Good morning, ladies and gentlemen, and welcome to the Franklin Electric Reports First Quarter 2021 Sales and Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Mr. John Haines, Chief Financial Officer.

Thank you, Stacy, and welcome, everyone, to Franklin Electric's First Quarter 2021 Earnings Conference Call. With me today is Gregg Sengstack, our Chairperson and CEO. On today's call, Gregg will review our first quarter business highlights, and I will review our first quarter financial results in more detail. When I'm through, we will 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 risks 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.

Thank you, John. Thank you all for joining us. We're very happy with our first quarter results. We see the momentum that was building in the back half of last year continuing and presenting us with robust demand environments for most of the end markets we serve. Our financial results in just about every measure were records for any first quarter in our history, including net sales, gross profit, operating income, net income and earnings per share. 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 and system design, continued to produce strong results as expected. During the first quarter, we continued to expand our water treatment adjacency in water systems and the distribution segment achieved tremendous organic growth. Our Water Systems business had a record quarter, generating overall revenue growth of 20% and organic revenue growth of 18%. We see multiple signs of demand strength in the Water Systems end markets, including a strong housing market, the global recovery of commodity prices, drier weather and robust demand in developing regions. Our Water Systems revenues also grew by over 3% from price actions realized in the quarter, which were necessary given the significant raw material inflation we continue to experience. Although our dewatering equipment sales declined by about 4% in the quarter, sequentially, this decline is much lower than what we had experienced in 2020, due in part to greater international demand. Although still a headwind, foreign currency exchange translation was a lesser impact on our top line than it has been in recent memory at just over 2%. In the U.S., strong housing and agricultural demand, combined with continued dry weather drove a 24% increase in groundwater pumping systems revenue in the…

Thanks, Gregg. Our fully diluted earnings per share were a record for any first quarter in the company's history of $0.59 for the first quarter of 2021 versus $0.23 for the first quarter of 2020. First quarter EPS before the impact of restructuring expenses was also $0.59 compared to 2020 first quarter EPS before restructuring of $0.24. Restructuring expenses in the first quarter of 2021 were $0.2 million and were related to various manufacturing realignment activities in the water and distribution segments and had no impact on earnings per share in the first quarter of 2021. Restructuring expenses in the first quarter of 2020 were $0.9 million and were primarily related to various manufacturing realignment activities in the water segment and resulted in a $0.01 impact on earnings per share in the first quarter of 2020. First quarter 2021 sales were $333 million compared to 2020 first quarter sales of $266.8 million. The sales increase from acquisition-related sales was $23.5 million. Sales revenue decreased by $2.9 million or about 1% in the first quarter of 2021 due to foreign currency translation. Water Systems sales in the U.S. and Canada were up about 21% compared to the first quarter of 2020 due to volume, price and acquisition-related sales. In the first quarter of 2021, sales from businesses acquired since the first quarter of 2020 were $7.2 million. Sales of groundwater pumping equipment increased by about 24%. Sales of surface pumping equipment increased by about 10% versus the first quarter of 2020 due to strong end market demand, in part due to lower sales last year due to the pandemic. These increases were offset by lower sales of dewatering equipment, which were down by about 8% due to lower sales in the rental channel. Water Systems sales in markets outside the U.S.…

[Operator Instructions]. Our first question comes from Mike Halloran from Baird.

So a handful of questions here. First, maybe you could just talk a little bit about underlying supply chain trends? How you're looking at pricing? And how you think price cost balances out for the remainder of the year?

Mike, it's Gregg. On the supply chain continues to be in localism of waccamaw [ph]. We continue to have challenges around the globe, and the team is responding tremendously admirably through the challenges that are in front of us to keep the supply chain moving. We're seeing in all the headline commodities and semiconductors everyone else is seeing, so I don't think there's anything new on that front. It continues to be a daily battle on that side. As to the cost, input and price realization, I'll turn that over to John.

Yes. So Mike, we saw very significant input raw material inflation in our manufacturing entities in the first quarter. I'll quantify that as twice as high on a percentage basis as any first quarter in the last 5 years. So we are going to respond to that with price actions. This is mostly in the Water Systems segment, although it will impact fueling as well. So we will respond to that with incremental price actions later this quarter in the U.S. and Europe, specifically. And then when we look at the inflation price on an output basis, that was all on an input basis. When you look at it on an output basis through cost of goods sold, because you know the input stuff gets hung up on the balance sheet for a period and then flows into the cost of goods sold. When you look at it on an output basis, we maintained the spread of price or inflation in the first quarter. However, that spread measured in basis points is lower than what it has been for the last 4 quarters and it was lower than what it was in the first quarter of 2020. So we knew this was coming at us. We took price actions late last year, earlier this year, in anticipation of that. We saw even more in the first quarter than we had expected in our annual operating plan and we are now going to respond to that with additional price action. Our guidance assumes that we will continue to maintain this positive spread of price or inflation for the balance of the year despite the fact that it is narrowing in the first quarter.

So that's helpful. And just to clarify maybe Gregg's comments. I know you mentioned that Headwater was seeing some product shortages. It felt like non-Franklin Electric water product shortages. Are you seeing any shortages of supply chain pressures that are impacting your ability to put content into the market in fueling or water or is that comment just limited to Headwater?

No, it's across the board, Mike. We're seeing some challenges in the manufacturing space. That's really where my comments responded to is that across the globe, we're just continuing to have challenges with suppliers that could shut down on a temporary basis because of COVID, because of availability of parts. We're expediting a lot of products and components. We're dealing with the tank -- the -- excuse me, the transport of containers on ships that get stuck off the port of LA. And just as I said, just pretty much anything you're reading in the top line and the headlines of newspapers, it's impacting us as well.

So in guidance, from a top line perspective. Maybe you could just walk through what's embedded in it as in -- are you assuming pretty normal sequentials from here an improvement, deceleration in any specific markets? Any markets where you think there was some pull forward in the short term? Or do you think that there's a lot of more backlog that still needs to be let out? Just some context on what the underlying thoughts are within the guidance.

Yes. In manufacturing entities, the backlog might remains very strong. As a matter of fact, it's -- when you measure the backlog and what we can measure from a backlog perspective, it's basically double at the end of the first quarter of 2021 than it was at the end of the first quarter of last year. So we continue to expect the kind of strong organic growth in both water and distribution. But we're not going to say that we're going to expect a strongest growth -- organic growth that we saw in the first quarter. We also announced an acquisition in water treatment on April 1. That estimate for Puronics is in our guidance as well. So we see a lot of opportunity and tailwind, but these issues that Gregg just described, combined with the inflation that comes with them is what's causing us a bit of a pause. And want to make sure that we see this play itself out in the second quarter in the manufacturing matters. In distribution, again, as we mentioned, there's a lot of underlying demand strength. And I'm not sure the time of organic growth that we saw in the first quarter, 31% should be expected for the full year, but we're clearly discussing or thinking about solid double-digit organic growth for distribution as we look at the balance of the year. And then their issues, again, are -- they're not issues unique to have water, but their issues again, or they're starting to feel some pinch from a supply perspective, and we'll have to wait and see how that plays itself out in terms of their top line. But Headwater got a lot of momentum, broad-based momentum, Gicon has a lot of momentum, and we expect strong results from them for the balance of the year.

And Mike, on the fueling side, great rebound. And again, we really didn't start seeing a slowdown outside of Asia Pacific from the pandemic in the first quarter last year. So strong results outside North America, outside of China. China is still kind of off-line for us for the initiatives we were looking forward to and still look forward to in China on organization diagnostics. But in the U.S. market, we're feeling -- it was flat. There is a strong sense that we're going to see the rebound in station builds here in the U.S. that actually one of the constraints there is that resin supplies for fiberglass tanks is in critical supply, and it may cause a push out of some of these availability for people to deliver tanks. We haven't seen that impact us yet, but we've heard in the marketplace that there is a limited availability of underground tanks on a go-forward basis, which may dampen would not -- or push out some revenue. But we still see a robust business in the U.S. for fueling as well.

Your next question comes from Walter Liptak from Seaport.

I wanted to stick with the discussion about the distribution segment. And congratulations on getting the $2 million of profit. And you guys have made a lot of progress with it. But I wonder what does that imply for the full year profits that you've turned the corner in the first quarter with profitability? And then you've owned this business for a while. And I'm just wondering why first quarters tend to be losses, is it like an overhead absorption thing? Are there front-loaded costs for the year or something that runs through distribution?

Yes. Well, so on the full year, as I said, we expect really robust organic growth in Headwater. We talked about 4% to 6% operating income margins in this business. We've been short of that kind of throughout its history. We expect to be solidly in the middle of that range or better for the full year 2021. Other than these -- some of these supply kind of concerns around certain products, this business, again, has a tremendous amount of momentum going right now. In terms of the first quarter, I think it's more seasonal, really, Walt, than anything. It's not really accounting-driven per se. It's in the U.S. This is the lowest season. The ground -- it's winter, the ground is frozen. Some of this work that is necessary is just not able to be done because the wells and work sites can't be reached or can't be accessed because of the weather. And that typically is what's driven the lower top line. And then, of course, with the lower top line, you have a lower -- you lose leverage on the fixed cost base that we have in the business. So we saw the reverse of that, thankfully, here in the first quarter of 2021, and that's a big -- that's a big driver of the top line growth and then, of course, the fixed cost leverage that we get on top of that is driving profitability in the first quarter.

Okay. Great. Okay. All right. But for the full year, you're thinking in that range of 4% to 6% operating profit margins?

Yes, sir.

Okay. All right. Great. And I wanted to ask about the profitability in the Fueling Systems business. I think you called out the strong $14.9 million in profit as a result of mix. I wonder if there's -- and then you also talked about cost management. I wonder if you could talk about which one of those was more meaningful in the quarter? And if some of that is sustainable through the rest of the year?

Yes. Fueling Systems, as we've mentioned in the past, they've done a really nice job of managing the fixed cost base, the SG&A base. It's a little more flexible there than what you might see in the water in the water systems segment, Walt. And they have done a good -- they did a good job in 2020 of lowering that fixed cost base. It's coming back slowly. We continue to want to support the international growth that we're seeing here. We saw in the first quarter, we will continue to see it but the incremental margins here are really, really strong, and it's because the business doesn't have to add much fixed cost when their top line grows. So that really is the key formula here. They did achieve price as well. All of our segments achieved strong price and that was a contributor to their profitability in the first quarter as well.

Your next question comes from Matt Summerville from D.A. Davidson.

A couple of questions. First, I want to make sure I'm clear. What was the magnitude of uplift you saw maybe from the Texas weather situation as well as the buy ahead you referenced in the quarter?

Yes. We think both of those things, Matt, we're in the $6 million range in total, $6 million to $7 million.

About half and half, Matt, about half from Texas, about half of the buy in.

Perfect. And then what exactly -- I understand the Texas thing, but what would have prompted the buy ahead? And just in the business overall, what's your assessment of channel inventories currently?

So Matt, when contractors need piping to install pumping systems. And when supply gets tight, they buy pipe. And because if they don't pipe, they can't install. I mean, you need all the other products as well, but pipe is a critical item when you get an event like you had in Texas, you get a hurricane like that, everyone starts buying a pipe. And so that's what we're seeing. That said, because of generally supply constraints we're seeing, I don't get a sense that there's a whole lot of channel inventory that is out there. Our working capital actually declined on a trailing 12-month basis at our distribution business at Headwater. So I just -- the -- what they're buying, they're putting on the ground with the exception of, again, maybe we'll buy forward on the pipe product.

And then as a follow-up, with respect to North America groundwater in one of your comments, I think it was mentioned that it was up 24%. Can you attempt to parse out kind of what you're seeing in resi versus ag around that 24% number?

Yes, the resi is up more than that, ag was up about 11%. Matt. So our ag -- we isolate certain product categories that we call ag. And when you look at those in North America, they were up about 11%. The residential product categories were up more significantly.

Got it. And then just maybe two other quick ones. You mentioned I think in the water business, you took about 300 basis points of price on a year-over-year basis in Q1. A question asked earlier on the call. In order to maintain the price cost equation you referenced, John, based on where spot prices are for things like steel, copper, resin, aluminum, et cetera, all things you use in fairly large quantities, how much additional price do you think you need to take in that business?

Yes. It depends on the end market, Matt, but the big thing is this inflation exceeding expectation on an input basis in the first quarter. So I think it's in the 75 to 100 basis point range or something like that, that as we see the cycle layer start to flow through in the second and third quarter, they're going to have these higher input costs in them, and we need to have more price to offset that. So that would probably be my best estimate on the Water Systems side.

Got it. And then just lastly, one of you mentioned China fueling down 19%, not necessarily a surprise, but maybe looking for an update on -- are you seeing -- starting to see any movement at all on that ISD initiative, do you think it's sort of a mute issue in '21, not going to happen? What I guess is the right way to think about that?

Yes, Matt, this is tough. We are -- we're seeing a little bit of activity and a little bit maybe less than 10% of the market activity. And the challenge we've always had with China as it's been rather opaque. And so when it comes on, and how fast it comes on is not evident to us at this point. It's out there. The regs are out there, the needs are out there. But when it turns on and how fast it turns on is not necessarily apparent at this point.

Your next question comes from Chris McGinnis from Sidoti & Company.

Nice quarter. I was just wondering if you could talk a little bit about the Puronics acquisition, how that adds to the business? And I think that's the third acquisition since November. Can you just talk about the landscape for M&A going forward as well?

Sure, Chris. So yes, this is the third acquisition since we got into water treatment now a little over a year ago. And what we're doing is we see an opportunity. It's a very fragmented business. It's also a business that is a nice adjacency for Franklin because much of the product goes through professional contractors, whether they're water quality dealers, they're plumbing contractors through the plumbing channel or through our strong position in the groundwater channel. So we just see this is just be a natural and growing adjacency for us, and we've been learning a lot about the space. And about the product requirements and about the key factors for serving the industry, and that's what we've been doing over time. And as you've seen, Franklin in the past, we'll buy smaller businesses. We put them together, we get operating leverage. We learn about the industry that allows us to grow then organically. And you can see it a little bit like what we did with distribution. We've both have bought businesses and put them together that we -- once we combine and we get that operating leverage, and then we get some nice organic growth. So we see water treatment, again, as being an important space, a rapidly -- a relatively rapidly growing space and one is a natural adjacency here in North America. And then because we have reach outside North America and expect that water treatment is going to be the demand across the globe, we'll see how we do that over time as well.

Great. I appreciate that. And I guess just the landscape for additional M&A going forward, is a good market as things starting to rebound, see valuations start to pick back up, maybe just any color that you can add?

Yes. I think, Chris, the pipeline is fairly robust. I would say that the expectation -- sellers' expectations are high, certainly historically higher than where Franklin is typically transacted. Gregg mentioned that this water treatment space, which is a targeted adjacency for us right now, it's highly fragmented. So we think there's going to continue to be opportunities. We see some opportunities in the water treatment space. And every deal is different. But there's the real possibility that we could continue to see opportunity there. The same is true really on the distribution side. I mean, there's fewer kind of end properties out there right now, we would say that might be the kind of property we want to own, but there are some. And we've done a fair number of acquisitions here. So we can be fairly selective. We think we know how to value these properties kind of the right way, but they're out there, and we continue to look at a handful of those type of properties as well. So I would say generally that the climate for M&A is not bad right now. And we've got a reasonable pipeline and have a look at a few things, and we expect that to continue. What we saw last year, and I think we may again see this year is a lot of these sellers are taking the read on tax law as kind of their indicator of what to do. And we -- if the U.S. tax situation moves away that it is expected to move, we might see more people interested in transacting before those changes take effect, I don't know. But we know that for the kind of sellers that we're talking to that, that tends to be a pretty big issue.

Chris, one additional point is that over the last several years, I think, last 10 deals for Franklin have all been in the U.S. and Canada. And that's not for lack of interest or effort outside of the U.S. and Canada. But again, for the properties we're looking for, these are family health businesses, it needs to be the timing for the family or an event. We continue to look at growing globally and have an appetite to do transactions outside the U.S. for as well. We've done many of them in the past, and I think we've done pretty good at it. So we continue to look for deals across the globe. It's just been more opportunity for us in the last couple of years have been in the U.S. and Canada.

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Gregg Sengstack.

Thank you, Stacy. We appreciate you joining us today and look forward to speaking to you in July with ours -- reviewing our second quarter results. You all have a good week.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.