Franklin Electric Q4 2024 Earnings Call Transcript

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February 18, 2025
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Operator

Hello, and welcome to the Franklin Electric Reports Fourth Quarter and Full Year twenty twenty four Results Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

It is now my pleasure to introduce Chief Financial Officer, Jeff Taylor.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Thank you, Andrew, and welcome everyone to Franklin Electric's fourth quarter and full year twenty twenty four earnings conference call. With me today is Joe Rozinski, our Chief Executive Officer. On today's call, Joe will review our fourth quarter business highlights, then I will provide additional details on our financial performance, and Joe will make some additional comments related to our key growth and value drivers along with our outlook. 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.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

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. 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.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

With that, I will now turn the call over to Jeff.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Thanks, Jeff. Good morning, everyone, and thank you for joining today's call. I'm pleased to share that the Franklin team delivered a solid close to a challenging year. We worked through some restructuring, focused our efforts on some faster growing markets and saw the breadth of our global portfolio help us grow our international business. This coupled with the team's strong execution proved resilient in a year marked by macroeconomic uncertainty.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Order volumes continue to improve throughout the back half of the year and we're excited about the opportunity that lies ahead in 2025. Before we jump into the quarter, I would like to briefly point out that we've transitioned the name of our Fueling Systems segment to Energy Systems. The product portfolio within Energy Systems remains unchanged along with our reporting structure. So this transition is in name only. Over time, we've launched several energy related products such as our critical asset monitoring and grid solutions offering, which now make up about 25% of the segment's revenues.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

We see the need growing for smart products in this segment both in our base business serving major marketers and wider power applications in utilities, data centers and grid strengthening. While our historical fueling products remain core to our strategy and have a positive outlook, we believe this change more closely aligns with the nature of the business today and our long term goals. Moving to Page four on the slide deck. I want to highlight some of the recognition our team has achieved this past year. We believe a company starts with its people and its promise.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

We take great pride in our culture and our commitment to our customers and the problems we help solve. I want to thank our team for all of their hard work this past year. Now turning to slide turning to our results on slide five. Consolidated fourth quarter sales totaled $486,000,000 up 3% over the prior year period. Growth in our Distribution and Energy Systems segments drove this performance, while the Water Systems business remained flat.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Operating margins for the quarter were 9% and this was down from the prior year. This reflects more challenging global FX headwind, continued pricing pressure, unfavorable geographic and product mix in the Water Systems segment and over $3,000,000 of restructuring charges, which we mentioned last quarter. This was partially offset by notable margin improvements in Energy Systems for strong U. S. Sales, disciplined cost management and streamlined operations supported results.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

We expect our productivity actions implemented in 2024 to benefit us as we enter 2025. Looking at full year 2024, we faced a challenging macroeconomic environment. Housing starts have yet to rebound and interest rates remain high. Having worked through elevated post COVID backlogs, we experienced a normalization of demand paired with net neutral impact from weather. I'm proud of our team's efforts in capturing growth throughout various parts of our business despite a softer demand environment.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Our global footprint is a key differentiator of our business and it can provide important insulation against the challenging environment. Growth in Europe, Latin America and APAC regions remained strong throughout the year, reinforcing the value of our diversified international presence. While foreign currency translations continues to present headwinds, our book to bill ratio is favorable and with healthy order trends we're looking forward to capitalizing on opportunities in 2025. Let's take a closer look at our segment's performance for the quarter and the full year on Slide six. The Water Systems segment delivered flat sales for the fourth quarter compared to the prior year.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Favorable volumes and contributions from acquisitions were offset by negative impacts from foreign exchange as underlying demand remains healthy. In The U. S. And Canada, groundwater sales were up year over year and bright spots within our small surface pumps and large dewatering pumps were encouraging. Outside The U.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

S, performance was robust across most regions, the challenges in Argentina driven by the devaluation of the Argentine peso impacted results. For the full year, the Water segment was solid despite a pullback in our U. S. Fleet business for large dewatering products as we lapped a comparable year of strong sales from pent up demand and higher backlog stemming from supply chain constraints. Momentum improved towards the end of the year and we expect more normal growth as we progress through 2025.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

I would also like to call out a strategic acquisition that we completed this month. A water systems business in Australia specializing in submersible pumps for the mining and industrial sector that complements our existing portfolio, aligns well with our growth framework and underscores our commitment to identifying and executing on opportunities that that strengthen our overall business. We've also recently signed a definitive agreement for a company in Latin America with projected close in early March. Barnes de Colombia will bring a very complementary set of products and a vertically integrated operating footprint to help us grow our strong position in Latin America and beyond. In the Energy Systems segment, sales for the fourth quarter were up mid single digits, driven by both favorable pricing and higher volumes.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Performance was particularly strong in The U. S. Where demand remained resilient. Looking at the full year, while the Energy segment delivered a strong fourth quarter, sales were down 8% as a result through the first three quarters and as they were up against a challenging year over year comparison due to elevated backlogs and a slower start to the year with new investments. Nonetheless, this segment achieved a record operating margin for 2024, reflecting our disciplined approach to cost management and operational efficiency.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

The distribution segment grew mid single digits in the fourth quarter with increase driven by favorable volumes and contributions from an acquisition earlier in 2024. Margin declined during the quarter as we work through cost reduction actions and the sequential lower volume in the fourth quarter from normal seasonality, which impacted the operating leverage. Distributions full year performance was driven by similar factors. In addition to commodity pricing pressure on results throughout the year. The trend in price decline lasted longer than the historical norm and we expect to see stabilization in the coming year.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

While we have little control over commodity pricing environment, we will focus on streamlining our operations, bringing new value added products to our customers and driving structural margin improvements to ensure we continue to deliver profitability irrespective of pricing trends. I'm now going to hand the call back to Jeff to review our financials in more detail.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Thanks, Joe. Our fully diluted earnings per share were $0.72 for the fourth quarter twenty twenty four versus $0.82 for the fourth quarter twenty twenty three. While down from the prior year, we were pleased to deliver results at the high end of our guidance range. Moving to Slide seven, fourth quarter twenty twenty four consolidated sales were $485,700,000 a year over year increase of 3%. The sales increase in the fourth quarter was primarily due to higher volumes across all three segments and the incremental sales impact from acquisitions completed in early twenty twenty four, primarily offset by the negative impact from foreign currency translation.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Franklin Electric's consolidated gross profit was $164,200,000 for the fourth quarter twenty twenty four, a 3% year over year increase. The gross profit as a percentage of net sales was 33.8% in the fourth quarter flat compared to the prior year. Selling, general and administrative expenses or SG and A were $117,800,000 in the fourth quarter compared to $108,800,000 in the fourth quarter of the prior year. The increase in SG and A expense was primarily due to higher employee compensation costs and the incremental expense impact from our twenty twenty four acquisitions. Restructuring expenses were $3,400,000 in the fourth quarter twenty twenty four, up from $400,000 in 2023.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Restructuring actions in 2024 related primarily to headcount reductions and facility closures to optimize our cost structure. Restructuring costs negatively impacted earnings per share by $0.06 during the fourth quarter. Consolidated operating income was $43,000,000 in the fourth quarter twenty twenty four, down $7,800,000 or 15% from $50,800,000 in the fourth quarter of twenty twenty three. The decrease in operating income was primarily due to higher SG and A and restructuring costs. The fourth quarter twenty twenty four operating income margin was 8.9% versus 10.7% of net sales in the fourth quarter of twenty twenty three.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Moving to segment results on Slide eight. Water system sales in The U. S. And Canada were down 2% compared to the fourth quarter of twenty twenty three. Sales of water treatment products increased 12%, sales of groundwater pumping equipment increased 6% and the sales of all other surface pumping equipment increased 4% compared to 2023.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Offsetting the increase sales of large dewatering equipment decreased 36% compared to 2023. Water system sales in markets outside The U. S. And Canada increased by 2% overall. Foreign currency translation decreased sales by 6%.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Outside The U. S. And Canada, sales in the fourth quarter of twenty twenty four increased in all major markets EMEA, Asia Pacific and Latin America, excluding the impact of foreign currency translation. Water systems operating income was $35,600,000 down $8,500,000 versus the fourth quarter of twenty twenty three. The decrease was primarily due to lower gross margin as a result of unfavorable geographic mix in sales and negative foreign exchange impacts, higher SG and A costs and restructuring expenses.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Operating income margin was 12.7%, a year over year decrease of three ten basis points. Distributions fourth quarter sales were $157,200,000 versus fourth quarter twenty twenty three sales of $148,000,000 an increase of 6%. The distribution segment sales increase was primarily due to higher volumes and the incremental sales impact from a recent acquisition in early twenty twenty four, partially offset by the negative impact of commodity pricing declines. The distribution segment's operating income was $500,000 for the fourth quarter, a year over year decrease of $500,000 Operating income margin was 0.3 of sales in the fourth quarter twenty twenty four versus 0.7% in the prior year. Recognizing our revolving portfolio and strategy, we renamed our Fueling Systems segment to Energy Systems to better reflect the markets and customers served by this business.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Energy Systems sales in the fourth quarter were $68,800,000 an increase of $3,100,000 or 5% compared to the fourth quarter twenty twenty three. Energy system sales in The U. S. And Canada increased 10% compared to the fourth quarter twenty twenty three. Outside The U.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

S. And Canada, Energy Systems sales decreased 5%. Energy Systems operating income was $24,700,000 compared to $19,400,000 in the fourth quarter twenty twenty three. The fourth quarter twenty twenty four operating income margin was 35.9% compared to 29.5% of net sales in the prior year. Operating income margin increased primarily due to improved manufacturing productivity and a favorable geographic mix of sales, price realization and cost management.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

The effective tax rate was 15.8% for the quarter compared to 17.6% in the prior year quarter. The change in the effective tax rate was driven by favorable discrete items and had an impact of EPS on EPS of approximately $0.02 Moving to the balance sheet and cash flows on Slide nine. The company ended the fourth quarter of twenty twenty four with a cash balance of $220,500,000 and $41,000,000 outstanding on its revolving credit agreement. We generated $261,400,000 in net cash flows from operations activities during 2024. Free cash flow conversion was strong at 122% for the year due to continued progress on reducing working capital.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

The company did not repurchase any shares of common stock in the open market during the fourth quarter twenty twenty four. At the end of the fourth quarter, the remaining share repurchase authorization is approximately 1,400,000.0 shares. And last month, the company announced a 6% increase in our quarterly cash dividend to $0.265 This dividend will mark the thirty third consecutive year that Franklin Electric has increased its dividend, demonstrating its commitment to returning cash to shareholders and confidence in the outlook of the business. Moving to Slide 10, the company expects its full year 2025 sales, including the impact of our recently announced acquisitions to be in the range of $2,090,000,000 to $2,150,000,000 and GAAP EPS or earnings per share to be in the range of $4.05 to $4.25 Additionally, we are initiating a process to terminate our primary U. S.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Pension plan, which if successful would impact our 2025 results. We have not assumed any impact from a potential pension termination in our 2025 guidance and we will provide updates during the year as we move through this process. Now, I'll turn the call back to Joe for some additional comments.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Thanks, Jeff. Before we open it up for Q and A, I wanted to share a few thoughts on our valuation framework and our road ahead starting on Slide 11. As I continue to spend time with our global teams, customers and investors, my optimism for Franklin Electric as a compelling investment opportunity has only grown. Our valuation framework centers around four key pillars: growth acceleration, resilient margins, strategic investments and attracting and retaining industry leading talent. These elements will serve to guide our strategy and decision making as we strive to deliver value for our stakeholders.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

We believe we can accelerate growth and drive share gain by leveraging our market leadership position and strong relationships amplified by our focus on faster growing verticals. With our global network, we have the capability to deliver both legacy products and new innovative solutions to the various geographies and end markets in which we operate and where the needs are greatest. Wherever we are, innovation is at the heart of our business and we strive to be our customers' partner of choice. Our resilient margins are made possible by the Franklin operating system, which we employ across the enterprise to increase productivity and efficiency. Whether it is our continued productivity objectives or portfolio simplification, data is always on the forefront.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

And I'm excited about our ability to optimize the business with data and digital tools. For our investments, we deploy capital across several priorities that drive growth, create value and strengthen our market position. Our M and A pipeline and the supporting activity is active and aligned with our strategy. I'm going to touch more on these in just a moment. Finally, putting all these pieces together is our incredibly talented team.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

The numerous awards we've achieved as an organization are a testament to the commitment to attracting and developing top talent ensuring that talent feels safe, heard and respected in our workplace. Turning to Slide 12, we can take a deeper dive on our capital allocation performance and priorities. Starting with accretive M and A, a key lever for delivering our value to delivering value to our shareholders. While the pace of acquisitions has been slower over the past year or so, we're excited about our robust pipeline. Our focus remains on capacity expansion and acquiring profitable and growing product based businesses that align with our strategic priorities and disciplined evaluation framework.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

While we have historically completed many bolt on acquisitions, our teams are ready and able to execute on a strategic deal if the right opportunity presents itself. Expectations and valuations in the market are normalizing. The market is healthy and it's active. We also see an advantageous position given the health of our balance sheet. We continue to assess opportunities on a deal by deal basis, but our general guideposts are clear.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Acquisitions must be accretive within two years and able to achieve a target ROIC within three years. On the organic side, we set a compound annual growth rate, which is above market growth achieved through investments in capacity, innovation and digital capabilities. Our capital expenditures have been consistent over the years supporting nearly 30 new product launches in 2024 alone. Reinvesting in our business is critical to our success, helping advance our leadership position in the market and deliver solutions for critical water and energy needs around the globe. Our next priority is managing leverage.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

We have a very strong track record of paying down debt and with a net leverage position currently well below our target range, Franklin has ample balance sheet flexibility to support our objectives. Finally, we have a commitment to return cash to shareholders through dividends and share repurchases. Franklin has increased its dividend in each of the last thirty three years, a long history that showcases the company's consistent execution, strong financial performance and balance sheet help. With any excess cash, we're always looking to opportunistically repurchase shares where it will be accretive. Moving to Slide 13, we wanted to give an example of our focus on investments and growth.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

We recently purchased we recently closed a deal with a product based company called PumpEng with a complimentary submersible dewatering product line that that increases our exposure to a number of markets we see is growing faster namely OpEx mining, construction, municipal and sewage bypass along with select industrial markets. Access to critical minerals, investments in infrastructure have seen good growth for us this past year and we see this continuing. We also see opportunities in some newer channels to markets and service business. With a strong balance sheet, we see product acquisitions as a great opportunity for 2025 and beyond. To conclude, we are incredibly excited about the long term growth potential of Franklin Electric.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

The portfolio has good exposure and attractive end markets supported by secular growth trends. We're committed to adding products and capacity to high growth areas and by leveraging our global footprint. We have the ability to introduce products to additional geographic markets and capture further growth. Our strong balance sheet and thoughtful capital allocation strategy supports these endeavors giving us the flexibility to capitalize on value add opportunities as they arise. And finally, we're not just looking for growth, but profitable growth.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

We are committed to driving operational efficiency with the Franklin operating system. As we've demonstrated this year, we're able to accelerate productivity when needed. We will continue to execute on our key initiatives in 2025 and I'm confident in our progress. Between our industry leading service and innovative products, faster growing verticals and strong operational execution, there's a lot to be excited about at Franklin and we are optimistic about our future. This concludes our prepared remarks and we will turn the call over to Andrew for questions.

Operator

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

Matt Summerville
Equity Analyst at D.A. Davidson

Thanks. Excuse me. A couple of questions. First, can you maybe give a little more color on the Groundwater business in terms of what you're seeing in both residential and ag markets, not only for the fourth quarter, but what your overall sort of expectation might be embedded in your guidance for that piece of the business in 2025?

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Yes. Thanks, Bec. Good morning. Our expectation for next year is probably a year that the market is going to be fairly similar to 2024. I think we commented on this, but our ability to grow we think is driven by products and some share gains and really working to make sure that we get our products and serve our customers as well or better than anyone.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

I think from an ag standpoint, that outlook clearly with prices and some of the other challenges there, it's a little bit less clear to us and a little bit smaller part of our business. That residential side is bigger. But just we always have to say to finish that up, the replacement market is really the biggest part of our Groundwater business and we see that as another as a good market this year. So flattish to not getting a ton of help from the market, but a year that we continue to build on as we did in 2024.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Yes. And just a little more background. So, Matt, for the fourth quarter and the full year, our Groundwater business was up low single digits between 1% to 2% overall. The stronger in resi and a little slower in ag. Ag was also low single digit growth year over year, whereas resi was closer to mid single digits overall for our water business and so in the groundwater space.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

And so as Joe pointed out, replacement demand is very stable and we see that stability in the results today. But we do see some challenges there on the ag side and we'll see we've got that business forecast slightly up for the full year.

Matt Summerville
Equity Analyst at D.A. Davidson

Got it. And I didn't hear anything in the prepared remarks, but just what's your thoughts on how Franklin would be positioned from an overall tariff standpoint? And then Jeff, if you could just provide a breakout in terms of where that restructuring charge maybe fell at the segment level, that would be helpful. Thank you.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Yes, I think good question, Matt. I think we like most industrial companies have a pretty dedicated team to understanding the changes in tariffs and then what our reaction needs to be. So that team is well structured. I think our understanding of tariffs if and when some of them hit. It's really a combination of a few things.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

One is, I think with a strong brand and the ability to control some pricing, if tariffs continue to escalate, we would have to accommodate that through some pricing. But also with a global footprint, supply chain actions, manufacturing efficiency and potential redundancies in terms of where we pull that product from are all opportunities that Franklin has. Our exposure to China is not that significant. There was some exposure that we had to take into account which is included in the AOP related to what else could happen in The U. S, Mexico, Canada.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

We're ready for it and prepared to take action. But I guess we'll wait and see what the next weeks and months bring.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Right. And then part two of your question, Matt, in regards to restructuring, that does get pushed down to our segments. And so in the water business, there was about $2,300,000 of restructuring in the quarter. Distribution had about $600,000 or $600,000 and energy had about $400,000 or $400,000 in the quarter. We did have cost improvement activities in our corporate area as well, but they technically didn't hit restructuring.

Matt Summerville
Equity Analyst at D.A. Davidson

Understood. I'll get back in queue. Thank you, guys.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Thank you, Matt.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Thanks, Matt.

Operator

And

Operator

our next question comes from the line of Brian Blair with Oppenheimer.

Bryan Blair
Managing Director & Senior Research Analyst at Oppenheimer & Co. Inc.

Thank you. Good morning, guys.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Good morning, Brian. Good morning.

Bryan Blair
Managing Director & Senior Research Analyst at Oppenheimer & Co. Inc.

I'd like to ask, I guess, a level setting question on renamed energy systems. You had said about 25% of mix being critical asset monitoring and grid solutions. Can you offer recent rates of growth or decline for the newer energy systems revenue relative to legacy fueling applications? And also remind us of the respective margin profiles besides the business?

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Yes. On the critical asset monitoring and some of the grid related products, the first three quarters of last year were slower than some of the growth that we saw in 2023 and 2022. That picked up momentum as we exited 2024 and we expect a good year in 2025. I think you see it if you look at some of the utility and other companies that there was definitely a softer spot there after a really hard pull in 2022 and 2023. But we see that business continuing to be robust and to grow.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

So in addition to that, some of the smarter solutions that we offer and I think I mentioned this, we bring to the legacy customers, the major marketers. So if you think of a service station and some of the smart products that we offer there, we have that opportunity to leverage some of the monitoring, sensing and other technology across that entire Energy Systems segment. And the margins for that business in the grid or the power monitoring maintenance, asset monitoring, the margins are very good. Jeff, I don't know if you wanted to follow-up on?

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

No, I just think if you look at the last couple of years, that business had its record year in 2022, really driven off of pent up backlogs from COVID coming into 2022 and then supply chain challenges and constraints in 2023. And so, 2024 was a year where we had really tough comps every quarter in the year. We're effectively past those tough comps in this business. And the backlogs have now normalized and we see that demand has stabilized and now moving forward

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

going to start to pick up hopefully. Brian, one other comment there, just critical asset monitoring. What we like about that from a go forward standpoint is it replaces some of the manual monitoring that has to happen across the grid and across the power infrastructure. So, as labor gets tighter, as the need for more automated solutions become more important, I think it's going to be a great area for us here going forward.

Bryan Blair
Managing Director & Senior Research Analyst at Oppenheimer & Co. Inc.

All makes sense. I appreciate the color there. It would be also great to hear more about Barnes and the strategic fit of the asset. I suppose beginning with the degree of portfolio overlap, we were looking through the website, it's pretty diversified product lineup that Barnes has. So I'm just curious where you have overlapping technologies versus what's truly incremental to Franklin offerings?

Bryan Blair
Managing Director & Senior Research Analyst at Oppenheimer & Co. Inc.

And then if you're willing, perhaps give us the key financial metrics on the deal price, valuation, anticipated T and L contribution?

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Yes. I'll comment on just strategic alignment and then Jeff maybe overall for the two deals that we talked about today can you just give a sense for that impact. For Barnes, where we have similar products in terms of application or what those products do, these products are there's really that commercial complete commercial line of surface pumps. They've got a number of wastewater products and other things, but they've been built for. They are well attuned to and ready to serve the Latin America market.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

I think we mentioned this comment global presence a few times today. Our ability to serve within region versus move product around the world, we do that of course at times. I mean we are a global company, but that ability to be efficient and to scale within region is important. Barnes gives us a great opportunity to do that. I think also as companies are trying to find how to get their castings to lower cost sources, the fact that Barnes is vertically integrated with the foundry that we can build upon that and be self reliant, I think is a great position for us here as we go forward.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Yes. And really excited to have these two acquisitions, one completed and closed. And just to remind everyone that the Barnstable on the acquisition is we signed a definitive agreement, but we haven't closed yet. So we accept that around March 1 or early March as Joe indicated in his prepared remarks. So, we do have the impact of these acquisitions built into our full year guidance on a because they'll be prorated for ten months, approximately ten months of the year.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

The revenue impact of the two deals combined is going to be approximately $50,000,000 of top line revenue for us and that's built in once again into our guidance range. We haven't disclosed the purchase price of either of the deals individually. What I would say is, this will be reported in there certainly in our first quarter filing. We expect that the combined purchase price of the two businesses will be in the $125,000,000 range. For us, we would expect to finance that effectively through cash on the balance sheet.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

So not adding any new debt. On an EPS accretion basis, it will be approximately $0.03 for the full year for the two businesses. There will be acquisition accounting and amortization that will get added to the balance sheet or to the income statement, and that will certainly impact us. But from a valuation perspective or a margin, we expect the EBITDA margin of each of these businesses to be in the high teens to 20 plus percent range for EBITDA margin. So that's a little background on the acquisitions.

Bryan Blair
Managing Director & Senior Research Analyst at Oppenheimer & Co. Inc.

Understood. Appreciate the detail.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

You're welcome. Thank you.

Operator

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

Michael Halloran
Associate Director of Research at Robert W. Baird & Co

Hey, good morning, gentlemen.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Good morning, Mike.

Michael Halloran
Associate Director of Research at Robert W. Baird & Co

A Miles follow-up to that. Can you just round out then the composition of how you're thinking about the growth for the year? What FX is? What the organic is? And then how are you thinking about sequentials embedded in guidance and if there's any improvement fundamentally in numbers or excuse me, underlying demand trends or relatively stable expectations from where we sit here today adjusting for seasonality as you work through the year?

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Yes. Lots of impact there, Mike. So we'll try to get as much of that as we can. Let me start with maybe walking through some of the guidance assumptions that we have. And obviously, we're going to start 2025 effectively the way we finished 2024.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

And I think it's human nature to effectively think things at some level will continue the way they've been going. So we see moving into Q1 similar to what we saw in Q4, although you understand the seasonality of our business and you know that the first quarter is typically a lowest quarter of the four quarters in the calendar year. And so we expect to see that normal seasonality in the full year profile of the business. Without giving quarterly guidance, what I would say is, the first half is typically a little wider than the second half. I think if you look historically, it's around 48 in the first half and 52% in the back half of the year is how that seasonality shapes that first half to second half.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

But as we sit here today, we see economic conditions are reasonably stable yet with certain with some level of uncertainty out there around certain areas and obviously interest rates, tariffs, inflation are three big factors. But interest rates as we sit here today appear to be flattish, probably more likely that interest rates would go up in the future than go down, at least based on our read of what we're hearing from the Fed and other economists. Our view is effectively flat, at least going into the year. How many market has been challenged? We expect that the housing market is going to stay somewhat depressed as we move into 2025.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Potential for the housing market to improve in the back half of the year, but certainly as we're moving into the first part of the year, that housing market has some pressure on it. Inflation has moderated at some level, excluding the impact of tariffs. And the impact of tariffs, as Joe has already commented on, is kind of yet to be determined what's going to hold and how long term or short term those tariffs are going to be. We feel like our team is well prepared to manage through whatever situation comes through, both in the short term and in the long term.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Jeff, can I ask?

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Yes, Mike, maybe

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

just a couple of thoughts. I think we were obviously you see some of our excitement and optimism for 2025. I think the first half of the year starts a little flatter to slightly up, picking up some momentum through the year. I think what's changed for us and what gives us some confidence, I mentioned order trends are positive, book to bill is positive. But I think in just the focus of the organization, we spent a lot of time in the last four, five months of last year really focusing on where should we make these investments and where should we get that key focus that will give us that return.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

So, we're not sitting back and letting the market dictate our progress here. And I think we're starting to see that readout. So, just a little added commentary to Jeff's comments there.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Yes. Couple of really quick comments here Mike just to close out. FX will be a headwind. We expect in 2025. Currently, our view is that's going to be $15,000,000 to $20,000,000 That's about 1% of sales.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

On an organic growth basis, top line is in the range of 1% to 4%, so low to mid single digits, 2.5 midpoint EPS, 3% to 7% organic and then the impact of the acquisitions. We do expect to capture some operating leverage as we get the improvements in productivity and managing costs throughout the year overall. And we didn't comment really on our fleet business. The fleet business in 2024 was down materially on a year over year basis. We see right now that business is effectively flat on a year over year basis in 2025.

Michael Halloran
Associate Director of Research at Robert W. Baird & Co

Great. Really appreciate it. That was a lot of color there. So on the M and A side and congrats on the two you just announced. If you think on a forward basis and I heard the prepared remarks, product centricity and fit and everything, how wide of an aperture are you guys thinking?

Michael Halloran
Associate Director of Research at Robert W. Baird & Co

Near adjacencies, are you willing to go a little farther afield? And maybe when you think about the focus internally, are there areas that are more interesting than others, all else equal?

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Yes. It's a good question. I think when we look at adjacencies, one of the benefits that we have here at Franklin is we have exposure to those adjacencies in some capacity, in some region. So I think where we see opportunities, for instance, in wastewater or municipal or other industrial, we can add that focus. We can really move our attention to those markets.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

So I think from an Aperture standpoint, we're not going into something that we have no exposure, no experience and no market awareness. But for instance, we talked about the new acquisition in Australia. We saw that business in OpEx mining and some of the industrial markets have tremendous growth last year, which is one of the reasons we had confidence to add to that portfolio, because we see not only serving markets within regions in places like Australia and South Africa and others where where mining is growing, but also bringing some of that product and introducing to our strong channel here in North America where we have ready access and have visibility. So, I would say, we've got a lot of good work to do in near adjacencies that we have some exposure to today in wastewater, industrial, other commercial applications. So, I think longer term there could be some things that push us a little further from that, but the near term is fairly well known to us and I think it's an effort of focusing capital allocation.

Michael Halloran
Associate Director of Research at Robert W. Baird & Co

Great. Thanks guys. Appreciate it.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Thanks Mike.

Operator

Thank you. And our next question comes from the line of Walter Liptak with Seaport Global.

Walter Liptak
Industry Analyst at Seaport Research Partners

Hey, thanks. Good morning guys. Just as a follow on to the M and A discussion, I just want to make sure that I'm understanding that it looks like you're looking at adjacencies and continuing with the smaller bolt on deals. Were you alluding during your opening remarks to anything transformational, size of the M and A deal? Can you talk about that?

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Yes. I think what we're alluding to is that we're making sure that we're ready for something that's more strategic or transformational. And I think those opportunities the last two or three years, there just wasn't a tremendous amount of opportunity and the market was a bit frothy and valuations were high. We see that changing bolt and we want to make sure that for something that's larger than the traditional bolt on strategy we've had that we're ready for. And we've got a lot of work to prepare for that to understand the market and then to make sure that the right deal for us we're ready to go.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

So we're open to it. And yes, you heard that correctly in our comments.

Walter Liptak
Industry Analyst at Seaport Research Partners

Okay, great. And what so what is sort of a max size or a debt ratio that you would think about going up to?

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

I think it's hard to say what a max size would be, but what I would tell you is this. I mean, if you look at the fact that we have an incredibly strong balance sheet as we exit last year. So really

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Yes, I mean, we have with our current balance sheet, we have about $1,000,000,000 of available capacity for transactions. And depending on the deal, you could go beyond that. But obviously, it depends on the specifics of any given deal. We've said in the past, I mean, we've had very low leverage on our balance sheet. It gives us a lot of flexibility and optionality just like the ability to evaluate more strategic acquisitions if the right opportunity presents itself.

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

But from a leverage perspective, I mean, our debt covenant limits us at 3.5 times. We will not be uncomfortable at 2.5 times and certainly three times we think is something that's very manageable for the business. At three times, we would want to, I think, have a pretty aggressive plan to pay down debt quickly and get the balance sheet back to below 2.5 times. But we're comfortable if the right opportunity presents itself to add some debt leverage to the balance sheet and we'll see what happens.

Walter Liptak
Industry Analyst at Seaport Research Partners

Okay, great. I appreciate that color. Thanks, Clardy. And then maybe as a follow on, just thinking about the productivity and the restructurings that you've done, the improvement in 2024. Do you have an idea of what the volume leverage is at this point, your operating leverage?

Walter Liptak
Industry Analyst at Seaport Research Partners

And from the restructuring and other things that you did, how much benefit do you get from productivity in 2025?

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Yes, I think it's obviously we've got a diverse business, it's global. There's a lot of factors that come into impacting our operating margin, but certainly from I think cost control, restructuring activities. We're going to see somewhere between twenty and forty to 50 basis points of improvement.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Well, one thing though I would just add to Jeff comment. We've got a slightly larger capital plan next year than historically we have. And our incentive, some of those productivity efforts is to invest that in capacity and invest for growth. So, it's not going to be an exact clean readout, but we do expect the efforts of last year to pay dividends. We also have some good ideas in terms of where to deploy that money and our focus.

Walter Liptak
Industry Analyst at Seaport Research Partners

Okay, great. Did you say what the CapEx is? How much do you expect to spend in 2025?

Jeffery Taylor
Jeffery Taylor
VP & CFO at Franklin Electric

Historically, it's been about 2% of sales, Walt. So, in a $2,000,000,000 company, it's been $40,000,000 40 million dollars plus $41,000,000 this past year. I think it will be higher than that this year and it will be closer to 2.5% of sales.

Walter Liptak
Industry Analyst at Seaport Research Partners

Okay, great. Okay, thank you.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Thank you.

Operator

Thank you. I would now like to hand the call back over to CEO, Joe Wrzesinski for any closing remarks.

Joe Ruzynski
Joe Ruzynski
CEO at Franklin Electric

Thank you and thanks everyone for joining our call today. We appreciate the questions and the conversation. We appreciate the interest in Franklin Electric. We're excited about 2025 and we look forward to talking to you all here in the next quarter. Have a great day.

Operator

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

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Key Takeaways

  • Q4 sales rose 3% to $486 million, but operating margin fell to 9% from 10.7% last year, driven by FX headwinds, pricing pressure and $3 million of restructuring charges.
  • The Fueling Systems segment was renamed Energy Systems to reflect its expanding portfolio in critical asset monitoring and grid solutions, now ~25% of segment revenue.
  • Water Systems sales were flat in Q4 as global volume gains were offset by currency headwinds; Franklin also closed an Australian pump acquisition and signed an agreement to buy Barnes de Colombia.
  • Energy Systems grew mid-single digits in Q4 with a record 35.9% operating margin, while Distribution posted mid-single digit growth but saw margin pressure from seasonality and commodity pricing.
  • For 2025, Franklin targets $2.09 billion–$2.15 billion in sales and $4.05–$4.25 in GAAP EPS, assuming 1–4% organic growth, a 1% FX drag, and ~$50 million revenue from recent acquisitions.
AI Generated. May Contain Errors.
Earnings Conference Call
Franklin Electric Q4 2024
00:00 / 00:00

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