Franklin Electric Co., Inc. (FELE) Q2 2026 Earnings Report, Transcript and Summary

Good day, and welcome to the Franklin Electric Reports Second Quarter 2026 Sales and Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Dean Cantrell, Director of Investor Relations.

Thank you, Andrew, and welcome, everyone, to Franklin Electric's Second Quarter 2026 Earnings Conference Call. Joining me today is Jennifer Wolfenberger, our Chief Financial Officer; and Joe Rozanski, our Chief Executive Officer. On today's call, Joe will review our second quarter business highlights. Jennifer will provide additional details on our financial performance, and then Joe will make some additional comments highlighting our Water Systems segment. We will then take your questions. A replay link of the webcast will be archived for 7 days, and a transcript and audio version of this call will be available on our website tomorrow. 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. During this call, we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the appendix of our earnings presentation. 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. Earlier today, we published a slide deck to accompany our prepared remarks. The slides can be found in the Investor Relations section of our corporate website at www.franklinelectric.com. With that, I will now turn the call over to Joe.

Thank you, Dean. Good morning, everyone. Thank you for joining today's call. I'm pleased to share Franklin's results today and show you a company that is on a journey of growth and transformation. Let's move to Slide 3. Our second quarter was solid for all segments. We continued our work to expand margins and increase our investment in our strategic plan. Our revenue from new products recently launched is at a record pace and we expect this to continue throughout the year. As we exited the quarter, we saw strong order growth and a healthy backlog, along with a balanced inventory position in our channel. Our balance sheet remains strong. We closed 2 deals in our water business in the first half, strengthening our position in water treatment in North America and our Water Systems business in Europe. We also closed a deal in our distribution business, which extended our ability to bring our leading customer service and portfolio to some new end markets. All 3 deals are tracking ahead of plan. Finally, as we are a company on the move and have a great story and momentum to share, we'd like to announce our first Investor Day on March 23, 2027 in New York. So please stay tuned for more details. If we could move to Slide 4. Looking at our for the second quarter, we like to talk first about our growth. It's critical for us. While we play in global markets that have dealt with some significant uncertainty, our story is 1 of the focus strategy, clear metrics and controlling our destiny. We finished the quarter with over 6% growth, 3.5% organic, and each segment grew nicely. We saw positive pricing, some good volume growth overall and strong contribution from new channels, new customers and M&A. Our adjusted operating income was up 12%. GAAP EPS was up 11%, with adjusted EPS up 18%. Our adjusted EPS growth in Q2 more than tripled our sales growth year-over-year. This was helped by strong improvements in our income and SG&A productivity. We received a portion of our EPA tariff recovery as we knew we would receive some benefit in Q2, we modeled some balance in pricing and the offset to these same tariffs included in our inventory. The benefit to us was a few million dollars, mostly benefiting the energy P&L. We saw an acceleration of inflation throughout the quarter and some softer regions in Europe and South America and continue to watch for pricing and productivity measures to offset as we move to the back half. We are ramping up a new factory in Turkey and working through some facility consolidations in North America to build an efficient operating structure to better serve customers long term. Some of these costs are included in our overs, both in restructuring and operating expense, and we expect a nice productivity boost from these efforts as we move into 2027. If we can move to Slide 5, I'd like to share our progress on some of our strategic priorities. Our value creation model starts with a clear growth focus on moving to faster-growing markets, adding new channels and customers and accretive revenue through new product launches. I'd like to give some proof points for Q2. By focusing on wider customer needs and the market trends, we have invested in our R&D. Our goal is to increase velocity and scale. In Q2, we've seen some growth from new products deliver over $10 million in new sales. We expect this number to grow over the next few years. We are also focused on partnering with the best channel and looking to add customers. One great example is our water treatment business, adding new dealers that contributed over $2 million in new revenue in Q2. These 2 examples highlight a focused plan to expand our reach customers we can serve and to accelerate our growth. Our margin expansion efforts continue to accelerate. We have recently announced VT Regent as our new Chief Supply Chain and Transformation Officer. He brings a stellar resume of building teams, supply chain networks and transformation execution. He will also lead our VAO our value Acceleration Office, which is off to a great first year and a funnel and has a funnel that we expect to help accelerate our productivity efforts as we move into the second half of 2026. I mentioned on our last call, we launched a new factory in Q1 and -- we've also made some smart consolidations of assets to more efficiently serve our customers and expand capacity in North America. Our capital budget is a record this year. More importantly, we are getting a great balance of growth, productivity and sustaining projects to ensure we achieve our long-term strategy. Our commitment to our shareholders remains a key tenet with continued growth in dividend in 2026. Finally and most importantly, we are focused not only on building the strongest team in our industry, but growing a company that attracts, develops and retains this great talent. Thank you to our Franklin team for your support of our journey and your important contribution to our results. With that, I'd like to turn the call over to Jennifer to discuss the financial results in more detail.

Thank you, Joe. Please turn to Slide 6. Our fully diluted earnings per share was $1.46 for the second quarter 2026 and versus $1.31 for the second quarter 2025. Second quarter adjusted diluted EPS was $1.55, a new quarterly record compared to our 20,252nd quarter adjusted diluted EPS of $1.31. The 18% year-over-year expansion in adjusted diluted EPS and was primarily driven by the expansion in our adjusted operating income year-over-year as a result of volume growth above market, price discipline and cost management. This is a continued demonstration of our commitment to expand the earnings power of our business. In the quarter, we booked a $4.5 million provision as we concluded a legal matter. This was recorded in the Energy Systems segment during the second quarter of 2026. There were $400,000 in restructuring costs in the second quarter of 2026 compared to $200,000 in in the prior year second quarter. Restructuring costs in the quarter are primarily related to structural improvement initiatives across our global water operations. These actions will deliver savings in 2026 and and will be accretive in 2027. The effective tax rate was 25.7% for the quarter compared to 24.9% in the prior year quarter. The increase in effective tax rate was primarily due to increased unfavorable discrete events in Q2 of 2026. Moving to Slide 7. Second quarter 2026 consolidated sales were $622.9 million, a year-over-year increase of 6%. The sales increase in the second quarter was primarily driven by organic growth, including price, volume and foreign currency translation, followed by the incremental sales impact from recent acquisitions. Franklin Electric's consolidated gross profit was $230.6 million for the second quarter of 2026, up from the prior year's gross profit of $211.8 million. The gross profit as a percentage of net sales was 37% in the second quarter of 2026 compared to the second quarter of 2025 gross profit margin of 36.1%, an increase of 90 basis points compared to the prior year. The gross profit margin was favorably impacted in the second quarter of 2026 by price volume and tariff refunds, which were largely offset by material inflation and the timing of tariff expense rolling off the balance sheet. Selling, general and administrative expenses were $132.1 million in the second quarter of 2026 compared to $123.5 million in the second quarter of 2025. The increase in SG&A expense was primarily due to the incremental impact of our acquisitions in the past year. SG&A as a percentage of net sales was 21.2% in the second quarter of 2026, and and 21% in the second quarter of 2025. Without the impact of acquisitions, our SG&A as a percentage of net sales was 20.8%, an improvement year-over-year of 20 basis points. Consolidated operating income was $93.6 million in the second quarter 2026, up $5.5 million or 6% from $88.1 million in the second quarter of 2025. The increase in operating income was primarily due to favorable price and higher sales volumes in the second quarter. As previously mentioned, there were $4.5 million in legal settlement and $400,000 in restructuring costs in the second quarter of 2026 versus $200,000 in the prior year second quarter. Excluding those items, consolidated adjusted operating income was $98.5 million in the second quarter 2026, up $10.3 million or 12% from $88.2 million in the second quarter of 2025. The second quarter 2026 adjusted operating income margin was 15.8% and versus 15% in the second quarter of last year, an 80 basis point improvement year-over-year. Moving to segment results, starting on Slide 8. Global Water Systems sales were up 5% compared to the second quarter 2025, driven by strong price, favorable currency exchange on sales and additional volume from our recent acquisitions. Water Systems sales in the U.S. and Canada were 8% compared to the second quarter of 2025. The sales increase was led by sales of groundwater pumping equipment into the agricultural market up 12% and sales of residential products, including water treatment products, up 11% and sales of product into mineral extraction applications up 6% and partially offset by sales of large dewatering equipment sold into industrial applications, which decreased 12% compared to 2025 in the U.S. and Canada. Our system sales and markets outside the U.S. and Canada increased 1% overall. Foreign currency translation increased sales by 5%. Recent acquisitions added roughly 1% and and volume price were newly impacted by 5%. Excluding the impact of acquisitions and foreign currency translation, sales in the second quarter of 2026 increased in Asia Pacific as Latin America and EMEA sales were down year-over-year. EMEA sales volumes, specifically in North Africa, Middle East and Eastern Europe were negatively impacted by the ongoing conflict in the Middle East. Global Water Systems operating income was $65.2 million, up $3.4 million versus the second quarter of 2025. The operating income margin was 18.2% and a year-over-year decrease of 10 basis points. There were $400,000 in restructuring costs in the second quarter of 2026 in the Water segment. Restructuring costs in the quarter are primarily related to the prior quarter structural improvement initiatives across our global water operations. Adjusting for restructuring charges, the Water Systems adjusted operating income was $65.6 million, up $3.7 million or 6% from the prior year, with an adjusted operating income margin of 18.3%, an improvement of 10 basis points from the second quarter last year. Operating margin for our Global Water Systems business was positively impacted by favorable price realization and somewhat offset by higher material costs. Moving to Slide 9. We Distribution second quarter sales were $221.1 million versus the second quarter 2025 sales of $200 million, an increase of 11% and the Distribution segment sales increase was primarily due to higher volumes, acquisition-related sales and price realization. The distribution segment's operating income was $19.7 million for the second quarter a year-over-year increase of $3.6 million. Operating income margin was 8.9% of sales in the second quarter, an improvement of 80 basis points versus the prior year. Operating income margin increased primarily due to higher sales volumes and strong price realization. Moving to Slide 10. Energy Systems sales in the second quarter of 2026 and were $80.2 million, an increase of $2.7 million or 3% compared to the second quarter of 2025. Energy Systems sales in the U.S. and Canada increased 1% compared to the second quarter of 2025. Outside the U.S. and Canada, Energy System sales increased 12%, primarily in Europe and Africa. Energy Systems operating income was $27.9 million, down $1.2 million versus the second quarter of 2025. There was $4.5 million in legal settlement provisions booked in the second quarter of 2026 in the Energy segment. Adjusting for the legal settlement provision, the Energy Systems adjusted operating income was $32.4 million, of $3.3 million or 11% from the prior year, with an adjusted operating income margin of 40.4%, up 290 basis points from the second quarter of last year. Adjusted operating income increased primarily due to favorable price, organic volume growth and refunds associated with IPA tariffs. Moving to the balance sheet and cash flows on Slide 11. The company ended the second quarter of 2026, with a cash balance of $97.3 million and with $107 million outstanding under its revolving credit agreement. We generated $58.7 million in net cash flows from operating activities during the first half compared to $32 million in the first half of 2025. The main driver for the change was cash flows from operating activities, including improved inventory usage. Yesterday, the company announced a quarterly cash dividend of $0.28 and the dividend will be payable August 20 to shareholders of record on August 6. Moving to Slide 12. Our second quarter financial results were in line with our expectations and underlying demand remains. Given our strong performance despite mixed markets year-to-date, we are raising our full year sales expectation to a range of $2.21 billion to $2.29 billion and a full year adjusted diluted EPS to a range of $4.50 to $4.70. And -- this range reflects some uncertainty in our global markets as we further assess macroeconomic and geopolitical outlook. We continue to maintain a strong balance sheet, and we'll continue to be disciplined as we deploy our capital resources to drive maximum return on investment. Before I turn the call back to Joe mark our calendars for Tuesday, March 23, 2027 when we will host our inaugural Investor Day at NASDAQ in Midtown Manhattan. We look forward to sharing our strategy refresh midterm guidance and vision for long-term value creation. We hope you'll join us. Now I'll turn the call back to Joe for some additional comments.

Thanks, Jennifer. As we shared last quarter, this year, we're spotlighting each of our segments to give investors a clear view of our focus, differentiation and long-term opportunities. These spotlights will also serve as a foundation for the deeper strategic discussion we'll have at our Investor Day next March. This quarter, we're highlighting our Water segment, a $1.3 billion business that has been central to Franklin's identity for decades. After building our reputation as a leading electric motor manufacturer, Brent Electric transformed the industry by inventing the gold standard submersible motor, a foundation that still anchors our leadership today. Today, we're a global leader in the global water market and products that supply, move, treat and dewater. With 15 factories worldwide and a leading channel, we designed from the application outward, building solutions around how customers want to be served. Our strategy aligns tightly with Franklin's broader focus on faster-growing markets, supported by powerful megatrends, a rising middle class, increased residential construction, accelerating urbanization and and the expanding need for critical minerals. Industrial growth and urban density also increased demand for pressure boosting systems that enable reliable and efficient water access. We also see a growing opportunity in making computing energy efficient, particularly through advanced liquid cooling solutions that support the rapid expansion of AI and data center infrastructure. Innovation remains central to our strategy. Our world-class water labs, deep engineering expertise and agile development approach allow us to design for what's next. By increasing velocity and scale, we're adding meaningful value to our base business and delivering solutions that anticipate customer needs. Our brands are trusted. Our customer service is tireless and our focus on execution continues to reinforce our leadership positions globally. While our end markets are diversified today, we expect a more balanced mix over time as we innovate and expand into growing markets and acquire businesses aligned with our strategy. In future calls, we'll provide a deeper look at our fast-growing water treatment business, which is becoming a model for how we execute our strategy. I will now turn the call over to Andrew for questions before closing thoughts.

[Operator Instructions] Our first question comes from the line of Matt Summerville with D.A. Davidson.

Joe, I was hoping you could maybe delve a little deeper into how you define your exposure today to things like critical minerals as well as data centers or data center infrastructure? How big are those exposures? What sort of can we kind of think about you attaching? And on the latter data centers, are there any sort of CDU wins that you'd like to call out? And then I have a follow-up.

Yes. Thank you. Just maybe touching on those 2. I think as we go back to the theme of what are the markets growing faster and how do we point and position how we serve new products, et cetera. I mean, you call out 2 markets that I think we've highlighted a few times, and we're excited about. I think 1 theme in both of those places is we like being the industrial kind of point of service and development of product that sits a level or 2 behind some of these mega trends. For critical minerals, obviously, energy infrastructure, the need for more electricity, data centers, et cetera, that critical mineral space for us, we think, is a multibillion dollar TAM that we're trying to make sure that we can both position ourselves to serve but also have the products to meet that need. I think 1 interesting thing about that space for us, we said that space for us was up high teens in the first quarter, up another 10% roughly in the second quarter is our service in that space really is focused on the operating of those mines. So not as exposed to the capital cycles or the commodity swings, but really the maintenance and it's a dewatering focus largely but we made a few acquisitions in the last few years. We like the space a lot. We've been able to move those products around the world because we see those needs in South America and Africa and the U.S. And we're really positive about building that channel out and getting those products to our customer. I think that market, our view is that's a high single-digit CAGR. So if you look at our base business, which sits more in the low to mid-single digits, as we move from resi, we move from that groundwater space. It's a nice mix up for us, and it's a very nice margin business. On the data center, we're not ready to call out big wins. But I think as we've talked about before, one thing we like about our portfolio is we serve different elements of that loop within a data center. So from the entry point, we've had some nice wins in terms of the municipal hookup we have some flushing applications that are critical for the service and the maintenance of that loop. And then also, as I mentioned in my prepared comments, serving CDU manufacturers of which, as you probably know, there's more and more of those getting into that space having an efficient and focused supply chain that can serve in Asia, North America, we're excited about in Europe. I think we're in a great position. Our emphasis to talk more about it with some increased specificity as we get into the back half of the year, but stay tuned there.

And then as a follow-up, can you maybe just kind of double back on what you acquired in the second quarter, how big the acquisitions are maybe a little bit of quantitative detail and then any color you can provide on orders, backlog, book-to-bill overall for Franklin Electric during the quarter.

Yes. The 3 deals we referenced in the first half, 2 of those actually closed just before we exited Q1. So there's a systems business really focused on the groundwater and the resi space in Europe, specifically in the U.K., a smaller business. But we like it a lot because we see government investment there. We see a space that we could not only bring in the product but also integrate solutions for for builders and drillers, which has been a great business. It's a business called Geo quit. So we like this a lot. We've known these guys for a while. We serve them upstream. The other 2 businesses, 1 in the water treatment space, is a company that really helps us to extend Wood Brothers helps us to extend our reach in a part of the U.S. that we historically didn't have as strong of a presence. It kind of sits right in the center of the U.S. that kind of revenue is in the mid-20s, low 30s. What we really like about it is we called out this idea of serving as an OEM and being across, being able to serve across the market, not only is the front-end directly to customers. but also we've become really a platform that smaller dealers around the U.S. really look to for for their infrastructure, for their technical solutions and obviously, the scale that we can buy and serve them. So we think that, that extends our reach. And again, that 1 is nicely ahead of our plan. The final 1 is -- it's a company called Benson. And Benson is a great distributor kind of in that same space, right, in the middle of the U.S., but they expose us to markets that historically they reached down to the Gulf Coast, they serve a nice ag space they touch utility or a municipal in the infrastructure space really well. And again, we've known them for a while. But bringing them into the family, it's a mid-20s type revenue business close that one as we enter Q2. And again, what it allows is to pull through other great Franklin products I think as we've talked about before, if you look at extending that reach further with OSI or the container solutions, but then also bring in some of these new products, 1 of the themes I think that's interesting for us is as we design to build new products having that channel that exposure to end customer really is a multiplier for us. So all 3 of those kind of clearly fit that being able to bring that wider solution set and serving those end markets and I think that balance is something that, obviously, Franklin has had a part of our repertoire portfolio for a while. And that playbook is 1 we're well accustomed to. So -- and your question about inventory, so just to go further, one thing that's nice for us is if you look at -- we have a very diversified channel. So other than our distribution segment, which obviously we've got a nice feed into upstream from Franklin product. We've got a nice balance and some leading distributors around the world. We feel good about the inventory position. Our best indication is, and you can see it in our numbers, it's fairly easy to see our sell-in and sellout are right aligned with each other. So if you look at that distribution business and you pull out the acquisition, you can kind of see that North American performance that Jennifer talked about, the 8%, 9% for our Water business. we're right on top of that for the distribution business in terms of what their organic growth looks like. So yes, we feel good about the position. As you know, I think with watching weather, watching where that product is going. It's been some different ag markets, hot out West, wet in the Midwest. We've really become good at how to position that inventory to make sure we're not sitting too heavy or not serving those customers that need them on a real-time basis. So it's a nice position to be in. And I think we're getting smarter in terms of those end-to-end metrics with SIOP and with inventory planning to make sure that we keep that balance. So we feel we're in a good spot. And the other proof point is if you look at our working capital and cash flow. In spite of some growth, some nice growth in volume, we continue to improve our turns and to make sure that we're keeping our inventory moving and those right skews those items just right on top of.

Our next question comes from the line of Ryan Connors with Northcoast Research.

On the good quarter and the all-time high for the stock as we speak. So great stuff. I wanted to dive into some of the tactical stuff on some of the revenue drivers, demand drivers in the quarter. I was 1 of the things that jumped out to me is the growth in Water Systems in agriculture. If I got it right, you said 12% increase. That's a pretty good number given that we've still got some pretty significant headwinds, more broadly speaking, in ag. So curious what exactly is driving that and allowing you to buck the trend in the ag space.

Yes. A couple of things. I think 1 is ags been a bit underinvested over the last year or so, just as you've seen some of the volatility and the pressure from a commodity standpoint. So there's probably a little pent-up demand that we're able to serve there. Weather definitely hasn't hurt us this year. We're well positioned as you see El Nino and some of the drought conditions come. You turn that pump on and it's not working. And given our footprint and our reach with we talked about OSI and having that real-time inventory availability, we get a benefit of any short-term movement in terms of what those trends are, what the needs are, et cetera. So I think planting season has been more normal. The last 2 years have been just not great. And you see the systems that are out there and farmers need it, we're ready and we're there for it. So ag and specifically in the U.S. and Western Europe has been a nice story for us. We see the season kind of holding in there here as we get through Q3. So we like that. I think part of our business, Ryan, we've talked about this before is we're a high replacement business. And in that ag space, it's the same thing about 75% plus replacement business. And when you blend that with good service, good inventory availability and the quick turn that we have for our customers, I think you see that reading out this year. So that's been a help to us.

Got it. Good to hear. And then on the mining side, good to see mitchamindewatering in Australia, nice and strong. I know that's a strong market for you. But any evidence that we're going to see that strength spread to some of the other key geographies for the mining industry beyond just Australia that that's going to become more of a global cycle for you?

Yes. And we're getting more intimate with that market. I think 1 of the reasons that Jennifer called out, just North America mining is we're watching those end markets. We're closely tied in with the mine operators, the distributors that serve and the OEMs that pull that product, and we see a nice funnel of opportunity in South America, in Africa, in Europe, specifically in the stands, just to call out some of the areas that we see them pulling this product in addition to Australia and the Pacific region. We'll continue to highlight that because we think that's an area where that investment is going to have a good return for us. At the end of the day, critical minerals are the needs and you can kind of do your own market double check here, but 6 to 7x the critical minerals needed in the next 10 years. there's just really no other way to do that. The position that we're into, we like because a lot of the investment you see is on expanding existing mines where it becomes easier, the technology improves to go in to go deeper to spread that mine out and that really plays well with the portfolio we've decided to focus on, which is in that dewatering or the maintenance of that mine space. In the U.S., it's really interesting. I mean, you go from copper, nickel mines in Minnesota to lithium mines out west in Nevada and Arizona. You're seeing uranium start to pick up and you can see the pull from some of the government comments on wanting to invest in that space. we serve it really through 2 important ways. One is an OEM business that our water systems team works with works with those operators to get spec-ed in on those products and then we create that pull-through channel. But the other one is, we did a small deal last year in the distribution side that put us up in the Dakotas and one of the reasons is because we have the products, we can see what the pull is. And really, that was as much of a nod to this faster growth movement to the mining space as anything. Small business, but but we like that, and we're seeing that in all parts of our business. A big thing for us too, Ryan, is just raising awareness is tying these brands together we like to use that Pioneer brand a lot because it's known. It well known in the dewatering space. So really bringing some of the different products and these acquisitions under an umbrella has really increased the awareness out there for here in the next 3 years.

Got it. And then one last housekeeping for me, if I can. I realize it's a onetime item, but can you give us any kind of flavor for what exactly the legal settlement was related to? I know you said it was in energy, but whatever you're able to kind of share there, just so we have some that was about?

Well, I can tell you, it's a bit long in the tooth of the deal or of a situation and preceded both me as CEO and probably the prior CEO. He's been sitting out there for quite a long time. It was it was a piece of litigation that was going through in Europe. It's taken a long time. We feel really good about our legal team and kind of bringing this to resolution. So we've known about it for a bit. We think we ended up in a good spot. And that one is behind us. And yes, I think that's project.

There'll be a little bit of information in our Q. But additionally, it just it's a long-standing legal item that's been there that we were able to to close out in the quarter. And it is core behind us.

Sorry, Jennifer, yes.

Our next question comes from the line of Bryan Blair with Oppenheimer.

On another really solid quarter for your team. And that in mind, I'm hoping you can step back as much as you'vd provided very useful color throughout the call. I just step back and walk through the key puts and takes as your team is looking at the back half and then specifically what's contemplated in the implied 2H guide because the earnings moderation second half versus first half is pretty notable. I realize that you see more challenging comps in the back half, but it just seems like you have a very broad-based momentum, you're very confident in the setup and that's perhaps not fully reflected in the guidance.

Well, I'll start and then let Jennifer add. But I think where you ended, which is our core market are strong. We feel good about our core markets. We feel good about the demand in those markets. I think if you look at the balance, so if those are the puts and that momentum that you see is we feel it as well, order trends, backlog, healthy here as we enter Q3. I think what we're still watching for is, obviously, last week another tariff announcement -- we're watching the Middle East. Middle East, if you go back a year ago, we talked about the Middle East with quite a bit of confidence in terms of what we were doing there to position ourselves and some things are well. The replacement business, we're still able to sell at that conflict definitely has put a damper on kind of that Middle East region to Jennifer's point, North Africa, Southeast Europe and the Middle East. I think the other thing is it's a slower year than we expected in South America. There's some political change. There's a pause on some of the support that they're giving to farmers and others. We see that in our business as well. It's hard for us to know exactly how those read out in the back half. So that does give us some balance and pause. But it's the unknowns that are a little harder to predict. We feel we have a modeled in. So the puts and the takes are in there. But those are some of the things that we're paying close attention to core business, the markets that we feel are growing. We've got the good products. I think that momentum is real. But it's an interesting time in the world today as we all read the headlines and digest.

I want to understand -- the things on the horizon that we're watching, our tariff expense as Joe mentioned, our Brazil market, which is a very strong ad market for us, and we had a great 2025 in ag in Brazil. Q1 was actually very strong for ag in Brazil. whereas we saw our competition being impacted by the election year in Brazil. So keeping a watchful eye and then as Joe mentioned, the Middle East complex continues to have some impact in the broader European regions. So we continue to see good growth despite that in Western and Southern Europe. It just gives us a little bit of pause of the unknown out on the horizon in the second half.

Understood. That's a fair point. And apologies if I missed this detail. What was organic growth for water treatment in Q2? And I guess even more important, maybe remind us what's allowing our team to win in the space. I know it's difficult to isolate over short periods. Definitely seem to be taking share in a relatively sluggish market backdrop.

Yes. I'll just chime in there. So organic volume growth in water treatment was was north of 5% in the quarter. So really, really good growth despite a pretty muted residential market. We play mostly in the residential space and water treatment. What's driving that, and we've talked about this on previous calls. We have some very pointed CSIs in our water treatment space for that team to drive new dealer revenue and that team exceeded those metrics in the prior 2 quarters in the first half by about 4%. So continuing to take share through either new dealer storefront, but more and more so new dealer revenue in that space. So really proud of the team for the work that they've done in that space.

Maybe just one add, I think what we like about our water treatment space is a really focused go-to-market strategy. I think to Jennifer's point, of creating that platform of we're a great assembler, and OEM and producer product but I think our service and specifically our marketing online and support for those dealers is something that's unique. So we're not all things to all people. We have a very specific route. When you get into the front end of 1 of our water treatment sites where you see how we support our dealers there's really something special there that the team has developed, and we do feel that share gain, and we expect that to continue.

[Operator Instructions] Our next question comes from the line of Mike Halloran with Baird.

You hear me guys?

Yes. Yes, we can hear you, Mike. One moment. There's some technical difficulties. Just 1 moment. Mike, you can hear me correct? I can hear you. We lost you for a moment there. So we'back on, sorry. Could you still hear us there, Andrew, is we're answering those questions? Yes, yes. But once I open mic, that's when you guys disappeared.

Great. I'm good to go. All right. Very good. Good to hear you guys. So just could you tie up a handful of things here for me -- if I think about the back half guide, is there a change in the trajectory that you're assuming in the back half of the year versus what you've seen in the front half of the year. Is there a change in how you guys are thinking about your share oriented performance I think somebody mentioned there's a little decel embedded there relative to normal seasonality. My guess is that's more conservatism. You don't know what you don't know at this point, but I just want to make sure there's not any core assumptions that have shifted relative to the momentum in the first half of the year?

I think -- thanks, Mike, and I think to -- where Jennifer ended that last question, and we talked about some of the puts and takes I think watching the South American market, we're definitely watching that, watching the Middle East conflict. We don't see any change in terms of the performance, the base performance of our business. There are some unknowns there that we've tried to model in. But if you look at the -- again, the core markets, you look at our order rates, we feel relatively confident I think there are some comps where we had some stronger performance in Q3 specifically and into Q4 in some of the water business. So there's some of that, but we generally see the business performing kind of as we set out at the beginning of the year, hence us raising that top line a bit. There's no real share change that we see. We expect to continue to do what we're doing and serve the markets. So there is a little bit of balance based on some of those unknowns that we talked about that you see modeled in there.

And then secondarily, just an open-ended question. Just where do you think you stand on some of the margin initiatives you'driving internally? And what are you prioritizing as we sit here today?

Yes, good question. So we called out some of the consolidations that and we've mentioned this as we exited last year into this year, being a highly acquisitive company here over the last 5 or 6 years, there is work for us to do to streamline operations, consolidate a few rooftops and make sure that from an operating and a campus environment, we had some smaller factories that we wanted to get the benefit and the leverage of some more strategic and efficient overhead. Those movements have been happening here the last couple of quarters. We're finishing some of those up in the back half of the year. So those costs are baked in both our performance and then our guide. But we expect some of those operational consolidations, the new factories to get more efficient we expect from an operational standpoint, us to pick up some steam there. The other thing is and Mike, we're -- it probably got lost in a fairly long read there. But we're building a focused supply chain organization with our new Chief Supply Chain Officer with a focus on we've settled in on work the last couple of years to make sure that we're not we're not sitting in China for some of our suppliers. We're repositioning those supply chains. That benefit and that read of of material productivity. I would tell you, material productivity in some of the factory transitions, those are really 2 of the focus areas. Maybe one other small tidbit as a part of our value acceleration office, we hired an AI director here this past year. And what's been interesting for us is really to take a look at the way that we're positioned, patent a little bit different than maybe some of our peers. We didn't migrate our customer service overseas. We didn't make some of these changes but we really see an opportunity to make that more efficient. We, like a lot of companies, have a lot of long tenured, very experienced, very talented people. So we have a lot of fun AI products that we think both give us productivity but also can help us to make sure that we continue that level of improvement as and I mentioned this as we're bringing in some great new talent here today. So our ability to ramp them up. We've really seen that accelerate. So those are a couple of areas we'excited about.

I'm showing no further questions. So with that, I'll hand the call back over to CEO, Joe Rosinski, for his closing remarks.

Thanks, Andrew. Thanks, everyone, for joining us today. As we look ahead, we feel very good about our performance year-to-date and the momentum we're carrying into the second half. Raising our guidance reflects the confidence we have in our growth strategy, the strength of our execution and the resilience of our teams across the globe. Our focus on faster growing markets, innovation and channel expansion continues to fuel our growth engine, and our productivity initiatives are progressing well, along with the new and strong leadership now in place across our supply chain. While global challenges remain, we're navigating them with discipline and clarity. We believe our strategy positioned to add customers expand in new markets. While global challenges remain, we're navigating them with discipline and clarity. We believe our strategy positioned to add customers, expand the new markets and drive meaningful productivity gains throughout the year, we'll continue to pay dividends. We really like the businesses that we're in. We like the direction that we're heading. We appreciate the continued support of our employees, partners and shareholders.

Thanks, everyone, for joining us today, and have a great week. Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.