Hello, and welcome to the Franklin Electric Reports First Quarter 2024 Sales and Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. It is now my pleasure to introduce Chief Financial Officer, Jeff Taylor.

Thank you, Andrew, and good morning, everyone. Welcome to Franklin Electric's First Quarter 2024 Earnings Conference Call. With me today is Gregg Sengstack, our Chairperson and Chief Executive Officer. On today's call, Gregg will review our first quarter business highlights, then I will provide additional details on 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 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 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 Sengstack.

Thank you, Jeff, and thank you all for joining us. Our first quarter results were slightly below our expectations while the business generally performed as expected. The Franklin team executed well and managed cost during the quarter despite much wetter weather and expected and continuing commodity price pressures. As we have previously communicated, the first quarter is seasonally our slowest quarter as it relates to demand. However, underlying activity in our core markets remains healthy. Comparing to our record first quarter 2023, net sales were down $24 million or 5%. And we had an exceptional start to 2023, particularly from large dewatering equipment and fueling systems, which made for a tougher year-over-year comparison. Largest contributing factors were the decrease in large dewatering equipment sales in the U.S. to our fleet rental customers, which accounted for approximately 2/3 of the decrease and lower sales in Fueling Systems as demand and order patterns have normalized. Even with more moderate demand, we delivered improved gross margin versus the prior year, driven by favorable mix and continued cost control. As expected, SG&A expenses were higher than prior year due to inflationary pressure, investments in recent water treatment and Distribution acquisitions and the addition of new Distribution branch locations. Turning to our segments. Water Systems first quarter sales and operating income declined 7% and 4%, respectively. As I previously mentioned, volumes were lower in large dewatering equipment, creating a difficult year-over-year comparison against the first quarter record sales in 2023. Additionally, demand in the U.S. for our groundwater pumping systems was impacted by continued unfavorable weather patterns. Operating margin improved to 16.4% and up 40 basis points versus prior year and 60 basis points versus the fourth quarter of 2023. This was driven by favorable product mix and lower freight expenses. Fueling Systems sales and…

Thanks, Gregg. Overall, our first quarter was largely in line with our expectations as Gregg highlighted. While we started off the first quarter with sales down from our record levels last year, the Franklin team executed well with a focus on delivering for our customers and cost management, which resulted in an improvement in our gross profit margins. Our fully diluted earnings per share were $0.70 for the first quarter 2024 versus $0.79 for the first quarter 2023. First quarter 2024 consolidated sales were $460.9 million, a year-over-year decrease of 5%. The benefit to sales from our 2023 acquisitions were more than offset by lower volumes in Water Systems and Fueling Systems. Water Systems sales in the U.S. and Canada were down 12% compared to the first quarter of 2023 due to volume declines. Sales of large dewatering equipment decreased 50% compared to record quarterly sales in the prior year quarter and sales of groundwater pumping equipment decreased 8%. These sales declines were partially offset by the incremental sales impact from our recent water treatment acquisition. Sales of all other surface pumping equipment were flat compared to the first quarter 2023. Water Systems sales in markets outside the U.S. and Canada increased by 4% overall as sales increased in all major markets, Latin America, EMEA and Asia Pacific. Water Systems operating income was $47.1 million in the first quarter of 2024, down $1.9 million or 4% versus the first quarter 2023. Operating income margin was 16.4%, a year-over-year increase of 40 basis points. The decrease in operating income was primarily due to lower sales. Operating income margin improved due to favorable product mix shifts and lower freight expenses. Distribution's first quarter sales were $147 million versus the first quarter 2023 sales of $143 million, a 3% increase. The Distribution segment's…

[Operator Instructions] And our first question comes from the line of Bryan Blair with Oppenheimer.

I was hoping you could offer a little more color on how orders trended through the quarter and into Q2 and how your team views the relative puts and takes or upside/downside drivers versus the reiterated full year guidance at this point.

Yes, I mean, from -- how it trended during the quarter, I think it trended as pretty much as we would have expected with the normal seasonal profile. Typically, it's going to start slow and then build as we move through the quarter, so lower in January and then finishing stronger in March. I believe we saw that. The puts and takes there, the one thing that I think impacted the business more than we had expected was the weather. We continued to see much wetter weather in the U.S. And that impacted us certainly in the western part of the U.S. And so that was a factor that was worse than we had forecast or expected. And then the other is the commodity prices, particularly for pipe, continue to be under pressure. And that market has to stabilize at some point, Bryan. We've been waiting for that for a couple of quarters now and -- but we continue to see pricing pressures there. And that's more than 4 quarters in a row that we've seen those pricing pressures on commodities. So when you look at it from a year-over-year impact, it does have an impact.

Understood, appreciate the color. If we could dig into Fueling Systems trends a bit, what was the growth in critical asset monitoring in the quarter? And at this point, how mix-accretive is that build-out? Obviously, the segment margin came in, at least relative to our model, ahead of expectations and the optics are quite favorable there.

Yes. I would say that the grid solutions business performed pretty much in line with the way the fueling business did in terms of it was down on a year-over-year basis. And so we -- while that business has been growing strong double digits, and we expect it to continue to grow strong double digits, I think it went through some of the same dynamics that we saw on the fueling side, where people have built up inventory destock. And now with supply availability, lead times improve, people are waiting. They're not placing their orders as early as they did in prior year. And so we saw a year-over-year decline in grid solutions.

Okay, understood. And one last one, if I may. Any color on the integration of Action Manufacturing and commentary on the M&A pipeline? It seems optimistic. Any color you can offer on the opportunities over the near-term potential Action ability, whether in water treatment, distribution, the typical focus areas for you or you called out a couple of new potential areas for investment as well?

Yes, Bryan, on Action, integration is going on schedule. We actually have pulled up, bringing them onto our ERP system. We're actually doing that tomorrow. So we are good on both distribution and in water treatment. We're able to get businesses onto our system very quickly and get them aligned in our business practices, layouts to their warehouses and their assembly locations and so we improve flow. And Action is right on plan, actually a little bit ahead of plan on top line and bottom line. We have the platform we need to operate in both distribution and water treatment, groundwater distribution and water treatment. But as people decide to exit the business, we're available to be an acquirer in that business, and we'll continue to do so. We are also being more intentional now that, I think, as the world has accepted higher interest rates, particularly in the United States, and valuations that, I think, the sellers and buyers are getting a better understanding of what valuations are in this new interest rate environment, it's -- we're just seeing higher deal flow in manufacturing assets. And at its core, Franklin is a manufacturing company. Our distribution decision was forward-integrated in a channel that we're a leader in the United States in groundwater. So at our core, we're a manufacturer. At our core, we're a global company. And so we're looking again at opportunities to acquire companies that have larger pumps to augment what people recognize us as being a leader in residential and ag. So we want to be intentional about that. And that's where we're seeing also greater deal flow and deal activity. And also, with adjacencies and being mindful that we've grown this company over time through intentional expansion in adjacent markets but thoughtfully doing that so that they're adjacent to make logical sense from the standpoint of either distribution, common customers, and so we're looking at that as well. But definitely, we've seen just more deal flow over the last several months -- last couple of quarters than, say, maybe a year ago.

And our next question comes from the line of Walter Liptak with Seaport Research.

So considering the slightly weaker-than-expected first quarter and related to the wetter weather, you maintained the guidance for the full year. Can you talk about your confidence levels, what has to go right second quarter and the back half to get to your guidance?

Yes. Well, I mean, I would say, first of all, that we maintain our guidance. We feel confident with the guidance range that we have out there 1 quarter under our belt, slightly below our expectations, but I would still say generally in line with our expectations. So from that perspective, not a major change. I've already talked about a couple of the things that impacted us were a little bit wetter weather and some of the commodities pricing. But we certainly expected that 2024 was really going to start much like 2023 ended. And I think we signaled that when we talked that the business was going to come into the year and then build as we move through the year. And I think we still see that happening. Overall, we don't predict the economy. We're not economists. But we've said no recession. I think we still don't see a recession coming. I do believe that we expect interest rates to stay higher for longer now. That will have a little impact on our housing market. And areas like water treatment will be a little more impacted -- are a little more impacted by housing. But overall, I think our view there is pretty much intact for the full year guidance. There was a question last quarter about first half and second half. I think we're still generally in line with how the business has performed over time in that regard. And so we feel good about the guidance that we have out there through the end of the year.

Okay, great. And then thinking about second quarter, are you -- you talked about how the destocking in fueling seems to be behind you. Are you seeing more sell-through now going into the construction season?

Yes, I would say we're right at the beginning of the groundwater drilling season. And so I think we are seeing a pickup in activity. But we're on the front end of it at this point in time. And so there's still a ways to go. As we said, first quarter was impacted by weather in some key areas, the West Coast, Texas, other parts of the U.S. We've started to see some improvement there, but it's hard to predict the weather. And so we'll just -- I mean, we take what we get when we talk about the weather impact on the business overall. But we expect a normal seasonal pickup in the second quarter. So our business is pretty consistent from that regard.

Okay. And how about related to the fueling part of the business? Are you seeing better sell-through at the -- for fueling and equipment now that the destock is over?

Yes, I think the conversations that we have with our customers in fueling are indicative that they expect to have a more normal year this year. And so I think we're also on the front end of that curve as well. And so we're -- the indication at this point is that we'll see fueling pick up as we move through the middle part of the year. And like I said, those customer conversations are positive at this point but reflective of really a more normal level, not an increase in stocking, not a destocking environment. And so that's where we are in fueling.

And our next question comes from the line of Mike Halloran with Baird.

So just a couple here. One, when you think about the pricing dynamics in the marketplace on the water side, anything of note? I know the commodity pricing was mentioned in the prepared remarks, just more thinking competitively. And then similarly, any thoughts on the inventory levels on the water side...

Mike, the last part of your question broke up. Could you please repeat that?

Yes. Similarly, any thoughts on the inventory levels on the water side in the channel?

Yes, Jeff will give a little more detail. I'd say that on pricing, it's more kind of pre-COVID, where you're seeing a little more promotional activity in groundwater. The RSS channel, the residential pricing is again kind of flattish. As we commented on dewatering, I remember at our conference -- your conference back in November, we talked about the durability of Franklin's business across the globe and the fact that we're in multiple channels. And the one that we still see the challenge is the cyclicality of that dewatering business with the overall company. And so when you start seeing a slowdown, some pricing action there, get a little competitive. But we've been able to maintain margins, as you saw in our results. And then on the -- and outside the United States, we're getting price, interestingly enough, with respect to inflation. So we're getting a little price in EMEA. And in the hyperinflation markets of Turkey and Argentina, we price them in dollars or price in euros. So that's our spot pricing, so that kind of helps insulate us. With respect to inventory levels in the channel, we look at Headwater as being kind of an indicator of the groundwater channel. And they're bringing inventory levels down compared to last year, which we commented on. Our overall inventories are down, I think, about $70 million. And part of that is distribution because the supply chains are better and lead times are coming down. And I think that all of the distributors in the channel are probably doing similar things. So we're probably still seeing, I don't know want to say destocking, but certainly inventory is probably at appropriate levels. Jeff and I were talking before the call that one thing we all need to be mindful of is that as the world dries out here in the United States and we have -- and it's at 130 a year, and we actually had a wetter year, 120 this year in the first half -- first quarter of the year and 110 last year this time. And one did not plan for that. But you can't plan for the weather, you just respond to it. As the world dries out, the likelihood of seeing some good demand in ag as we start seeing pumps getting turned on. So I think the channel inventory, to answer to your question specifically, I think is in good shape. I don't think it's overly high. I don't think it's overly low. Jeff, you have any additional color to add there?

No, I think you've hit it right on, Gregg. I mean, the business as a whole water, fueling and distribution, we are getting positive pricing. As Gregg mentioned, in water, we're a little more favorable outside the U.S., generally low single digits, more of a return to normal from what we saw several years ago and less frequent price increases than when we were in a high inflation environment. Distribution is getting good price on what I would call the core products, pumps, motors, drives and controls. The commodity piece continues to be negative price in the current environment. So that's what we're seeing across the business.

Great. And then second one, just on the margins for the water side, good seasonal margins there. Obviously, you mentioned in the prepared remarks that mix was a benefit. How do you think about what the run rate looks like or how to think about modeling that for the rest of the year?

Yes, I think the -- I mean, we've got a favorable mix, particularly from the decline in large dewatering, which is at the low end of the Water Systems margin range. And so with that being a lower percentage of the overall mix, that will be a favorable mix impact for us. We do expect large dewatering to continue to be down year-over-year as we move through 2024. And so I think the best way to model it, Mike, is just assume the current mix that we have on a go-forward basis and then we'll see as it happens. I will mention though that large dewatering is going to be lumpy this year as we move through the year. There's a lot of movement there in terms of quarter-to-quarter impact.

And our next question comes from the line of Matt Summerville with D.A. Davidson.

Can you maybe talk about kind of embedded in your guidance for the year, what sort of organic outlook you're assuming for water, distribution and fueling in '24 relative to '23? Just maybe a little bit more segment granularity there and then I have a follow-up.

Yes. A little more organic outlook. I mean, I think for the guidance overall on a full year basis, we're kind of low to mid-single digits top line growth. In Water Systems, I think we expect pretty normal organic growth for the business, excluding the impact from large dewatering, which we know is going to be down on a year-over-year basis. And so that will be in this normal range that we talked about, in that 3% to 5% range. Fueling, I think, fueling will be slightly lower this year, still net positive overall. But they've come off of a really strong year in 2023. And we're seeing a bit of a normalization in terms of demand in that market, so still positive overall. And then Distribution, Distribution on an organic basis, I think, similar to what we see in Water Systems. And possibly some upside in Distribution as the market -- as we come into season when the market picks up.

Got it. And then just a follow-up on kind of water and distribution. If you look at U.S., Canada, how did your business perform in terms of residential versus ag? And how are you thinking about organic outlook there for '24 relative to '23?

Yes, interesting, interesting question. In the first quarter on a year-over-year basis, residential was down slightly, I would say, low single digits. And that's reflective of our groundwater business, which was somewhat impacted by weather during the quarter. Ag was down a little more in the quarter. Ag was down mid-single digits for the quarter on a year-over-year basis. And I also believe weather was a factor that impacted ag overall.

And then Matt, our other residential surface pump business is essentially flat, those product...

With respect to dewatering, given I think that business is coming off of a record year in '23 and it is going to be a top line headwind this year, how much of a decline do you expect in large dewatering pumps on a revenue basis in '24 relative to '23 as we kind of think about modeling that in with Jeff's comments on the overall organic outlook for water ex that business?

Yes, Matt. So there's -- let me unpack that a little bit. There's a couple of pieces there. So when we talk about large dewatering, we have a large dewatering business that is global. And then we have a piece of it that is primarily U.S., Canada, which is selling to the fleet rental companies. And so we are seeing the business to the fleet rental companies, primarily in the U.S., is where we saw the significant pullback on a year-over-year basis of about 50% in the first quarter. Our business globally for the first quarter, it was down 50% in the U.S. Canada. It was actually up 10% outside of the U.S. and Canada. And so that gets us to a global year-over-year decline of about 40%. So it's really the large fleet rental business in the U.S. and Canada where we're seeing the pressure in this year. I think our business overall, we would expect it to be down in the mid-teens for the full year coming off of a record year in 2023 globally of about $200 million of sales.

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

We thank you for joining us this morning on our conference call, and we look forward to speaking to you in July with our second quarter results. Have a good week.

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.