Ladies and gentlemen, thank you for standing by, and welcome to Franklin Electric Reports Third Quarter 2020 Sales and Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Mr. John Haines, our Chief Financial Officer. Please go ahead.

Thank you, Goody, and welcome everyone to Franklin Electric's third quarter 2020 earnings conference call. With me today is Gregg Sengstack, our Chairman and CEO. On today's call, Gregg will review our third quarter business results and the impacts our Company is experiencing from the global pandemic and I will review our third 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 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. As I noted in our press release, I'm consistently impressed with how our company and my 5,500 colleagues are dealing with the pandemic. Our global product supply leadership and facilities teams continue to do a great job maintaining protocols to keep our people safe. We continue to follow the guidelines of health authorities around the globe, including the CDC and national, state and local government requirements. Even with these new protocols, guidelines and requirements, our operating performance continues to improve, both sequentially and year-over-year. With the benefit of price, mix and thoughtful expense control, the recovery in our third quarter revenue drove record consolidated operating income and earnings, earnings per share for any quarter in our history. Water Systems product demand strengthened through the quarter, driving double-digit organic growth outside the U.S. and excluding our large dewatering pumps in the U.S. as well. While our business in Brazil and Turkey experienced the strongest organic growth, driven in part by price increases to offset inflation, generally, our business was strong in all end markets with the exception of the Middle East and North Africa. Large dewatering pump sales are stable, albeit at depressed levels given the lack of demand by pump rental customers. Our Fueling Systems business is recovering slowly. Outside of China, revenue was down 7% in the quarter. In the U.S. and Canada, Fueling declined 5% compared to the third quarter last year. Our business in China improved slightly, but the run rate is currently sub $20 million, more like it was in 2017. Our U.S. distribution business continues to perform well. Demand is strong. While it is dry in the western U.S., which is generally favorable for our groundwater manufacturing and distribution businesses, it has been wetter than average…

Thanks, Gregg. Our fully diluted earnings per share were a record for any quarter in the company's history at $0.82 for the third quarter of 2020 versus $0.72 for the third quarter of 2019. Third quarter EPS before the impact of restructuring expenses was $0.83 compared to 2019 third quarter EPS before restructuring of $0.73. Restructuring expenses in the third quarter of 2020 were $0.4 million and were related to various manufacturing realignment activities in the Water Systems segment and resulted in a $0.01 impact on earnings per share in the third quarter of 2020. Restructuring expenses in the third quarter of 2019 were also $0.4 million related to various manufacturing realignment activities in the Water Systems segment and also resulted in a $0.01 impact on earnings per share in the third quarter of 2019. Third quarter 2020 sales were $351.2 million compared to 2019 third quarter sales of $348.4 million, an increase of 1%. Sales revenue decreased by $10.4 million or about 3% in the third quarter of 2020 due to foreign currency translation. Water Systems sales in the United States and Canada were flat compared to the third quarter of 2019. Sales of groundwater pumping equipment increased by about 17% and sales of surface pumping equipment increased by about 8% versus the third quarter of 2019 due to strong end market demand. These increases were offset by lower sales of dewatering equipment which were down by about 54% due to lower sales in the rental channel. Water System sales and markets outside the U.S. and Canada increased by 3% overall. Foreign currency translation decreased sales by 12%. Outside the U.S. and Canada, Water Systems organic sales increased by 15%, primarily driven by higher sales in all three major geographic region; Latin America, Europe, the Middle East and Africa…

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

Hey, good morning, gentlemen.

Good morning, Mike.

Good morning.

So let's just make sure I understand the trends in the fourth quarter on the water side, and how you're thinking about sustainability here. If I heard the prepared remarks correctly, it sounds like the underlying dynamics in the third quarter are going to be mirrored in the fourth quarter. But could you give some granularity on how you're thinking about some of the sustainability of those pieces in that – kind of excluding what weather looks like, with a real focus on maybe the ag market as well as the other groundwater markets?

Sure, Mike. So if you look at our North American business, to your point, what we're seeing is that effectively much as Q2 kind of pushed out to Q3, Q4 and it's been a good climate for our business and both in the residential and ag space for the groundwater business. And then we've also seen a nice recovery in the plumbing HVAC business. And we just feel that given the information we get from our Distribution side of our business, which is more focused on groundwater, that there's good backlog with there's good backlog with contractors. So as long as the weather is reasonable, the contractors can continue to get out in the field, that unlike prior years, we achieved more a slowdown in Q4. We think that's going to carry a little bit more into Q4. Outside of the United States, you go around the globe, with the exception again of North Africa and like, Saudi, were impacted by lower oil prices, is that we're seeing generally good demand in Latin America, Africa, Europe steady, Asia steady. So we're just seeing good water demand across those end markets as we move into the last quarter of the year.

So could – maybe touch on what the inventory levels look like through the channel, both within the Water Segment as well as in the Distribution? And then any thoughts on an early buy this year and whether there's enough out there for some of your customers to try to pull ahead and get some rebates?

Well, with business being basically strong, people have got plenty to do and they're plenty busy. I can't really comment to the early buy side. I would just say generally, inventory is good, maybe even a little bit skinny because the supply chains for ourselves and others because we see multiple suppliers for our Headwater Distribution Company. Supply chain struggled actually in the third quarter, maybe not as much as second quarter, but you still had a struggle as people start ramping up their supply chains. And so we saw even in our own case, with Franklin, towards the back half of September, we were struggling getting some components from key suppliers. We've actually [indiscernible] help now, but I wouldn't think that inventories are particularly robust. People tend to go for cash in these situations whenever you have a shock to the system. And so I would not think that inventory levels are particularly robust in the channel.

Yes, that makes sense. And then last one, really strong cash generation, really good cash position. I'm guessing not much has changed, but love some thoughts on how you're looking at the M&A landscape out there, what the optionality looks like and any cash usage priorities, excluding the obvious, which is invest in yourself first?

Yes, Mike, we – our view towards M&A really hasn't changed. We have some transactions that we continue to look at. So the pipeline, I'm not sure I would say it's really robust, but we've got – we're getting looks, and we'll see where some of those may take us here. But that continues to be our priority, as you know, is accretive acquisitions. And from there, we'll go. And we're not really particular, if it's a good opportunity, it's a good opportunity. That may be in Water, it may be in Fueling, maybe in Distribution, it may be outside the U.S., in the U.S. The cash generation is really coming, as you can see from the working capital improvements that we've made largely around the corporation or working capital ratio is down to 29% at the end of the quarter, which is an important performance measure for the leadership team here. And it's almost 400 basis points better than where we were last year at this time. So kudos to the team for the great improvements they've made there, as Gregg pointed out, and not a particularly easy supply chain kind of environment in the third quarter.

Great. Thanks guys. Appreciate the time.

Yes, Mike.

And our next question comes from the line of Ryan Connors from Boenning and Scattergood. Your line is open.

Great. Thanks for taking my question. And congrats on the great results, what a difference six months makes.

Hey Ryan.

Good morning, Ryan.

Really remarkable bounce back. So, I wanted to talk a little bit about Fueling, and particularly to start with on the margin side. I mean, obviously, there's some top line headwinds there, but the margins holding up really well. So can you drill down that a little more than you did, John and – a, what's driving that and what's enabling that? And b, what are the different scenarios for margins from here? If we get a top line bump, is there actually upside to that? And if we do get a leg down at some point, can we continue to hold the line on margins there in Fueling?

Yes. So kind of two factors at work there, Ryan. The first one is we had nice price realization in Fueling in the quarter, in the neighborhood of 350-plus basis points. So the business has done a nice job at managing its supply chain, matching increases and inflation that's coming out of and then going into the market and getting price. So that's a big impact. The other thing that this business has done really well at is controlled our SG&A expenses. Understood that 2020 was going to be kind of a flattish year and now a down year because of the pandemic and really held the line on SG&A increases. So as you know, I always get a little uncomfortable when we try to get talked up on Fueling OI margins, 27.6%, is pretty healthy. Sequentially, it's up. It's just about even with where we were in the third quarter of 2019. So product mix matters, geography mix matters. And I just don't think I would get too fired up beyond that mid-20 range for very long for Fueling Systems. Now as we look forward and we capitalize on some of these opportunities in China, which are just great, other developing world opportunities continue to – hopefully see station builds come back in the U.S. Some of those SG&A costs are going to come back. There's no question about some of the comp, variable comp, those kind of things are going to come back. But overall, I would point to price in the SG&A is the main contributors to that. And the business – the leadership team there is doing a really nice job of managing those factors.

Okay. No, obviously, the election impacts many businesses, but it's hard to imagine a business that's more impacted than Fueling. I mean you've got two very different visions there of kind of the path forward in terms of electric vehicles and then so forth. So obviously, we can come back three months from now and talk about it a little more definitively, know how – what the landscape is. But what's your broad view on the risks and opportunities there as you look out? Is that something that you look at as a risk that if there's this movement away from fossil fuels that, that could impact you real tactically? Or is that still something that even if that does take place, that's still kind of pretty far out there in terms of the tangible impact?

Ryan, a couple of observations. With respect to the U.S. market, much of our growth is coming from innovation and solving customer pain points, so they can operate their systems safely with the lowest total cost of ownership. And demand, for example, we just started shipping some corrosion control systems for underground diesel storage tanks where the problem with corrosion from low-sulfur diesel, which is going to become a bigger problem worldwide as we go to low sulfur diesel, which is a good thing. We had to go to low-sulfur diesel, it's better for the environment. But it's going to create some corrosion challenges, and we have a solution for that. So that's an example of a product that's not being driven by regulations, being driven by, again, the station operator is looking for lowest total cost of ownership. Also, I would keep in mind that within the United States or even outside of the United States, a vehicle is sold today. That's a liquid fueled vehicle is most likely going to be on the road for 20 years. So while there's no question it be a conversion to EV vehicles over time, no question is going to come in developing regions first. But there's a long build-out. And if you look at various data around energy consumption across the globe, without massive conversion to some type of solar, wind and so on is that we're going to need energy from all sources. And liquid fuels are really a great way to move vehicles around, aircraft around and so that's going to be a part of the energy solution for decades. And so we just see the Fueling business, our growth rate is actually inside the United States has often exceeded our growth rates outside the United States. As we see major marketers consolidating the smaller stores and building out new stores and as they get more sophisticated stores, they like our equipment. Outside the United States, which would not be so impacted by the U.S. elections, again, some of the environmental initiatives that you're looking at in China and India, around the gas stations are some really simple solutions that can really help with cleaning up the environment. Stage 2 vapor recovery, which was started in China and then subsided, but now they want to put in, in-station diagnostics to confirm that these stage 2 systems are working correctly, and that will be good for the environment to do that. Similarly in India, we know there are real air pollution problems. Again, as long as we have liquid fueled vehicles, these vapor recovery systems are a very effective way to capture significant amount of VOC. So we see these as being – as long as we have liquid fuels in the world that we're going to have those for decades, we see our systems being relevant. And we're seeing it as being a good driver of growth for our fuel business.

Got it. Now, that's really great commentary. Thanks, Gregg. And then my last one was – and I apologize if I missed this – a little choppy – you were a little choppy towards the end of your answer to the last question. But when you talked about M&A and sort of acquisitions, it seems like distribution has really gotten its legs under it and is in a good place here. The other growing pains kind of passed, and that business is really doing well. But yet, it's still smallish in the overall mix. Is that a particular area where you would be looking to maybe build through acquisition? I know that space needs to consolidate anyway?

Yes, Ryan, it is. We're going to be thoughtful and patient and a couple of more comments. We don't see anybody else out there kind of consolidating this space. We've done several acquisitions. So we think we know the ins and outs and the key factors when it comes to valuation, evaluating these kind of entities. So yes, there's going to be more opportunities, and we're going to be thoughtful and consider those. We think about geographic presence and where certain parts of the country, it might be better to own a platform there that we don't have. So the answer – the short answer is yes. And we'll consider opportunities as they come at us and be very thoughtful on how we execute those.

Super. Well, thanks. I appreciate your time.

Thank you, Ryan.

Thank you. Our next question comes from the line of Matt Summerville from D.A. Davidson. Your line is open.

Thanks. Hi, guys.

Hi, Matt.

With respect to the two pieces of the business that are pretty soft for you right now, first, with dewatering, where do you think Pioneer's business comes in from a revenue standpoint in 2020? And do you have an initial preliminary sort of view on how that might shape up in 2021?

Yes. 2020, Matt, $60-ish million, $65 million top line there. We're doing our work right now on 2021. I'm a little hesitant to share something there. But a big – as you know, the big impact this equipment is sold to rental houses and then in the U.S. anywhere, they put those out on rent to OG activity, including fracking activity. So I think that there's different views on that, but we're not real bullish on that, at least in North America at the moment. The good news is that the business continues to pick up traction internationally, really good applications for mining, the watering applications, other types of things like that. And we see some traction in Latin America, Australia; we see some traction in Southern Africa with this product. So it's much smaller, of course, than kind of the bulk that's in the U.S. that there are some positives in this product line as well, and we'll continue to try to push that.

Just sticking with that theme. If I recall correctly, your dewatering business in – I think it was down like 50% in the fourth quarter of 2019. And if I heard you guys correct in your prepared remarks, you're thinking water is going to be down kind of mid-single digits in Q4, unless I didn't hear you correctly. So I guess I'm maybe a little surprise that you're anticipating Water to be down in Q4. Can you expand on that?

Yes, I think, the key thing, Matt, is just seasonally, as you know, we're going into the fourth quarter. As Gregg pointed out, we saw a really nice quarter in both groundwater and surface pumping in the U.S. Groundwater was up 17 and surface was up 8 some of that surface is recovery of de-stocking, we believe that what's happening in the in the second quarter. That's going to trail off, right. As seasonally we get into the winter months, that's going to start to decline. And then groundwater is really – it's difficult to predict, as Gregg said. Right now, the weather conditions have been in our favor, at least in this country. We definitely think that there's this resurgence of demand that's coming out of the second quarter when a lot of areas were suppressed. And a lot of that's going to depend on the contractors being able to get out there and do the work. We're still hearing a lot of positive things from our distributors. And in the Headwater business we're hearing positive things that there's more work than there is time. So that's a tailwind for the fourth quarter, but there's lots of puts and takes, and we don't expect dewatering to change that much. And then in second quarter, dewatering was down 70%. It was down 54%. Now the comps get easier. But as I said, we're not expecting much out of that product group in the fourth quarter.

Got it. And then over to Fueling, the other piece of the business that is kind of soft for you guys. Where do you think China fueling comes in from a top line standpoint in 2020 and similar to my dewatering question, how should we be thinking about how this – the next wave of environmental-related stuff, the ISD sort of revenue. How should we think about that in the context of 2021 at this point?

Yes. The top line number for 2020, Matt, $17 million to $20 million, somewhere in that range, $17 million to $19 million. We keep kind of inching it down a bit here. In terms of looking forward, again, a little hesitant to give too much on 2021, just up, but the reality is, is that these environmental mandates in China are real. There's lots of volume. And our – it's competitive, for sure, but our product and our technical solution fits with what is needed there. So we continue to be optimistic. I think 2020 or we think 2020 was a highly unsettled year in China with the pandemic and floods and other issues there. So I think generally, our view is that it will stabilize, and we'll see more volume traction in 2021 in China for our Fueling Systems business.

Got it. And then just last real quick. You mentioned the price realization in Fueling. Can you give the same figure for your Water business? Thanks, John.

Yes, in Water, it was a nice quarter as well. Now some of that, as Greg pointed out, is our developing region – some of our developing regions businesses price on spot rates. So as FX starts to go up and they go get more price. In Water Systems, we're in the 2.25 to kind of 2.50 range, Matt. And in distribution, we're in the half a point to a full point kind of range of price realization. And for year-to-date through the three quarters, Water in the 200 basis point range and Fueling in the 300 basis point range. So it's been a nice – it's been a good year, and the teams have done a nice job at getting price to stick.

Great, thank you guys.

Thanks, Matt.

[Operator Instructions]

Lodi, I think we're ready to wrap up the call with some final commentary from Mr. Sengstack.

Thank you. I will now turn the call over to Mr. Gregg Sengstack for any closing remarks.

Thank you, Lodi. Before we end this call, I would like to call your attention to the 2020 Franklin Electric sustainability report that will be issued today and available for download on our website. While this report is our first public disclosure of some important environmental and social measurements, principles of sustainability are the foundational tenets of Franklin Electric's culture and long contributed to our success. A commitment to safety, ethical compliance with established policies, here for the well-being of our employees, and a history of innovation, environmental protection, continuous improvement and lean manufacturing practices. Thank you for joining us this morning. We look forward to your joining us on our conference call following our fourth quarter earnings release. Take care, and stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. Have a wonderful day. You may now disconnect.