Franklin Electric Co., Inc. (FELE)

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Franklin Electric Company, Inc. (FELE)

Q3 2009 Earnings Call

October 26, 2009 5:00 pm ET


Patrick Davis - Treasurer

Scott Trumbull – Chairman, Chief Executive Officer

John Haines – Chief Financial Officer

Gregg Sengstack – Senior VP Fueling and International Water


Michael Schneider – Robert W. Baird

Matt Summerville – Keybanc

Paul Mammola – Sidoti & Company



Welcome to the Franklin Electric’s third quarter 2009 earnings conference call. As a reminder, today’s call is being recorded. I would now like to turn the call over to Mr. Patrick Davis.

Patrick Davis

Welcome to the Franklin Electric third quarter 2009 earnings conference call. With me today are Scott Trumbull, our Chairman and CEO, John Haines our CFO, Robert Stone, SVP of America’s Water and Gregg Sengstack, SVP of Fueling and International Water.

On today’s call, Scott will review our third quarter business results and John will review our third quarter financials. 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 the company’s financial results, business goals and sales growth involve risks and uncertainties. These include but are not limited to risk and uncertainties with respect to general economic and currency conditions, various conditions specific to the company’s business and industry, the 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 risks which are detailed in the company’s SEC filings included in Item 1-A of Part 1 of the company’s annual report on Form 10-K for the fiscal year ended January 3, 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 Trumbull

Water Systems represent about 83% of our total sales and in this segment our operating earnings before restructuring expenses improved by $2.3 million or 12% versus the third quarter last year and our operating income margin increased by 323 basis points.

Much of the Water profitability improvement is attributable to a share increase in operating income margins in our businesses in the U.S. and Canada. The U.S. and Canadian Water Systems revenues account for about 43% of our total sales, and during the third quarter operating margin on these sales increased by over 500 basis points compared to prior year.

This improvement in operating income margin was brought about by reduced raw material costs, reduced price promotion activity and the start up of expanded production operations in our Linares, Mexico factory and the curtailment of capacity in more expensive North American plants.

As a result, our operating earnings in the U.S. and Canada grew by about $3 million despite a $14.1 million or 16% reduction in sales. Based on trade association data, we are confident that we are continuing to gain share in our key product lines in the U.S. and Canada but we have not been able to offset the decline in the residential and light commercial pumping equipment market.

Again, according to trade association data, the North American residential and light commercial pump market was down 25% during the first half of this year in units brought on by the decline in housing starts, consumer spending and credit availability.

We believe that the rate of decline of our sales in the U.S. and Canada is slowing and that during the fourth quarter our sales in this region will approach prior year levels. Certainly, the significant increase in operating margin in our U.S. and Canadian water business, coupled with improving sales outlook was the most encouraging development during the quarter.

Our Water Systems businesses in international market represent about 40% of our total sales. During the third quarter our sales in these markets declined by about 5%. Excluding acquisitions and foreign currency effects, they declined by about 6%.

Sales increases in Latin America and Asia Pacific were not sufficient to offset the declines in Europe, the Middle East and Africa. International operating income declined modestly.

Fueling Systems represent 17% of our total sales during the quarter and Fueling operating income declined by $15 million versus prior year which more than accounts for the $12 million decline in total company third quarter operating earnings.

During the third quarter last year, Fueling Systems achieved record earnings as we benefited from surging sales of vapor control equipment to gas station owners in California who were complying with an environmental mandate in that state.

We have known for quite some time that the Fueling Systems sales surge in California would wind down in late 2009 or 2010, and since the fourth quarter last year, we’ve also experienced an unprecedented decline in our Water Systems markets. As I mentioned earlier, based on trade association data, the overall market for residential, light commercial pumps in North American is down 25% through the first six months of this year.

In light of this situation, we focused much of our effort in 2009 on fixed cost reduction and cash generation. We’ve reduced fixed costs which are a combination of SG&A spending and plant fixed spending throughout the year. In the third quarter, fixed spending was lower than prior year by $6.3 million or 10%.

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