Franklin Electric (NASDAQ:FELE) reported third-quarter financial results on Wednesday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Franklin Electric reported a 9% increase in revenue for Q3 2026, with a significant contribution from recent acquisitions and growth in its legacy business.
The company achieved a 15% growth in EPS and an 11% increase in adjusted operating income, despite gross margin pressures from inflation and operational challenges.
Strategic initiatives included the acquisition of Cat Pumps and Challenge Pumps, aimed at expanding into faster-growing markets such as mineral extraction.
The company raised its full-year sales guidance to $2.23 billion to $2.3 billion and adjusted EPS to $4.62 to $4.82, reflecting strong demand and execution.
Franklin Electric’s distribution and energy segments showed strong performance, with notable growth in sales and operating income, driven by market expansion and pricing strategies.
Management highlighted ongoing restructuring efforts and plant moves expected to yield productivity gains in 2027, and expressed confidence in the company’s strategic direction and market position.
Full Transcript
OPERATOR
Hello and welcome to the Franklin Electric reports third quarter 2026 sales and earnings 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. To ask a question during the session you will need to press star 11 on your telephone. You will then hear an automated message advising your hand has been raised. To withdraw your question, please press star 11 again.
Please be advised that today’s conference is being recorded. It is now my pleasure to introduce Director of Investor Relations, Dean Cantrell.
Dean Cantrell (Director of Investor Relations)
Thank you, Andrew, and welcome everyone to Franklin Electric’s third quarter 2026 earnings conference call. Joining me today is Jennifer Wolfenbarger, our Chief Financial Officer, and Joe Ruzynski, our Chief Executive Officer. On today’s call, Joe will review our third quarter business highlights. Jennifer will provide additional details on our financial performance and then Joe will make some additional comments highlighting our Energy Systems segment and recent acquisitions.
We will then take your questions. A replay link of the webcast will be archived for seven days and a transcript and audio version of this call will be available on our website tomorrow. Before we begin, let me remind you that as we conduct this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which could cause actual results to differ materially from such forward-looking statements. A discussion of these factors may be found in the Company’s Annual Report on Form 10-K and today’s earnings release.
During this call we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the appendix of our earnings presentation. All forward-looking statements made during this call are based on information currently available and, except as required by law, the Company assumes no obligation to update any forward-looking statements. Earlier today we published the 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 Ruzynski (Chief Executive Officer)
Thank you, Dean, and good morning, everyone. Thank you for joining today’s call. We had a very busy quarter and I’m pleased to share our progress with you today. Let’s move to Slide 3. We had a very solid third quarter. I’m proud of our team’s performance in light of a sometimes challenging global backdrop. Not just executing for our customers every day and operating in a challenging environment, but bringing new products to market, growing our business, optimizing our footprint, and executing our strategy.
Our strategy discipline remains strong and our balance sheet healthy. We saw some market softness localized in Eastern Europe and the Middle East and in South America as the Brazilian elections are providing some headwinds during the quarter. Excited to share today that we have found some great additions to our portfolio in Cat Pumps and now Challenge Pumps. We will talk about this later during the call, but both of these deals are aligned with our strategy of a portfolio pointed towards faster-growing markets where our legacy channel and expertise can help us integrate and grow these acquisitions as we expect in the future.
Acquisitions will play an important and balanced role in our growth. The first month of Cat Pumps was a great start and our teams are excited about the future. Moving to Slide 4, our business was up 9% in revenue with nearly 5% of our growth coming from our legacy business. We did see some pressure on our gross margins as we worked through some operational headwinds during our plant moves and dealt with a more inflationary environment throughout the quarter. We delivered adjusted OI growth of over 11% and we delivered 15% growth in EPS during the quarter.
We are very satisfied with our overall performance as a company as we exited the quarter. Our order rates remain healthy, our inventory positions are balanced in the channel, and our team continues to find great opportunities to win. We continue to work on pricing and productivity to offset this pressure and have implemented some important restructuring efforts to ensure our business is positioned well from a cost perspective. Jennifer will give some detail to these efforts shortly.
Importantly, these efforts and some other recent consolidation and value chain repositioning efforts will bring productivity into 2027. If we can move to Slide 5, I’d like to share our progress on some of our strategic priorities. Our strategy is clear. We are focused on markets that are growing faster, supported by wider macro trends, while diversifying our end markets. We are adding new channels and customers by bringing innovation and our leading services to broader end markets. In Q3 we saw strong growth again from new products, delivering over $28 million in new sales year to date, accelerating our growth and showing the desire for new Franklin innovations.
We continue to expand our reach and saw strong dealer adds in water treatment, and our recently deployed OSI containers helped us to achieve $32 million of sales in the quarter and increases in our share with current customers as we add muscle and focus to our productivity. With our new Chief Supply Chain Officer and Value Acceleration Office, we are building and executing on a sizable funnel as we enter 2027, and as a company with a healthy balance sheet and strong cash generation, we are excited about our recent deals and their performance.
We are announcing a new and exciting one with Challenge Pumps today that puts us in the operating cycle of the fast-growing mineral extraction market, adding to two great deals we’ve done in the past few years in this space. As talent and culture are Franklin’s bedrock, we are excited to announce Luciana Amaro as our new Chief Human Resources Officer. She brings a strong history of helping companies grow globally and will be a great addition to our team and help us with key integration of the new additions to our Franklin team. Finally, and most importantly, we are focused not only on building the strongest team in our industry, but growing a company that attracts, develops, and retains this great talent.
Thank you to our Franklin team for your tireless support of our customers and execution of our strategy. I’d like to turn it over now to Jennifer to review our financials in more detail.
Jennifer Wolfenbarger (Chief Financial Officer and Chief Accounting Officer)
Thank you, Joe. Please turn to Slide 6. Our fully diluted earnings per share was $1.35 for the third quarter 2026 versus $0.37 for the third quarter 2025. Third quarter adjusted diluted EPS was $1.50, a new third quarter record, compared to our 2025 third quarter adjusted diluted EPS of $1.31. The 15% year-over-year expansion in our adjusted diluted EPS was primarily driven by the expansion in our adjusted operating income year over year as a result of volume growth, price above market, price discipline, and cost management.
This is a continued demonstration of our commitment to expand the earnings power of our business and our dedication to delivering durable earnings even in challenging market environments. In the quarter we recorded $5 million in acquisition-related costs, $300,000 in Water Systems segment and $4.7 million in the Energy Systems segment. In addition, we amortized in cost of sales $3.6 million from the impact of marking up acquired inventory to fair value as part of acquisition accounting for our most recent acquisitions, $500,000 in Water Systems and $3.1 million in Energy Systems, compared to $1 million in the prior year third quarter.
There were $300,000 in restructuring costs related to continued site consolidation work in the third quarter of 2026 compared to $100,000 in the prior year third quarter. The effective tax rate was 24.4% for the quarter compared to 26.9% in the prior year quarter. The decrease in effective tax rate was primarily due to a mix of foreign earnings taxed at rates different than the U.S. statutory rate. Moving to Slide 7, third quarter 2026 consolidated sales were $633.6 million, an increase year over year of 9%. The sales increase in the third quarter was primarily driven by organic price and volume growth, the incremental sales impact from recent acquisitions, followed by favorable foreign currency translation. Franklin Electric’s consolidated gross profit was $224 million in the third quarter of 2026, up from prior year’s gross profit of $208.7 million.
The gross profit as a percentage of net sales was 35.4% in the third quarter of 2026 compared to the third quarter of 2025 gross profit margin of 35.9%, a decrease of 50 basis points compared to the prior year. The gross profit margin was unfavorably impacted in the third quarter of 2026 by inefficiencies driven by recent manufacturing site moves, inflationary material and freight costs, as well as the previously mentioned impact of purchase accounting associated with marking up acquired inventory.
The work that we’re doing in terms of site consolidation and restructuring will result in productivity that will read out nicely in 2027. Selling, general, and administrative expenses were $137.2 million in the third quarter of 2026 compared to $123.5 million in the third quarter of 2025. The increase in SG&A expenses was primarily due to the incremental impact of acquisitions in the past year. SG&A as a percentage of net sales was 21.7% in the third quarter of 2026 and 21.2% in the third quarter of 2025.
Without the incremental impact of acquisitions and the additional acquisition-related deal costs, our SG&A as a percentage of net sales was 20.7%, an improvement year over year of 50 basis points. Consolidated operating income was $86.5 million in the third quarter 2026, up $1.4 million or 2% from $85.1 million in the third quarter of 2025. The increase in operating income was primarily due to favorable price and higher sales volumes in the third quarter.
As previously mentioned, there were $5 million in acquisition-related costs and $3.6 million from the impact of marking up acquired inventory to fair value as part of acquisition accounting, and $300,000 in restructuring costs in the third quarter of 2026. The prior year third quarter had $1 million from the impact of purchase accounting associated with marking up acquired inventory and $100,000 in restructuring costs. Excluding those items, consolidated adjusted operating income was $95.4 million in the third quarter 2026, up $9.2 million or 11% from $86.2 million in the third quarter of 2025.
The third quarter 2026 adjusted operating income margin was 15.1% versus 14.8% in the third quarter of last year, a 30 basis point improvement year over year. Moving to the segment results starting on Slide 8, Global Water Systems sales were up 5% compared to the third quarter of 2025, driven by additional volume from our recent acquisitions, strong price, and favorable currency exchange on sales. Water System sales in the U.S. and Canada were up 7% compared to the third quarter of 2025. The sales increase was led by sales of residential products, including water treatment, up 13%, and groundwater pumping equipment into the agricultural market, up 9%.
Sales of product into commercial and industrial applications were relatively flat. Water System sales in markets outside the U.S. and Canada increased 2% overall. Breaking down the international growth, foreign currency translation increased by 4%, recent acquisitions added roughly 1%, price added roughly 2%, and organic volume was negatively impacted by nearly 5%. Excluding the impact of acquisitions and foreign currency translation, sales in the third quarter of 2026 increased in Asia Pacific, as Latin America and EMEA sales were down year over year.
EMEA sales volume, specifically in Northern Africa, the Middle East, and Eastern Europe, were negatively impacted by the ongoing conflict in the Middle East. From an end market perspective outside the U.S. and Canada, the sales increase was led by sales of products into mineral extraction applications, which increased 71%; sales of products into commercial and industrial applications, up 3%; offset by sales of residential groundwater products, which were down 12%.
Sales of groundwater applications into agricultural markets were relatively flat year over year. Global Water Systems operating income was $58.9 million, down $1.3 million versus the third quarter of 2025. The operating income margin was 16.7%, a year-over-year decrease of 120 basis points. There was a $500,000 impact from acquired inventory, $300,000 in acquisition-related expenses, and $300,000 in restructuring costs in the third quarter 2026 in the Water segment.
The third quarter of 2025 was impacted by $1 million from the impact of acquired inventory and $100,000 in restructuring costs. The Water Systems adjusted operating income was $60 million, down $1.3 million or 2% from the prior year, with an adjusted operating income margin of 17% compared to 18.2% in the third quarter of last year. Adjusted operating margin for our Global Water Systems business was impacted by inefficiencies associated with recent manufacturing site moves and higher material and freight costs driven by inflation.
Moving to Slide 9, Distribution’s third quarter sales were $226.1 million, a new record for any quarter, versus third quarter 2025 sales of $197.3 million, an increase of 15%. The Distribution segment sales increase was primarily due to higher volumes from increased market share, acquisition-related sales, and price realization. The Distribution segment’s operating income was $20.6 million, a new third quarter record, a year-over-year increase of $4.3 million.
Operating income margin was 9.1% of sales in the third quarter, an improvement of 80 basis points versus the prior year. Operating income margin increased primarily due to higher sales volume, strong price realization, and continued cost optimization. Moving to Slide 10, Energy System sales in the third quarter of 2026 were $91.7 million, an increase of $11.7 million or 15% compared to the third quarter of 2025. The sales increase was primarily due to acquisition-related sales from our recent acquisition of CAT Pumps, higher organic volumes, and strong price realization. Energy System sales in the U.S. and Canada increased 15% compared to the third quarter 2025. Outside the U.S. and Canada, Energy Systems sales increased 12%, primarily in Europe and Asia.
Energy Systems operating income was $23.7 million, down $1.7 million versus the third quarter of 2025. There were $4.7 million in acquisition-related costs and $3.1 million in acquired inventory step-up in the third quarter of 2026 in the Energy segment compared to none in the third quarter of 2025. The Energy segment’s adjusted operating income was $31.5 million, up $6.1 million or 24% from the prior year, with an adjusted operating income margin of 34.4%, up 260 basis points from the third quarter of last year.
Adjusted operating income increased primarily due to favorable price in our legacy Energy business, organic volume growth, and the contribution from our acquisition of CAT Pumps. Moving to the balance sheet and cash flows on Slide 11, we continue to maintain a strong balance sheet and robust cash flow, enabling us to invest in future growth and deliver consistent return to shareholders. The company ended the third quarter of 2026 with a cash balance of $159.1 million and with $125 million outstanding under its revolving credit agreement. We generated $139.2 million in net cash flow from operating activities during the first nine months of 2026 compared to $134.7 million in the first nine months of 2025.
On Monday, the company announced a quarterly cash dividend of $0.28. The dividend will be payable November 19th to shareholders of record on November 5th. The company purchased 50,000 shares of its common stock for approximately $4.8 million in the open market during the third quarter of 2026. As of the end of the third quarter of 2026, the remaining authorized shares that may be repurchased is about 0.6 million shares. Moving to Slide 12, our third quarter financial results were in line with our expectations and underlying demand remains. Given our strong performance despite mixed markets year to date, we are raising our full year sales expectations to a range of $2.23 billion to $2.3 billion and full year adjusted diluted EPS to a range of $4.62 to $4.82. The revised guidance does not include last night’s announcement of our purchase of Challenge Pumps. We continue to maintain a strong balance sheet and will continue to be disciplined as we deploy our capital resources to drive maximum return on investment.
Now I will turn the call back to Joe for some additional comments.
Joe Ruzynski (Chief Executive Officer)
Thanks, Jennifer. As we’ve shared the last two quarters this year, we’re spotlighting each of our segments to give investors a clear view of our focus, differentiation, and long-term opportunities. These spotlights will also serve as a foundation for deeper strategic discussion we’ll have on our investor day next March. This quarter we’re highlighting our Energy segment. This business will finish with over $350 million in sales this year and is a market leader in technology, customer intimacy, and returns.
We have seen this business grow with smarter, more accretive new products and recently added a new industrial element to support industrial uptime. Our end market segments are in key markets such as serving the major players in fueling and convenience, industry, energy, data infrastructure, and diversified industrial markets where uptime defines their ability to win. We have a long history in these markets, starting with our expertise in building the leading variable speed submersible pumps over 25 years ago. We built this business with a promise to solve our customers’ most important concern about uptime and reliability while helping them achieve the lowest cost of ownership. We performed a series of strategic acquisitions over the years to bring innovative solutions in controlling and monitoring that help us to manage a series of mission-critical systems for our customers.
For a quick view of selected solutions, our EVO line fueling and site management system bring right-size options for any operation, advanced features, intuitive design, and superior scalability. The EVO series is engineered to evolve with our customers’ business. It brings highly accurate inventory management and full-featured compliance monitoring for any size fuel system. Our new EVO-1 solution, which we highlighted last year as we launched, is an economical turnkey fuel monitoring solution designed for complete system management, as uptime is critical for our customers.
Our Oversight solution empowers fuel marketers and convenience store operators with the ability to monitor critical site equipment for outages and to perform remote resets, maximizing uptimes across the entire site and in the store by resolving common outage issues before they turn into extended downtime. This has been a critical time and money saver as our major customers have expanded their geographic reach. Uptime and remote monitoring are key reasons why our INCON Optimizer Circuit Breaker Monitor is a leader in online, continuous performance monitoring solutions for high-voltage circuit breakers, designed to facilitate condition-based maintenance with real-time performance and health data. Continuing with this theme, our new acquisition of CAT Pumps helps us to serve the heart of any high-pressure flow solution by providing the highest quality and most trusted high-pressure pump brand.
Our systems sit at the core of our customers’ business and equipment. In addition to our high-quality, most dependable products, our sales, service, and support structure is critical for our success. We collaborate, we innovate, we solve problems, and we help our customers win. Our growth and return on that growth are a testament to our team, our strategy, and our performance every day. In summary, our Energy business serves some very attractive growth markets.
Our blend of innovation, customer service, and intimacy will keep us growing and solving problems for years to come. Turning to slide 14, I’d like to briefly discuss our recent deals, starting with CAT Pumps that we announced early in September. A welcome addition to our great brands, CAT is known globally as a leader in high-pressure piston and plunger pumps, serving OEMs and contractors with the industry’s highest quality pumps. Our customers expect their product to perform, and we sit at the center of this with our wide and highly capable product line. This increases our exposure to attractive, high-growth end markets across mission-critical applications.
We expect this to be accretive to adjusted EPS in 2027 and bring an attractive financial profile with more than $100 million in revenue and EBITDA margins above 35%. On to slide 15 to share a bit more about the Challenge Pumps acquisition that we announced last night. We’ve entered into a definitive agreement to acquire Challenge Pumps, a leading provider of underground mine dewatering solutions headquartered in Perth, Australia. The transaction is expected to close following the completion of the target’s audit process and the customary closing conditions, which we currently expect to occur later this year. Challenge Pumps is an excellent strategic fit with our Water Systems segment and further advances our strategy of expanding in attractive commercial and industrial water management applications.
The company has built a strong position in underground mine dewatering through differentiated technology, application expertise, strong customer relationships, and a significant recurring aftermarket business. More than 55% of revenue over the last three years has been generated from recurring parts and service activity. Combined with our existing dewatering and rugged submersible products, it gives us a complete solution for mine dewatering and services.
Revenue for this business is about $52 million, and it is nicely accretive to our base Water segment portfolio. We like this large and growing market, supported by electrification trends and the need for critical minerals globally. We believe Challenge Pumps strengthens our mineral extraction platform by expanding our ability to provide mine water management solutions across the mining life cycle. In addition, we see attractive opportunities to accelerate growth by leveraging Franklin Electric’s global commercial footprint, customer relationships, and operational capabilities.
I’ll now turn the call back over to Andrew for questions before closing thoughts.
OPERATOR
Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment, please. Our first question comes from the line of Ryan Connors with Northcoast Research.
Ryan Connors (Analyst at Northcoast Research)
Good morning. Thanks for taking my call. I wonder if you could provide us more detail on the plant moves and the site consolidations, Joe, that you mentioned a few times as a gross margin headwind in the quarter. Can you give us any color on what exactly those were and where we are in that journey, whether we’re complete there, whether there’s more of that on the way.
Joe Ruzynski (Chief Executive Officer)
Yeah, there’s a few of them. You know, some of these we started planning and executing earlier this year or coming into this year, and we’re starting to get to the point where we see the end in sight. And you know the comment you heard, Jennifer? I think both of us made it about a tailwind in ’27. There’s a site in Mexico that we moved to a bigger campus. We’ve consolidated our Pioneer production line into Oklahoma. We’ve consolidated some smaller peripheral distribution sites into some bigger ones to give us leverage, economy of scale, better data visibility.
And then in the water treatment side, which is a part of that Water business, as we’ve acquired companies over the last few years, getting to a more regional assembly, production, testing-type environment, we’ve completed those moves. Water treatment one is done. Those other ones that affect kind of Water overall, like I said, the moves are done but we had to run in parallel, and we have some wind-down activity, but should have those wrapped up. Those ones that I mentioned there here this year. We also have some other activity around the world, but I think those are the bigger ones where the ramp-down, ramp-up is just something that we had kind of all of these things at once in the back half. Not a huge cost but just something we wanted to call out.
And also the lift for next year,
Jennifer Wolfenbarger (Chief Financial Officer and Chief Accounting Officer)
I’ll just add we’ll have a little bit more of that work in Q4. You’ll see a little bit more of that, but as Joe mentioned, plan to have that wrapped up for the most part in 2026, and the readout is nice. Productivity going into 2027.
Ryan Connors (Analyst at Northcoast Research)
Got it. Okay. And then I want to talk about price/cost a little bit. You’re getting price across all three divisions, but yet inflation is still cited as a headwind to margins. I know we have some kind of acquisition-related margin headwinds as well, but it did sound like inflation was still a net headwind. Does that mean the pricing actions aren’t sticking, or we’re behind the curve on rolling those out? Or just curious how the price/cost situation looks.
I guess that’s a, you know, kind of each-to-each division might be different, but any comments there?
Joe Ruzynski (Chief Executive Officer)
You know, we’ve been satisfied with price realization. Price has been sticky. We know that as we go into next year, you know there’s going to be some more work to do. I think the inflationary environment not only has held strong but obviously accelerated through the quarter. Most notably, you know, we have distribution and getting product to our end customers important for us. I mean, I’d call it fuel as a good one or as a clear example. And there definitely was some more pressure there than we saw coming into the quarter.
I think we’ve got good plans for price. We’re confident that price and productivity are going to more than offset inflation, but definitely with some pressure to call out there. I think just overall, I’ve mentioned this before, Ryan, but we’ve got a good funnel, some good activity. We feel good about material productivity and plant productivity going into next year. So there’s good offsets to that material inflation, but we definitely saw a bit of that here in Q3.
Jennifer Wolfenbarger (Chief Financial Officer and Chief Accounting Officer)
I’ll just reiterate: price is reading out very solid across the businesses. On average for the enterprise, about 3% in the quarter. So we do feel very good about the price actions that we’ve taken. Inflation just continues; it continues to escalate, and we’ll maintain really good discipline going forward. And as Joe mentioned, productivity heading into next year is going to also provide some additional opportunity.
Ryan Connors (Analyst at Northcoast Research)
Got it. Okay. And then just one last one for me. You know, obviously you’re not giving ’27 guidance today, but, you know, we’re almost in November and we’re all in print for ’27. So any qualitative color you can give us about how you see ’27 shaping up on the top line, especially, just any qualitative comments about where you might steer us would be helpful.
Joe Ruzynski (Chief Executive Officer)
Yeah. Overall, we feel good about our base business. One thing, and you see this in our theme, Ryan, in terms of the acquisitions and where we’re focused, but we’re really looking at those markets where there’s good macro trends underlying support. I think Jennifer made the comment about some of these areas, these faster-growing markets. We’re seeing a nice, nice return. We know that, hey, we’re a global company. We like that the needs for water, for infrastructure, for energy are kind of all over.
But given that there is instability, we need to find those offsets, and we feel good about it. The base business, we feel, is going to be solid and strong as we go into next year. So right now we feel fairly confident as we go into 2027 on the top line. And then of course with some of the bottom-line work we’re doing, you know, right now it’s hard to—hard to. Elections are going on. You know, we all read the newspaper. It’s a crazy, crazy world out there.
But I think the way that our teams operate, our high replacement business, we’ve added now, you know, with Challenge as an example to that service and replacement business with those macro trends. You know, we feel pretty good about ’27 here as we get into Q4.
Ryan Connors (Analyst at Northcoast Research)
Excellent. Thanks for your time.
Joe Ruzynski (Chief Executive Officer)
Thanks, Ryan.
OPERATOR
Thank you. Our next question comes from the line of Matt Somerville with D.A. Davidson.
Joe Ruzynski (Chief Executive Officer)
Morning, Matt.
Matt Somerville (Analyst at D.A. Davidson)
Couple questions. Morning. On a pro forma basis for the Challenge acquisition, which I realize is going to close here shortly, how much revenue will Franklin Electric be generating from critical minerals and mining? And is there any update, Joe, you’d be willing to provide on where you’re at with your data center initiative as it pertains to the water business? And then I have a follow up or two.
Joe Ruzynski (Chief Executive Officer)
Thanks. Yeah. With this deal from a pro forma basis, it pushes us nicely over $100 million and we’ll come out and fine tune that here as we get, as we exit the year we’ll give those numbers. You know and Matt, we actually had a, we had a data center update. We were going to share with the team but we didn’t want to crowd out here the announcement of Challenge today. So we’ll come back to that. From a data center standpoint, we still continue to make good progress. We’ve got some nice wins in flushing and condensation management and power quality. It’s still a sub $50 million business for us. I think what we’re excited about from a data center standpoint is that work being done with end customers and on specs.
I’ve mentioned this before. You know, right now it’s the testing and the operational standup. So. But I think what we can do and we can do this as a follow up is to share more in terms of what the outlook for 2027 looks like. I’m sure you’ve heard our peers, anyone that has pumps, motors and drives is playing in this market. And then the timing and the predictability is one that we’ve tried to get a little better dialed in. But yeah, still making good progress there.
And that’s still something that from a midterm standpoint we expect to see nice growth. We’ll also share, we’ll do this in March but we’ll probably give a preview of this here as we exit Q4 for those faster growing markets. Kind of our midterm expectation in terms of how big we expect these markets to be as a percentage for revenue. We’ll give updates on that as well. But yeah, this mineral extraction business is a nice growth lever. You heard Jennifer make the comment of up 70% within the quarter.
We definitely see a need. These markets are receiving investments. Just long term trends of electrification and the need for metals and critical minerals is something we feel good about. I would absolutely concur on that.
Matt Somerville (Analyst at D.A. Davidson)
So how should we be thinking about the go forward outlook into Q4? Maybe a little bit into next year specifically for the water systems business. And if you can add some geographic and market color to that because you are seeing some demand, I’ll call it variability from region to region, region and across end markets. So maybe a little bit more go forward looking color would be awesome.
Joe Ruzynski (Chief Executive Officer)
I’ll start out and then I’ll let Jennifer fill in some of the space here. But you’re going to see a Q4 for water that looks somewhat like Q3. We see mid to high single digit on the top line. We see some of that additional pressure as we talked about the operational moves and still some inflation but really set up well from a performance standpoint. As we get into 2027, the soft spots that we saw in Q3, we expect those to still be kind of soft. But that is in the numbers that I mentioned.
The Middle East, southeastern Europe, it’s definitely a bit slower with inflationary pressure there with conflict. And then Latin America, specifically Brazil is important to us. We saw that stabilize as we exited the quarter. But anytime pre election, some uncertainty, you know, we see that stabilized, albeit at a softer rate. When we talk about APAC, maybe just to comment there, you know, our center of gravity is more in the PAC, not in North Asia.
And you know, really that dewatering business, we’re looking for those identities within region where we can be known for something, be a top tier player. And that’s definitely starting to read out. We think Asia is going to have a nice finish to the year and a nice start to next year. And then North America, we’re sharing a lot of numbers here today, of course, but when you look at still good growth in North America, we see that channel expansion, the innovation, I call that out here, new products that we’re launching.
Even in markets that are not high single digit markets, we still see those mid to high single digit growth largely work with the team, adding channel, adding customers, adding new products. And we feel good about the North American market as we go into 28, 27 as well.
Jennifer Wolfenbarger (Chief Financial Officer and Chief Accounting Officer)
Yeah, I would just add, you know, year to date in the water business, we’re at a, you know, top line growth of just north of 7% in that business. And you know that we expect that to continue as we head into Q4. Really good, continue to see good top line growth. And as Joe commented on the regions a little softer in Latin America, Brazil, I think the election has sort of settled. We’re anticipating that settles things in Latin America a bit. We’re seeing good growth in parts of Latin America, Asia, PAC, particularly the PAC side and specifically in mineral extraction.
MIA continues to be a little bit of a hard spot, but we are making up for it elsewhere within the regions with good strong performance in US and Canada and as I mentioned, Australia and parts of South America.
Matt Somerville (Analyst at D.A. Davidson)
Great. Thank you guys. Thank you.
OPERATOR
Thank you. Our next question comes from the line of Walter Liptak with Seaport Global.
Walter Liptak (Analyst at Seaport Global)
Hi, thanks. Good morning, guys.
Joe Ruzynski (Chief Executive Officer)
Morning, Walter.
Walter Liptak (Analyst at Seaport Global)
So I wanted to ask a little bit about the acquisitions that both of them carry. Really nice EBITDA margins. And so I wondered about, you know, adding value. You know, can you improve EBITDA margins from here? And then asking about the sales synergies. Wonder if you can tell us a little bit about the go to market strategy, you know, as a bigger platform. How does that help you in these markets?
Joe Ruzynski (Chief Executive Officer)
Yeah, so maybe just to go through those too quickly. If you look at CAT Pumps as they go to market, they sell other pumps that they bring into the fold along with kind of their core product in the piston plunger pumps. From a sales synergy standpoint, from a channel standpoint, what’s been fun for us to do, and part of that kind of thesis of this combination is we see and touch some of the same end markets that they do today. So as a start, we definitely know of and have found some of these opportunities to both bring their product through, but also to bring our products more closely associated with what they’re selling.
I mean you look at that little chart there and some of the different flow opportunities, we’re touching some of those flow opportunities today. Our commercial and industrial business is a focus for us to grow. I think another just point on CAT is the global opportunity we have. And as we talk about Latin America as an example, specifically in Mexico, we see those opportunities today. They’re not penetrated in some of the geos we are. So that channel natural sales synergy is there.
Your question in terms of can we improve the EBITDA margins most of these two deals? I mean growth synergies. Well, let me just say it this way. If you look at the theme of these deals, it’s diversification of vendor end markets, faster growing markets than our core business and accretive deals. This is important for Franklin. So we want to start in a strong position from an EBITDA accretion standpoint. But we feel we could do more there as well.
As we’re as we’re working on global supply chain sourcing material contracts, we see those opportunities with these acquisitions as well. Maybe just to comment on Challenge, we have a good core mining business in pockets in Franklin today. And have Jennifer called out a growth metric from some of the work we’ve done here the last few years. But we’re seeing these opportunities in our distribution business across the US, we’re seeing them in Latin America. We’ve had a long historical presence in Africa, specifically the southern part of Africa there. So again, it’s bringing these products together.
I thought that this chart here is a good kind of explanation of that, of bringing this Challenge pump technology, which is really a piece that we were missing, combined with the rugged submersible, the surface pumps we have today. It’s everything from gold to copper, to gravel, to uranium, to you name it, these opportunities are there. Bringing these all under one umbrella is a nice lift from a growth synergy standpoint. And we do see opportunity to continue to hold and increase these margins.
Jennifer Wolfenbarger (Chief Financial Officer and Chief Accounting Officer)
I would just add particularly on the Challenge. The Challenge business, actually the CAT Pumps business as well. These are critical applications, high uptime, they’re running 24/7 and require high level of service and aftermarket coverage, which is right in our sweet spot. That’s where we operate in our current existing businesses. And so we see a great opportunity to continue to take that forward with our operating model.
Walter Liptak (Analyst at Seaport Global)
Okay, sounds great. And you called out that big growth in mineral extraction for your core business. Are these acquisitions growing at a similar rate?
Joe Ruzynski (Chief Executive Officer)
Yeah, they’re actually growing at a rate faster than we expected. That 70% number. When you look at just raising awareness throughout our channel and bringing these additional products. Some of these companies we’ve acquired going back three, four years, Mindtuff and Pumpenge. But the opportunities to basically serve a wider need for the specific set of operators in mind, it makes it easier for them. We can now bring a wider portfolio in, and we’re seeing that growth accelerate.
We expect Challenge to continue to grow at nice rates as well. So not only growing the portfolio, but also accelerating that growth rate overall.
Walter Liptak (Analyst at Seaport Global)
Okay, great. Thank you.
OPERATOR
Thank you. And our next question comes from the line of Mike Halloran with Baird.
Trent (Analyst at Baird)
Hey, guys, good morning. This is Trent on for Mike.
Joe Ruzynski (Chief Executive Officer)
Hey, Trent.
Trent (Analyst at Baird)
So first question here. Really good performance in the distribution business, particularly as it relates to the growth side here. Be helpful to kind of unpack what you saw in the third quarter from, you know, the drivers of that between market expansion, you saw, you called out water treatment and wastewater on the slide, you know, market, channel share, etc. And then the durability of those kind of growth drivers as we exit 26 and move into 2027.
Joe Ruzynski (Chief Executive Officer)
Yeah, you know, there’s really two themes for that distribution business that that team is focused on here the last few years. One is bringing products that we sell in one region to all regions. So kind of building a national capability and set of products. We call it cross pollination. It’s an internal term, but it’s essentially if we see needs or we have access to sell and serve customers in one region, making sure we do that in all sounds trivial, but it’s actually been a nice growth driver because very productively, you know, we can move those capabilities from regional to national.
The second thing is, and I know we’ve talked about this before we highlighted distribution. But OSI or on site inventory is essentially a containerized, you know, great technology support, highly capital efficient way for us to expand our reach and to better serve. So it helps us to serve customers that are a little harder to get to. It gives them the ability to see and track and have all of the on site products that they need on a day to day basis.
So we’re winning more, they’re winning more and you know, the margins and turns are healthier for us which is why you see a readout not only in growth but also that’s a margin lift for us. So these are, this is not. The market is not up. Their organic number was up 10 or 11%. They had a small acquisition or they had an acquisition in Q2, but just that organic number, that’s a lot of really great work by the team and making sure that they stay on top of price costs which they’ve done a really nice job of. So that’s a part of it too. But yeah, really we’re very pleased with distributions Q3.
Thank you Price. Yeah, go ahead.
Trent (Analyst at Baird)
I was just saying price read up very strong. As Joe mentioned, the organic volume growth, we measured the business on really three big growth initiatives: onsite inventory, cross-pollination, and pull-through, and all of those came in better year over year, in all three metrics, with OSI and onsite inventory growing about 30% in the quarter. So really nice continued growth there, that’s helpful. And then similar conversation on the energy side, just kind of moving the performance between the traditional kind of fueling assets, the critical asset monitoring business, what you see in each of those and kind of trajectory as we move forward here in each of those businesses.
Joe Ruzynski (Chief Executive Officer)
Well, the midterm outlook for that market we feel good about. We actually, even though we had nice international growth, one piece that—and we talked about this last quarter—we actually expected it to be more because we can see the projects and the work being done in places like India and Saudi Arabia and Eastern Europe. Those have slowed down a little bit. We’re still growing, not quite at the clip we thought. I think the bigger story there was, and as we profiled that segment, is to talk about the innovation and the technology, the problems that we’re solving for our customers and what we’re doing for them.
So if you think of major marketers or service stations, convenience stores, gas stations, all of these bigger players are expanding their geographies and their reach. Our tools basically help them to manage that across wide geographies, to have all the data, to do it online, from remote resets to monitoring their solutions from inside to outside the service station. And we just think that that focus on innovation and solving problems has helped us, obviously from an accretion standpoint because these are more hardware, software, highly technical products, but also they’re just, they’re new to the market and we’re seeing great response.
So it’s a great end market. The next year or so looks strong, but I think what we’re doing in that market continues to increase in value and size. So, yeah, we’re very, very pleased with that progress as well.
Trent (Analyst at Baird)
That’s great. And then last one for me, just kind of on the balance sheet priorities in the near term here, obviously we’re still very flexible as it relates to a leverage profile, have some acquisitions coming in. So if there’s any constraints in continuing that in the near term, but just preferences between buyback, continued acquisitions, any comments on the pipeline would be helpful. Thank you.
Jennifer Wolfenbarger (Chief Financial Officer and Chief Accounting Officer)
Yeah, I would say, you know, given that we’ve done two pretty sizable acquisitions, we’re going to work to digest those over the, you know, over the next six months. That’s been a priority. Growth is always going to be our top priority from an investment perspective, whether that be internal growth or acquisition growth. And you can see that through the actions that we’ve taken. We’ll continue our trajectory of consistent dividend and return to shareholders through dividend.
We will also continue buyback of shares and looking at that every single quarter. So nothing really changed from a capital allocation perspective, with again, just emphasizing our initial first priority is going to be investing for growth and good returns in that growth.
Joe Ruzynski (Chief Executive Officer)
You know, Trent, just one final comment. I think you see with these acquisitions, your question on are we still committed to dividends and buybacks? Yes. Are we still committed to investing in the business? I think you see that and you hear that as we talk about some of these plant moves and serving our customers. We want to see all of these read out. But as we’ve had a healthy balance sheet and good cash generation, we see the size of some of these deals increasing.
We’re excited about that. It brings us the ability to do all of them and make sure that we’re kind of firing on all cylinders.
Trent (Analyst at Baird)
Great. Thank you, guys.
Joe Ruzynski (Chief Executive Officer)
Thank you.
OPERATOR
Thank you. And I’m showing no further questions. So with that, I’ll hand the call back over to CEO Joe Ruzynski for any closing remarks.
Joe Ruzynski (Chief Executive Officer)
Thanks, Andrew. Appreciate it. And thank you all for joining us today. We feel very good about our performance and, more importantly, our future. We’re very positive about the recent acquisitions. The recently announced deal with Challenge Pumps is exciting for us last night, and Franklin Electric is still and always is committed to growing through innovative products, consistent returns, and a strong balance sheet. We see our strategy reading out and are on track for a solid 26 and have good confidence in our momentum as we look to 27.
Our performance this year represents our progress and our strategy gives us confidence to continue this trend. We’re a company on the move and we want to give a special thanks to our Franklin team for the leadership and contribution to our performance and results this quarter. Thanks everyone for joining us today and have a great rest of your week.
OPERATOR
Ladies and gentlemen, thank you for participating. This does conclude today’s program and you may now disconnect.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
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