FELE - NASDAQ

Good day, and welcome to the Franklin Electric Reports Third Quarter 2025 Sales and Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce CFO, Jennifer Wolfenbarger.

Thank you, Andrew, and welcome, everyone, to Franklin Electric's Third Quarter 2025 Earnings Conference Call. Joining me today is Joe Ruzynski, our Chief Executive Officer. On today's call, Joe will review our third 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. 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.franklin-electric.com. With that, I will now turn the call over to Joe. Joe?

Thank you, Jennifer, and good morning, everyone. Thank you for joining today's call. Before we get into the details, I want to start with a few key takeaways from the quarter. Franklin Electric delivered another quarter of strong performance, in line with our expectations. The quarter was marked by growth across our end markets, disciplined execution, solid integration of our acquisitions and continued investment in our long-term growth priorities. Despite a dynamic operating environment, our teams delivered solid organic sales with both volume and price, margin expansion and solid cash generation. These results demonstrate the strength of our strong channel partners, commitment to delivering the best service in the industry and the diversified global portfolio that our customers trust. Q3 has shown our ability to manage through varying macro conditions and drive profitable growth. Our teams were able to overcome some challenging weather conditions, regional headwinds, slow existing home sales and relatively few housing starts to ultimately deliver solid results. Our resilience is in part attributable to ongoing price and cost actions, which continue to prove effective. We also maintained strong cost discipline through the quarter, with SG&A improving as a percentage of sales despite several onetime acquisition-related costs. As we navigate the near term, we remain focused on our strategic priorities, advancing several key initiatives this quarter, pushing on the pace of innovation and completing several capacity expansion projects that position us well for the future. With a global footprint, strong balance sheet and operational excellence, we are building enduring advantages that distinguish our business and support long-term value creation. Moving to Slide 4, I want to take a moment to thank our Global Franklin team for their commitment to our customers and to each other. My first year has brought change and an agenda of growth and innovation and market conditions that make great results challenging. We have 2 new officers that started in the third quarter, and our team has done a great job of getting them up to speed and welcoming them to our Franklin family. Our culture is strong, and our team is getting stronger. My very humble and sincere thank you to our Global Franklin Electric team. Turning to our results on Slide 5, consolidated sales for the quarter were $582 million, up over 9% year-over-year with strong organic contribution. Importantly, pricing was positive as we continue to offset tariff impacts and manage impacts of inflation through disciplined pricing actions. Gross margins were up 20 basis points and operating margins grew by 80 basis points, reflecting strong execution, cost control and volume leverage. Looking at our business segments, Water Systems sales increased 11% year-over-year, driven by price, volume and acquisitions. Our ability to deliver both price and volume growth this quarter reinforces the strength of our competitive position and demonstrates that our pricing initiatives are holding up well in the market. Performance was solid across various regions with strength in Europe, the U.S. and Canada. U.S. and Canadian markets continue to perform well despite softer housing starts, underscoring our resiliency and ability to capture share even in the challenging environment. We're also encouraged by the results of our -- of several key product lines with groundwater exhibiting momentum and water treatment continuing to gain share and grow organically throughout the year. In Energy Systems, sales were up nearly 15% year-over-year, reflecting strong growth in the U.S., Europe and India. As we discussed last quarter, Q2 represents a seasonal peak for this business, and we expected a moderation in Q3 due to timing, product mix and tariff impacts. Continued price realization efforts will take effect over the coming months, which should help offset the tariff pressure we saw in Q3 and preserve margins as we move into 2026. Order intake remains healthy. The backlog is up, and we continue to see steady demand across the end markets. Our critical asset monitoring business continued to gain traction in the quarter due to deeper customer adoption and ongoing channel expansion. In distribution, sales were up 3.4%, driven by both price and volume. This marks the strongest pricing performance we've seen in this business in more than 2 years and reflects the effectiveness of our self-help initiatives. Our channel inventory is down slightly year-over-year and healthy. This is mostly due to stronger performance in our supply chain and shortening of lead times through our value chain. From a macro standpoint, conditions remain variable and residential construction activity remains subdued, leading us to maintain our focus on disciplined execution in this environment. We continue to perform well relative to the market, supported by strength in key product categories and solid channel relationships. Our wide portfolio and strong customer intimacy provide important earnings durability across evolving market conditions. With that, I'll turn the call back over to Jennifer to discuss the financial results in more detail.

Thank you, Joe. Moving to Slide 6, our fully diluted earnings per share was $0.37 for the third quarter 2025 versus $1.17 for the third quarter 2024. The company terminated its U.S. pension plan for approximately $55.3 million pretax and an estimated EPS impact of approximately $0.93 per share. Our adjusted fully diluted earnings per share was $1.30 for the third quarter 2025 versus $1.17 for the third quarter of 2024, up 11% versus prior year. Moving to Slide 7, third quarter 2025 consolidated sales were $581.7 million, an increase year-over-year of 9%. The sales increase in the third quarter was due to the incremental sales impact from recent acquisitions and higher volume and price in all 3 segments. Franklin Electric's consolidated gross profit was $208.7 million for the third quarter 2025 up from the prior year's gross profit of $189.7 million. The gross profit as a percentage of net sales was 35.9% in the third quarter of 2025, an increase of 20 basis points compared to the prior year. Moving on to SG&A expenses, we have seen a 60 basis point improvement in our SG&A as a percentage of sales metric as a result of cost improvement actions taken in the last year. SG&A expenses were $123.5 million in third quarter of 2025 compared to $116 million in the prior year. The increase in SG&A expenses was primarily due to additional expense impact of our 2025 acquisitions, including various onetime deal-related costs. Absent acquisition-related SG&A expenses, the company experienced an increase in SG&A expense year-over-year of approximately $2 million or 2%, primarily driven by compensation. Consolidated operating income was $85.1 million in the quarter, up $11.6 million or 16% from $73.5 million in the prior year. The increase in operating income was primarily due to volume pull-through, price and cost management. Operating income margin was 14.6%, up from 13.8% in the prior year. Moving to segment results on Slide 8, Water Systems sales in the U.S. and Canada were up 9% compared to the third quarter 2024. At a product level, sales of large dewatering equipment increased 38%. Sales of water treatment products increased 9%. Sales of all other surface pumping equipment increased 4% and sales of groundwater pumping equipment were flat compared to Q3 2024. Water Systems sales in markets outside the U.S. and Canada increased 15% overall. Foreign currency translation increased sales by 1% and recent acquisitions added roughly 13% to sales. Excluding the impact of acquisitions and foreign currency translation, sales in the third quarter of 2025 increased 1%, led by higher sales in Europe, partially offset by sales declines in Latin America. Water Systems operating income was $60.2 million, up $7.4 million or 14% versus the prior year. The increase in operating income was primarily due to higher sales and price offsetting inflation. The third quarter operating margin was 17.9%, an increase of 40 basis points from 17.5% in the third quarter of the prior year. Distribution third quarter sales were $197.3 million versus third quarter sales in 2024 of $190.8 million, an increase of 3%. The Distribution segment sales increase was primarily due to higher volumes and price realization. The Distribution segment's operating income was $16.3 million for the third quarter, a year-over-year increase of $4.1 million or 34%. Operating income margin was 8.3% in the third quarter, an improvement of 190 basis points versus the prior year, driven by higher volume, positive price realization and improved margins as a result of margin and structural cost improvement actions taken in the last year. Energy Systems sales were $80 million, an increase of $10.3 million or 15% compared to third quarter 2024. Energy Systems sales in the U.S. and Canada increased 11% year-over-year. The increase was broad-based and across all product lines, led by fuel pumping systems. Outside the U.S. and Canada, Energy Systems sales increased 26%, led by increased sales in India and our European markets. Energy Systems operating income was $25.4 million compared to $24.1 million in 2024. Operating income margin was 31.8% compared to 34.6% in the prior year, a decline of 280 basis points. Operating income margins decreased primarily due to unfavorable geographic mix and sales, increased tariff impact and a challenging comparable in 2024. The effective tax rate was 27% for the quarter compared to 24% in the prior year quarter. The change in the effective tax rate was driven by an increase in foreign earnings taxed at rates higher than the U.S. rate as well as less favorable discrete items. Moving to the balance sheet and cash flows on Slide 9, the company ended the third quarter of 2025 with a cash balance of $102.9 million and with $66 million outstanding under its revolving credit agreement. We generated $135 million in net cash flows from operating activities during the third quarter compared to $151 million in 2024. The company did not engage in stock repurchases in Q3 of this year. Year-to-date, we have repurchased approximately 1.4 million shares from shareholders. As of the end of third quarter of 2025, the total remaining authorized shares that may be repurchased is approximately 1.1 million shares. Yesterday, the company announced a quarterly cash dividend of $0.265. The dividend will be payable November 20 to shareholders of record on November 6. Moving to Slide 10, we are holding our full year expectations of $2.09 billion to $2.15 billion and tightening the range of our EPS guidance. We are maintaining the midpoint of our GAAP EPS guidance, targeting a range of $4 per share to $4.20 per share, adjusted to remove the impact of the termination of our U.S. pension program. Now I will turn the call back to Joe for some additional comments. Joe?

Thanks, Jennifer. Turning to Slide 11 and our value creation framework centered on 4 key pillars that guide everything we do at Franklin Electric, growth acceleration, resilient margins, strategic investments and top-tier talent. This quarter, we made great progress toward our growth and investment objectives. This past year, we've added great talent. We've improved our integrated operating model, made 2 important acquisitions and saw our focused margin efforts in water treatment and distribution gain momentum. Moving to Slide 12, innovation is core to our growth strategy. As several of our legacy markets are more mature, we are sharpening our focus on customer feedback, aligning our priorities with their evolving needs and leveraging the strength of our channel partners. By delivering targeted solutions, we continue to drive meaningful growth across our business. I'd like to highlight our new pressure boosting platform, which enhances efficiency and reliability for homeowners, businesses and contractors. Three new products we are launching this year, the VR SpecPAK, which was built to bring a wide range of features in an industry-leading footprint, the in-line SpecPAK designed for an efficient footprint with minimal noise and our VersaBoost Pro, which is easy to use and solves your residential pressure challenges in an elegant and compact design. These products are seeing strong interest and early adoption and all the quality and service expected from a Franklin product line. The pressure boosting market is a growing one and shows our commitment to migrate to faster-growing applications in our markets. And now on to Slide 13, we also made meaningful progress in our global capacity expansion with a new factory on our campus in Izmir, Turkey, the latest addition. We are a global company and growing our capabilities close to our growing customer needs in Eastern Europe and the Middle East are critical for our growth. We had the chance to review this progress during a recent visit and are pleased to start production in Q1. We will now turn the call over to Andrew for questions. After Q&A, we'll return for closing remarks. Andrew?

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

So can you just give some thoughts on how you see the end markets playing out as we move into next year? Probably a bigger focus on the water markets as you sit here today. Maybe just puts and takes in how you see the sequential trends playing out. Sequential trends imply growth next year on a volume basis. Is volume growth something you're planning for in some of those core water markets next year? Or is it mostly going to be led by price? Just kind of understand how those puts and takes are playing out as we sit here today.

Yes. Thanks, Mike. I think as we look at next year, we see market conditions relatively similar, starting with the U.S. and Canada to this year, which is subdued market, flattish market, but we do expect volume growth. I think a key part to our story, if you look over the last few quarters, is delivering volume expansion in markets that aren't really doing anything that are helping us a ton. If you look at housing starts, if you look at interest rates, all of the other trends that we see in here in the market, but our expectation is volume growth. One of the reasons we like ending this conversation on innovation is we want to create some of that own space -- some of that space for ourselves. So I think our good channel partner relationships, some new products we're bringing to market. I think the story of bringing new products to our end customers, this is both distribution. This is in the Water Systems business overall, and then adding dealer and expanding our network in water treatment, we feel that, that flywheel has helped us to kind of create some of our own space even in the more mature markets. I would say when you look outside the U.S., we're more optimistic about just the market in general for water. We've built a strong position in Latin America. With our acquisition, we're starting to see some of that pull-through on the growth synergy side there. With our acquisitions in large dewatering, we read about the trends in mining. We read about the trends where we have to move big volumes of water, getting those products to the markets that need them in Brazil and South Africa and other places, some of the initial trends they're on a smaller scale, but they're positive. And I think talking about capacity expansion, where we see growth is really where we're trying to make sure that we're positioned to serve it. We talked a little bit about India, the Middle East, Turkey, just Eastern Europe in general, that position we have in Southeast Europe has been one that's paid some good dividends. So we feel better about market growth outside the U.S. U.S., flattish, but yes, volume expectation. And we would expect the opportunity to price -- for price realization to be more subdued, but we do expect price next year as well.

And part of that price is just the carryover work that you've gotten this year into next year, right? So that price comment is less -- is more incremental price from what you've already announced is more subdued?

Exactly. I think you're going to see price carryover in that 1% to 2% range based on what we've done thus far. But our expectation is there'll be some more price. I think Jennifer alluded to this, but we set price in some of our segments here going into next year. The Energy segment is an example. So we do expect incremental price next year as well.

And last question. Just maybe help with the Energy Systems margin profile. Obviously, variability as you work through this year, mix, I'm assuming is a big component of that. What's the baseline that we should be thinking about for this year as we move into next year? In other words, how do you expect that to play out? And what's kind of the base we should be building off of?

Yes. I'll make a comment and Jennifer can add some color to it. I think we've kind of set the table that as we grow internationally, you're going to see a slight moderation based on mix. And that growth is starting to read out. Middle East, India, we called those out specifically. From a tariff standpoint, we knew that Q3 would be the most pressure. And part of that is due to that onetime April big lift on some of those input costs coming from China. So one is we're working to normalize that supply chain and make sure that we're prepared for next year. But two is that's my comment on incremental price. Maybe Jennifer wants to talk about our thoughts on margin as we go into next year for that Energy segment.

Yes, I think we're well positioned. As Joe mentioned, we did announce a price increase for the Energy Systems business in September that will kick in, in December. That will help as well as we continue to moderate additional tariffs or the tariffs that we're experiencing. In Q2, we did call out, we shared that, that was a little bit of an anomaly. And Joe mentioned that we were in the high 30s in our operating margin. That was a little bit of an anomaly given the outsized mix that we saw in the quarter. Where we ended this quarter, we're very pleased in the low 30s. We'll continue to see that play out through the balance of the year.

Yes. That low to mid-30s kind of expecting further income growth next year is the expectation we would set. But we feel good about the strength of that portfolio. It's going to grow well outside the U.S., but the U.S. growth for next year in that segment looks strong as well.

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

The value prop of the water pressure boosting line, that's pretty clear. We saw some of the technology at WEFTEC, it's impressive. I was wondering if you're willing to speak to your team's opportunity there a bit more. What's the current TAM of the pressure boosting vertical? And what kind of share capture do you think is realistic over, say, the medium term?

Yes. We feel -- I mean, the TAM is in the high hundreds of millions of dollars that we have access to today. But I would say what we like about that -- about the application in that space is it's a growing market. We see that market continuing to grow. As you see further expansion in suburbs and cities and residential buildings, the need for pressure boosting just becomes more and more as hotels get built, as businesses get built, and the opportunity for us is both on commercial, industrial and residential, which is why we wanted to show a blend of some of those different products there. I think you saw a few of those in terms of the SpecPAK products. But customers are very specific about we want to be able to put these in, in existing buildings as they have those needs, and we have to address those needs. And they're asking for a couple of things. They're asking for a variety of solutions. All of the elements of those products are designed internal to Franklin, so from software, hardware, the actual panels, the pumps, et cetera. And they want to be able to park those into compact spots within legacy footprint. So we found good response to those products. We think that that's going to continue to grow as you see the urbanization, not just in the U.S. from a commercial and industrial standpoint, but really in Latin America and the Middle East and other places. And from a residential standpoint, we're excited. We've been working on an elegant residential solution there for a while. So to launch these 3 products in the back half of this year, the response thus far has been very positive.

That's very encouraging. I appreciate the color. If I ask a finer point on energy margin, just to level set there, are you willing to parse out the impact of geographic mix versus tariffs in Q3?

Yes. I would say, and we're looking year-over-year, the majority of that impact is going to be tariffs. I would say probably more than 2/3 of the impact you're seeing on the variance year-over-year. The balance is going to be really mix, yes, primarily mix.

Okay. Understood. And one last one, if I may. Obviously, you have a lot of balance sheet capacity and your team seems quite keen on deploying your balance sheet going forward. How are you feeling about the deal environment now? You've obviously transacted a couple of high-stakes deals. And I'll reiterate, there's a ton of capacity there. So curious what you're seeing, the opportunity set, actionability, et cetera.

Yes. We think that space is getting a little bit more active. I'll just put it that way. We saw a little bit of a pause in the first half of the year as people were trying to sort out what tariff impacts would be and what the supply chains of these companies look like. But definitely, there's more activity there. We're seeing and hearing more things. I'd say more than that, though, Bryan, is we've built a biz dev team to really focus on putting our eyes on markets that we like more and making sure that we're being proactive as well in terms of how we look at those markets and what further products could bring to us. I think a nice advantage of Franklin is just our commitment to global growth doesn't limit us to just the companies in the U.S. The markets inside and the outside U.S. in terms of what's available and the prices you pay for them are very different. So similar to your reference to our deals in Q1, we cast a global net. And if you look at our funnel, it's a good mixture of companies inside and outside the U.S. So we're feeling good about it. I think we want to put that balance sheet to good use next year. And we feel better about it coming into '26 than we did as we came into 2025.

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

I want to talk a little bit more about energy. You mentioned seeing some nice backlog sort of growth there. If you can maybe touch on that a little bit. And then where are we from a cycle standpoint with respect to ongoing investments in fuel and infrastructure and what kind of informs you of that view?

Yes. Maybe a couple of thoughts there. One is just starting with kind of that core and our biggest market in the U.S. The outlook for '26 looks favorable right now. We can see a little further out in that business from a backlog standpoint relative to some of our other businesses. And the backlog is up nicely year-over-year. You can see kind of the revenue trend that really started as we came into this year, and we expect that to continue for some time. But '26 growth prospects for the major marketers, the C-store investment, our view there is that continues to be a positive trend and a good story next year. I think where we're also excited about, and this has been a few areas -- these are a few areas we've been working on the last few years is some of the growth that we see outside the U.S., we really see some positive trends there as well. Some of these are regulation-driven that we're well positioned to support as people look to strengthen their infrastructure in places like the Middle East. In other instances, it's building our ability to serve those customers in emerging markets that are serving more cars, more people, the more need for regulation in countries like India and Latin America. So we see that trend continuing. Next year is shaping up to be a nice year from an outlook standpoint in energy.

And then I apologize if I missed it, could you give a little bit more granularity as to groundwater performance, in particular, what you saw in North America across resi and ag and maybe what your high-level thinking is for next year in those key markets?

Yes. The groundwater market in the U.S. was -- the market itself was relatively flat this year. I think our volume growth, we feel, is a bit of an outlier in our space. I think next year, that outlook looks similar, where the market we tend to see is flattish. We'd remind everyone that one benefit of Franklin is our replacement rate in the groundwater, both ag and resi is very high in the high 70s. So from that standpoint, for us, it's relatively stable, and then we look to create our own space. But I think in the U.S., that market is going to see low single-digit growth. And part of that is supplemented by some share take and some additional work that we know we need to do. So not a great ag market for next year, I think similar to this year. But I think we're well positioned to be able to serve that market and continue to see some volume growth.

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

I wanted to take -- go back to one of the first questions regarding kind of the planning assumptions for 2026 and look at that more from a scenario perspective. I mean you laid out your base case pretty well, but there's a lot of talk about renewed weakness in residential, especially on new lot development. But at the same time, we have the Fed lowering rates, which should be good. I mean what -- is there an upside scenario for 2026, where talk about if things go well, what could things look like around that base case?

Ryan, I feel I was asked this question last year and tried to predict it and maybe didn't do a great job. I would say interest rates would have to move quite a bit more before we see yields drop and we see that impact in terms of just people being able to get houses started and to make those investments. Our expectation and kind of how we're modeling it is, again, is a subdued residential market. But I think I'd just call out a couple of things, and I know we talked about these in our script here. But one is, if you look at the water treatment business, we think that's a great example of our ability to succeed in markets that are relatively flat. That business has continued to grow. We've expanded our margin there in a really nice way. And part of it is just due to adding customers, adding dealer, adding to our channel. I think on the other side, if you look at that distribution business, the growth in both volume and price in that business is about bringing products that we can see in certain regions to other products. We now have a fairly nice reach with both our independent distributors and our distribution arm as well and finding other opportunities to bring products there, whether it's in wastewater or in groundwater. So I think that template has proven effective, and we expect that to continue next year even if we don't see that upside. I would say just a final comment, your question is, is there an upside scenario? Well, one is given our customer intimacy, the fact that we can see end customers, I'd tell you, we're ready for it. We've got a value chain from suppliers to factories to a really strong channel throughout where if we see those trends, our ability to get product there and to serve those markets, I think, is -- would be an exciting opportunity. Not a whole lot of it baked in our plan here right now as we look at 2026.

I'll just add on to that last comment there on being well positioned and Joe touched on this from a water treatment perspective. We've added significant share in storefront there and in distribution with our on-site inventory applications and the adds that we've done in 2025 sets us up for real great success. If those macros take off, we'll capitalize on that even more. If they don't, I mean, we're going to continue to grow that. And I think the service, the quality, the lead time that we've been able to demonstrate has really helped us with gaining that share and gaining that customer loyalty. So that will continue.

Got it. And the one number that really jumped out, large dewatering, up 38%, if I heard that right. And I know that business does tend to jump around a bit, but that's a big number. And I'm just curious, any added color there? Was that -- is that -- is the rental fleets involved with that? Or anything short-term oriented that, that should normalize? Or does that set up a difficult comp for next year? And any color on that big number in dewatering would be helpful.

Yes. That -- so starting with the fleet business, some of that is surely the fleet business. And if you remember, last year was kind of the low end of that cycle that tends to run in 18 months -- kind of an 18-month span. We saw that pickup coming into -- as we exited Q1 coming into Q2. And we think that, that story continues in 2026, which means that market will be relatively stable and strong. But there's other elements of that large dewatering business that we're excited about. We made a few acquisitions here over the last few years recently in Q1 with PumpEng down in Australia. As we bring those markets to our customer and we start to build that portfolio and take a complete line in addition to our legacy Pioneer brand, we're seeing some good opportunities there, not only in the industrial and the municipal side, in the fleet business, but also in the mining space. So I think dewatering, that trend going into next year, we feel it's going to be a relatively good space for us.

Got it. Okay. And then just a couple of quick -- more very quick ones, this pressure boosting product line sounds very exciting. Is that -- is there a big retrofit opportunity there? Or is that mostly related to new buildings going up?

It's really both. From a retrofit standpoint, some of the challenges that customers have, as you add water treatment, as you add other applications for water within legacy multifamily apartments, hotels, we're finding it's a mixture of customers calling us to say, look, we have problems that we've got a legacy building here that we need to solve for. Same for residential. I think a great time for us as we're servicing that groundwater business or from our water treatment business to go in and solve those problems. So that one is -- it's a mixture. I would say more of that probably is in legacy builds than it is new builds, which, again, we're not waiting for interest rates to drop for some of those builds to pick up. We think that there's a good market there for us to go serve from a retrofit standpoint. That's probably -- it's probably a little bit stronger on the retro than it is on new.

Got it. And then just a housekeeping for you, Jennifer. It looks like ForEx was almost $3 million bad guy year-over-year in the quarter. I mean does that stabilize through the end of the year? Or should we expect that to be -- to shrink a little bit in 4Q? Any color there would be helpful.

We're not really anticipating that's really driven -- step back a little bit that the FX challenges and what we saw in the third quarter, and we saw a bit of it in Q2 as well as hyperinflation really in areas such as Turkey, Brazil and Argentina. We're not really banking on that improving into Q4, although I do anticipate we should see some improvement, particularly in Argentina. We're not baking on it at this point in time.

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

I wanted to ask about the distribution business. The 8.3% margin looked pretty good. And I wonder if you could help us understand the different puts and takes there, the cost structure improvements versus mix versus anything else that went on?

Yes. Maybe just a few thoughts, and then I'll let Jennifer add to it. But we've really put a clear focus on this business the last year in a couple of ways. One is making sure that our input costs are well managed. So strategic contracts upstream, working on consignment models to help us align commodity prices with that sell point. And then also just looking at the overall infrastructure of that business. I think I've mentioned this before, but as we've grown acquisitively over the last 4 or 5 years, our opportunity to streamline the back office to make sure that rooftops align with how we serve market, and Jennifer talked about this a moment ago, but how we get better at hub-and-spoke OSI, which is on-site inventory. And we've just -- we've built out a data and a technology infrastructure that allow us to get a lot more efficient in how we serve those end markets. We expect that to continue. I think I've said this before, but we think that there's margin room. We called that out this year that, that would be a key focus for us. It is going into next year as well. So we've taken some of those cost actions in the last few quarters in terms of aligning cost with market, but also the self-help piece is better input cost, strategic pricing management and then just getting more efficient in terms of that overall value chain of how we touch product and serve end customers. So yes, we're excited about that story, and we're excited to continue to talk about it.

Just to pile on there, I want to take a moment just to give a shout out to our teams in the distribution space that have really worked to improve the margin and the structural cost of our business. That's really driven what you're seeing in the readout. We saw it in Q2. We saw it in Q3. Joe touched on the margin enhancement, just to maybe provide a little bit of a deeper insight. It's buying better, spending better, but also working with our customers, we had to make some tough decisions in certain SKUs and so forth to rationalize and make sure that we're not sacrificing service to our customers, providing the right products at the right price, but also ensuring we reap the respectable margin for that business. And then the structural work, really, we did much of that work back in late 2024. You're seeing that readout. We continue to make adjustments throughout our structure to make sure that we have the right structure in place, leveraging technology. We'll continue to do that as we head into 2026.

Okay. Great. And so for the 2025 cost structure actions and profit benefits, what kind of magnitude can you -- if the market were flat next year, could you see profit growth?

Yes, we expect profit growth in that business for next year. So even with less help from the market. Maybe one other comment, too, just on the market, I think a big benefit that we've got from that distribution business as well is bringing new products to the end market. So again, with macro headwinds, wherever they may be, we still expect to grow volume and our margin for that business in 2026.

Okay. Great. And on the factory expansion in Izmir, Turkey, is that going to become accretive in 2026? Is there a cost that we should be modeling in?

Our expect is to start production in Q1. Clearly, any time you start a new factory, there's some costs associated with ramping that up and commissioning the equipment. So there could be some impact in the first half of next year. But I would say our expectation is to run at normalized margins as we get into the back half. And then finding ways to make that more efficient. We've got a great ops team. They know how to start this up. One beautiful thing about that factory is it's on the same campus where we have another factory. So it's not a greenfield in a new country, in a new place. So our expectation is we get to normalized margins in fairly quick order. So nothing to model at this point. I think this is work that our team needs to do. But we're excited about the start, and we're actually ahead of schedule there, too. So.

I'll now hand the call back over to CEO, Joe Ruzynski, for any closing remarks.

Appreciate it, Andrew. So in summary, a great quarter. We're excited about another solid quarter of both volume and profitability. We continue to execute well, invest strategically and build momentum for the future. Our team is going to innovate. We're going to focus on growth, and we're going to lead with our great products, our great people and how we serve our customers. We have more great opportunities in front of us and are pleased with the team that we're building, the strategy we've developed and the progress thus far in 2025. Our consistent performance through varied market conditions demonstrates the strength of this model and the dedication of our global team. Thank you, everyone, and have a great day.