Good day, ladies and gentlemen, and welcome to your Franklin Electric Q4 2011 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Mr. Patrick Davis. You may begin, sir.

Thank you, Kevin, and welcome, everybody, to Franklin Electric's Fourth Quarter 2011 Earnings Conference Call. With me today are Scott Trumbull, our Chairman and CEO; and John Haines, our CFO. On today's call, Scott will review our fourth quarter and annual business results, and John will review our fourth quarter and annual 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, effect of price increases, raw material costs, technology factors, integration of acquisitions, litigation, government and regulatory action, the company's accounting policies and future trends and other risks, which are detailed in the company's SEC filings and are included in Item 1A of Part 1 of the company's annual report on Form 10-K for the fiscal year ending January 1, 2011. Exhibit 99.1 attached there, too 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 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.

Thank you, Patrick, and good morning. The fourth quarter provided a solid ending to an outstanding year for Franklin Electric. During the quarter our earnings per share increased by 47% and by 35% after adjusting prior year's EPS for some unusual items. Our fueling team led the way in terms of earnings improvement during the fourth quarter. Fueling sales represented about 23% of our total company sales and increased by 11%. And adjusted fueling operating income grew by 80%. Our fueling team has done a masterful job integrating the PetroTechnik acquisition. When we acquired PetroTechnik, their operating income margin was about 1/2 the margin level in our existing fueling business. As a result, when we consolidated PetroTechnik, our overall fueling operating income margin fell from its traditional level of about 19% to about 14%. Since then our margins have steadily recovered as the fueling team has achieved their synergy targets. During the fourth quarter 2011, adjusted fueling margins were 21%, about 800 basis points higher than the prior year and better than our typical pre-acquisition level. In addition, sales of our fuel pumping systems and fuel management system product lines were particularly strong during the quarter. During the fourth quarter, our water system sales increased by 6%, and our operating income grew by 4.5%. Our fourth quarter Water Systems business was characterized by strong results in the Americas, which more than offset weaker results in Europe, the Middle East and North Africa. During the fourth quarter, our Water Systems sales in North and South America represented about 50% of our consolidated sales and grew organically by 9%. Throughout 2011, our year-over-year sales of pumping systems for irrigation and industrial applications grew by about 25% in North and South America. And they continue to increasing at this pace in the fourth…

Thank you, Scott, and good morning. Our fully diluted earnings per share were $0.50 for the fourth quarter 2011, an increase of 47% compared to the 2010 fourth quarter fully diluted earnings per share of $0.34. As we note in the tables in the earnings release, there were non-GAAP adjustments in the fourth quarter of 2011 and 2010 that impacted operating income, or EPS, that were not operational in nature. We believe presenting these matters in this way gives our investors a more accurate picture of the actual performance, operational performance of the company. In the fourth quarter of 2011, there were no non-GAAP adjustments impacting EPS, therefore the EPS of $0.50 is the same as the fully diluted EPS. In the fourth quarter of 2010, non-GAAP adjustments impacted EPS by $0.03 and our adjusted EPS after these non-GAAP adjustments was $0.37 versus the reported $0.34. For the full year 2011, fully diluted EPS was $2.65, an increase of 61% versus the fully diluted EPS of $1.65 in 2010. After adjusting EPS for non-GAAP items in both years, the 2011 adjusted EPS was $2.70, an increase of 42% versus the adjusted 2010 EPS of $1.90. Fourth quarter 2011 sales were $187.2 million, an increase of 7% compared to the 2010 fourth quarter sales of $175 million. Full year 2011 sales were $821.1 million and were $107.3 million or 15% higher than full year 2010 sales. 2011 full year organic growth was 9%. Foreign currency translations increased 2011 sales by $18.8 million or about 3%. Water systems sales were $143.9 million in the fourth quarter 2011, an increase of 6% versus the fourth quarter 2010, the Impo acquisition completed in the second quarter of 2011 contributed $4.9 million or about 4% to sales. Excluding acquisitions, water systems sales grew by 2%.…

[Operator Instructions] Our first question comes from Matt Summerville with KeyBanc.

Just a couple of questions here. With regards to Impo, it looked like, unless I'm mistaken that, that business contributed roughly $10 million in sales to your Q3, roughly $5 million in Q4. Why would that business have experienced that kind of sequential decline? And is that normal? Should we think about that going forward?

Matt, I think the Q3 number is high. Impo's Q4, it's a North American Water Systems business, so they do have some seasonality. But their sales in the fourth quarter were -- the fourth quarter sales for Impo consistent with the seasonal pattern of the third quarter.

Yes, it's mainly seasonality, Matt. The third quarter sales were significantly higher, about $9.8 million. Their fourth quarter sales were right around $5 million. And as Scott's saying, it's entirely due to seasonal nature of their business.

Okay, and then can we walk through your raw material versus pricing dynamics again in Europe? I want to make sure I'm clear. It sounds like right now, you have about a 4 percentage point kind of gap you need to close and how around the timing and which that actually gets shut. And are these contracts you have with your suppliers here, and if so, when did those get renegotiated? Can you just kind of walk through what happened there in more detail?

Okay. In the raw material costs as a percentage of sales in the fourth quarter in EMENA was higher by 410 basis points than it was in the prior year. A significant part of that had to do -- or a part of it had to do with the timing of the run-off of fixed price contracts that we had with suppliers. And when those fixed price contracts ended, then our -- several of the suppliers brought their prices back up to the market level. So we had a fairly, kind of fairly significant run-up in prices. And those prices then take 4 months or so to finally start showing up -- 4, 5 months in some instances to start going through cost of goods sold. And so the kind of peak impact of the higher cost materials year-on-year, we think is kind of flowing through in the fourth quarter and early in the first quarter of this year. And that the comparisons, as we look at what happened to raw material costs as a percentage of sales, as we go into the second quarter, the raw material costs as a percentage of sales in EMENA was higher in the second quarter than it was in the fourth quarter and in the first quarter, and that therefore, the comparison it looks like it's going to get easier. And we're getting 3% to 4% price increases across much of our European business. That will start kicking in, in the second quarter. The price increases are being implemented during the first quarter of this year. So we think the combination of the fact that prior year raw material cost, as a percentage of sales, are higher in the second quarter than they were in these last 120 days or so. And the fact that we'll have the benefit of a price increase, that will largely close this 410 basis point gap that we have in the fourth quarter of this year.

Got it. And then with regards to your Southern Hemisphere business, which is currently...

Just a little more color on it. Our business is influenced so heavily by operating leverage with contribution margins in the roughly mid-40s. If our volume is solid, then our operating income margin, with that formula that I described, higher raw material costs plus price, plus volume will have higher margins. I think that the key variable will be what happens to the volume in the EMENA region.

Got it. With regards to your Southern Hemisphere business, can you compare, kind of, what you're seeing this season, if you will, versus last season? And how your comps there look?

We think Latin America is, exclusive of foreign currency effects, going to grow at a double-digit pace again this year. Our business in Brazil looks solid, our business in elsewhere, and the southern cone looks very solid. We think that our distributors are optimistic with another good year in Mexico. So we think Latin America looks like it's in pretty good shape from a demand perspective and the issue will be what happens to the currencies. In the fourth quarter, our sales in Brazil were impacted by about 8% due to foreign currency translation effects due to the stronger dollar relative to the Real.

And then what about Southern Africa, Australia, some of the other markets?

Australia looks very strong. It's coming out of a period where, while we benefited from both Australia and Southern Africa in both of those markets, while we benefited by -- from weather conditions in especially the U.S. and Canada, dry weather leading to unusually heavy industrial and irrigation sales force . Our sales in Australia and Southern Africa have been negatively impacted during most of the season this year by relatively wet weather conditions. It -- recently, that started to change, so we're optimistic that we're going to have -- the weather is going to be our friend instead of our enemy in those markets this year. And we're optimistic that we're going to have a pretty solid sales performance, especially in Australia.

Last question, Scott. On, what would your assessment be of channel inventories in North America. Was there any sort of stock-up or prebuy ahead of this price increases, and then your level of confidence in Franklin's ability against increasingly tough comps to grow the Ag piece of the business this year?

Well, the Ag business -- our Ag business last year was up 25% in the U.S. and Canada. That business grew for 3 reasons: one is that the weather conditions were favorable and when weather is dry, then people are running their systems harder and there's a larger replacement demand. The second was more macroeconomic factors that impacted the farm economy. The demand for food and the higher prices of grains, typically, resulted in farmers being willing to invest more heavily. Now, the weather we don't know. And then the third is we gained share. There's no question in our mind that we gained share last year. And I think that there are distributors, who are right there with the farmers in their local communities, are optimistic that there will continue to be pretty strong investment in order to improve yields, in order to get more crops out this year. And that we believe that the shared gains we got last year are going to stay with us. And so at least 2 of the 3 were fairly confident that we'll continue to see strong demand, will benefit from strong demand on those fronts. And the issue of the weather is pretty difficult to predict that. But I think that, Mike, we're going to see another strong, industrial -- or excuse me, Matt, we're going to see another strong agricultural and industrial year for us. We're certainly not predicting another 25% growth, but we think it should be pretty solid. And we've seen -- we've continued to see pretty good growth in our residential business and our wastewater business. The U.S./Canada market is pretty solid right now. Not just in I&I, but in the residential and light commercial water and wastewater product lines, as well.

And then, Scott, your assessment of channel inventories, please?

Mike, I don't -- we're getting no indication from our distributors that they are stocking up. At the end of the year -- most all of our distributors last year had a really good year. And at the end of the year, they did not have to stretch in order to hit sales targets. And so they didn't, and if anything, they deferred purchases because each year, we kind of ratchet up the targets. And so they didn't want to add to their sales at the end of the year. So there was no real, from our distributor base, no real inventory build or incentive for inventory build at the end of the year. And we're not seeing that they're building inventories at this stage other than the normal seasonal pattern. They normally build either in March or April for the upcoming construction season just to prepare for the season. So other than the normal inventory build that we see every year, we're not -- we don't think that channel is overloaded at all.

Our next question comes from Mike Halloran with Robert Baird.

So, if you look at the water margins, it sounds like all the pressure was really because of the European, North Africa region. A little color on the North America margin, it sounds like those are progressing pretty well. Are you still seeing any sort of mix impact that you think is maybe a little bit above norm? It didn't sound like from your Ag outlook commentary there. And then just any more color on how you think those margins in North America look now and progression from here? Qualitatively, that is.

Okay. The North American business has grown nicely this year. And again -- and we've done our -- the management team there because we've been consolidating facilities, we moved Oklahoma City into Linares over the course of the year. And as we have consolidated down to a smaller and smaller manufacturing number of facilities in North America, we are able to take out of good bit of fixed costs. So our -- even though we increased our RD&E spending and some of our sales spending, our overall fixed cost base in our North American operations was relatively flat last year. And so when we get sales growth, a lot of that incremental contribution margin goes straight to the bottom line. And that, I would say, that dynamic, more than mix, has accounted for the margin improvement that we've seen in our U.S./Canada Water Systems business over the last year. Having said that, a portion of it is also because the Irrigation and Industrial business tends to be modestly more profitable than our Residential and Light Commercial business. And so our most rapidly growing end use was also one of our higher profitability end uses. But I think the primary driver of margin improvement has been operating leverage, and we believe that we're going to be successful at holding the line on fixed cost increases well below the rate of increase of sales in North America, and that we'll continue to see operating leverage generated, margin improvements in that business.

That then makes sense. And then on the North America market, in general, talk about the AG side already. Maybe you could give a little thought on what's underpinning your 2012 expectations on that side? If you're starting to see something beyond the replacement demand side, a little color would be great.

Okay, you're talking about on the residential side.

Residential, light, commercial.

Okay, we're benefiting by a modest uptick in new housing starts. I mean we're coming off the bottom and some of our products that are really new home construction-related products are starting to pick up a little bit. But I think 80% of our demand on the residential, light, commercial side or more is still replacement demand for residential or light commercial water well systems or residential-like sub-sewage and effluent pumping systems. So I would say replacement continues to be the vast majority of our shipments on that side of the business.

And you expect that to change, not drastically obviously because replacements' always going to be the bulk of mindshare, which you guys are pushing through. But are you expecting that to shift a little bit more in 2012? How healthy of a backdrop are you looking at for residential?

We really aren't expecting at the shift very much in 2012.

Okay, that makes sense. And then as far as the new product introductions go, could you talk a little bit more about the prepackaged system solutions you're putting in the marketplace? Specific end markets geographies that you're pushing through, and then what makes it unique relative to what the marketplace is selling right now?

Okay, we have 2 systems that we're introducing, both are in beta test and will be until the third quarter. These pumping systems, particularly that involve water and water well, we don't like to introduce them until we've done very extensive life testing of these systems. And so the 2 systems that we're excited about right now are number 1, a system for dewatering oil and gas wells. The technology for extracting oil and gas, not always, but frequently involves removing groundwater from the well site, relieving pressure in the formation and allowing gas to flow to the surface or removing water that contains oil mixed with it from the ground, putting it in some storage system and letting the gas and oil separate, the oil is stripped off and the gas is reinjected or the water is reinjected. And so we -- there are literally hundreds of thousands of wells that are really operating to extract natural gas and oil that are really, just really deepwater wells. And up to now, our company has not focused on operating at those depths. So our systems are really designed for extracting water for irrigation or personal consumption or industrial uses and typically go down to no more than 500 to 1,000 feet, where the depths for -- that we need to go to for the oil and gas market is frequently 1,000 meters or more. So what we have -- what we found is that the systems that are being used at those depths are very expensive and are subject to replacement frequently on a 1 to 2-year cycle. And we were convinced that we could develop a system for extracting water at those depths that would have the same kind of reliability that we have in our traditional systems. It's…

I'm not showing any further questions at this time. I'd like to turn the conference back over to the host for closing comments.

Well, Kevin, thank you and thank everybody else. Appreciate your time today.

Ladies and gentlemen, this does concludes today's presentation. You may now disconnect, and have a wonderful day.