Good day, ladies and gentlemen, and welcome to the Franklin Electric Company Inc 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Mr. Jeff Frappier, Treasurer. Sir, you may begin.

Okay. Thank you, Amanda. And welcome, everyone, to Franklin Electric’s first quarter 2015 earnings conference call. With me today are Gregg Sengstack, our CEO; John Haines, our CFO. On today’s call, Gregg 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. 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. During this call, we will also discuss certain non-GAAP financial measures, which the company believes helps investors understand underlying trends in the company’s business more easily. A full reconciliation of non-GAAP to GAAP financial measures is included in today’s earnings release, which you can find on Franklin Electric’s website. With that, I will now turn the call over to our CEO, Gregg Sengstack.

Thank you, Jeff, and good morning everyone. The first quarter started strong with slow measurably in the back half. While our GAAP earnings per share were 17% higher than last year, our operating earnings were well below our expectations and guidance, for the same two reasons decided by most global companies. Maternal strengthening of the U.S. dollar and dramatically lower oil prices. These two factors accounted for the majority of the $9.5 million decline in our adjusted operating income. The impact of these two factors was greater than we originally forecasted and overshadowed our continued positive organic growth across many markets. Specifically, the strengthening of the U.S. dollar reduced our report sales 7% and adjusted operating income by about 10% as compared to the first quarter of last year due to translation effects. In addition, our pioneer pump unit which drives the vast majority of the domestic revenue either directly or indirectly from the upstream oil and gas market to our sales decline by 50% in the U.S. as compared to last year. Even with the continued growth in offshore sales, total pioneer brand of sales declining by over 30% during the quarter. Most of the balances of decline in our adjusted operating is a result of two additional factors, first, raw material cost at several of our overseas units increased since these units purchased several raw materials that are priced globally in U.S. dollars. We have implemented price increases in those units to offset the cost increases. We should start to see the impact of these price increases during the second quarter and second, with the challenge of weak demand due to multiple factors in the U.S. market, we incur higher promotional cost in the quarter. So while we continue to be impacted by currency and the soft oil…

Thank you, Gregg. Our fully diluted earnings per share as reported were $0.41 for the first quarter of 2015 versus $0.35 for the first quarter of 2014. As we note in the tables in the earnings release, the company adjusts the as-reported GAAP operating income and earnings per share for items that we consider 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. When current transactions are related to previous period transactions that were called non-GAAP, the current period impact is also called on GAAP to be consistent. Non-GAAP expenses for the first quarter 2015 were $0.8 million and included $25 million in restructuring costs, primarily for the continuing European manufacturing realignment started by the company last year, and $0.3 million of other non-GAAP expenses related to retired executive pension costs. The company acquired a minority share holdings of pioneer during the first quarter. This transaction created subtle significant financial benefits for the company, but first was the reversal of the differed tax liability created in 2012 when the company acquired a controlling interest in the pioneer subsidiary and realized the gain on then equity investment in pioneer. The first quarter tax benefit, this first quarter tax benefit of about $4.8 million was treated as the non-GAAP adjustments to the company’s earnings because the transaction in 2012 that gave right to the gain and the tax liability was treated as the non-GAAP adjustment as well. The first quarter 2015 non-GAAP adjustments had a net EPS impact that reduced earnings by $0.09. There were no adjustments to EPS for non-GAAP items in the first quarter of 2014. So after considering these non-GAAP items, first quarter 2015 adjusted EPS is $0.32, which is down…

Thank you. [Operator Instructions] Our first question comes from Mike Halloran with Robert Baird. Your line is now open.

Good morning, guys.

Good morning, Mike.

Good morning, Mike

So, could you talk about some of the pricing initiatives and the cost initiatives you guys are doing out there? What about the product categories or the environment enables you to take some of these pricing initiatives and have them be successful, that’s the first question. And secondarily just kind of go through some of the fixed cost changes you guys are making.

Sure. Mike, I’ll speak to the pricing first. You take an economy like Brazil where inflation is not 1% to 2% that is more of a high single digits and where the economy – they’re custom to seeing when their input cost increase in pricing actions it’s pretty straight forward, we’ll follow right for example, when they’re changing the motor pricing along with their pump pricing, and we can also do that on imported product. Similarly in Southern Africa where we are in a competitive market where the vast majority of the product is coming in from Europe and or the United States rather areas of the world, again there is an expectation that you’re going to respond with market base pricing based on the cost in the import exist. And it kind of goes on throughout the developing regions of the world there all these expectations and you can move on pricing. With respect to fixed cost, certainly we are continuing to integrate in Brazil we mentioned Real it’s been a nice acquisition, it’s moving on schedule. We’ve talked earlier about the fixed cost takeout we’re doing in Europe with the consolidation of facilities there. We are balancing in North America, the balance of fixed cost with also increasing promotional activity which you can look at being variable but as part of our SG&A expense as we’re balancing that to maintain demand and maintain sales in the market place. So those would be kind of some general buckets, John you may help someone in that?

Now, I would just say Michael on the fixed cost line that there is a public specific projects in the U.S. relative to facilities that we’re working through right now, those will have some benefit in 2015. And as Gregg said, the balance of trying to draw the organic growth with taking out fixed costs where it makes sense. So I think we’ll stay very attentive to that and make sure that these effort to lower, structurally lower some of the fixed costs that we have continue to progress.

Thanks for that. And then could you just provide an update on how the distribution channel changes are going in North America?

Sure. As you may recall, we announced changes about early last year in 2014 that impact with the business, for instance with the east Mississippi River and Western Rockies where continues to be good traction of those areas. We’ve announced the change at the end of last year for the central region and that is underway and it’s unrolling, we’re getting positive feedback in the field but we haven’t minimally touched the situation with respect to weather, with respect to Ag and so that’s going to be little slower to come about but we’re clearly getting attraction we expected Eastern Mississippi and Western Rockies.

Okay, so just in line with expectations less the weather which leads to my last question here, maybe just give us a sense for how much inventory you guys think for the channel, is it a month or two of inventory that you guys need to work through, maybe not even remotely that high, and kind of what the core underlying demand looks like if you can kind of strip out the weather somehow?

Okay, we don’t have that level of visibility, it’s all anecdotal but I’ll make the following observation specific to agricultural activities. Yeah, if you follow the irrigation companies for example, their sales have been reported to off I guess in the mid 20s percent. And as most of that would take new activity and let’s say new activity for them is about half of our business. Well new activity for us would be maybe 20% of our business, because 80% of our are slow are principally replacement. So you’d say the math we work out would maybe 10% impact on the irrigation piece of our business. We saw that our sales decline was in the mid single digits, so you sense that there is just a level of inventory and again I think there is a level of conservatism because there has been a couple growing seasons like this where your people are just very cautious about taking additional product, but I can’t give you a specific number beyond that.

No, but that’s certainly helpful in triangulating. So I appreciate the time guys.

Sure.

Thank you. Our next question comes from David Rose with Wedbush Securities. Your line is now open. Q – David Rose: Good morning, gentlemen. Thanks for taking my call.

Good morning, David. Q – David Rose: If I can just intake a couple of these and I’ll get back in the queue with some additional ones, maybe a little bit more on the distributor change in the central region, have you started it, how far along are you, because I got the impression you are underway at the last call, can you give us a little bit more color in terms of how much longer you have given where you in the process?

Sure. I mean we’re underway, we have all of our new distribution appointments and it’s just a question I think of distributions that we used to do business with working off inventories and distributors that we have added to start selling our product in addition to products they were already selling. And we mentioned in the last call we think that kind of works through the first half of the year in that region, certainly there is a weather [indiscernible] reason, it just takes a little time for people work through this. Again, we saw and are moving the coast that we’re getting the traction we expected this year. Q – David Rose: So how are you measuring, I mean what are the metrics that you’ve seen in the coast that for margin comfort, is it on sales per distributor, is it profitability, is it combination of the two?

Yeah, it’s a growth and sales with our distribution partners or distribution partners we did business with in the past that are rejoined us, as seeing their growth and as seeing the growth relative to prior years.

And we have this groundwater market share measure Dave that we discussed in the past that as an independent compilation of every specific products and that’s something we watch and so far we have been kind of neutral or flat in the first quarter or year-over-year. So, yeah that’s another indication of kind of what our shares doing versus what else is happening out there I think as Gregg said, all of it is crowded by this backdrop of not so ideal weather conditions and then we have to deal with that and everybody else does as well, but it’s difficult to parse through or specifically say, this is because of weather or this is because of new distribution or this is because of another factor but generally it’s going a way we thought it would. Q – David Rose: Okay. And then if maybe we can switch gears a little bit on the impact from pioneer going forward, you have a larger piece of it, so I’m assuming that it’s going to be given where your pump sales were down 50%, it’s going to be a negative on the margin front in the second quarter versus the first quarter, is that fair?

Well again, they’re down 50% in the U.S., down 30% globally. The pioneer margins in the back half of last year contribution variable margins were low because we were adding a lot of cost by outsourcing, we don’t want to do that. So the pioneer margins on variable basis are consistent with our surface pumping margin, but overall we’re going to get delivered on the pioneer fixed cost and we’ve taking steps to reduce fixed cost there as well but we have a 50% decline in one market and 30% decline in raw, maybe it’s not going to respond that fast on your fixed cost base because we want to maintain a base to continue to grow that business as we have successfully gotten outside the U.S. Q – David Rose: Okay, that’s helpful. And then the last one, I’ll get back in the queue, can you give us a little bit more color on the fixed hike and the debt, I’m assuming some of it was for the debt from pioneer piece but what was the remainder of that?

Yeah, so the borrowings that you saw David, three things coming out of it, the minority pioneer purchase that we discussed. Then we have our first installment on the prudential firm debt, there was a $30 million installment coming up on that in this month. And just seasonally when you look at our company this was seasonally when we have the highest investments in working capital. So those – that higher debt was mainly anticipation goes three times. Q – David Rose: Okay, great. Thank you, I’ll get back in the queue.

[Operator Instructions] Our next question comes from Edward Marshall with Sidoti & Company. Your line is now open.

Good morning.

Good morning, Edward.

Good morning, Edward.

So, you mentioned the actions of control fixed cost and I just wanted to kind of maybe circle back to that if I could and I don’t know that you had quantified new benefits that you anticipate or maybe even better the timing of those cost actions that you’re planned to take. Do you have any kind of understanding maybe to put some numbers around that – those targets for me?

Well, we haven’t issued specific benefits and when you look at our SG&A generally you’ll see 4% to 5% growth in SG&A, the benefits from the European restructuring is underway, we talked about that a little bit. Some of the other stuff we’re just not a point of disclosing specific benefits but as I said, there are action some of them related to facilities here in the U.S. that we have started to take action on that we’ll have some incremental benefit to our fixed costs, not measured in tens of millions but measured in millions that we’ll start to see the benefit from.

And anything on the timing of that or is it just too early to tell?

No, I think you’ll start to see some of that in the back half of the year. We’ll certainly start to see some of the benefits from the European restructuring in the back half of the year as we get through most of the moves than disruption of that. Some of the other stuff that’s going on you’ll start to see benefits from in the back half of the year.

Okay. And when you talked about taxes, and I’d note the $4.8 million gain, I think you gave some others in there as well, I know you said there was a $2.5 million gain in other and then there was another $1 million gain on that in the tax line. Can you kind of walk me through kind of how you got back to the 27% effective again because I missed a lot of that.

Yeah, what we’re saying is that these gains runs through the tax line that are discrete items. So the 27% is what our company would view is the effective tax rate before the discrete items, if you consider the discrete items then we would call out, the one tax rate and the 27% for all 2015 might be more in the 24%, 25% range. But what we’re talking about was to this pioneer transaction was, there was a differed tax liability that was reversed that was the $4.8 million that related all the way back to the transaction in 2012 and therefore we called out it with the time reduction because when we did it in 2012 we call that on GAAP and now reversal or the benefit of it we’re going to call non-GAAP in 2015. The second piece is there is actually two pieces, the $3.5 million of discrete tax items in total, $2.5 million of that was taken in previous periods and burned the previous period’s earnings, and then a million of it was taken in the first quarter. So what we’re saying is that that because that tax item burned in the previous quarter’s earning when we reversed it now we’re not going to call that out non-GAAP, and that is related to the gain on the final minority purchase. So we paid basically $20 million for that minority position in pioneer, so we had a liability of about $3.3 million established. So two pieces that are flown through one is the gain, the absolute gain of $2.7 million which is another income and then this $3.5 million of differed tax liability or the reversal of differed tax liability that’s in the tax profit.

Okay, got you. So there is about $4.8 million of additional – I’m sorry, $8.3 million of unusual, what I’d characterize is unusual tax items in Q1?

The $2.7 million and the $3.5 million.

Got it, okay. Mobile pumps I think you said was down 50% in 1Q, is that first of all all-pioneer? And secondly I guess the veteran continue in 2Q?

The 50% decline was in the North American market, overall decline was 30%. And we expect sequentially the second quarter to have higher revenue than the first quarter, but we also said that the there will be a decline year-over-year in the second quarter from the second quarter of 2014.

Okay, now based on the timing of the remaining acquisition of that 30% of pioneer, first, was that consolidated priority and then reported back as a minority interest or was that – or were you receiving 70% of pioneer? And secondly…

Yeah, we’ve consolidated all of that and then reported a portion of borrowings [indiscernible] potion of borrowings out for the minority interest.

Got it. So essentially revenue line will be a light comparison on the top line going forward?

Say that again, I’m sorry.

So, essentially it wouldn’t be – I wouldn’t look at an additional 30% coming on from pioneer in that business, essentially you’ve been consolidating a 100%...

Yes, that’s correct, that’s correct.

Okay. And then finally, when I look at the fueling guidance, does that include the impact of FX like you included on the water business?

Yeah, it includes our current view of FX, yes.

Okay. And so when I look at maybe the largest zones that might be of interest to you, I guess India and China probably smaller and I know you called those as negatives for the fueling division but when I look at the two biggest impacts, would it be Brazil and Europe would be the two places that I think would have the biggest impact overall on the company? And maybe not necessarily the fueling business with the company as a whole and is it also right to think that maybe that had a left of an impact of fueling business more on the water side?

Okay, let me answer maybe a different approaches little bit probably. The fueling business like the water business, well the water business is about 45% of, we’ll call at U.S. Canada and then 55% of the rest of the globe. Joint business is similar rated, just almost 50-50. The fueling business have pretty big positions in India and China, larger in China than India actually. Maybe the fueling business is not particularly strong in Brazil although we do a decent business in Latin America outside of Brazil. So, if you think about fueling business the slowdowns we’re seeing where as you pointed out, we have a business in fueling that makes large underground tanks that are also used above ground and on the oil fields of the North Sea, that piece has been impacted. We see a slowdown in Russia because of the Russian economy and we’re seeing a slowdown in China which we believe is related to some of the political issues within the Chinese oil companies. And in India, the business is lumpy, it comes in tender business over a period of time and we have strong tender year last year, we’re not seeing that just yet this year, but the Indian [indiscernible] people want to see how that unfolds. So we won’t point that out to people. Generally in fueling business, maybe that was little soft in Europe but most of that has been the Russian business, so that’s kind of the view of fueling. Now if you look at water, we’ve had again great growth throughout Latin America where we have a very strong position and we’re expecting to continue growth. We’ve had – we have a solid business in Southern Africa, we had a lot of disruptions last year that’s settled down now, we got…

Okay, great. Thanks guys.

Thank you. Our next question comes from Kevin Bennett with Sterne Agee. Your line is now open.

Hey guys, good morning.

Good morning, Kevin

Good morning, Kevin

First on the water, can you remind us about the timing of the ramp in surface from the URI national pump acquisition, I’m just wondering kind of when the comps are going to get a little bit easier in that piece of the business?

Yeah, the URI acquisition, I don’t know exactly but we think it’s completed about a year ago and the ramp really came in the back half of the year, so the comps will be easier at the back half of the year and the margin comps will be better as well.

So the top line comps will be tougher in the back half and then, but the margins will be easier?

I’m sorry, yeah the top line will be tougher but the margins will be better fairly.

Got it, thanks Gregg. And then on the promotions in North America, is that primarily related to the weak Ag markets as well as the distributor reset or are you seeing weakness in the residential piece as well?

Well, we commented that our residential business was off a few percent, so it wasn’t naturally robust and there would be general activity, certainly again the Ag market is the big part of it because it’s a central region, it’s where we are focused our attention right now. So I’d say it’s a little bit of both but I wouldn’t say that the residential market is way off, it’s just low.

Okay. And then lastly Gregg, your organic growth rate total company has been kind of in a high single digits in the recent years. I’m wondering if you think any of the headwinds affecting your business right now will affect that longer term or are all of these things temporary?

That’s a big question. From the same kind of [indiscernible], you look back and say, okay what was Franklin’s strategy over the years, okay, and our strategy to grow through geographic expansion and product line extension is serving the markets globally. We have – we’re very fortunate to have almost 40% of our revenue coming from developing regions in our water business, not quite that much yet in fueling but fueling is growing rapidly in those regions as well. And that’s where 80% of the people are and that’s where, as people move into the middle class they’re going to consume typically more water, they’re going to consume more fuel and that all I think goes well for continue strong organic growth. We’ve seen in the North America market where we have – we’re repositioning our distribution, we expect then to see good organic growth there. And keep in mind, we continue to have robust pipeline of introductions as well so that would be a product line extension as mentioned, so we think that is also a good piece of our organic growth. But when you have currencies move tens of percent relative to the dollar, it just don’t come back to dollars, but the underlying growth demand we don’t see [indiscernible] matter of fact our argument can be seen as the world economy stabilizes we think like hit on cylinders could actually accelerate.

Sure, that’s helpful. And the last question, kind of what you mentioned I was – do you have any update on the artificial list that you guys are working on given what oil and gas is done, are you slowing down on that or?

We have – we continue to invest a level of consistent with prior years in artificial list, with the gas price in North America that we’ve sold for $3 there is not a lot of demand here. Gas prices outside North America is higher, we have better connections again in China with the oil companies, in India, in Turkey, these are markets that have higher prices and have more immediate demand. So we are continuing to protest systems in these markets, we haven’t had a major top yet but we will continue to focus and we have these connections with closer to the field. So we remain optimistic and we’ll continue to invest in the business.

That’s great. Thank you guys.