Franklin Electric Co., Inc. (FELE)

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Franklin Electric Company Inc. (FELE)

Q4 2008 Earnings Call

March 2, 2009 5:00 pm ET


Patrick Davis – 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


Ned Borland – Next Generation Equity Research

Paul Mammola – Sidoti & Company

Matt Summerville – KeyBanc Capital Markets

[Bryan Myer] – Robert W. Baird



Greetings and welcome to the fiscal 2008 and fourth quarter earnings release for Franklin Electric Company. (Operator Instructions). It is now my pleasure to introduce your host, Mr. Patrick Davis, Treasurer for Franklin Electric. Thank you. Mr. Davis, you may begin.

Patrick Davis

Thank you, [Manny], and welcome to the Franklin Electric fourth quarter 2008 earnings conference call. With me today are Scott Trumbull, our Chairman and CEO, John Haines, our CFO, Robert Stone, SVP of Americas Water and Gregg Sengstack, SVP of our Fueling and Asia Pacific business unit. On today's call Scott will review our fourth quarter and full year 2008 results and discuss the key issues confronting our company for 2009. John will review our fourth quarter and full year 2008 financials and when John is through we will allow some time for questions and answers.

Before we begin let me remind you that any forward-looking statements contained herein including those related to the company's financial results, business goals and sales growth involve risk and uncertainties including but not limited to risk 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 and future trends and other risk which are detailed in the company's Securities and Exchange Commission filings included in item 1A of Part 1 of the company's annual report on Form 10-K for the fiscal year ended December 29, 2007, Exhibit 99.1 attached thereto, and in item 1A of Part 2 of the company's quarterly reports on form 10-Q.

Of note, the company's 2008 10-K will be filed this Wednesday, March 4th. 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.

Scott Trumbull

Thank you, Patrick. After a record third quarter we experienced an abrupt change in market trajectory during the fourth quarter. Through the first nine months of 2008 our sales increased by 32% and our operating income increased by 78%. During the fourth quarter our sales declined by 1% and our operating income before restructuring charges declined by 21%.

In our Water segment, acquisitions increased fourth quarter sales by about 10% but this growth was more than offset by an organic sales decline of 6% and negative foreign exchange translation effects of 7%. The organic sales decline occurred in the United States where according to trade association data the market for water systems products fell by approximately 15% during the quarter. While we continued to gain share during the quarter we were nevertheless impacted by the drop in the overall market.

We believe that demand in the overall market fell for several recession-related reasons. First, U.S. new housing starts fell by approximately 40% versus the fourth quarter 2007. We estimate that about 15% of our total Water segment sales are tied to U.S. new housing starts. For planning purposes we are assuming that new home construction will continue to decline by 30 to 40% through the first half of 2009. In the back half of 2009 we believe that housing starts will meet the depressed prior year levels.

Second, as the banking crisis unfolded and credit availability became an issue, we believe that distributors and contractors focused on reducing their inventories and therefore curtailed their purchases of additional pumps and motors. We expect that these downstream inventories will continue to be reduced into the first quarter and that inventory levels will stabilize as the spring construction season approaches in March and April.

Our sales of water systems products in international markets, which represent about half of our total water system sales, were flat organically but declined by 7% due to the impact of the strengthening U.S. dollar on our translation rates. During the fourth quarter we had organic sales growth in Latin America and Europe, Middle East and Africa, but this was offset by a decline in Asia Pacific.

In our fueling segment, fourth quarter sales increased by 6% versus prior year. All of the increase was organic and was driven primarily by increased sales of vapor control and monitoring systems in California due to that state's vapor control mandate. We estimate that as of year end 2008, 45 to 50% of the 11,200 filling stations in California have already installed vapor control systems and that Franklin has supplied over 90% of the systems that have been installed to date.

During the fourth quarter we noted a reduction in the monthly system installation rate. We believe that station owners are having difficulty arranging debt financing for the installations. As a result of this slowdown while we had previously forecasted that our sales for the California mandate would start winding down in the second quarter of 2009, we now believe that our California vapor control sales may continue, albeit at a slower installation rate, into the third or fourth quarter.

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