Good day and thank you for standing by. Welcome to the Franklin Electric Reports Fourth Quarter 2021 Sales and Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised, today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your host today, Jeff Taylor, Chief Financial Officer. Please go ahead.

Thank you, Michelle, and welcome everyone to Franklin Electric's fourth quarter and full year 2021 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 and full year financial results in more detail. When we're finished, we'll have some time for questions and answers. Before we begin, let me remind you that as we conduct this call, we'll 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 the 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 Chairperson and CEO, Gregg Sengstack.

Thank you, Jeff, and thank you all for joining us. While this call with shareholders is to review our company's performance, I would like to start by taking a moment to publicly congratulate and thank the entire team at Franklin Electric for a record year. It takes a team effort to deliver outstanding results, despite the many challenges we faced in 2021. For the fourth quarter, sales, operating income and EPS were records for any fourth quarter in our history. And the fourth quarter closed out the highest performing year in Franklin's history that we established new all-time full year record for sales, operating income and earnings per share. Demand across the business remains strong with continued strength in all end markets, fueling additional growth and a robust open order balance. Our results substantiate our strategy as we capture the healthy demand across our end markets and advance Franklin as a global provider of water and fuel systems. Supply chain constraints continue to affect our industry and we expect them to continue at least through the first half of 2022, most likely through the balance of 2022 in the case of some input materials and geographic regions. Our team navigated these ongoing challenges as well prepared to handle future volatility. Our current inventory levels are intentionally elevated when compared to the fourth quarter of last year, in preparation for future volatility and in response to strong demand. Inflationary pressures continued in the fourth quarter, increasing material, freight, transportation and labor costs. In response, we continue to implement our pricing strategy to offset these higher costs that are committed to maintaining margin discipline across the business. Turning to our segments. In water systems, we delivered overall revenue growth of 36% with organic revenue growth contributing 23%. As I've mentioned in prior…

Thank you, Gregg. Our fully diluted earnings per share were a record for any fourth quarter in the company's history at $0.85 for the fourth quarter of 2021 versus $0.57 for the fourth quarter of 2020. Fourth quarter earnings per share before the impact of restructuring expenses was $0.86 compared to the 2020 fourth quarter earnings per share before restructuring of $0.57. The company's fourth quarter results included an estimated $0.12 earnings per share gain related to a 6.5 million one-time income gain on a bargain purchase price transaction on the income statement in the other income and expense section. While it is not our practice to callout items as non-GAAP adjustments in our reported results, we are mentioning this gain due to its size and since we do not consider it to be operational in nature. Fourth quarter 2021 consolidated sales were a record 432.5 million compared to 2020 fourth quarter sales of 321.1 million, an increase of 35%. The increase from acquisition-related sales was $40 million, while organic growth contributed 24%. Sales revenue decreased by 6.6 million or about 2% in the fourth quarter of 2021 due to foreign currency translation. Water systems sales in the U.S. and Canada were up about 58% compared to the fourth quarter of 2020. In the fourth quarter of 2021, sales from businesses acquired since the fourth quarter of 2020 were 29.6 million. Water systems sales in the U.S. and Canada grew 26% organically in the fourth quarter. Sales of groundwater pumping equipment increased by about 34%, sales of dewatering equipment were up about 61% and sales of other surface pumping equipment increased by about 11%, all due to strong in-market demand. Water systems sales in markets outside the U.S. and Canada increased by about 15% overall. Sales revenue decreased by 6.9…

Thank you. [Operator Instructions]. And our first question comes from the line of Mike Halloran with Baird. Your line is open. Please go ahead.

Good morning, everyone.

Hi, Mike.

Good morning.

So a couple of questions here on the guidance. First, obviously, really healthy guidance, strong growth year-over-year. Maybe help understand two components of it. One, volume versus price or at least qualitatively how you're thinking about those two pieces. And secondarily, when you think about trends through the year, pretty normal sequentials or is there some variance in how you're thinking about that pattern through the year?

Yes. Good morning, Mike. Thanks for the questions. In regard to our guidance, there's a couple of components there. First of all, we have the full year acquisitions that were completed in 2021 built into our guidance, so that's certainly going to contribute to the volume component of it. We expect strong demand and organic growth to continue in our base business. And Gregg mentioned the ongoing supply chain and inflation issues. Pricing versus volume, we're seeing inflation in the mid-single to high-single digit ranges. So we're certainly pricing to offset that level of inflation. So I think we're going to certainly put pricing in to cover that and maintain our margin to the greatest extent possible. So probably a little bit heavier on the price side, but there's strong volume growth in the guidance that we gave overall. In terms of the dynamic of the seasonality, we do expect first half to be under a little bit more pressure than the second half of the year. And so we see inflation probably impacting us greatest in, once again, first quarter, first half of the year.

And was that a profitability response there or was that more just on the revenue line, or kind of a combination of both?

On the seasonality?

Yes, the front half being a little bit more impacted than the back half comment.

Yes, it will impact our margins more in the first half than it will in the second half.

So that's a good bridge to the next question. A lot of moving pieces here with the acquisitions you've brought in with the price cost dynamics, inflation, timing, et cetera. Maybe a little directional help on how you're thinking about margins year-over-year by segment, or any kind of variances we should think about on that side?

Yes. So, Mike, I guess quantitatively, we don't give margin guidance by segment. But certainly, we do see -- if you look implied in the guidance range, I think if you look at the midpoint, you would see that generally we're planning to maintain our margins within their normal ranges that we expect for our three business segments. The lower end of the guidance, you would probably see stronger inflation than what we built into the midpoint. And then vice versa on the higher end of the margin guidance. But as you look at the segments, we would expect them to be in the normal ranges.

Okay. I appreciate it. Thank you.

Thank you. And our next question comes from the line of Matt Summerville with D.A. Davidson. Your line is open. Please go ahead.

Thanks. A couple of questions just, first, as a follow up. Price cost, where would you have been for the fourth quarter? And then with the price increases you're putting in the place for '22, is that more of a list price increase? Are there surcharges involved? I guess I'm trying to understand how permanent or not all of these increases might be for you guys.

Thanks, Matt. So as you look at the full year of 2021, inflation and pricing has been interesting. It's been dynamic as we started out the first half of the year. It was slower and it seemed to accelerate as we move through the year. As we kind of move through the quarters, we had -- the second quarter I believe we were slightly below in terms of pricing covering costs we called out on the third quarter. On the fourth quarter, we were just slightly below on that price cost dynamic. But for the full year, we were ahead. So we were able to at least maintain on the full year basis. As you look at moving into 2022, we're continuing to implement and evaluate additional pricing actions. And I would say that everything's on the table in terms of what those may be. So each business is a little bit different. We'll see less price increases on many of our businesses, or it will be the increase in the base price of the product. Other markets, there may be surcharges to offset specific materials, components and/or freight. And so I think it's -- everything's on the table.

In the past, you guys have talked about or at least in the recent past what, I can't remember if you called it open orders or backlog, but what did that number look like coming out of the fourth quarter? Did it increase sequentially relative to Q3? And I guess maybe one for Gregg around -- relative to your guide for the full year '21, what surprised so much internally versus your plan for the upside in the fourth quarter? Thank you.

So, I'll take the latter part first, Matt, is that just continued strong demand. We do have some seasonality with the Northern Hemisphere being more Northern Hemisphere weighted, but just a continued strong demand across all three segments and beyond really kind of where we were forecasting. We don't have a lot of visibility in this business. We are a short-cycle business generally with the exception of some of our large pumping systems. And fueling, we do talk to some major marketers about their station build plans. But this is a short-cycle business. So we look at current demand, we talk to the people in the marketplace, but we're just getting a lift in all segments and across the globe. So we outperformed on the top line and have been all year relative to internal planning, which has been, of course, a struggle for us to keep up. But we see that continuing into 2022. And again, we're short cycle, but in talking with contractors the last couple of weeks and looking at our dynamics of our backlog of some of our larger pumping systems, looking at our fueling business is that at this point, we don't see it slowing down for us in '22, given just kind of where the inventory levels are in the marketplace. And Jeff can give you some more dynamics around our backlog. Again, it's not something that we typically talked about in the past, because we typically don't have one or a very large one, but it's gotten to be sizable and it continues to grow a little bit. So Jeff can give you some information on that.

The open order balance or backlog at the end of the year was approximately 175 million for the total company. That's an increase of about 30 million from the prior quarter. So we did see it grow in the fourth quarter and year end. So we continue to see strong demand across certainly our water systems business, our fueling business and then distribution is performing exceptionally well.

Got it. Thank you, guys.

Thank you, Matt.

Thank you, Matt.

Thank you. And our next question comes from the line of Ryan Connors with Boenning & Scattergood. Your line is open. Please go ahead.

Great, thanks. Thanks for taking my question. I wanted to come at the distribution business more just from a big picture standpoint on the margins. It's been tough to sort of pin down where those margins shake out any given quarter. The results have certainly been improved on a run rate over time, but still a lot of volatility quarter-to-quarter. So how do we think about -- are we closer to where that business gets to a run rate where it's a little easier to think about a model and where might that be?

Sure. Ryan, because I have a history with this, I'll give Jeff a break in this one. So if you go back to when we stood up distribution and we said it's going to be -- we said publicly we were looking at 4% to 6% OI range, the business is seasonal. So you may recall the first couple of years, we actually lost money in Q1 and Q4 and made much more in Q2 and Q3 to make up for it. And this year, we made money in all quarters. And that's somewhat level in the maturity of the business. I've looked at some other distribution businesses where there's public information and how they've matured over time and saw a similar pattern where there's a seasonality aspect to it, that as the business grows and matures, that you begin to, while you still have the seasonality and you still have the margin change quarter-to-quarter, is that you begin to make money in Q1 and Q4. And that's what we expect going forward. So we feel great about a 7% margin overall for the year, with the strength in Q2 and Q3. And we want to declare victory as the first year of being above the 4% to 6% range, but we feel pretty confident that this business is going to continue into '22 with similar kind of dynamic and kind of a similar seasonality that you saw in 2021.

Got it. Okay. So you have the seasonality. That's helpful. The other one just on fueling, it does seem like we've had a few quarters now where China has been somewhat of a pretty material drag there. So can you just give us your updated thoughts strategically? Is that something you see getting better? Is there a thought to monetize that piece of it at some point? What are your strategic thoughts about fueling in China?

Yes, definitely not to monetize it. It is a piece of the business and we have a presence there, we have good brand recognition. The business is probably at a nadir [ph]. Now it's in a run rate and would expect a whole lot of acceleration from where it is today. It's in the low-teens sales wise. What we are all kind of waiting for, us and Gilbarco and Dover and others, is for China to start moving towards in-station diagnostics in a meaningful way. They have approved more local systems. But that said, we haven't seen really any initiative of any substance from the government to initiate that program. And it's important in a country like China, and look there are burning a lot of coal, there's a lot of challenges around pollution. But one of the easiest ways to recover VOCs is through vapor recovery systems at the gas station. And we have a system, others have systems but our systems have proven it works in China. And so it's just a question of when the government decides to get more serious about that aspect of their pollution control. And it's a pretty opaque area to do business in China. We don't get a lot of forward visibility. When they decide to spend the money, they spend it. And that's when we have to react. So right now, I see it being a good business. It's stable and again the low teens unfortunately. And we still see some upside -- some big upside if they get initiative behind in-station diagnostics.

Got it. Okay. Thanks for your time.

Sure. Thank you, Ryan.

Thank you, Ryan.

Thank you. And I'm showing no further questions at this time. And I'd like to turn the conference back over to Gregg Sengstack for any further remarks.

We appreciate you all joining us today and we look forward to speaking to you after the end of the first quarter. Have a good week.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.