FELE

Franklin Electric Co., Inc. (FELE)

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Franklin Electric (FELE)

Q3 2013 Earnings Call

October 30, 2013 9:00 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

Joseph K. Radigan - KeyBanc Capital Markets Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Franklin Electric Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Jeff Frappier, Treasurer. Mr. Frappier, please begin.

Jeff Frappier

Thank you, Janine, and welcome, everybody, to Franklin Electric's Third Quarter 2013 Earnings Conference Call. With me today are Scott Trumbull, our Chairman and CEO; John Haines, our CFO; Robert Stone, Senior Vice President and President of International Water Systems; and Gregg Sengstack, President and COO.

On today's call, Scott will review our third quarter and year-to-date business results, and then John will review our third 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 as we conduct this call, we will be making any forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which could cause actual results to differ materially from such forward-looking statements. A discussion of these factors may be found in the company's annual report on Form 10-K and in today's earnings release.

Also, our press release and this call contain non-GAAP financial measures that include, but are not limited to, earnings after non-GAAP adjustments, fully diluted earnings per share after non-GAAP adjustments or adjusted EPS, operating income after non-GAAP adjustments and percent operating income to net sales after non-GAAP adjustments.

The company believes that these measures help investors understand underlying trends in the company's business more easily. The differences between these measures and the most comparable GAAP measures are reconciled in the tables in our earnings release. All forward-looking statements made during this call are based on information currently available and, except as required by law, the company assumes no obligation to update any forward-looking statements.

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

R. Scott Trumbull

Thanks, Jeff. We're pleased to report that our sales and earnings per share were the highest for any third quarter in the company's history. Our global sales of Pioneer branded mobile dewatering systems and Little Giant branded wastewater pumps increased by more than 25% during the quarter.

In addition, we continue to achieve high single-digit organic sales growth for both Water and Fueling products in developing regions. This growth more than offset the decline in groundwater pump shipments. Recall that during the third quarter of 2012, drought conditions prevailed across much of North America, resulting in unusually strong demand for our groundwater pumping equipment. So on balance, Water Systems achieved 5% organic sales growth during the quarter after excluding the impact of foreign translation, which along with ongoing productivity improvements and expense controls, enabled us to increase our earnings per share after non-GAAP adjustments by 9% and increase our operating income margin after non-GAAP adjustments by 60 basis points to 14.8%.

Our water sales in the U.S. and Canada represented 42% of our consolidated sales and grew by 5% compared to the third quarter prior year. As I mentioned, our sales of groundwater pumping equipment in North America declined during the quarter, but this decline was more than offset with rapidly growing demand for our mobile dewatering pumps and for our residential and light commercial wastewater pumps.

We believe we'll continue to achieve solid sales gains for these product lines in North America through the fourth quarter. However, we are concerned that our groundwater pumping equipment distributors in North America may be entering the seasonally slow fourth quarter with somewhat higher-than-normal inventories. Our water sales in the Asia-Pacific region represented 5% of our consolidated sales and declined organically by 16% compared to the third quarter prior year. This decrease was driven principally by a falloff in sales orders from our customers in Southeast Asia.

During the first half of this year, our sales in Southeast Asia grew organically by 38% compared to the prior year. Several of our large distributors in the region curtailed orders during the third quarter in order to adjust inventories. So in spite of the third quarter decline, our year-to-date Southeast Asia sales are up 21%.

Our water sales in Europe represented 7% of our consolidated sales and grew organically by 8% compared to the third quarter prior year. We experienced solid sales increases across all regions of Europe, with our sales to Eastern Europe growing most rapidly. We had particularly strong demand in Europe for our 4-inch groundwater pumps and motors that are used in residential and light commercial applications, as well as in smaller irrigation and municipal applications. Our European sales also benefited from expanded distribution for our E-Tech branded line of stainless steel pumps. This is particularly encouraging because in the next few months we'll be expanding this product line to include a complete line of vertical multistage pumps used for pressure boosting in commercial buildings and industrial applications.

We also achieved solid sales growth in Europe with our Pioneer line of mobile dewatering equipment. As I've mentioned in previous quarterly calls, we're in the process of starting up a Pioneer Pump rental business in the U.K. We now have 6 rental depots open with the seventh scheduled to open in the first quarter next year. This venture is not scheduled to reach breakeven for several months yet, but it is starting to have an impact on our overall European sales growth rate.

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