Franklin Electric Co., Inc. (FELE)

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Franklin Electric Co., Inc. (FELE)

Q1 2014 Earnings Conference Call

April 29 2014 17:00 PM ET


Jeff Frappier - Treasurer

Scott Trumbull- Chairman and Chief Executive Officer

John Haines - Vice President and Chief Financial Officer

Robert Stone - Senior Vice President and President,

Gregg Sengstack - President and Chief Operating Officer

International Water Systems


Joe Box - KeyBanc Capital Markets

Mike Halloran - Robert W. Baird

David Rose - Wedbush Securities



Good day, ladies and gentlemen. Thank you for standing by and welcome to the Franklin Electric First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen only mode. (Operator instructions.) As a reminder, this conference call is being recorded. I would now like to turn the conference to our host Mr. Jeff Frappier, Treasurer. Sir, you may begin.

Jeff Frappier

Thank you, Eric. And welcome everyone to Franklin Electric's first quarter 2014 earnings conference call. With me today are Scott Trumbull, our Chairman and CEO; John Haines, our CFO; Robert Stone, SVP and President of International Water Systems; and Gregg Sengstack, President and COO.

On today’s call Scott will review our first quarter business results and then John will review our first quarter 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 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 table 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?

Scott Trumbull

Thank you, Jeff. During the first quarter we again achieve record sales and earnings and increased operating income margins driven strong Water Systems sales growth in developing regions and strong operating income growth in our Fueling Systems business. Our Water Systems sales in developing regions represented 33% of our consolidated sales, an increase by 8% compared to the first quarter last year. This strong growth occurred despite the negative impact of declining currency in developing regions. Our developing region in water sales grew organically by 19% during the quarter after adjusting the foreign exchange rate. While our fueling sales increased by about 2% during the quarter. Our fueling operating income increased by 35% driven by a combination of productivity, favorable pricing, mix and synergies from Flex-ing acquisition. These positive factors were partially offset during the quarter by lower sales and earnings for our Water business in the U.S. and Canada due to an unfavorable mix shift. In total, our first quarter sales in the U.S. and Canada grew by about 2%. Foreign exchange rates were also a factor during the quarter reducing our consolidated growth rate by 360 basis points.

Turning to our first quarter review of our business by global market area. Our Water sales in the U.S. and Canada represented 38% of our consolidated sales and grew as I mentioned earlier by 2% during the quarter. While or sales of mobile pumping equipment sold to the pump rental channel grew, this growth was partially offset by declining sales to the groundwater and wastewater distribution channels. Our U.S. and Canada sales in the groundwater and wastewater channels declined by about 6.5% in the quarter driven by more significant declines during the severe weather months of January and February, but were positive during the month of March as the weather moderated.

During the first quarter, our second largest corporate customer, National Pump and Compressor, was acquired by United Rental. As you know United is one of the largest rental companies in the world and has announced plans to use the National Pump acquisition as a platform for significant growth. We believe that over this has the potential to be a big positive for our Pioneer product line.

Our Water sales in Latin America represented 13% of consolidated sales and declined by about 2% during the quarter. Now Latin American Water sales increased organically by about 9% when the currency effects eliminate. Most of the organic growth in Latin America occurred in Brazil, where our business was strong across virtually all regions and all product lines. In the second quarter, our new factory in Brazil is expected to open. Which will give us the capacity to continue growing and enable us to streamline our operations.

Our sales team in the Middle East and Africa was our star growth performer during the first quarter. This region represented 13% of consolidated sales and grew by 25% during the quarter. Our Middle East and Africa sales grew organically by a strong 43% excluding foreign exchange. The growth was driven by sales of groundwater pumping equipment sold under both the Impo and Franklin brand names in Turkey and North Africa.

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