Good day ladies and gentlemen, and welcome to the Franklin Electric Company Fourth Quarter and Fiscal 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Jeff Frappier, Treasurer. Now you may begin.

Thank you Shannon. And welcome everyone to Franklin Electric’s fourth quarter 2015 earnings conference call. With me today are Gregg Sengstack, our CEO; Robert Stone, Senior Vice President and President of our International Water Systems Unit; and John Haines, our CFO. On today’s call, Gregg will review our fourth quarter business results and then John will review our fourth 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 help 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. Similar to our third quarter, fourth quarter revenue down 14%, was a couple of percent weaker than anticipated due to the same two factors. First, the translation impact from the continued strengthening of the U.S. dollar versus many other currencies. And second, the further weakening in the price of oil which depressed demand for Pioneer brand pumping equipment and for mud tanks manufactured in the UK by our fueling business and used in the North Sea oil production. However, with the continued reduction in input costs, the benefits of restructuring and other fixed cost take-out initiatives, better mix in selling price, adjusted operating income increased 21% over fourth quarter 2014. So even with a 14% sales decline, our reported and adjusted operating income, net income and earnings per share were all records for any fourth quarter in the Company’s history. Turning to end markets. The U.S. and Canadian end market demand for mobile dewatering pumps, agricultural pumps, waste water and water transfer pumps continue to be depressed but stable. Mobile dewatering pump sales were down over 50%, but the decline was marginally less than the third quarter. Agricultural pumping systems sales were again down over 20%, with overall groundwater pump demand throughout the year being up so much from 2014. There was limited interest from distributors to buy off from the fourth quarter to reach annual volume incentives targets. Our waste water pumping business, where we really didn’t have a normal season in 2015 continued to be down in the 10% range. However, from customers’ feedback and industry data, we are confident that we gained share in this market throughout the year. In Europe, excluding mobile pumping equipment, Water Systems sales in local currency were flat than the last year. In the rest of world, which represented…

Thank you, Gregg. As Gregg noted, we’re pleased with the reported operating income, net income, earning per share and the adjusted earnings per share in the fourth quarter of 2015 were all record to any fourth quarter in the Company’s history even though the consolidated revenue was down almost 14% versus the fourth quarter of 2014. Our fully diluted earnings per share as reported were $0.33 for the fourth quarter 2015 versus $0.06 for the fourth 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 representing these matters and this way gives our investors a more accurate picture of the actual operational performance of the company. Non-GAAP expenses for fourth quarter 2015 were $0.9 million, the fourth quarter 2015 non-GAAP adjustments had a net EPS impact that reduced earnings by $0.02. There was a $0.25 reduction in EPS for non-GAAP items in the fourth quarter of 2014. Recalling the fourth quarter of 2014 the company recognized the majority of the restructuring costs related to the closure of the Wittlich, Germany facility. In total non-GAAP items were $17.6 million for the fourth quarter of 2014. So after considering these non-GAAP items fourth quarter 2015 adjusted EPS was $0.35 which is an increase of 13% versus the $0.31 adjusted EPS the company reported in the fourth quarter of 2014. It is worth noting that the company estimates fourth quarter 2015 adjusted earnings per share was negatively impacted by $0.05 due to the translation impact from loan of foreign exchange. As Gregg noted, we saw a significant deterioration versus the U.S. dollar where many key currencies, which we do business in, including the euro, the real,…

Thank you. [Operator Instructions] Our first question is from Joe Radigan with KeyBanc Capital. You may begin.

Good morning, this is Shane Rourke on for Joe. Thanks for taking the call.

Hi Shane.

Hey, Shane.

So, first on the outlook for 2016, I'm curious, you said that you expecting this to start flow and then sort of build through the year. So we take that to mean earnings will be weighted to the back half and then sort of building on that. How should we think about margin cadence sort of throughout 2016?

Shane, what we would say is that our topline is going to – again we’re a northern hemisphere centric company, we have some cyclicality with the business, we would expect that given the slow U.S. market that we would expect the first quarter to would be kind of flattish topline with operating margins above last year and as we point out to be strengthening through the year as we see it in the North American and northern hemisphere strengthen overtime.

Okay, that's helpful. And then in the 3Q call you talked about how inventory levels were high at the distributor level through the middle of the country, and that was likely to bleed into 1Q. I'm curious what you're seeing there now, how that played out and what you're hearing from customers as far as demand early in the year there.

Yes, I would say that we – this is anecdotal information, because we don’t have a view into our customers distributors inventories to a great degree, other than what they tell us. I would say that given the overall weak demand and the [indiscernible] much of the residential sector, customers are bleeding off inventory throughout the year to generate cash. And so we would think that that continued in the fourth quarter. Where the inventory levels were relative to a year ago? Maybe similar, just because people are being conservative about buying up at the end of the year, we certainly didn't see [indiscernible] to do that. So I think the inventory levels are in pretty good shape coming into the year. We have had a relatively mild start east of the Rockies that would bode well for drilling activity. West of the Rockies you get into California and the coast, of course we’ll be getting a lot of rainfalls, the El niño, but recently with the number of contractors, the sense of the contractors business was still very active. So we're expecting a pretty decent start depending on what happens in the corn belt, the west Texas, how that starts with de-watering later in the season.

Okay. Yes, that's really helpful. Thank you for the time.

Thank you. Our next question is from Mike Halloran with Baird. You may begin.

Good morning guys. This is Ryan [ph] on for Mike.

Hey, Ryan.

Hey, Ryan.

So just kind of piggybacking on the first question there in terms of confidence through the year can you maybe just talk about your growth versus the market and how much after the distribution reset you guys expect to maybe gain a little bit of share back as we look through 2016?

Yes so generally, this recent reset has now been in place for 12 to 24 months. So we are expecting our position to be as it has been in the past, which is continuing to gain shares from our customer base, particularly with the number of new products we launched and our commitment to the marketplace. That’s not something that happens overnight but anyhow our continued, direct involvement of customers through our customer service, through our hotline, our technical sales force in training, is that we believe that over time people will see the value with Franklin and we will earn that share back.

Okay, great. And then Secondly on the margin side, is the run rate that we saw here in the second half in terms of taking cost out, is that the right way to think about next year or are there incremental cost actions you that guys think you can deliver through the year with restructuring or whatever the case maybe?

Yes, Ryan, I wouldn't necessarily say there has been incremental cost back that we're thinking about when we look at the fixed cost base of the company. We ended 2015 with a fixed cost based right in the $300 million range. We know that FX helped us to some degree on we also know that we took variable compensation, incentive compensation down very dramatically in 2015. So some of that is going to come back as we look forward in 2016 and has stayed tuned to guidance that we provided here. You may recall that in 2014 that same number was about $323 million. Some is going to come back but it's not going to come back to $323 million. And we’re expecting something depending on the FX in the range of $310 to $315 million for 2016. So the biggest thing is that we're focused on right now are really the growth rate as Greg said, the North American water growth rate is a key variable that until we get into that kind of season, the second quarter and more into the season, we won't know that for sure. However, we always are ready that if revenue lines anywhere in the world don’t materialize the way that we think they’re going to materialize, to go take incremental fixed cost actions. And we can do that fairly quickly. So I hope that answers your question – or gives you a sense of how we’re thinking about it.

Yes. I think that makes a lot of sense. And last one for me, in terms of capital deployment I assume there is no change, but just given the cash on the balance sheet and relatively low leverage just any changes in the M&A environment or anything else that you guys are seeing out there?

No, we'll continue I think, to forecast [ph] like we historically have Ryan. Our first priority is the [indiscernible] acquisition and we continue to look globally for acquisitions, both in the water and in the fueling segment. And we’ll see how that plays out. The only thing I would add is we have about 2.3 million of authorized shares for purchase. We bought more shares in 2015 we thought that was opportunistic to do that given where the share price was. And we'll continue to do that. If we don't see there is a pipeline or opportunity for the acquisition we'll do that. But it all – it really comes down to kind of balancing it again a forward multiple where the price of the stock is. Our CapEx for the year will be as we’ve talked in the past in the mid-30s, mid to upper 30s is kind of what we're expecting right now.

Thank you. Our next question is from David Rose with Wedbush Securities. You may begin.

Good morning, gentlemen. Thank you for taking my call

Hello David.

I had a couple housekeeping questions to start with. As I look through the press release and then I look on Page 2, on the table, you’re showing earnings after non-GAAP on Page 2 of $16.2 million, but in the press release you're also showing $16.2 million on a GAAP basis. So I was hoping you can reconcile the difference between those two, because they seem to be the same. And then the line above it, the net income attributable to noncontrolling interests shows $90,000 on the income statement, and on the table reconciliation you're showing $500,000. So can you walk me through the differences?

Yes, David, we – I might have to look at that and come back with some clarification on that, if there's an issue there. Income attributable to FE is $16,200, that's what's on the P&L. Our allocated, undistributed earnings is $500,000. And then the – so that would get it to $15.7. And the $15.7 plus the $0.5 would get us to $16.2. So – I'm sorry, David say again what your…

Your income statement – yes, your income statement shows $16.2 as the GAAP number.

Yes.

But here that's showing an adjusted number, if I'm reading it correctly. And then your income attributable noncontrolling interest on your income statement shows $90 but on your reconciliation page it's showing $500.

Yes. That’s the bottom of $500 versus the $90.

Yes, they will have to comeback with some clarification on that.

Okay.

The math on Page 2, I think does work if the $500 – with the $500. So we will come back with some clarification on that.

Okay. Then the other below the outline item is the $800,000 income item, the other income item. What was the $800,000 other income item. Can you refresh me?

Yes, the other income was primarily cash earned, interest earned on cash deposits, and then the minority share of certain minority equity investments that we hold around the world. And that’s what drove that other income. Those are the two primary contributors.

Okay, and then just from an SG&A perspective, I mean, you were able to parse some of it out, maybe a little bit more detail on the impact from the incentive compensation. Was this a reversal from something you accrued throughout the year, so you reversed it in the fourth quarter, is that right?

Yes, that's certainly a portion of it, David, yes.

And how much was that, the incentive comp so we can think about that next year? Because I’m assuming…

I would say the way I would answer that would be that if you look at the total SG&A decline in the fourth quarter year-over-year from last year’s fourth quarter, about half of it was related to FX and to incentive comp reductions.

Okay. And then the dealer reset the spend you had on the dealer reset, is that effectively done then, the SG&A, or is there an incremental piece that we have to look at, given the floods that you had last year and that it was, I think largely ineffective in Q2 of last year. Should we expect incremental spend this year for the dealer reset or kind of similar numbers as we had in 2015?

Now I think the SG&A impact of that was primarily in the back half of 2014, David. I think that anything that we have related to that I wouldn't characterize that being a lot incremental to that.

Okay, perfect. All right. Thank you very much. I’ll jump back in the queue.

Thank you. our question is from Edward Marshall with Sidoti & Company. You may begin.

Good morning, guys.

Good morning.

So I was wondering if you would – was better than the 2% to 4% sales guidance or growth that you anticipate for 2016. I’m wondering if you can kind of work to the individual segment level and kind of may be talk about water and fuel, as to the expectations there?

Yes, broadly I didn’t say that numbers are going to be similar. We typically our fueling business had a little bit higher rates than our water business. And that was consistent again this year we saw fueling in the fourth quarter up 9% outside the United States, and excluding the drag on [indiscernible] systems services drove strong single digits in the United States. So we typically see a little bit higher growth rate in fueling and in water. But we really look that as binging pretty similar because there are similar profiles. I mean, both of them have large exposures to developing regions of the world. While these areas of the world are having difficult times relative to some measurement in the U.S. dollars because of exchange rates is certianly unsettled situation in the Middle East, for example, is that overall we see both businesses having similar profiles and therefore is having similar growth rates.

So pretty much in line with the total sales guidance for the year, give or take?

Yes I think we're going to see – the expectation is certainly in the U.S. we had record rainfall in the second quarter of 2015. So we think that anything more than normal year in 2016 is going to be a tailwind for us in the U.S. market, subject to just the overall concerns about the ag market. But again as we’ve often talked about, and I think it's reflected in our numbers here, is the that, we are largely replacement items, so even if the farmers are not being in used systems much like if new home construction is not as robust, there’s still these large replacement segments to the market, which is what we serve. So we expect to get a bit of a tail wind from any kind of better weather situation than what we saw in 2015 and the middle of North America – the U.S., excuse me.

And there's been a lot of changes to the margin profile with incentive compensation, with cost savings that you've kind of enacted throughout the year. Seasonality in the fourth quarter kind of makes, I guess the judgment call leading into 2016 a little bit more difficult. I'm curious if you would maybe even particular just the water segment kind of talk about maybe the pluses and minuses to margin as we – I mean, first I guess can we get back to the 2014 levels and – or do you anticipate that that's going to exceed that?

From a margin profile?

As it relates to water?

Yes, I think – this is John. I don't know that we will get back to the 2014 levels for water margin. I think we'll see steady improvement in margins over 2015. Our target is still at 16 to 18 that we discussed before, but I'm not – I'm not sure we'll see – we may get into the low end of that range, but I'm not sure we'll see that for the full year 2016.

You say target 2016 to 2018 for what, I'm sorry?

For our water operating income adjusted operating income margins. That's historically the band that we have been targeting, and I would say for 2016 right now, we'll be in the – in the – more of a mid teens, not the 16 to 18 range.

Got you. Okay. Roy thought you were saying you were going to reach 16% which would have far exceeded the 2014 level. Okay. Then your assumptions for tax, has it changed much from the 27%.

The tax rate we would use for 2016 Ed is 25%.

25%. Okay. And that's baked into your guidance there, I guess. And then what's the expectation for energy? I think in one respect you thought it was going to be about 1% of sales, but then I think in some of the discussion points around, you know, maybe the level of rainfall and the stocking and so forth that you talked about, maybe some plus up in energy, so what are the expectations maybe throughout the year for energy as relates to your business?

Okay. Well what we talk about is we obviously in 2015 were impacted dramatically by the decline in oil price in our – dewatering pump sales, so volume was $50 million decline. We're saying now that our exposure, our direct exposure to the energy sector either through dewatering pumps, a little bit on the fueling business where we have the underground storage tank business, which those tanks were used in north steel oil production, as we look at some of the direct exposure in our ground water business to supporting oilfield production, we're saying that our exposure directly to the kind of price of oil is around 1% of our revenue. That the direct oil price goes, shouldn't have a lot of impact on business. More broadly, you can look at the price of oil as having a couple favorable impacts on our business. They're going to look for more station infrastructure, particularly developing areas of the world, where price of material is a material portion of a person's income. We would expect to see growth in infrastructure. Generally people have more money they move into the middle class, they're going to be using more water pumps and water pumping activity. So having lower overall energy cost is a long- term benefit to the business. When we refer to 1% we're referring specifically to it weigh believe is the exposure of our business to the price of oil on a go-forward basis.

Got it. Okay. Thanks guys.

Thank you. Our next question is from Kevin Bennett with Sterne, Agee. You may begin.

Good morning, gentlemen. How are you all?

Hey, Kevin.

Great. First, just want to clarify on the sales guidance, you're looking for 2% to 4%. I assume that's total revenue growth, which would imply organic revenue growth of 6% to 8%. Is that the right way to think of it after the FedEx headwind?

That’s correct.

Okay. Great. And then thinking about U.S. ground water specifically, you said sales down 15% Ag was down over 20% which I guess would imply revenue was up a little bit in the fourth quarter. Can you talk about that a little bit?

Actually, revenue was down a little bit, as well. It was not up, but we had – we had a pretty good backlog going into the year, so I would say demand was kind of flattish year-over-year but actual revenues were down in the residential segment.

Okay. And then on the de-watering and you just kind of touched on it. So you think, I guess direct oil and gas is now $10 million-ish of revenues. What was that I guess thinking back to, you know, 2013 and 2014, do you have those numbers in front of you?

Well, I use Pioneer as being – for a big part of that. So if you think about pioneer had about $50 million, $55 million exposure to oil and gas in 2014. That’s basically all went away – the vast majority have went away. And then in fueling business, [indiscernible] business we have, it’s also supports [indiscernible] oil, let’s call that $5 million to $7 million. We do have this small initiative in our official lift. We’re looking forward to being a bigger initiative at some point, but as the price of natural gas being as low as it is we continue to get that product installed around the world, we're having more wells put in China, as interest in Turkey, interest in India, where natural gas prices are higher than they are in the U.S. And so that's relatively a few million dollars right now, and we continue to install product line. But that's more talking about the exposure to oil and gas. The numbers I just gave you there.

Okay. Thanks. So I guess last first quarter of 2015, is when we really start to see the decline. And I have in my notes it was down 50%. I guess, you know, starting in 1Q of 2016 we've lapped those declines, is that the way to think about it? Or on a year-over- year basis there still may be a little bit to go?

Kevin, it’s pretty much I think the way to look at it is that [indiscernible] the decline in our business was pretty much with calendar year starting 2015 we had, as you may recall backlog – really had to push production in late 2014 and Pioneer compress the margins there. And with that all kind of came to a halt at the end of 2014. And 2015, we’re reporting pretty steadily quarter-to-quarter revenues at Pioneer were down by half, Pioneer is about $100 million business. It's now about a $50 million business, but stables at these levels [indiscernible] some potential organic growth Pioneer is there.

Okay, great. And last question for me is on pricing. I know we – I think we talked last quarter about there was some pricing issues in dewatering and potentially in AG, as well. Are you still seeing that or is pricing holding in? What's going on there?

Yes [indiscernible] we definitely saw improving prices sequentially as we ended the year. So fourth quarter pricing was meaningfully better than the first, second, or third quarter pricing on a consolidated basis. And so that's the good news. Both of that pricing benefit came from many of our international units that were adding price to try to get in front of some of the – issue, particularly for example in Brazil, where we didn't achieve a significant amount of price within this U.S., or for U.S. water business. And that’s one that we see definitely as more tail wind entering 2016. Tough competition year, tough weather year, and we just didn't get the price and some products I think we discussed at the end of third quarter, some products [indiscernible] products, we didn't think we can go to try to guess price in some of these end markets. So we have price increases announced already for February. And we've got a plan in place to reverse that. So we expect 2016 price to be better than what we realized in 2015.

Okay great. That’s perfect. Thanks John.

Thank you. Our next question comes from Matt Summerville with Alembic Global. You may begin.

Hi this is actually Nick Chen for Matt Summerville this morning. Thanks for taking our call.

Hi Nick.

In terms – hi guys. In terms of fueling systems can you just discuss a little bit about sort of what you're seeing outside of the U.S. in terms of those that are being converted to pressure systems and sort of what you're seeing as the annual conversion rate at this point?

It's a question we get asked often. I would generally say that given our organic growth profile at fueling, that there is a steady convergence through pressure throughout the world. It's generally seen as a more cost-effective system, a more efficient system, particularly as you get the larger gas stations. And we're seeing a similar profile outside the United States. We've seen in the U.S. where people are going from smaller stations to larger stations. That's why we've seen such a big activity in India, China certainly is pressure. Now, Brazil is not. Very, very low conversion in Brazil at this point, but they tend to have relatively small stations today. And so we respect that, to change in the future, when I'm not sure. Western Europe again, large install base [indiscernible] relative to the premiums that tend to be slow to change. Generally speaking, the world is moving pressure, it's a good way to distribute the fuel, particularly in large stations. And again we're seeing not only pressure in the business being stronger outside North America, we're also beginning to see again increased activity around recovery – a pause in China, in part due to the corruption in the two major Chinese oil companies that had a change out of leadership at the top, which I think disrupted some of the purchasing. China continues to put in big recovery [indiscernible] activates they are going to continue to work on – we'll begin to see more coming out of India now. India had a hiatus after – because they didn't have the staged more equipment in place with the tank trucks. We have a joint venture in India that is supporting conversion of tanked trucks two stage [indiscernible] – which is environmentally more friendly, that will then lead to stage two. We're seeing some interest in stage two equipment in deli, so we're beginning to see some interest in the Indian market towards vapor recovery. And then it's the underground piping systems. Many parts of the world are still using steel peep and we're seeing people moving more to plastic pipe. We sell – we have approval in India to do that. We're seeing interest in double wall pocket piping in China. So we're seeing the world moving in that direction, as well. So really across all of our fueling product lines, I can't leave out [indiscernible] systems to track all the fuel. It's just been generally across the product lines, across the globe, continued conversion to the more – that are environmentally friendly

That's very helpful answer. Thanks so much, guys. I'll jump back into the queue.

Thank you.

Is there – if there's no one else in the queue right now, I want to come back to David for the growth question. So the question that David was asking was when you look at the P&L the company on page 8 of the earnings release you see the income attributable to noncontrolling interest at the bottom. That is the earnings that is set aside for those entities that we consolidate but we don't consolidate a hundred percent of. An example of that the investment info in Turkey where we still have a 10% minority position. The accounting for this is generally set aside some of your earnings for these positions, and as you see on the P&L that's a reduction of the net income that is attributable to fiber. And then that 16 Q comes forward to the table on page 2. As the starting point for the earnings per share calculation. And that's the point of this table is, is to start the walk of earnings per share calculations. So David, the allocated undistributed earnings that you see there is not at all related to the $90,000 that's on the face of the P&L. This relates to this two step EPS calculation that you may be familiar with, which is a theory of that is effectively you have to set aside some of your earnings for share and equity awards that you've already made that are more - that basically are guaranteed to be granted. And that is the - that's what that $500,000 is there. Youcan see on year-over-year basis in the full year column that it's pretty consistent, a million envelope dollars or so. So that is strictly for the calculation of the earnings per share, which is what this table is setting out to do, versus the $90,000 that is an actual item on the face of the P&L. And I apologize for not being more clear about that earlier. End of Q&A

So with that we see no other questions in the queue, so we want to thank everyone for joining us on this conference call, and look forward to speaking to you at the end of our first quarter. Have a good day, everybody.