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Franklin Electric Co., Inc. (FELE) Q2 2021 Results - Earnings Call

2021-07-28 03:14

Franklin Electric Co., Inc. (NASDAQ:FELE) Q2 2021 Earnings Conference Call July 27, 2021 9:00 AM ET

Company Participants

Jeff Taylor - Chief Financial Officer

Gregg Sengstack - Chairperson & Chief Executive Officer

John Haines - Former Chief Financial Officer

Conference Call Participants

Walter Liptak - Seaport

Mike Halloran - Baird

Matt Summerville - D.A. Davidson

Chris McGinnis - Sidoti

Operator

Good morning, ladies and gentlemen, and welcome to the Franklin Electric Reports Second Quarter 2021 Sales and Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to hand the conference over to your host Jeff Taylor, Chief Financial Officer.

Jeff Taylor

Thank you, Whitney, and welcome everyone to Franklin Electric's second quarter 2021 earnings conference call. I'm excited to be joining you on my first call as Franklin Electric's Chief Financial Officer. With me today is Gregg Sengstack, our Chairperson and CEO; and John Haines, our former Chief Financial Officer.

On today's call, Gregg will review our second quarter business highlights, and I will review our second quarter financial results in more detail. When we're through we'll have some time for questions and answers.

Before we begin, let me remind you that as we conduct this call, we'll be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties many of which could cause actual results to differ materially from such forward-looking statements. A discussion of these factors may be found in the company's Annual Report on Form 10-K and in today's earnings release.

All forward-looking statements made during the call are based on information currently available, and as except as required by law, the company assumes no obligation to update any forward-looking statements.

With that, I will now turn the call over to our Chairperson and CEO, Gregg Sengstack.

Gregg Sengstack

Thank you, Jeff and thank you all for joining us. We are very pleased with our robust performance in the second quarter. From a financial perspective, we delivered record sales, operating income and EPS for any quarter in the history of Franklin Electric driven strong organic sales growth across all of our segments.

We continue to benefit from the sustained momentum that delivered record earnings for the last four quarters, thanks to a strong demand environment. At the end of the second quarter, we had record open-order balances. We continue to capitalize on inorganic opportunities as well.

In the second quarter, we completed the acquisitions of two water treatment companies Puronics and New Aqua, growing our water treatment position in the US and Canada. We now believe that this platform has reached critical mass north of $150 million in annualized revenues establishing a meaningful foothold in the growing North American water treatment market.

As the water treatment market continues to consolidate, our focus on our key factors will help us to stand out among the pack as we continue to build upon our position and add the runway to do so leveraging our expertise to manufacture and distribute complete water systems from the well to the faucet.

Despite supply chain and COVID-related headwinds facing much of the globe, we have reached new records and delivered value for our shareholders, customers and other valued stakeholders. We are confident that our current strategy will take us far as we continue to grow as a global provider of water and fuel systems through geographic expansion and product line extensions, while leveraging our global platform and competency in system design.

Our Water Systems business had record revenue for any quarter generating overall revenue growth of 39% and organic revenue growth of 23%. In the US, strong housing and agricultural demand combined with continued dry weather drove a 16% increase in groundwater pumping systems revenue in the quarter. Overall organic growth in US Water Systems was 17%.

Demand continues to be strong across the globe as well, thanks to a recovery in global commodity prices and robust demand in developing regions. Outside the US, organic water systems growth was 30% led by our businesses in Latin America, Europe, and the Middle East, all of which continue to see pandemic recovery demand.

Despite our record revenues, our Water Systems segment had an unprecedented amount of open orders at the end of the second quarter in total over $130 million. This compares to about $40 million at the end of the second quarter 2020 to about $25 million at this time in both 2019 and 2018.

Our US distribution business also delivered record performance for any quarter in Franklin's history, producing overall revenue growth of 57% and organic revenue growth of about 41% underscoring this segment's role as a catalyst for future growth for our company.

Headwater operating income reached $16 million in the second quarter. Quarter-after-quarter throughout the pandemic, Headwater's topline has grown and profitability improved. When faced with the same supply chain constraints facing much of the global economy, we leverage our expertise in this space to build a strong hold that will translate current success into further opportunity over the long term.

Our Fueling Systems business saw increased momentum in the second quarter as well producing overall revenue growth of 29% and organic revenue growth of 27%. This growth was led by strong performance in the US and Canada with revenue up 40% along with sustained strength in our EMEA and Latin American markets. We have a strong business in developing regions and have positioned ourselves to capitalize post-COVID recovery as it occurs in those regions.

At the end of the quarter open orders increased to about $45 million from less than $10 million at the end of the last three second quarters. Looking forward, Fueling Systems and Grid Solutions will continue to play a vital role in many regions across the globe over the coming years thanks to growing energy demand and the build-out of the electrical rig globally.

Throughout the quarter we generated strong free cash flow that will allow us to capitalize on many opportunities that will emerge while continuing to maintain our strong balance sheet enabling us to reinvest capital in our business.

To that end, we see organic and inorganic across every one of our segments and we look forward to continually growing our presence and updating you on future development.

I am extremely proud of our global team for this outstanding performance especially considering the significant headwinds and challenges we face. The global supply chain is still recovering from the post-COVID demand surge. Availability of raw materials and other components is a critical issue for us and it appears that it will remain so through the balance of the year.

Additionally, we continue to see rapidly increasing input costs both for materials and components and also for freight which is skyrocketed in the current environment. Jeff will address these issues more in a moment, but our Water Systems business in particular was not able to fully offset the inflation we experienced with price in the quarter. This in part explains our Water Systems operating income margin decline.

In response, we have announced additional price increases to be effective in the second half of the year. For some of our business units this is a third increase in price so far in 2021.

Despite the robust demand environment, we are maintaining our current year earnings guidance of earnings per share before restructuring in a $2.85 to $3.05 range given the rapid increases in cost supply chain uncertainties.

Looking forward, we are excited about the strong foundation we have built by staying rooted in Franklin's five key factors for success; quality, availability, service, innovation, and cost. We continue to see customers return due to the elevated experience in superior products we deliver.

We are also excited to position ourselves for success over the long term providing innovative products for customers and bringing more sustainable practices to the industry. We believe that our ESG initiatives outlined in our recently updated sustainability report are integral to our future success. We look forward to continually involving our stakeholders in our sustainability journey and providing further updates on our progress over the long-term.

Now, before I turn the call over to Jeff, I want to go a little bit off script here, and just recognize John Haines. John, as it has been noted as retired from the company. John started with Franklin Electric in 2008 right before the financial crisis. He steered us through that as our CFO, through a number of acquisitions, the creation of our Headwater Distribution segment, the standup of a new water treatment business, and a number of other acquisitions as well and across our segments.

And most recently, John has navigated through the global pandemic. And so I just want to take a moment to say thank you to John. A number of you on this call have been with – following us and with John over the years. So I think I'm saying that thanks for you all as well. And so I just want to do that, before I turn the call over to Jeff. So thank you again, John.

John Haines

Thank you, Gregg.

Gregg Sengstack

Jeff?

Jeff Taylor

Again, thank you, Gregg. Our fully diluted earnings per share were a record for any quarter in the company's history at $0.83 for the second quarter of 2021 versus $0.52 for the second quarter of 2020. Second quarter EPS before the impact of restructuring expenses was also $0.83 compared to the 2020 second quarter EPS before restructuring of $0.54.

Restructuring expenses in the second quarter of 2021 were $0.2 million and were related to various manufacturing realignment activities in the Water segment, and had no impact on earnings per share. Restructuring expenses in the second quarter of 2020 were $0.9 million were primarily related to various manufacturing realignment activities in the Water segment and resulted in a $0.02 impact on earnings per share in the second quarter of 2020.

Second quarter 2021 sales were $437.3 million compared to the 2020 second quarter sales of $308.3 million. The sales increase from acquisition-related sales was $38.9 million. Sales revenue increased by $6.1 million, or about 2% in the second quarter of 2021 due to foreign currency translation.

Water Systems in the US and Canada were up about 42% compared to the second quarter of 2020, due to acquisition-related sales, volume and price. In the second quarter of 2021, sales from businesses acquired since the second quarter of 2020 were $23.8 million. Water Systems organic sales in the US and Canada were up 17% in the second quarter.

Sales of groundwater pumping equipment increased by about 16%. Sales of dewatering equipment were up about 90% and sales of surface pumping equipment increased by about 13% versus the second quarter of 2020, all due to strong end market demand and in part resulting from lower sales last year due to the pandemic.

Water Systems sales in markets outside the US and Canada increased by 34% overall. Foreign currency translation increased sales by 4%. Outside the US and Canada, Water Systems organic sales increased by 30% driven primarily by higher sales in Latin America, Europe and the Middle East and Africa markets.

Water Systems operating income was $34.6 million in the second quarter of 2021 compared to $28.7 million in the second quarter 2020. Operating income margin for the second quarter of 2021 was 14% compared to the prior year quarter operating income margin of 16.1%.

Operating income margin decreased in Water Systems primarily due to two items: First about $3 million of higher shipping and freight costs which have not been fully offset by price increases mostly in North America. Contributing to these freight costs are pile product delivery issues across all points of the supply chain that also resulted in more frequent shipment expediting, along with many suppliers instituting surcharges to cover their increased costs for drivers insurance and fuel.

As a result the Water Systems unit in the U.S. and Canada has initiated its third price increase of 2021 effective August 1. And second general and administrative costs of about $2 million for transaction, legal and other charges incurred in the second quarter. These two items combined resulted in a lower Water Systems operating income margin of about 200 basis points in the second quarter. Distribution sales were a record at $144.8 million in the second quarter of 2021 versus second quarter of 2020 sales of $92.1 million.

Sales from businesses acquired since the second quarter of 2020 were $15.1 million. The distribution segment organic sales increased 41% compared to the second quarter of 2020 and revenue growth was driven by broad-based demand in all regions and product categories. The distribution segment operating income was a record at $16.0 million compared to the second quarter of 2020 operating income of $6.8 million. Operating income margin increased to 11% in distribution primarily due to revenue growth and operating leverage.

Fueling Systems sales were $72.2 million in the second quarter of 2021 and increased 29% versus the second quarter of 2020. Fueling Systems grew sales organically by 27% in the second quarter. Fueling Systems sales in the U.S. and Canada increased by about 40% compared to the second quarter of 2020. The increase was due to higher demand for piping, pumping and fuel management systems. Outside the U.S. and Canada Fueling Systems revenue increased by about 1%, driven primarily by higher sales in Latin America, Europe, Middle East and Africa offset by lower sales in China.

Fueling Systems operating income in the second quarter was $18.5 million compared to $13.5 million in the second quarter 2020, driven by higher sales. The company's consolidated gross profit was $152.2 million for the second quarter of 2021 an increase from the second quarter of 2020 gross profit of $107.1 million. The gross profit as a percentage of net sales was 34.8% and second quarter 2021 versus 34.7% in the second quarter of 2020 and was essentially flat in most part due to price increases being offset by shipping and freight cost increases.

Selling, general and administrative or SG&A expenses were $100.5 million in the second quarter of 2021 compared to $72.3 million in the second quarter. SG&A expenses from acquired businesses were about $10 million. Excluding acquisitions SG&A expense is higher by $18.3 million about $11 million of which is variable compensation expense and commissions on higher sales. In addition, transaction, legal and other administrative costs were about $2 million. SG&A costs as a percent of net sales were slightly below the second quarter of 2020.

The effective tax rate for the second quarter of 2021 was about 19% compared to 21% in the second quarter last year. The decrease in the effective tax rate was primarily a result of net favorable discrete events. The tax rate as a percentage of pre-tax fundings for the balance of 2021 is projected to be about 20% before discrete adjustments.

As Gregg mentioned, the company is reaffirming its guidance for the full year earnings per share before restructuring expenses of $2.85 to $3.05. The company ended the second quarter of 2021 with a cash balance of about $82 million and generated $35.5 million of net cash flow from operations during the first half of 2021 versus $47.0 million in the same period of 2020. The decrease was primarily due to higher working capital requirements in support of higher revenues.

Yesterday the company announced a quarterly cash dividend of $0.175 per share that will be paid on August 19 to shareholders of record on August 5. The company purchased about 79,000 shares of its common stock in the open market for about $6.2 million during the second quarter of 2021. At the end of the second quarter, the total remaining authorized shares that may be repurchased is about 840,000.

This concludes our prepared remarks. We'd now like to turn the call over to Whitney to lead the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of Walter Liptak with Seaport.

Walter Liptak

Hi. Thanks. Good morning everyone.

Gregg Sengstack

Good morning, Walter.

Jeff Taylor

Good morning, Walter.

Walter Liptak

Hey. Yes. Thanks. John it's been a pleasure working with you and all the best of luck. And hello to Jeff as well. My question is about the distribution profit margins look very good. And so I wondered if that was just the $16 million of profit if that was covering of fixed cost? And if that is sustainable? Is this revenue level, or is there some sort -- it sounds like demand was strong in all kind of categories. But was there any kind of mix going on or the pricing that may have helped that profitability? And maybe some thoughts about what the back half profitability could look like. Are we at a new level in the double-digits for distribution?

Gregg Sengstack

Yes. Well, let me take a stab at that and then Jeff weigh in. First, the business performed, we get great operating leverage, this business is seasonal as we've discussed in the past. So Q2 and Q3 are the stronger quarters. But then the margin averages out as you know Q4 to Q1 are just softer quarters, and while we're now in the black in those quarters and for Q4 2020 and Q1 of 2021, they are lower margins if we kind of factor that in.

But certainly during the season, we've had a solid execution. It's a good pricing environment. It's -- distribution debt pay will act a little bit quicker than we can in manufacturing in that respect. But overall, there's great execution and getting good operating leverage off the fixed cost base.

Walter Liptak

Okay. Great. Yes that's right the seasonality. I wanted to ask too about – about some of the dewatering and the growth that you saw there, how much of that growth was from price and how much of it was from volumes when we talk about the organic growth?

Gregg Sengstack

On dewatering? I don't have the specific price volume on the dewatering product line. But overall, we've had pricing actions in the low single-digits earlier this year. And then really most of it would be a volume pick up.

Jeff Taylor

Yes, it's more volume Walt, for sure than price. You recall last year in the second quarter that business was impacted meaningfully by COVID. That product line was impacted. I think the other thing I would note is that we are seeing some international lift in that product in Southern Hemisphere markets like Australia, Brazil, Argentina, South Africa. So the bulk of it is volume but there's certainly some price in there as well.

Walter Liptak

Okay. And is that the same for the groundwater too that most of that growth is volume related?

Jeff Taylor

Yes. The volume is – we look at this more by – we look at it more qualified geography than we do by individual product line. But the volume change in water call it four times the price change. About that.

Walter Liptak

Okay. Okay. Great.

Jeff Taylor

Yes, and that generally will hold through across product lines.

Walter Liptak

Okay. And then just a quick one and I'll let someone else have a shot at questions. But the legal expense of $2 million, what was that related to? And is that a recurring charge, or is that a one-time expense?

Jeff Taylor

Yes. It was a combination of things. It is – we view it as one-time. Walt, it was transaction related as well. So as you know, we did these water treatment transactions in the second quarter. There were at a cost for that banker fees. There were also legal fees for that. And then there were just other legal matters that we are dealing with in the normal course around the globe that kind of had a surge in the second quarter as well. So in total, that was about $2 million of SG&A and we would generally characterize that as one-time. Yes.

Walter Liptak

Okay. Great. Okay. Thanks, guys.

Operator

Your next question is from the line of Mike Halloran with Baird.

Mike Halloran

Hey, good morning, everyone.

Jeff Taylor

Hey, Mike.

Gregg Sengstack

Good morning.

Mike Halloran

So just some thoughts on price cost inflation. How are you guys thinking about the pricing environment, efficacy of what you're pushing through, when do you think parity can come back into the system? Obviously, inflation pressures have been rampant. And at some point they'll likely bounce out. Just some thoughts on, when you think they bounce out. Is it this year? Is it next year? Any kind of commentary around those things would be great.

Jeff Taylor

Well, I would say, Mike, that we talked about price versus inflation. And generally, I would characterize what is happening in distribution and dealing as we're in it – we're advanced. We're seeing greater price than we are inflation. It's really in Water Systems and more specifically, it's more in the US, Canada and then even more specifically, it's the freight costs that I think we're a bit surprising to us in the second quarter.

When we look at our freight volume adjusted year-over-year in the first quarter and water seems actually positive, where we were actually experiencing lower freight costs. And then sequentially that flipped in a meaningful way to negative in the second quarter. It did in Fueling Systems as well.

So, as Jeff mentioned in his comments, the idea that we're having trouble with the supply chain with our suppliers of getting inbound material and components, and then also, because of that we were falling behind in some cases on fulfilling and meeting the requirements of our customers. So, we're expediting shipping activity on the outbound side, all of that is contributing to a very significant unfavorable freight variance from the prior year.

So, to your question, I think that there's some signs of that starting to call down. I think our supply chain guys have talked about maybe the ports being a little bit better shape, Long Beach, Los Angeles. But then, there's more constraints in other parts of the country, for example, in shipping in the Midwest and through Chicago, I'm sure you've seen and read.

So, that part of it is a little bit harder for us to gauge. As we also mentioned, we have more price coming. We announced a third price increase in our US water business, effective August 1, which is we think going to go along the way in the back half and the second half of the year of helping us offset some of this inflation. So, that's more about Mike what's really kind of driving the biggest concern, and quite frankly, driving where the water OI margins went in the quarter.

Mike Halloran

And you mentioned the Headwater margins very impressive, maybe just some thoughts on sustainability there. Obviously you're going to have seasonal upticks based on the revenue levels, but at a high level how are you thinking about the sustainability?

A –Unidentified Company Representative

Yes. The first half margins in Headwater are about 7.5%. Last year's second half margins in Headwater Mike, were about 3.9%, so just at the very low end of our expected range. So we expect that to be meaningfully better in the second half this year. I think something in the high end of our expected range, 4% to 6% for the second half.

So -- yes, we're -- volume adjusted, we're going to lose some leverage as we go into lower volume periods here. But the business has done a nice job on price. They've done a really nice job as Gregg said on managing their costs. So, we definitely see margin expansion second half to second half. But I don't think that getting back to that first half margin of 7.5%. I think we'll be just short of that.

Mike Halloran

And then, on the water side, obviously really strong momentum. It seems like basically pretty broad-based there. Anything that you're worried about inflation impacting demand or some, sort of, air pocket developing. It seems like the momentum is pretty consistent here and you feel pretty good about the trajectory on a forward basis. But just curious if there's anything else that worries you, yeah.

Gregg Sengstack

Yeah. Again we're a short-cycle business. So we learned about it later than most people. But the -- to your point, I mean we've got almost 45 days of incremental open orders than what we normally see in the past. So we've got plenty to work our way through. As the supply chain go down, we're going to be continuing to catch up through the back half of the year, certainly well documented in North America US market that strong housing, strong commodity prices. It's been dry, very dry in the West and actually average in the East or a little bit Mississippi but certainly dry in the West.

We're seeing good demand in Latin America. We're seeing good demand in Europe, Middle East, Africa. We had a little bit of timing issue on some age of shipments. So we still see the Asian market as strong. So we're really not seeing anything out there in our businesses that -- in the way of an air pocket and with commodities strong and with metal prices coming up as much as it impacted our margins, it's also a good demand for our large dewatering pumps as well that's a smaller piece of our overall business. So we're really seeing the demand across all product lines and all geographies.

Mike Halloran

Great. I appreciate that. And one last thing, John I just want to say best of luck. It's been a pleasure working with you for well over a decade now. And I hope everything goes great for you in the future. I really appreciate all the help over the years. Best of luck.

John Haines

Thanks Mike.

Operator

Okay. Your next question is from the line of Matt Summerville with D.A. Davidson.

Matt Summerville

Thanks. A couple of questions. And yes, John congratulations. It's been great working with you over the last 13 years or so. With respect to your comment Gregg around this open order number, I don't remember you guys historically sharing that. So can you put a little more context around that? You mentioned 45 days of for the lack of a better word I'm going to use the word backlog. So 45 days of backlog if you will. What is a more normal number if you go back and look at that for Franklin over a much longer term period?

Gregg Sengstack

Yeah, Matt to your point, it isn't something that we normally talk about because we're normally a short-cycle business; we're selling and filling orders on a pretty rapid basis. So typically at the end of the second quarter if you look back 2018, 2019 for the company for our manufacturing business it'd be about $35 million. And at the end of the second quarter this year, I think it was closer to like $175 million.

So that incremental $130 million, $140 million if you look at our manufacturing business as being kind of $1 billion run rate or $1.2 billion run rate, $100 million a month it, kind of, gets you to that number. So it was significant enough that we wanted to call it out that we have unfilled orders backlog as you would say that is much higher than what we've seen in the past and what we're working on, on catching up.

Matt Summerville

And then to that point, do you get the sense that that type of number in the incoming order rates you're seeing is that truly indicative of demand, or do you get the sense that your end customers are concerned about their ability to get product given what's going on from a supply chain standpoint and instead of ordering the three they would typically order -- maybe they're ordering four or five. Do you get what I'm saying? I'm trying to get a sense as to whether you feel like this is truly indicative about the door demand or whether you feel like the channel may be trying to stock up for their own fears of supply?

Gregg Sengstack

I'm sure that there's some of the latter. But one of the things we have is -- again, it's an indicator for one of our product lines in the US market is our distribution business itself. The sell-through of Franklin and Headwater is greater than the purchase rate that Headwater is buying. So they're clearly drawing down inventory as are others. So at one level, you're going to see just customers across the globe, trying to refill back up to what they consider to be normal inventory levels on a go-forward basis. It was a pretty robust demand requirement -- demand environment. Now what -- to your point, what may also be going to add is some anxiety and so over ordering or ordering for multiple suppliers, they might see some cancellations. But you're bourgie, I mean as we look at our distribution business in the United States, which gives us some outlook to me a broader view or lens on the world, there's just not a lot of inventory in the system and demand remains strong.

And you can see it on the fueling side of the business is that when we look at our fueling numbers last year in the United States for example, we were down 10% of revenue. Now we had always looked at for example that the -- we thought the EMV initiative in the US market was one that was maybe neutral to our fueling business. I've learned now that the fueling distribution companies, the ones we sell to in fueling actually had a record revenue year last year on the back of the EMV. Well, that's now coming to an end in the first quarter. So we're not seeing I think because of that a strong surge in fueling. So the fueling business is now up, it was up 43% in the quarter and we're seeing strong end market demand in the US, as marketers are spending their capital dollars things other than EMV. So that's good for us as well. So we're just seeing really strong demand and we're not getting a sense that there's a lot of inventory in the channel. So it is a rebuilding inventory overtime. And yes, I'm sure there's a risk out there of people trying to overorder so that they get their fair share.

Matt Summerville

And then, I want to follow-up on price. If we can maybe just do a recap of the pricing you've already put in place and the magnitude -- the magnitude is what I'm talking about. The pricing you already had in place and what this next wave set for August 1 contemplates in terms of magnitude?

Gregg Sengstack

Yeah. So, all of our water businesses Matt all of our businesses have made at least one many have made two and now three price increases. In the case of what we're talking about in the United States where I think the spread is the highest and actually went negative in the second quarter. There was a 3% price increase, a 5% price increase and then this one coming in August is a 5% price increase again. So that's the makeup of the three. When you look at the businesses around the world, they're kind of different everywhere, but that's basically the order of magnitude that we're kind of getting to ask price -- list price increases of somewhere in that the 7% to 12% range, 8% to 12% range.

Matt Summerville

Got it. Thank you. I’ll lever it there and get back in queue.

Operator

Thank you. Your next question is from the line of Chris McGinnis with Sidoti.

Chris McGinnis

Yes. Good morning. Thanks for taking my questions. And John, congratulations on the retirement and thanks for the help as well. Can you just maybe just talk a little bit about the Puronics and Aqua acquisitions and how they're being integrated? And can you -- are they going to the Headwater as well already, or is that the plan going forward? Thanks.

Gregg Sengstack

Yes. Sure, Chris. So we're integrating the four companies that we’ve acquired in water treatment over the last couple of years, three in the last eight months. And we'll have, of course, on a common platform. But the Headwater is a customer, but one of the reasons for the Aqua Systems acquisition is Aqua Systems is deep in-water quality dealers. So that's a real -- it's effectively a new channel for us, both Aqua Systems and Puronics, pretty deep in that area.

Whereas, the first sales and to less degree water, maybe more to the plumbing wholesale or the groundwater dealers. So really -- so Headwater will be a natural outlet for those stores that are those Headwater locations that Aqua and Puronics at all can earn the business. We will have a branded product, Franklin Electric branded and Franklin Water Treated branded products will go through that groundwater channel.

But the other channels are very important as well, particularly again, the water quality dealer channel is a very large segment and is one that Aqua has done well in and Puronics has done well in the U.S. in water, as well in Canada. So that's the large area of focus for the company.

Chris McGinnis

And can you just maybe just talk a little bit about the M&A opportunities that are out there? And are you holding off at this point, just given the recent acquisitions or still a lot of opportunity? Thanks.

Gregg Sengstack

Yes. We've always looked at acquisitions -- John, would use the word opportunistically. We look at acquisitions across our segments and standing up new business. So, we're certainly engaged and we have identified a number of properties that, if they were available, we would like to pursue.

I'm also -- those of you who know me, we're pretty methodical about what we do and build the capacity. If you think about, with Headwater, when we did the initial stand-up of the Headwater business back in 2017, Davis and his team had a lot on their hands getting respectively four businesses stood up on one platform, one of those businesses another -- use organic pump line was their primary pump line in Franklin and we had to -- we were cut off. We had to deal with that. So there was a lot going on and our profitability suffered in that initial couple of years.

But now, Headwater, for example, completed the Gicon acquisition at the end of last year and is integrating it very quickly. And the sales of Gicon are -- actually have increased whereas -- when we did Western Hydro which was -- had a competitor's product line in there, we actually saw a sales decline at first year, we’re actually seeing sales increase.

So our ability and capacity to do deals and to bring them online, now that we have a common platform and ERP platform, both for our manufacturing and another one for our distribution serves as well.

And we see -- in fueling, we continue to look at opportunities in adjacencies. Our grid business we're looking -- which is a subset of fueling, we're looking at opportunities and of course in our water segment as well. So we are -- we have to get water treatment, these platforms up and integrated.

Don Kenney, who is the President of our water business, he came over from Fueling. He's done a lot of integration work. And with the leadership team of Aqua Systems leading the charge, I'm confident we're going to get these businesses integrated and we'll continue to look at other opportunities. So I really don't see us taking a formal pause, but we've got some things to adjust.

Chris McGinnis

Great. Thanks for taking my questions and good luck in Q3.

Gregg Sengstack

Great. Thanks, Chris.

Operator

I am showing the further questions at this time. I will now turn the call back to Gregg Sengstack.

Gregg Sengstack

Thank you very much for joining us for this call today, and we look forward to speaking to you after we have our third quarter results. Everyone have a good week.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a very wonderful day. You may all disconnect.

富蘭克林電子(FELE.US)2021年第二季度業績電話會
開始時間
2021-07-28 03:14
會議性質
業績會路演
會議形式
線上會議