Good day, ladies and gentlemen, and welcome to the Franklin Electric Fourth Quarter and Fiscal 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today, Mr. Patrick Davis, Treasurer. Sir, please go ahead.

Thank you, Karen, and welcome, everybody, to Franklin Electric's Fourth Quarter and Full Year 2012 Earnings Conference Call. With me today are Scott Trumbull, our Chairman and CEO; John Haines, our CFO; Robert Stone, SVP and President, International Water Systems; and Gregg Sengstack, President and COO. On today's call, Scott will review our fourth quarter and full year business results, and then John will review our fourth quarter and full year 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 related 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 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 31, 2011, 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?

Thank you, Patrick. I'm pleased to report that the fourth quarter 2012 was our 13th consecutive quarter of year-over-year earnings per share improvement, with EPS after non-GAAP adjustments of $0.56, an increase of 12% compared to the prior year. Additionally, our consolidated operating income margin after non-GAAP adjustments improved by 170 basis points compared to the fourth quarter prior year. We attribute much of the margin improvement to leverage on excellent sales performance from our management teams in developing regions. Over the past 8 years, we've increased our business base in developing regions from about 16% of sales to 40% of sales in the fourth quarter. We're continuing to expand in developing regions in order to take advantage of burgeoning demand growth for our water and fueling product lines in Latin America, the Middle East and Africa and Asia-Pacific during the fourth quarter, our Water and Fueling organic sales growth in developing regions was a healthy 16% and drove much of our earnings gain in the quarter. Turning to our review of our Water business in each global region of the world. Our Water Systems sales for the U.S. and Canada represented 34% of our consolidated sales, an increase by 10% during the quarter. However, excluding acquisitions and the impact of foreign currency translation, U.S./Canada sales declined organically by 4% in the fourth -- compared to the fourth quarter prior year. During the fourth quarter of 2011, 2 of our large OEM customers in the U.S. ordered a higher-than-normal percentage of their annual motor requirements primarily in order to buy ahead of a price increase. So in 2012, our fourth quarter sales to these customers were down sharply. Excluding these 2 customers, our organic sales growth in the U.S. and Canada would've been 4% due in part to higher wastewater…

Thank you, Scott. Our fully diluted earnings per share were $0.55 for the fourth quarter 2012, an increase of 10% compared to the $0.50 fully diluted earnings per share the company reported in the fourth quarter 2011. As we note in the tables in the earnings release, there were some non-GAAP adjustments in the fourth quarter 2012 that impacted operating income and 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 operational performance of the company. In the fourth quarter of 2012, the non-GAAP adjustments were primarily related to certain legal expenses incurred by the Fueling Systems segment of $0.4 million pretax and reduced EPS by $0.01. There were no non-GAAP adjustments in the fourth quarter of 2011. So after considering these non-GAAP items, fourth quarter 2012 adjusted EPS is $0.56, which is $0.12 -- which is 12% higher than the $0.50 adjusted EPS the company reported in the fourth quarter 2011. For the full year 2012, diluted earnings per share were $3.46, an increase of 31% compared to 2011 diluted earnings per share of $2.65. Adjusted earnings per share were $3.14, an increase of 16% compared to the $2.70 adjusted earnings per share in 2011. Water Systems revenues were $157.5 million in the fourth quarter 2012, an increase of $13.6 million or about 9% versus the fourth quarter 2011 sales of $143.9 million. Sales from businesses acquired since the first quarter of 2011 were $10.4 million or 7%. Water Systems sales were reduced by $3.5 million or about 2% in the quarter due to foreign currency translation. Water Systems sales growth, excluding acquisitions and foreign currency translation, was about 5%. Scott mentioned developing regions was the principal driver of the quarterly sales growth.…

[Operator Instructions] Our first question comes from the line of Matt Summerville from KeyBanc.

A couple of questions. First, in Q1, can you talk about why you don't anticipate getting much in the way of incremental leverage off your revenue growth down to operating income? What are sort of the pluses and minuses in there?

We have -- actually, Matt, we've got a number of projects going on right now that are causing our fixed costs to increase. We're starting up this 3 pump rental venture in the U.K., we're starting a new warehouse in Columbia, we have a couple -- or distribution centers, we have a couple of other smaller distribution expansions. And I'd say, it's primarily because of growth initiatives causing our fixed spending to grow at a rate that is about in line with our sales growth. It's been our practice and philosophy here to allow our fixed spending to grow anywhere from 50% to 70% of the rate of growth of our sales and to see operating leverage. I think over the next several quarters, that will temporarily be suspended in light of the initiatives that we're undertaking.

Okay, that's helpful. And then both of you mentioned the pre-buy impact, if you want to call it pre-buy, in the fourth quarter of '11 on the part of the couple of pump OEM customers. Is there any sort of quantification that you can put around that at least on revenue impact? If my back of the envelope is correct, it was not an income sequential number.

Well, the -- I think the year-on-year difference was about $5 million, $4 million to $5 million. So in other words -- and we don't expect their 2013 purchases to be lower than their 2012 purchases. So it's strictly a timing issue for -- as far as that goes. But it hurt our fourth quarter as far as U.S. and Canada is concerned, as far as organic growth.

And then just maybe one more and I'll get back in queue. For Pioneer, it looks like revenues have fallen off pretty -- fairly precipitously in that business. Can you talk about where the annualized run rate of that business is from a top line standpoint, and whether that's also diluting the company's earnings?

We would not care to disclose the Pioneer Pump sales run rate. That's a number that we have not disclosed. I will acknowledge that in the back half of last year, Pioneer's sales were below our expectations. As you know, they had grown very rapidly since we acquired roughly 35% of the business 5 or 6 years ago, and a lot of that growth was rental equipment into the oil and gas market. And the oil and gas market has slowed, and so that equipment has come and -- instead of being rented and out in the field generating revenue for our pump rental customers in North America, the equipment has come back to their lot and they're not purchasing as much. So our sales fell with -- in North America last year at Pioneer compared to what they were in 2011. We are expecting, and I know our Pioneer management team is expecting, that the sales will rebound from 2012 levels to between 2012 and 2011 levels in 2013, okay?

That's helpful.

And our next question comes from the line of Mike Halloran from Robert W. Baird.

So can you talk a little bit about the ag side of the business for you guys? How that tracked in the quarter? And then more importantly, as you look at '13 here, obviously, a couple of strong years of growth behind you, what's the market outlook looking like as it stands today? And then secondarily, maybe just a little bit of a discussion of how you see mix particularly on the ag side tracking for you as you work through the year and impacting your margin profile?

Okay. Firstly, we have to say that on -- we, living here in the United States, are inclined to be very attuned to what's going on in the ag market here in the U.S. But the ag market in the U.S. only represents less than 40% of our global ag product sales. So for us, the ag market is -- not only the ag market for U.S. but what's going on globally. Globally, our ag sales is in 2012 were up about 6%. Now they were up substantially more than that in the U.S., but there were other regions of the world where it was not a particularly strong ag sales, particularly sales -- particularly in the southern hemisphere where while it was hot and dry up here, it was, last year, during the ag season, rainy, so our ag sales were down a little bit in those regions. So in overall, it was a decent year but not an extraordinary year globally as far as ag sales are concerned. In the fourth quarter, our ag sales were up about 1%. And so, let's say, we anticipate this year, we're seeing a stronger ag business in the southern hemisphere right now because we're coming through that season right now. So we're seeing pretty good ag sales in the southern hemisphere. In the fourth quarter, our ag sales in the U.S. and Canada were actually down a little bit. So -- however, I will say that our conversations with customers, distributors in that segment of our business are advising us to expect another strong agricultural equipment sales year in North America. So right now, we were a little surprised to see ag sales in North America off a little bit, that small amount in the fourth quarter. But our salespeople still have quite a bit of confidence that it's going to be another good ag sales year in North America, and we think we're going to see a little bit of a rebound in some of the other regions of the world.

And then maybe shape that conversation in context of your Water margin and how you guys are thinking about the mix impact as you look in the first quarter and beyond?

Well, certainly, the ag business is a higher-than-average profitability business for us. It's not extraordinarily higher than average. I, right now, think that our margins are going to be driven probably more by the success we have with price increases and the impact of raw material inflation, then by mix as we look out. Mix is an important factor, but right now, I think we're encouraged that we've been successful pretty much everywhere in the world that we've gone after price this year, and at the end of 2012 and so far in 2013, we're encouraged that the raw material inflation that we experienced in 2011 and through the first part of 2012 has kind of flattened out. So we think that will be good for margins. I will say that, if anything, our mix might pressure margins a little bit, I think we're going to see a much stronger wastewater sales year this year than we had last year and we may see a somewhat, somewhat softer ag market this year. I mean, I don't think -- it's a little early to tell there. And that trade-off would mean -- would penalize earnings a little bit. But I think the big drivers are going to be price and raw material inflation, and we're pretty -- we're feeling pretty good about that equation right now.

And last one for me. At the end there, you mentioned the wastewater side. It looked like in the fourth quarter, there was a little bit of trend, I don't know if that was Sandy-related. So maybe could you just talk about the underlying trends there? What inventory levels look like, both from an industry perspective, I guess, more so than for you guys, but from an industry perspective on the inventory side? And then kind of what makes you feel like 2013 will shape up to be a little bit better than historically bad 2012?

Yes, it's easy comp is the answer. It was last year, I don't know whether you've seen the industry data or not, but it was down like 30%. It was an extraordinarily bad year in 2012. And so we think it's safe to assume -- 2011 was a pretty good year. So that -- I'm not -- I would -- I don't think a bounce back to normal would mean industry unit shipments would be up 30%. It might be up 15% or 20%. And so we would expect -- we have generally, in that part of our business, done better than the industry, so we're expecting a nice increase in wastewater sales this year just because of the easy comps.

And our next question is a follow-up from Matt Summerville from KeyBanc.

Just a couple of quick things. You talked about kind of the grey water market and what your assessment of it was for 2012. Scott, what do you think the fresh water market did from a growth standpoint? And what was your performance relative to the market, as you see it?

Okay. Well, in North America, our largest product category volume-wise is 4-inch submersible pumps and motors, and our unit shipments of those products in 2012 increased by 22% and the balance of the industry increased by 3%. Another important product line, one of our largest product lines is jet pumps. And our shipments of those products increased by 8%. The balance of the industry declined by 8%. So unfortunately, we don't get good strong data on our share of the market in very many product lines, but we do get good data on that. But I think it's indicative of the fact that especially in the pump market, we're gaining share, and so that's helping us to grow a little faster than our competitors in the clean water segment of the market, particularly in the U.S. and Canada. I don't know if that answers your question or not, but that's the data that we can point to.

And then can you talk a little bit more as to what your expectations are for the -- not with respect to Pioneer, so that the newer product you're bringing to market in oil and gas, with some of the tests you have running in the U.S., South Africa and Australia, how close are you to more of a tipping point in actual getting orders like you started to see in South Africa? I want to understand more on the timing of all this.

Okay. Matt, I think the way this is -- first of all, we're encouraged by what we see because we -- the customer reaction to our product is very favorable, and we are working with some customers that have the potential to buy a large number of systems from us. But their attitude is, wow! If -- kind of if this is what you say it is, this is -- I hope you can make enough of them. Literally, we've had those kind of comments. But it's always followed by, I want to take 2 of them, I want to take 4 of them and put them in, and see how they work for 6 months or so. And so I think we're going to have that over the next -- I would say, for 2013, we're not counting on this being an important part of our sales growth story in 2013, but we think it has the potential to be an important part of our sales growth story in 2014 and beyond.

Scott, as you think about, and obviously this is early days here, but how would you characterize to your point, to your ability to get this product out the door? Is this a long lead time product? And how would the -- do you envision the margin profile of this business comparing to the core Franklin Water segment?

Well, it really is comprised of 3 principal components as far as the product is concerned. There's a Franklin submersible motor that we can -- that we have plenty of capacity to make. Of course, it's a adapted Franklin submersible motor, but it -- nevertheless, those adaptations are things that we can handle in our existing facilities. The pump is a progressive cavity pump, and we have installed several million dollars worth of machining equipment in our factory where we manufacture progressive cavity pumps in South Africa. And that factory is going to be capable, we think, of keeping up with the demand for these. And then there's the drive and control unit, which we are manufacturing in our existing plant in Grant County in a sort of a adaptation to products that we're currently making. So yes, we think that we can keep up with this. I want to make a point. One of the things about this market where we may make 1 million units of some products a year for the Water Systems market, for this market, we were going to make a lot fewer units, but the systems sell for a lot more dollars. The system that the Australian customers are considering, we sell for $50,000 a system. And because they're looking at a complete skid mounted system, some of our customers in North America are looking at $10,000 systems because we will be selling a different configuration. But nevertheless, you don't need to make as many units when you're selling things for $50,000 or $10,000 apiece in our business. And we expect the margin profile to be consistent with our other Franklin groundwater pumps and motors type products.

And that concludes our question-and-answer session today. I would like to turn the conference back to Mr. Scott Trumbull, Chairman and CEO, for concluding remarks.

Thank you for listening in on our conference call today, and thank you for your interest in Franklin Electric. Goodbye.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.