Ryan Connors

Ryan Connors from Northcoast Research asked about a potential upside scenario for 2026, considering renewed residential weakness against possible Fed rate cuts. He also inquired about the significant 38% growth in large dewatering, the nature of the pressure boosting market (retrofit vs. new builds), and the anticipated foreign exchange impact for Q4.

Answer

CEO Joe Ruzynski stated that Franklin Electric's 2026 plan assumes a subdued residential market, but the company is prepared to capitalize on any upside due to strong customer intimacy and supply chain. He attributed large dewatering growth to the fleet business cycle and recent acquisitions like PumpEng, expecting continued strength. He clarified that the pressure boosting market has a stronger retrofit component than new builds. CFO Jennifer Wolfenbarger indicated that Q4 forex challenges, driven by hyperinflation in Turkey, Brazil, and Argentina, are not expected to improve significantly, though Argentina might see some improvement.

Ryan Connors explored potential upside scenarios for Franklin Electric's 2026 planning assumptions, particularly concerning residential market weakness versus potential Fed rate cuts. He also sought additional color on the significant 38% growth in large dewatering, the retrofit opportunity for the new pressure boosting product line, and the expected stabilization or shrinkage of Forex impacts through Q4.

Answer

CEO Joe Ruzynski stated that while the residential market is modeled as subdued, Franklin Electric is well-positioned to capitalize on any upside due to strong customer intimacy and supply chain. He attributed large dewatering growth to the fleet business cycle and recent acquisitions, expecting continued strength. He also noted that pressure boosting has a stronger retrofit opportunity than new builds. CFO Jennifer Wolfenbarger explained that Forex challenges, driven by hyperinflation in regions like Turkey, Brazil, and Argentina, are not expected to improve significantly in Q4.

Ryan Connors of Northcoast Research Partners LLC inquired about the drivers of margin pressure in the Water Systems segment, other potential growth catalysts for the residential business besides interest rates, and whether tariffs could boost the company's resource-related businesses.

Answer

CEO Joe Ruzynski and CFO Jennifer Wolfenbarger clarified that Water Systems margin pressure was primarily from product mix (higher large dewatering sales), not geography, and noted healthy backlogs. For the residential market, Ruzynski highlighted self-help drivers like the high replacement rate, market share gains, and new products. He also noted that while the company is prepared for growth in domestic mining, its current exposure is relatively small.

Ryan Connors from Northcoast Research inquired about the sustainability of the high Energy segment margins, the potential for tariff pull-forward in Water Systems' order book, and the M&A strategy and weather outlook for the Distribution segment.

Answer

CEO Joseph Ruzynski stated that Energy Systems margins should remain strong due to a shift to smarter solutions, though the recent growth rate may not continue. He and Interim CFO Russell Fleeger clarified that the Water Systems order book appears organic, with inventory builds being selective and also influenced by recent acquisitions and seasonal patterns. Ruzynski added that while Distribution M&A is still possible, the current focus is on operational efficiency, and the Q2 weather outlook appears more favorable than the prior year.

Ryan Connors of Northcoast Research sought clarification on the seemingly more optimistic order pattern commentary on the call versus the press release, and asked for a detailed breakdown of the SG&A increase, questioning its drivers and the timeline for normalization.

Answer

CEO Joseph Ruzynski explained that while year-over-year order rates are up against easier comps from late 2023, this isn't fully translating to revenue yet due to the large backlog worked down last year. The positive order trends are seen as good indicators for 2025. Executive Jeffery Taylor quantified the SG&A impacts, citing $3-3.5M for the CEO transition in 2024 and about $1.6M per quarter from recent acquisitions. He also mentioned inflation and strategic investments. Ruzynski added that these investments are largely complete, and with cost actions underway, SG&A should normalize in 2025.

Ryan Connors of Northcoast Research inquired about the business impact from recent "drama" in the distribution channel. He also asked about the long-term vision for the sales mix, noting that Pipe is approaching a milestone of becoming less than half of the company's total sales.

Answer

President & CEO D. Scott Barbour described the distribution channel issues as "largely in the past" and not having a significant impact on the business. Regarding the sales mix, he confirmed the strategy is to grow Allied Products and Infiltrator faster than Pipe to create a positive mix, but he does not foresee Pipe becoming a small fraction of the business, viewing a 40% contribution as a potential low watermark.

Ryan Connors probed the pricing environment, asking about the degree of variability in local markets, and also questioned if any planned competitor capacity additions could be disruptive.

Answer

CEO D. Barbour described the pricing environment as having less variability than earlier in the year, with no wild swings, even as some markets remain tougher than others. He stated that the company does not see any unanticipated capacity investments from competitors on the horizon and that ADS competes on a broad value proposition beyond just product and price.

Ryan Connors inquired about the competitive environment, asking if any shifts have made it more challenging to pass on price increases and if there are any geographic nuances to pricing power. He also asked for an update on the material conversion story and whether recent price hikes have impacted it.

Answer

Executive Michael Higgins stated that the competitive environment has not fundamentally changed, with the Northeast, parts of the Midwest, and Texas remaining the most competitive regions. He asserted that recent price increases have not negatively impacted the conversion story, as competitors like concrete pipe manufacturers have faced similar inflationary pressures. CEO Scott Barbour added that the strong growth in residential and infrastructure markets is largely a conversion story driven by prior investments.

Ryan Connors of Northcoast Research Partners LLC inquired about the quantifiable impact of the sales pull-forward, the dynamics of recent price increases related to tariffs, and the sustainable, intermediate-term gross margin level for the company.

Answer

CFO Shashank Patel quantified the sales pull-forward at approximately $20 million and noted a one-time $6 million price-cost favorability in the quarter. He explained that price increases of 5-15% will see full realization in the second half. Patel also stated that while Q2 gross margin hit 50%, a more normalized level going forward would be around 48%, accounting for the one-time benefits and volume leverage.

Ryan Connors questioned whether raw material constraints, such as for bismuth, were contributing to price increases alongside tariffs. He also asked about the company's pricing strategy and if it would opportunistically raise prices to take advantage of competitors who are more heavily impacted by tariffs.

Answer

CEO Robert Pagano clarified that while raw materials are a factor, the price increases are mainly driven by tariffs on certain products sourced from China. CFO Shashank Patel added that rare earth metal restrictions are not a significant issue. On pricing strategy, Pagano emphasized pricing to the value provided and remaining competitive, stating they would be cautious about drastic price changes as they believe the large tariffs are not sustainable long-term.

Ryan Connors asked about the drivers behind the strong European drains business, the strategic view of the European footprint given the planned restructuring in France, and the go-to-market strategy for the new Nexa platform.

Answer

CEO Robert Pagano explained the European drains business is strong due to its focus on the marine, cruise ship, and food processing markets, which are performing well. He characterized the French plant closure as part of an ongoing effort to optimize the global footprint based on market demand. For Nexa, he described a multi-faceted go-to-market approach using channel partners, strategic accounts, and direct sales to introduce the new ecosystem.

Ryan Connors of Northcoast Research Partners LLC asked for perspective on the new Pennsylvania consumer advocate's approach, potential challenges with the Small Business Advocate, and the fair market value (FMV) acquisition environment. He also requested guidance on modeling the company's effective tax rate.

Answer

Chairman & CEO Christopher Franklin expressed optimism for a constructive relationship with the new consumer advocate and noted open communication with the Small Business Advocate. Regarding FMV, Franklin stated the goal is to stay near the state's reasonable review ratio (RRR). EVP & CFO Daniel Schuller advised modeling a low single-digit tax benefit for full-year 2025, transitioning to a low single-digit expense in 2026.

Ryan Connors from Northcoast Research asked for clarification on the flat O&M expenses, particularly the impact of bad debt recovery, and the expected core O&M growth rate for the year. He also inquired if a rate base value had been disclosed for the Intelis meter rollout and sought commentary on the adverse ALJ recommendation for the Beaver Falls acquisition.

Answer

CFO Daniel Schuller explained that after normalizing for one-time items, the core O&M growth was approximately 2.8%, in line with the company's target. President of Gas Business Michael Huwar confirmed that a rate base value for the Intelis meter program has not been disclosed. Regarding Beaver Falls, CEO Christopher Franklin expressed optimism for a favorable decision at the commission level, expecting it to be on the June agenda, despite the ALJ's recommendation, and emphasized the strategic importance of the deal.

Ryan Connors of Northcoast Research Partners, LLC inquired about the Pennsylvania PUC's reform of Act 12 and its effect on potential legislative changes, feedback from public hearings on the pending water rate case, and guidance on the effective tax rate for the remainder of the year.

Answer

Chairman and CEO Christopher Franklin stated that while the PUC's C-motion on Act 12 was a positive step, it does not halt parallel legislative efforts, though he believes a full repeal is unlikely. He also noted that public feedback on the rate case has not presented any surprising concerns. CFO Daniel Schuller added that the company anticipates a slightly negative effective tax rate for the full year 2024.

Ryan Connors asked for more detail on pricing being a tailwind, the reasons behind a product mix shift to shorter machines, whether government farm payments could boost irrigation sales, and the expected margins on the new $20M MENA project.

Answer

SVP & CFO Brian Ketcham explained that proactive US pricing actions ahead of cost impacts created the tailwind, and the shift to shorter machines is a regional mix effect from the Pacific Northwest. President and CEO Randy Wood noted that government payments are unlikely to drive new machine sales in the mature Midwest market. Ketcham confirmed the new MENA project should have margins comparable to the current large project.

Ryan Connors from Northcoast Research Partners asked for an explanation of how Irrigation segment margins remained strong despite the significant contribution from typically lower-margin international projects. He also inquired about the potential secondary effects of retaliatory tariffs on the broader U.S. agricultural economy and farmer demand.

Answer

CFO Brian Ketcham attributed the margin resilience to a combination of stable margins in North America, stabilizing margins in Brazil, and significant volume leverage from the large international project which helped offset gross margin dilution. CEO Randy Wood addressed the agricultural economy, conceding that retaliatory tariffs could disrupt U.S. exports and harm farmer sentiment, but noted that historically the government has stepped in with support during similar trade disruptions.

Ryan Connors from Northcoast Research inquired about the impact of smaller irrigation systems on mix, the potential for follow-on service revenue from the large Middle East project, and the dynamics causing timing volatility in Infrastructure lease revenue.

Answer

CFO Brian Ketcham explained that the irrigation mix effect was marginal compared to the overall volume decrease and is typically regional. On lease revenue, he noted that quarter-to-quarter volatility can occur from timing gaps between short-term project leases, but the portfolio is stable on a full-year basis. CEO Randy Wood added that the Middle East project will generate long-term aftermarket parts revenue, as service is typically handled by dealers or the customers themselves.

Ryan Connors questioned the drivers of margin pressure, highlighting the significant year-over-year increase in SG&A expenses rather than just negative volume leverage. He also asked about the scale of other potential Middle East projects in the pipeline and sought guidance on the expected tax rate for fiscal 2025.

Answer

CFO Brian Ketcham attributed the SG&A increase to sales commissions on large projects, investments in R&D and technology, and additional resources deployed for the MENA region. Executive Randy Wood described the project funnel as a mix of several small and a couple of large projects, noting it's more likely a handful of smaller projects would add up to a large sum than another single $100M+ project. Brian Ketcham projected the fiscal 2025 tax rate would be approximately 25%.

Ryan Connors questioned the impact on personnel utilization from the USAID wind-down and asked how long it might take for the company's backlog to recover to its previous levels.

Answer

CEO Dan Batrack explained that while utilization for the USAID-focused staff did decrease, it was offset in the aggregate by a surge in high-utilization disaster response work, and he expects utilization to normalize. Regarding the backlog, he clarified that excluding the multiyear USAID funding, the underlying business's visibility is actually stable at about one year of revenue. He noted there isn't a 'hole' in the core business backlog, which is now at a similar or slightly better level than before.

Ryan Connors questioned the different margin profiles across Tetra Tech's federal business segments (Defense, Civilian, USAID) and the potential profitability impact from shifting budget priorities. He also asked about workforce flexibility and the company's view on the new Republican-controlled House.

Answer

CEO Dan Batrack detailed the margin hierarchy: USAID is lowest at 6-8%, civilian work is 10-15%, and high-tech defense is in the mid-teens. He noted a reduction in USAID work would be accretive to overall margins. He also stated that about 80-85% of the workforce is fungible, enhanced by virtual work capabilities. He views a unified government as potentially positive, as it reduces the risk of shutdowns, which has been his primary concern.