Franklin Electric Co., Inc. (FELE)

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Franklin Electric Company (FELE)

Q3 2008 Earnings Call

October 27, 2008 5:00 pm ET


Michael Butchko - Treasurer

Scott Trumbull - Chairman and Chief Executive Officer

John Haines - Chief Financial Officer

Robert Stone – Senior Vice President, North America Operations

Gregg Sengstack - Senior Vice President, Fueling and Asia Pacific


Mike Schneider - Robert W. Baird

Ned Borland - Next Generation Equity Research

Paul Mammola - Sidoti & Company

Matt Summerville – KeyBanc



Welcome to the Franklin Electric Company third quarter 2008 earnings release. (Operator Instructions) It is now my pleasure to introduce your host Mike Butchko, Treasurer for Franklin Electric Company.

Michael Butchko

Welcome to Franklin Electric’s third quarter 2008 earnings conference call. With me today are Scott Trumbull, our Chairman and CEO; John Haines, our CFO; Robert Stone, Senior Vice President of America’s Water, and Gregg Sengstack, Senior Vice President of our Fueling and Asia Pacific business units.

On today’s call, Scott will review our third quarter results and discuss the key issues confronting our company for the balance of 2008 and into 2009. John will review our third quarter financials. When John is through, we will allow sometime for questions and answers.

Before we begin, let me remind you that any forward-looking statements contained herein including those relating to the company’s financial results, business goals and sales growth involve risks and uncertainties, including but not limited to, risks and uncertainties with respect to general economic and currency conditions; various conditions specific to the company’s business and industry; weather conditions; new housing starts; market demand; competitive factors; changes in distribution channels; supply constraints; technology factors; litigation, government and regulatory actions; the company’s accounting policies; future trends and other risks which are detailed in the company’s Securities and Exchange Commission filings included in Item 1(a) of part 1 of the company’s annual report on Form 10-K for the fiscal year ending December 29, 2007; Exhibit 99.1 attached thereto; and in Item 1(a) of part 2 of the company’s quarterly reports on Form 10-Q.

These risks and uncertainties may cause actual results to differ materially from those indicated by the forward-looking statements. All forward-looking statements made herein are based on information currently available and the company assumes no obligation to update any forward-looking statements.

I will now turn the call over to our Chairman and CEO.

Scott Trumbull

Thank you, Mike. We are pleased to report record third quarter sales, earnings and EPS. Earnings this quarter were the highest of any quarter in the company’s history. The performance of our fueling segment exceeded our expectations. Sales grew by over 90% and operating income grew by over 270% versus third quarter prior year. Most of the growth was driven by fueling sales in California as filling station owners installed vapor control and monitoring systems in accordance with the California Air Resources Board mandate. We estimate that the California conversion is now between 35% and 40% complete and that the sales surge from the mandate will wind down in the latter part of 2009.

In the meantime, our fueling management team is moving to expand our sales base outside of California in order to partially offset the impact of the surge winding down. We are encouraged that a number of countries outside the United States have either implemented vapor control initiatives or are actively considering them; these include China and India. We are modifying our vapor control and fuel management product lines to meet the specific needs of customers in these and other developing markets.

Also in mid-2009 we will introduce a line of vapor control and petroleum dispensing products for the European market. As we sell more Franklin vapor control systems in California and elsewhere in the world, we are building a large install base of nozzles and hardware that we recognize has a limited useful life due to handling wear, tear and damage. As we move into 2009 and 2010 we anticipate developing a $10 million to $15 million per year replacement business that will continue growing as our install base grows and ages.

Our water systems sales for the quarter grew by $21 million or 16%. Acquisitions accounted for $15.5 million of the $21 million overall growth. Water systems sales in international markets represented 47% of our total water sales and grew by 24% overall and 6% organically.

Water sales in the U.S. and Canada represented 53% of the total and grew by 10% overall and were up about 3% organically. In general, our water systems sales to the agricultural and commercial markets grew at high single-digit rates while our sales for residential applications were flat. The weakness in residential sales was due to the housing recession in the U.S. and portions of Western Europe. The major issue for the company during the third quarter was the 380 basis point decline in water systems operating margins versus the prior year. This decline came after a 480 basis point increase in water margins during the second quarter.

There were three factors that were primarily responsible for this decline. First, as we have discussed during previous conference calls, we entered 2008 with water systems inventory levels in our North American plants that were too high. During the second half of this year, we are focused on improving liquidity and inventory turns across the company, and especially in our North American water plants. As a result of this focus, by the end of the third quarter inventories in our North American water systems plants were 26% lower this year than the same period last year, while our year-to-date sales volume out of our North American facilities is running about 10% higher.

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