Good day, and welcome to the Franklin Electric Reports Third Quarter 2023 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 that today's conference is being recorded. I would now like to hand the conference over to Vice President of Investor Relations, Sandy Statzer. Please go ahead.

Thank you, Abigail, and welcome everyone to Franklin Electric's third quarter 2023 earnings conference call. With me today is Gregg Sengstack, our Chairperson and Chief Executive Officer; and Jeff Taylor, our Vice President and Chief Financial Officer. On today's call, Gregg will review our third quarter business highlights, then Jeff will provide an overview of our financial performance. We will then take questions. 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 will 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 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 Gregg.

Thank you, Sandy. The third quarter, which is seasonally one of our strongest periods, was a solid quarter, but more challenging than we had anticipated with the results reflecting additional commodity price pressure in our distribution business and further destocking impacting demand during the quarter. Our Fueling business was most impacted by destocking as well as by marketers delaying new station build projects. Conversely, with our product line breadth and geographic reach, our Water Systems business set third quarter records for sales and operating income, with continued strength in large dewatering systems more than offsetting product lines impacted by inventory rightsizing and destocking. While underlying demand in our core markets remains solid with higher interest rates and trading costs, customers are more sensitive to inventory levels. With improved lead times and delivery performance, we have higher confidence in the availability of products when they need them as well. As a result, just like us, they are reducing inventory levels. Despite these external factors, the team executed well and focused on delivering for our customers. Disciplined cost management allowed us to maintain healthy operating margins in our manufacturing businesses, while Distribution delivered a solid operating margin in a market challenge with the deflation of commodity products. We generated strong cash flow in the period and year-to-date. Our cash flow improved by approximately $190 million as compared to last year. We accelerated shipments and converted backlog during the quarter, decreasing inventory by $31 million and reducing our backlog by $44 million sequentially. I'm incredibly proud of the Franklin team for their commitment to driving operational excellence. A little more color on our segments. Water Systems delivered year-over-year revenue growth on top of a strong third quarter 2022, with sales increasing by 1% on a reported basis and 5% excluding the impact of…

Thanks, Gregg, and good morning, everyone. Overall as Gregg said, it was a solid quarter for Franklin Electric, despite the challenging operating conditions. We established new quarterly records in the Water segment, while the results were below our expectations in the Fueling and Distribution segments. Third quarter 2023 consolidated sales were $538.4 million, a year-over-year decrease of 2%. Excluding the impact of foreign currency translation, sales were flat compared to last year. Our fully diluted earnings per share were $1.23 for the third quarter 2023 versus $1.24 for the third quarter 2022. Water Systems sales in the U.S. and Canada were down 1% compared to the third quarter 2022, primarily due to lower sales of groundwater equipment resulting from channel destocking and wet weather across much of the U.S., which was largely offset by higher sales of our large dewatering equipment. Water Systems sales in markets outside the U.S. and Canada were up 4%. Foreign currency translation decreased sales outside the U.S. and Canada by 11%. Sales increases in Latin America and the EMEA region more than offset lower sales in the Asia Pacific markets. Water Systems operating income was a record $52.7 million in the third quarter of 2023, up $7.2 million or 16% versus the third quarter of 2022. Operating income margin was 17.8%, up 230 basis points compared to last year. The increase in operating income was primarily due to the leverage from sales growth, gross margin expansion, and cost management. Distribution's third quarter sales were $189.2 million versus the third quarter 2022 sales of $193.2 million, a 2% decrease. The Distribution segment's operating income was $10.7 million for the third quarter, a year-over-year decrease of $8.3 million. Operating income margin was 5.7% of sales in the third quarter 2023 versus 9.8% in the prior year. The…

Thank you. At this time, we'll conduct the question-and-answer session. [Operator Instructions] Our first question comes from Matt Summerville with D.A. Davidson. Your line is open.

Thanks. Couple of questions. Just maybe first with respect to Water Systems' margins, 17.8%, that's the highest level you guys have delivered, I believe, in three years. I think, last time you were up in that zip code was third quarter of 2020. Can you talk about the factors a little bit more that drove that kind of performance and how you think about sustainability net of normal seasonal factors that impact the business? And then I have a follow up.

Yeah, good morning, Matt. Thanks for the question. Water Systems had, as you pointed out, really strong operating margins in the quarter, and they had record sales and record operating income. So that business certainly performed very well. And I think it's a -- as Gregg mentioned in his comments, it's a diverse business and a global business, and we had strength in different parts of the business. But overall, we had strong top-line, very good cost management, very good delivery of products during the quarter. We are seeing a little bit of an improvement on our gross margin line as commodity prices like copper and steel slowly retreat, and that's providing a little bit of flow through on the margin line as well, as well as just overall good mix in the business. I think the second part of your question was regarding seasonality?

Yeah, just how we should think about the go-forward cadence and the sustainability? 2Q and 3Q are typically your stronger margin quarters. Is 17.8% kind of the new go-forward way to think about based on the commodity price environment where margins should be during the seasonally high period? And then, similarly, how should we think about an appropriate level in the seasonally lower period? And then, I have a follow-up.

Yeah. Matt, we typically guide Water Systems operating margins in the 15% to 17% range. And so, I think 17.8% was very strong. They had a really solid strong quarter. It's a record third quarter for them. Seasonally, the business does slowdown in the fourth quarter and the first quarter, and we expect to see that normal seasonality coming through. And typically, there will be a little bit of a margin impact as you get lower leverage on fixed costs and lower volumes during those couple of slower quarters for us. So, we would expect to see that happen. But I think normal operating margins are very strong right now, but in that 15% to 17% range on a go-forward basis.

Yeah. Matt, you may recall, when we think about that, that's of course on an annual basis, 15% to 17% range, but you may recall back in the Halcyon days back in '12 and '13, we had -- much more centric in groundwater that we had margins above that. But we've done a lot also with our international operations and then also the cost structure, our large pumping systems to improve margins there by standardizing some of the production for the high runners in our Wilburton, Oklahoma plant. So that's also aided us in structurally improving our margins what you've noted over the last several years. So, we're not necessarily stating, we tend to -- we want to deliver and then talk about it. So, we certainly are directionally moving in the right way. But we want to make sure we can prove it out over a period of -- seeking a couple years rather than just talking about a one-time thing. But clearly, we're at a different margin profile than we were a couple of years back.

Got it. And then just maybe to flip over to kind of the negative things impacting the business, you talk about destocking, you talk about projects push-outs. Gregg, you've done this for a number of decades. So, drawing on your experience, how long do you think kind of the downcycle can persist as it pertains to the destocking sort of phenomenon as well as what you're seeing on the project side in both Water and Fueling? Thank you.

Yeah, Matt, you think with my experience, I get smarter over time. And we -- I would say I was -- I thought we were kind of through this and through Q2. But I think with the interest rates and just with the ability of lead times, including our own and our customers, that we're back to the pre-COVID normal and people who are looking at -- and we are seasonal in Northern Hemisphere, and so, I think that customers are saying, look, I don't need to take the stock, I don't need to carry the stock, I'll let the manufacturers carry it. And then there are -- even in our case, our own distribution being more reliant on us as a supplier because we supply about one-third of the product, I'm saying, look and rather have it carried upstream. So, there is a -- so I think that we're kind of getting through that, maybe through the end of the year. Certainly, the pipe, which is the large portion of the Distribution business, is this plastic resin and also steel pipe, that availability was acutely tight through the pandemic and then it came on in a flood. And so that's I think maybe exacerbated the situation probably into year-end. But here again, I think that the discipline of having higher interest rates will help us coming into '24 relative to our competitors in Distribution. Relative to the push-outs, I think here again, we continue to stay in close contact with major marketers in the Fueling business, and they said, we have these build programs, and they normally hit their build programs, and it just seemingly things came -- went to the -- pushed to the right. I talked to some contracting companies in late July or I think was…

Perfect. Appreciate it, Gregg. Thank you.

Sure, Matt.

Thank you. I'm showing no further questions at this time. I would like to turn the call back to Gregg Sengstack for closing remarks.

We appreciate you following the company and joining us today on our call. We look forward to speaking to you after the first year with our full year results. And everybody have a great week. Thank you for joining us.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.