Franklin Electric Co., Inc. (FELE)

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Franklin Electric Company, Inc. (FELE)

Q1 2009 Earnings Call

April 23, 2009, 8:30 am ET


Patrick Davis - Treasurer

Scott Trumbull - Chairman and CEO

John Haines - CFO, VP and Secretary

Robert Stone - SVP and President, Americas Water Systems

Gregg Sengstack - SVP and President, International and Fueling Group


Michael Schneider - Robert W. Baird

Anthony Kure - KeyBanc Capital Markets

Paul Mammola - Sidoti & Company



Greetings and welcome to the First Quarter 2009 Earnings Release Conference Call for Franklin Electric Company. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded.

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, Tani. And welcome to the Franklin Electric first quarter 2009 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 International Water.

On today's call Scott will review our first quarter business results and John will review our first quarter financials. 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 risks and uncertainties, these include but are not limited to risks and uncertainties with respect to general economic and currency condition, 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 SEC filings included in item 1A of Part 1 of the company's Annual Report on Form 10-K for the fiscal year ended January 03, 2009, Exhibit 99.1 attached thereto, and in item 1A 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.

Scott Trumbull

Thank you, Patrick. The major factor impacting our earnings during the quarter was the sales volume decline brought on by the weak global economy. Water Systems represent about 75% of our total sales. During the first quarter our Water Systems revenues declined by about 16% overall and by 11% organically before the impact of foreign exchange. Virtually the entire organic sales decline occurred as a result of weakness in the US Canada market which represents about half of our total Water segment sales.

As an indication of overall market weakness, trade association data and our own analysis of market trends indicate that first quarter industry-wide groundwater pump sales were down about 33% versus prior year. And while our sales did not decline as much, we were nevertheless impacted by the extraordinary drop in the overall market.

We believe the industry sales decline was caused by the on-going slump in housing, with new housing starts off by about 50% versus the first quarter of 2008. In addition, we believe the downstream distributor in contract of customers reduced inventories during the quarter which negatively impacted our shipments.

International sales represents about half of Water Systems revenues and were up about 3% organically, but were negatively impacted by $12.8 million due to foreign exchange translation. During the quarter, organic sales growth in Asia Pacific, Latin America and Southern Africa offset the decline in Europe and Middle East.

Fueling sales represent about 25% of our total revenues and sales in this segment declined by about 10% during the quarter. Our fueling sales in the US grew by about 2%, with growth of sales in California offsetting an 8% decline in the balance of the country. Fueling sales in international markets declined sharply during the first quarter of 2009, because last year in January and February, we had heavy shipments of vapor controlled systems to the Beijing area as part of China’s program to reduce air pollution prior to the Summer Olympics.

We were encouraged that in March our overall Fueling sales were up 19% versus prior year as station owners in California continued their capital spending projects to comply with that state’s vapor control mandate, and station owners outside of California also moved ahead with upgrade, replacement and expansion projects.

To summarize our sales outlook. During the next quarter, we expect our consolidated sales to continue declining versus prior year, but at a somewhat lower rate than in the first quarter. Regarding our Water business in the US and Canada, we believe that the recession will continue to cause our customers to curtail discretionary purchases and that housing starts will continuing to be a drag for the next two quarters. However, we believe the inventory adjustment is winding down and should not be a significant factor for the balance of the year.

We are forecasting that our international Water sales will be flat organically during the next two quarters, but then our reported US dollar sales reduced due to foreign exchange translation rate. Although, we don't try to predict exchange rates we believe that it is likely that the translation declines will diminish in the fourth quarter if the dollar gain strengthen versus the Euro and the Brazilian Real during the fourth quarter of 2008.

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