FELE

Franklin Electric Co., Inc. (FELE)

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Exchange: NASDAQ
Industry: Consumer Durables
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Franklin Electric (FELE)

Q2 2013 Earnings Call

July 30, 2013 10:00 am ET

Executives

Jeff Frappier

R. Scott Trumbull - Chairman and Chief Executive Officer

John J. Haines - Chief Financial Officer, Principal Accounting Officer, Vice President and Secretary

Analysts

Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division

Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division

David L. Rose - Wedbush Securities Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Franklin Electric Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Jeff Frappier, Treasurer. Please go ahead, sir.

Jeff Frappier

Thank you, Danielle, and welcome, everybody, to Franklin Electric's Second Quarter 2013 Earnings Conference Call. With me today are Scott Trumbull, our Chairman and CEO; John Haines, our CFO; and Gregg Sengstack, President and COO.

On today's call, Scott will review our second quarter and year-to-date business results and then John will review our second quarter and year-to-date financial results. When John is through, we will have some time for questions and answers.

Before we begin, let me remind you that any forward-looking statements contained herein, including those relating to market conditions or the company's financial results, costs, expenses, expense reductions, profit margins, inventory levels, foreign currency translation rates, liquidity expectations, business goals and sales growth, involve risks and uncertainties.

These risks and uncertainties include, but are not limited to, general economic and currency conditions; various conditions specific to the company's business and industry, new housing starts, weather conditions, market demand, competitive factors, changes in distribution channels, supply constraints, effective price increases, raw material costs, technology factors, integration of acquisitions, 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 and are included in Item 1A of Part I of the company's annual report on Form 10-K for the fiscal year ending December 29, 2012, Exhibit 99.1 attached thereto, and in Item 1A of Part II 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 except as required by law, the company assumes no obligation to update any forward-looking statements.

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

R. Scott Trumbull

Thank you, Jeff. We're pleased to report that our sales and earnings per share during the second quarter were the highest for any quarter in the company's history. This record performance reflects the successful implementation of 2 of the company's long-term strategies. The first is to build distribution networks in developing regions, where the markets for our Water and Fueling products are growing most rapidly. We achieved organic sales growth of about 9% in developing regions during the quarter led by robust demand in Latin America and Asia-Pacific.

The second is to provide a value proposition for our customers worldwide, such that we can more than offset inflation with a combination of tight cost controls, productivity improvements and price. During the second quarter 2013, our gross profit margin increased by 170 basis points, which enabled us to achieve record earnings while continuing to invest in initiatives that will spur the company's growth in the future.

Our Water Systems sales in the U.S. and Canada represented 44% of our consolidated sales and grew by 6% compared to the prior year. Residential and light commercial is our largest end-use category in the U.S. and Canada, and Water and Waste Water sales in this market increased by 9% compared to the second quarter prior year. This increase was driven by strong wastewater pump sales and a general increase in housing construction and renovation activity.

Our U.S./Canada Water sales were penalized by a double-digit reduction in our Pioneer mobile pumping equipment product line. The sales reduction is attributable to a slowdown in demand for mobile pumps in the upstream oil and gas market. Based on our order backlog, we're expecting our Pioneer sales to turn around and grow at a double-digit rate during the back half of the year.

Our sales of irrigation and industrial pumping equipment in the U.S. and Canada declined by about 2%, and this is in the U.S. and Canada, compared to the second quarter of 2012. Last year much of the U.S. was experiencing abnormally dry weather, which contributed to heavy shipments of groundwater pumping equipment. This year, drought conditions persist west of the Mississippi, but it's been unusually wet in the East. Based upon feedback from our customers, we believe that distributor inventories in the West are in line with demand. But our distributors in the East are concerned that their inventory levels may be too high, unless weather conditions normalize and demand levels increase.

Our Water Systems sales in the Middle East and Africa represented 12% of our consolidated sales and grew organically by about 4%. Our sales in the Gulf region continued to increase by more than 40%, as the governments in both Saudi Arabia and the U.A.E. are supporting investments in groundwater-based irrigation projects.

Sales in Botswana and Zambia increased dramatically in the second quarter, and we're preparing to open a new distribution center in Zambia during the fourth quarter. We experienced a high-single digit organic sales decline in the near East, including a double-digit decline in Turkey. We believe the sales decline in Turkey is mainly due to the timing of customer orders because our sales in Turkey grew at a double-digit rate in the first quarter and are projected to grow at a double-digit rate in the third quarter as well.

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