased by 3%, primarily driven by higher sales in Latin America and…

[Operator Instructions] Your first question comes from Mike Halloran from Baird. Your line is open.

So maybe just start on the inventory side, obviously I understand that the wholesaler side of the inventory was depleted through the quarter, maybe where does that stand now? But then, if you could extend the question in to the other channels, specifically Headwater, any of the other water businesses and just where the inventory level sit from your perspective in the channel?

Mike, so again, this is anecdotal information from some channel checks is that to your point, in the surface pumping business, we said that in the second quarter, particularly, the first half of it that there was a destocking going on. At some point, that seems to come to an end. There's some indication we are having a pretty hot summer and so the HVAC condensate product line seems to be out of door, sales from those guys were pretty good, so we would expect that that's going to be a potential tailwind for us in the back half. With respect to the groundwater channel in the U.S., I'd say a similar story, maybe a lesser degree. You remember last year was pretty wet in the first half. This year is - we will be getting more - into a more normal year...

Yes.

Normal weather pattern. And so I would expect that we saw some destocking there, but not as maybe as material as we saw in the plumbing wholesale channel. On the large dewatering in North America that tend to be more - we get the orders in chunks and certainly with oil, even though a negative in the first quarter - for the second quarter, excuse me, that certainly was paused for cause. But the - I'd say, looking at the back half of the year again, we're seeing interest by the rental companies and others to put in more orders. So we're seeing that business stabilizing. Outside of North America, I don't see such dramatic changes in end inventory levels. John, anything other - thing you want to offer?

Yes. On the - just on the dewatering, Mike, we mentioned that we think sequentially that will start to get a little bit better in part because of the comps, but in the first half that equipment was down about 52% from the prior year. And in the second half, we think it will be down about half that amount, about 26% versus the prior year. So still down meaningfully, of course, for the reasons Gregg described, but sequentially it's a bit better.

That makes sense. Also good jumping-off point to the second question. Maybe talk about what's embedded in the guidance from a sales perspective. Obviously, the Fueling piece you're expecting to see sequential improvements in trough. You're running at pretty healthy levels in the - in some of your water businesses as we sit here today. What's embedded in that back half from an improving perspective relative to normal sequentials feels like, there is some growth that you're still expecting in some of those businesses that are doing pretty well right now, but any context around that would be super helpful.

Yes, so the - on the guidance, Mike. I guess, the way I would describe it would be that, we had a two ends. We had a low-end and a high-end that we were manipulating this June forecast that Gregg mentioned. And generally, the low end, it - basically assuming that there is kind of a same earnings per share decline in the second half as there was in the first half, call that about 14% and that the revenue improvements that we would see are pretty modest from water and Fueling and pretty consistent with the - in Distribution with what we saw in the first half. If you go to the higher end of our range then we're starting to see EPS declines of about half of what we saw in the first half, at about 7% versus the 14% and there we are seeing pickups in water and most notably in Fueling. So our Fueling revenue for the first half was down 19% and we think that really the range of outcome there is something between, let's call it 13% and 17% in our low and high ends. And that Fueling business, I call out there, Mike, because as you know, lot of profitability tied to that, very high margins has a bigger, more meaningful impact, higher detrimental margins has a more meaningful impact on our EPS. So I think, relative to guidance, that's the way we describe it. We don't really see distribution changing much. They are having a great year. They're going to continue, we think, to have a great year. Water incrementally better, but I think where the big improvement in our range is coming from is more on the Fueling side and that's - that is a more difficult one for us to predict, simple because of the U.S. market and China markets, we got some ideas about what's going on there, but it seems to be changing frequently.

Yes. That's definitely fluid situation. Makes sense. Last one from me. Really resilient strong margins in the quarter versus where revenue was at, could you just talk a little bit about how - the puts and takes in that margin profile qualitatively? And then, also just maybe how much is kind of normal incrementals versus what your specific cost-saving initiatives are?

Yes. So I would say that the two primary factors that - well, the primary factor that was driving Water improvement was, we did have a fairly meaningful mix shift. So as we mix shift revenue, Mike, as you know to groundwater, that improves. The other factors, however, were a pretty aggressive approach to SG&A in the Water businesses and then also raw material cost and direct cost being more favorable as well. So as you see from our table in the release, the primary impact of our margin improvement was from the Water business followed by Distribution and Distribution is - I think is just more kind of tied SG&A spending but getting more volume through that fixed cost base. The higher - the highest decremental margins that we have in the company, as you know our Fueling Systems and we lost some margin there mainly because of losing leverage on our fixed cost base. So as we think about the back half, I think the decremental margin that we saw here will likely still be in play in that range, although I think the Fueling margins can get a bit better than where they were in the first half. And the - many of the same factors that improved our Water margins, be it mix, be it SG&A, cost take out or input cost improvements on the raw material side, we don't expect those to change dramatically as we go through the second halves and would expect to see improving margins from the prior period - from prior year.

Your next question comes from Chris McGinnis from Sidoti & Co. Your line is open.

I was just wondering, if - just kind of given kind of declines in the markets, are you seeing any opportunity to put the balance sheet to work and is there any opportunities kind of presenting itself on the acquisition or the M&A side?

Couple of things with the balance sheet. One is that we have the opportunity to support customers and suppliers that are critical to us, We know all our customers are critical as far as critical, but from a standpoint, they were in trouble to be able to work with them. So the - so that was one use of the balance sheet. Another use to your point is M&A and it's - the pipeline seems to be pretty robust as - of late, so we'll continue to look at that. We didn't do anything in the quarter, obviously, but we do see the M&A pipeline is being fairly active now.

And then just one question, just on the Water side. You talked about the large deleveraging - or dewatering equipment, how quickly does that typically come back in kind of a - I know this is bit obviously a very different environment than '09 and '08, but how quickly does that come back as it seems like things are starting to improve a little bit and they are going to...

I think you need to - yeah and now when I probably focus more on the '14, '15 when the - last time when it was bigger oil shock, the financial crisis and John, sense for the kind of sequential improvements from - as compared to back in the '15 and '16 time-frame?

I'd have to look at that, Gregg. A lot of it has to do with the rental channels, Chris, I think the biggest thing that is, the headwind here is the state of the oil world, the gas, oil and gas exploration in U.S., which drove some of the peaks here. The outlook for that is really poor, so I don't know that - we have a lot of optimism about this coming back in a large way. The reality is that as we go through the back half, as I mentioned earlier, the comps to the prior year get a bit easier, but in terms of end-market demand, we think the - and 75% of this business is in the U.S., so we think a large portion of that will stay relatively weak because of O&G in North America.

That said, this downturn was probably more dramatic than the '15 downturn and we have done a level of diversification into other end markets. John pointed out, we have 75% of the business in U.S., but we've been growing the international piece, so we have some offset, but it's like it was back then and it's going to take a little bit time. It's a capital-intensive business and it's one in we see more cyclicality.

And then just one last question, just on the cost savings initiative. How quickly do they - if you see stronger trends come back, how much of the savings need to come back I guess, you are thinking about that is transitory?

Yes, I mean, our SG&A and the need to come back...

Qualitatively...

This is something - fine, something you don't need, but qualitatively, John, I hope you want to?

Yes. So Chris, our SG&A in the second quarter was down about 5%. The way we're thinking about the back half is it - probably more likely going to be down 3% to 4%, that's on the total base and there's a lot of assumptions in that. One of the key categories of cost takeout was travel. As you know, in this quarter or in the second quarter, travel just kind of ground to a halt everywhere. So we've got some assumptions about some of that coming back. We've got a little bit better assumption around some of the compensation categories that was dialed back in the first half of the year. So that's probably the best way to describe it. It was down 5% in the second quarter. We're thinking 3% to 4% in the back half.

Your next question comes from Ryan Connors from Boenning & Scatter. Your line is open.

Thanks for taking my question guys, and congrats on a really great results in the environment, really strong. My couple bigger picture questions. Gregg, you made a comment in the press release about the business being less cyclical and I wonder, if you can just kind of unpack that a little bit. I mean, obviously, some businesses are longer cycle than others, for example, municipal, four months falls really into the book ship time-frame in Municipal. The CapEx cycles there really take a couple of years to play out. So can you kind of discuss the portfolio in terms of what's shorter cycle versus longer cycle and how you see the things playing out over kind of a year, a year 18-month time-frame? Just kind of talk about the different types of cycles you're playing into there.

Sure, Ryan. Thanks for the comments. Good to speak with you this morning. So let's talk about Fueling first. So in Fueling, our people were in discussions with the U.S. market's about half, a little more than half of our business and our people are in touch with the major marketers who tend to drive at the margin initiatives for capital spend and give us a good insight into kind of how the overall U.S. market is operating. And so we'll be talking to them throughout the year, they generally get kind of a year look at their spends and their plans, station builds and rehabs and then we'll get updates through the years. And those station builds and rehabs, you can think probably anywhere from a couple of months to say six month advanced time-frame. You've got to get contractor on site and if you're going to do a whole spree from the front, you're going to see a few months of lead time, so that's kind of the view there. Thinking outside the United States, we get pictures on a state-operator oil companies and kind of getting their multi-year plans, some of the - some gets pushed to the right. We've seen some plans in India for example get pushed to the right. We've certainly seen in China, the next regulatory initiative at ISD get pushed to the right. There is a little more opacity, a little less clarity in China and then particularly, this year has been difficult with COVID and now we've had flooding and we have had other challenges. So it's little less clear in that market, which is meaningful for us and station builds. But again, like if you start in United States, you kind of say, you've got a visibility of a few…

No, absolutely. That's exactly it and it's very helpful. And yeah, I guess I have one other also real big picture in nature. I mean obviously, there is a pretty strong consensus that the shock and awe response we got from the Fed and from the government overall is really a key reason why we avoided the worst-case scenario for the economy and for Franklin as well as you mentioned but there's also sort of increasing talk about unintended consequences of that. There's a lot of talk about that the herd is not getting thinned in terms of companies that were indebted in different spaces and I wonder, if you could talk about, more an opinion obviously, but what your perspective is on that? How that manifest itself in your industry? I mean, are there other smaller players who would have been acquisition opportunities, who took PPP and now they're going to get through and now they're not going to be coming to market or maybe other weaker players who're problematic in terms of pricing in the market, who're limping along and survived now and then don't get cold from the herd. I mean, what is your view on - yeah, we got to save short term, but are there consequences now longer term that could be negative?

Ryan, it's interesting question. I appreciate you asking, as you said it's an opinion. Yeah, U.S., in the Fueling business and in the Water business, we've seen a lot of consolidation over the last two, three decades and so yes, there are still many family operated businesses that - I grew up in a family business, so I have enjoyed it and there is no - the spirit of my family business is, but it tend to have lower capitalization or they may have different expectations than say a publicly-traded company or a larger corporation. So to a degree that there are family businesses out there or smaller businesses that are under-stress then I suspect to your point, there will be a fallout. For the Water business and the Fueling business, it tend to be conservative business. They tend to be pretty steady businesses and so ability for people to plan is a little bit easier, little more transparent. And so I don't expect that you're going to see a kind of fall you might see say in travel industry or hospitality industry or some of the other industries that have much more dramatic volume impacts in the service space than you'd say, we were in end markets that are basically human condition, people need water, people need fuel. So those - that end demand is not going away and I think that creates a stability in the marketplace. Now, somebody - this precipitate the discussion by family business to say, look, we may want to look for a different strategic option and a knock on our door, that's why our door, that's why we are very pleased we have a low levered balance sheet and we have the ability to respond to those families as we have in the past.

Your next question comes from Walter Liptak from Seaport Global. Your line is open.

One thing just - one on the cost side, what we're seeing from a lot of our industrial companies is that, they are kind of rethinking cost structures and overhead levels and I wonder if - as we went through this - the last six months or whatever, if you had a chance to rethink some of the way the company does business and if there's anything structural in cost that can come out, because if I'm not mistaken, it sounds like most of the cost reduction done in on travel more temporary cost reduction?

Yeah, I would say the one clear thing that we've done, Walt, is we've accelerated some of our restructuring activities that we have on our fixed cost base. Our manufacturing or global product supply team kind of has a multi-year plan as they think about our capacity and our needs around the world and there's always some type of an effort or project going on. And one thing that we did this - the second quarter was to accelerate a couple of those projects that were in the United States that were actually planned out. So I would think as we think about the longer term and think about cost structure, it's that footprint, both manufacturing and supply chain footprint where the biggest bang for the buck is we believe. Now when you turn to SG&A, we absolutely took a critical eye, especially in our Water business towards headcount, toward other non-discretionary spend and we took a fair amount of that out in the second quarter, most of which will not come back. Now some will clearly come back with volumes, but most of which will not come back. So I don't know that I would necessarily portray that as a different view of the company or different view of the world, I think it was more a different view of where our top line was going and making some difficult decisions about short and long term and taking those actions. And I don't want to only imply that we did that in Water, we did it in Fueling, we did all across the company, but I think it was more related to, here is the current state versus having kind of a different two or three-year look at what the company was going to be. That's my take.

And the supply chain, have you been rethinking supply chain and some companies are shortening the supply chain, trying to get a little bit more local? It doesn't sound like you've had too many challenges with supply, it was really an effort right, but I'm thinking about electronic parts or maybe motors or something like that, that might come from the Asia Pacific region. Any thoughts there?

Couple of thoughts, Walt, I would say that the analogy to a duck, they're floating along the top of the water in a tranquil way with their feet are going like crazy, our supply guys really - our team just really hustled and there's a lot of what I would call whack-a-mole out there as issues popped up and having to deal with them and they did really nice job doing that. That said, of course, there is this natural reaction to say, let's bring everything closer. I'm not sure that that is necessarily the best long-term strategy we're thinking it through, but certainly, if we were sitting here with a vaccine and had herd immunity, we may be looking at the supply chain much like we were looking at back in 2019. Rebalancing our supply chain around the globe, yes, we have or probably have a disproportionate exposure to Asia, because of historical perspective and usage of Asia for sources of stainless and casting and so on. That said, we've been doing a multi-year in-sourcing of electronics. For a company, our size, we have our own electronics plant and now in Guadalupe, near Monterrey. So we continue to move more activity into that facility to shorten that lead time, which as you point out is one of the longer ones you have to deal with. We also are looking at our regional manufacturing centers of excellence and how to effectively put more throughput into those centers from - that we're currently getting from third parties. So yes, we're looking at this. It's certainly been a multi-year journey for Franklin. It's been one that heightened awareness with - going through what we have been in the last four to five months. With that said, I do think that we need to look at this over a long period of time and there is some natural opportunities for us to do more, but I'm not sure that, necessarily a knee-jerk reaction to getting everything short is in the right way either.

Just wanted to ask one on the Distribution part of the business, so last year, the weather - I think it was a tough year for Distribution because of the weather really wet. And I wonder, if you could talk about the timing of spend because I typically think of that business is standing in the spring and then tailing off. But with this hot season that we're having this year, could you see those trends continue maybe for breaking fixed product?

Yes. Walt, several aspects to your questions. So as a reminder, last year was essentially like the wettest year recorded in United States or second wettest year of 125 that we track, something like that. This year, I think this number is - right now, we're kind of mid-70. So it's kind of in the middle of a road from a standpoint of precipitation. To your point, we do see kind of second quarter activity, I believe you follow the center pivot guys, I mean there is definitely a spring aspect. You do pre-watering of fields in Q2 and that's the first time in the Ag piece of the business that you'll see some type of pumps failures and increased replacements. And then you get a kind of a second wave and the latest part of the season, again you get - equipment's been on or equipment's being used - kind of get - extend the moisture into the fall and you get kind of a second wave. That all relates to the Ag piece of the business and to your point, I think we're going to have - because it's more of a normal weather, we should have more of a normal business cycle we had last year. But you have to also keep in mind that a large part of the business is residential and there, we saw indications, as you may recall, we - when I was at our first quarter earnings call back on April 28, we've talked about how Headwater's sales were down 4% in April, or the six weeks of - end of March through beginning of April, just got to give an invitation, but ignored Michigan and Washington state in California that the Headwater sales were up 6%. So it really showed the impact of these stay-in-place orders or these are essential business definitions by the various governments. And so we have that business caught up in May and June and we expect that we indicated Headwater in the first - in July was up 8% over last year and so that's a part of it as well. So you think that while certainly, there's going to be some second quarter business is not going to get recovered, is that it is pretty much an emergency replacement, we estimate 80% or so as replacement business and so we would expect the back half in a normal weather year, as John pointed out to be a similar performance relative to last year's first half was.

Your next question comes from Matt Summerville from D.A. Davidson. Your line is open.

A couple of questions. First, just with respect to time of Fueling, can you talk a little bit more specifically around how we should be thinking about this transition from one environmental sort of initiatives to the next? And if I'm not mistaken, I had thought you had said in China previous to be down by roughly a third to maybe $30 million and now you're saying maybe down 50%. So what is actually worsening in China fueling?

What's worsen so far has been the slowdown in the double wall pipe initiatives in part due to the flooding in China, and part due to the COVID and then that's been pushing the ISD the right and I'll turn it over to John Haines to give you more substance in that piece.

Yes. So just, Matt, just - it's a highest level, this was the revenue. China contributed about $53 million in Fueling revenue in 2018, that dropped to $45 million last year. You're right, we had originally have been then thinking about $35 million or so for 2020. We thought 2020 anyway, would best case be flat to 2019 and now we're thinking about something in the low 20s. So as Gregg pointed out the pipe and containment initiative, it seems to have accelerated and is starting to wind down faster than we had thought it would. There is lots of factors, the pandemic, the flooding, I think it's fair to say there is also a competitive factor there for sure and then the new one that we expected to come on board, was this In-Station Diagnostic or the tankage for the vapor recovery, the ISD. And we are starting to bid that. We're starting to get awards on that, but again, the pace of that is just not what we had expected it to be for all the same reasons. So it's a little bit difficult to parse out the - how - the individual impacts of those reasons, but we do like our position in ISD, we think it's a big opportunity and we think we're going to very good position to compete there. And we'll do that, but we think, some of these market factors and environment factors that are happening right now in that country are the biggest impediments.

And then just is a follow-up, John, can you quantify what your realized price was in Water and Fueling in Q2 versus last year?

Yes. So in Q2, our realized price in Water was just under 2% and in Fueling, it was just under 3%, about 2.6%.

I am showing no further question at this time. I would now like to turn the conference back to Gregg Sengstack.

Great. Thank you, all for joining us in this conference call. We look forward to speaking to you after the Q3 at our normally scheduled conference call at that time. Have a great week.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.