Good day, ladies and gentlemen, and welcome to the Franklin Electric Company’s First Quarter 2016 Earnings Conference Call. At this time all participant lines are in a listen-only mode to reduce background noise, but later we will be a question-and-answer session and instructions will follow at that time. [Operator Instructions] As reminder, today’s conference call is being recorded. I would now like to introduce your first speaker for today, Jeff Frappier, Treasurer. You have the floor, sir.

Thank you, Andrew, and welcome everyone to Franklin Electric’s first quarter 2016 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 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 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. Our company delivered solid results in the first quarter, led by the improved profitability of our U.S. water business and record performance in our fueling systems business. Excluding the impact of foreign exchange, we achieved 3% organic growth in the first quarter of 2016 growing both our water and fueling systems segment. Adjusted operating income increased 33% as we realized the continuing benefits improved costs, sales mix, and pricing. The performance of our water systems business continued to improve. After non-GAAP adjustments, water systems’ operating income increased 25% on a reported 6% sales decline. Water systems’ operating margin increased 200 basis points sequentially and increased 360 basis points compared to the first quarter 2015. Our fueling systems business had our record first quarter with operating income increasing 8% and a 7% increase in sales. Our adjusted earnings per share declined 9% as compared with first quarter of 2015. You may recall, we have had transactions in the first quarter of 2015 that generated significant below the line benefits, including income on the tax line, all related to purchase accounting. John will give more details on that in a minute. Turning to end markets, our U.S. groundwater business showed signs of recovery during the quarter. The year-over-year revenue decline in agricultural pumping system sales was about 5% compared to the 20 plus percent decline experienced in the last half of last year. Our overall revenue from groundwater systems sales was up year-over-year. Our surface pumping business was weak in two regions. Our Canadian business was impacted by the dramatic swing in the value of the Canadian dollar over the quarter, and our retail sump pump business was soft due to the mild winter in the upper Midwest. Overall, our water business in the U.S. and Canada was flat…

Thank you, Gregg. Our fully diluted earnings per share reported were $0.28 for the first quarter of 2016 versus $0.41 for the first quarter of 2015. As we noted in the table in the earnings release, the Company adjusts the as-reported GAAP operating income and earnings per share for items we consider not operational in nature. Non-GAAP expenses for the first quarter 2016 were $1.1 million included $800,000 in restructuring cost and $300,000 in expenses related to retired executive pension cost. The first quarter 2016 non-GAAP adjustments had a net EPS impact that reduced earnings by $0.01. Non-GAAP expenses for the first quarter of 2015 were $800,000 and included $500,000 in restructuring cost primarily for the European manufacturing realignment and $300,000 of other non-GAAP expenses related to retired executive pension cost. The company redeemed the minority shareholdings of Pioneer during the first quarter of 2015. This transaction created multiple accretive benefits for the Company, a portion of which were called out as non-GAAP and a portion that were not. In last year’s first quarter, a tax benefit resulting from the Pioneer purchase of about $4.8 million was treated as a non-GAAP adjustment. I will discuss additional income statement impacts of last year’s Pioneer transaction in a few moments. In total, the first quarter of 2015 non-GAAP adjustments had the effect of lowering EPS by $0.09. So, after consideration of the non-GAAP items, first quarter 2016 adjusted earnings per share is $0.29 versus the first quarter 2015 adjusted earnings per share of $0.32, a decline of about 9%. As worth noting that the company estimates its first quarter 2016 adjusted earnings per share was negatively impacted by $0.03 due to the translation impacts alone of foreign exchange. As Gregg noted, global currencies have strengthened over the last quarter relative to the…

[Operator Instructions] Our first question comes from the line of David Rose from Wedbush. Your line is open.

Good morning. Thank you for taking my call.

Good morning, David.

Hi, David.

Just a couple. You noted that the groundwater pumping business had improved, and ag had been down 5% versus down 20%. So is your sense – this is question one. Is your sense that you are at the bottom of ag? Was there something that suggests that there might be more volatility in international markets? And then maybe just kind of give us a sense of how ag looks domestically versus internationally. And then a last question is on the margin front. You clearly had some tailwinds, as you noted, in material costs. How should we think about those headwinds as some of those costs have increased? Will that roll out in Q3; some of it in Q2? How should we think about the headwinds in the back half of the year?

Okay, David. I’ll speak to the first half of that and I’ll have John speak to the margin questions you had here. Yes, in the North American or the U.S. market, we saw groundwater – the decline to be much less than the back half of last year. I’m saying that in my travels through the center of the country over the last month or so that the sense is that people are still a little reluctant to take inventory. Clearly, demand will be driven by the use of pumps in second and third quarter for the ag space, which is somewhat weather-dependent. We will have to see how that unfolds over time. But I’d say that the comp was – our decline last year was in the second quarter. So the comp was pretty fair this quarter, as there is the nice improvement. And we would expect and we are expecting continued improvement throughout the year. Relative to the international markets: yes, again, stability. Our ag business globally was up just a little bit. So we have a sense that kind of globally, there’s stability in that business. There’s some puts and takes. We are doing well in Brazil in our groundwater business. We are doing well in the Middle East, Europe. But South Africa’s certainly been impacted. We talked about mining, but it has also been impacted their – they had a really tough situation with their maize crop and with general farming direction now importing products that aren’t standard as opposed to exporting, which they were a couple years ago. So I think from a standpoint of the ag business, again, domestically improving, internationally stable. John, you want to talk about on the margin side?

Yes. David, you are right. The key drivers of the margin expansion in the first quarter were some of the tailwinds that we discussed, not least of which is lower raw material input costs. We expect to continue to see margin expansion for the balance of the year, although in the latter half of the year, the comps will become a little bit more difficult. And as you mentioned, there is some indications that some of the favorable raw material trends may start to reverse themselves a bit in the back half of the year. Last year, which, as you know, was not a fantastic margin year for us, we ended on a consolidated basis at 10.3% in total. We are optimistic that we can be somewhere in the 180 basis point to 200 point improvement over that for the full year 2015. So it will be more first and second quarter expansion and probably less in the back half of the year.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Edward Marshall from Sidoti & Company. Your line is open.

Hey guys good morning. In the gross margin comments, you talked about pricing. I don’t know if you actually clarified it yet. Can you talk about where you might have been getting some pricing, in what geographic area and then what product line?

Yes. The pricing. In total on a consolidated basis, we achieved right around 350 basis points of total price. A good portion of that total price is being realized in our international markets and especially in those international markets that have experienced the most significant foreign-exchange deterioration of the local currency to the U.S. dollar. So we saw meaningful price improvements in places like Brazil, South Africa. And in the balance of the world, I’m trying to get into some reps [ph]. Fueling had a nice price quarter as well. So we saw really a broad-based improvement in price. But I would say that where we saw it the strongest was in these international markets that continue to fight this FX headwind.

Got it. So if I look at the three – I think there’s three points: direct material costs, lower fixed costs, and pricing. Pricing would be the largest of those three buckets for the gross profit margin, it sounds like.

I would think pricing and the lower raw material input costs are similar

Got it. And what were your assumptions heading into the year for the dollar? And then what are your assumptions now – it looks like – I look back; it looks like you looking for about a $40 million headwind from FX and currency. It sounds like that has improved.

Yes. The view that has caused us to be more optimistic about our earnings for the full year is really around two currencies where we didn’t see the weakness the first quarter or haven’t seen it so far in the second quarter. One is the Brazilian real and one is the euro. So all our assumptions for both were meaningfully weaker than where they currently are. That doesn’t mean that can’t change. We all know how volatile these things can be. But the good news is that we went through the entire first quarter with a real in the 3.50, 3.60 range. We went through the entire first quarter with the euro in that low teens, call it 1.10 to 1.13 range. And they are maintaining there so far in the second quarter. So that’s all good for us. Those are both significantly stronger than we had assumed. So as we look out for the balance of the year, it’s kind of a view that how many months can we get at with the euro at [indiscernible] how many months can we get with the real at something like 3.50 or 3.50. And every month that goes by that we can, then we are translating more earnings back. And that’s favorable to what our original assumptions were.

Got it. And it looks like you took out debt; you also bought back some stock. And I think the two are unrelated, but maybe you can talk about how you will use the balance sheet for the remainder of the year and the expectations there. It does look like CapEx stepped up a bit, too. And I was curious what you might be using – where the dollar – both fourth quarter and Q1, and where those dollars might be being spent as well. I guess there’s a couple questions there.

Yes, the view toward the capital deployment really hasn’t changed. Our priority will be accretive acquisitions. We continue to have a fairly robust pipeline of acquisitions that we are looking at. But as we’ve talked in previous quarters, price expectations are high right now. And we think some of that expectation is driven by the fact that the dollar is so strong to many international currencies especially if you look at international transactions. Our FX view has not changed significantly. We had a little timing of maybe more of it in the first quarter this year than what we usually see. That’s more in a $35 million $40 million range for FX.

CapEx.

I’m sorry excuse, CapEx. For the entire year 2016 is still the assumption. And that’s about where our depreciation and amortization levels are. So we are trying to manage that in that same neighborhood, if you will. In terms of the share repurchases, as we’ve discussed, what we are first trying to do is offset the dilution of equity awards that we make to our leadership team. That’s somewhere in the neighborhood of 300,000 shares a year. We will try to do that. We are not hard and fast on that, though. And what we are really trying to do on the share repurchases is protect that forward multiple price. So as we’ve discussed, if we see that that market price go below what we think is acceptable forward multiple, then we will become more aggressive in share repurchases. If it’s at or above, then we will basically be just looking opportunistically to get that 300,000 shares. So that’s kind of the view we do have. A second installment on our approved term debt relative to our debt will cover some of that with incremental revolver borrowings that we feel that we can end the year pretty solidly at a gross debt to EBITDA ratio below 1.5. And that’s the way we’re thinking about it. Long-winded answer to a simple question.

Right. You wouldn’t share the multiple or the price that you enter into the market, would you?

Yes, we probably won’t do that.

Can’t hurt to try. All right, guys. Thanks very much; appreciate it.

Thank you.

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

Thank you. Good morning, guys.

Hi, Kevin.

Good morning, Kevin.

I wanted to go back to the margins and speaking to water, specifically. And Gregg or John, I guess, I was wondering if you could kind of break down the 360 basis points of year-over-year improvement by those buckets, whether its mix or price cost or the cost cuts you’ve done or leverage. And then I guess kind of should we expect that kind of improvement going forward as we progress throughout this year?

Yes, Kevin. We haven’t broken down in great detail. As I said to I think David’s question, when we look at the 360 basis points, I would characterize equal portions of being between the raw material input and the price impacts. As I said, we had a pretty decent price quarter. Other factors that contributed were lower fixed costs; that was a smaller factor. Some mix favorability in certain markets. We saw little bit toward groundwater in some markets. That helped as well. Better translation of European unit. So there were other factors, but the key ones were price and the raw material input. In terms of the balance of the year, as I said, I would not expect – I think the comps for the second quarter are fairly reasonable comps. As we get back to the back half of the year, we will see more difficult comps, I would say. You will see less margin expansion in the back half of the year, but overall still looking for something in the 180 basis points to 200 basis points or so.

Got it, okay. That’s helpful. Thank you, John. And then Gregg, I was wondering if we can talk about Pioneer for a minute. And just have you seen – it seems like that business certainly has stabilized. I was wondering what kind of you’ve seen there.

It has stabilized. We were still a little bit down domestically in the quarter, not really enough to call out. We saw international growth in Pioneer. So yes, I would characterize the business as stable. I still think there is a lot of commentary out there about secondary impacts of a weak oil price, although it has now rebounded in the $40s, having cascading and further drag on the economy and businesses. And so there may be some of that. But as we pointed out, the exposure we have now is really so minimal that this is the base business, which is broadly covering oil and gas, de-watering, municipal mining activity, which is also soft, but we would expect mining is kind of added a later point as well. So Pioneer’s stable and we had a good quarter overall in revenue and profitability.

Okay, great. And then last question for me. On fueling, you mentioned or called out the strength in India. And I know that has been a lumpy business in the past. So I was wondering if this was just one of those good quarters that you saw or if you are seeing something that is I guess, more sustainable in your Indian business.

India is lumpy because it’s on tenders. We think that we are going to have pretty steady flow of business from India this year. So we should expect some of this to continue. But we started off the year with a nice business in India compared to last year. But the business is lumpy because of the tender nature of the business. And you win some; you lose some. But overall, we think that the international business for fueling is stable. We are expecting China to start strengthening as we get towards the back the year. They went through a lot of corruption issues in the few Chinese-owned oil companies which disrupted the top leadership and disrupted capital purchases. But generally, the feeling around the globe is good. And India was the highlight.

Okay. So this kind of high-single-digit organic revenue growth – it sounds like you think that’s sustainable, especially as we have some easier comps later this year?

Yes. Fueling has been a pretty consistent high single-digit business. And again, you look at demographics. With the continued growth in population and standard of living, even with the depressed global economy today in developing regions is just going to lend itself to having more infrastructure to support and more vehicles on the road. So we have been seeing this consistent mid to high single-digit growth rate in fueling. We had a little bit – it was a little bit softer in the fourth quarter last year, as I call. But generally speaking, fueling has been a steady climb, both domestically and internationally.

Got it. Thank you, guys.

Thank you. Our next question comes from the line of Matt Summerville, Alembic Global Advisors. Your line is open.

Hi, guys. Good morning.

Hi, Matt.

Hi, Matt.

A couple things. First, with this whole distributor reset you went through over the last year or so, have you been able to see net margin accretion from migrating away from this one big large guide to a lot of smaller guides, if you will? And do you feel like the inventory, maybe, bloating that resulted either at the OE or distributor level as part of this whole reset, is that fully behind you at this point?

Matt, in response to the first part of your question, I’d say that anytime you have a disruption to an industry, you are going to see aggressive pricing. People are looking to move share around and so on. And that, along with the fact that the market has been soft because of the decline in ag generally, I think has made for some tough pricing and margin. I think we are beginning to move through all of that as we enter into this year because it has been over the last 12, 24 months that we had that experience. But still, pricing is pretty aggressive on the street. Relative to the inventory, I’d say – again, we don’t have great visibility into distribution; it’s mostly anecdotal. Certainly, with the tremendous record second-quarter range throughout the center of the country, that loaded inventories. You had that combination again and kind of a slowdown in ag. We called out that we thought inventories were a little heavy in Q3, maybe a less heavy in Q4. I think there’s a general reluctance, again, to be buying up until people see end demand. With that said, distributors that we do talk to that handle price on product, we are seeing increased throughputs. And that is encouraging. I guess a broad answer or the short answer to your question is that pricing is still a little bit tough and we expect inventories are more in line now as they were 12, 24 months ago.

And just to get back to the question on ag, sticking domestically, we are four months into the year. What is your assessment as to the net favorability – at least, I would think there’s net favorability – in weather versus where we stood at this point last year? And then can you speak more specifically about what you’re seeing in California, Texas, maybe the Corn Belt in particular?

Sure. The really wet weather came in May and June last year. So we are not quite into that. And we’re really just starting the planting season, as I understand it, in the United States. So it’s still a little bit early to tell. But again, our premise is that we have a large replacement portion of our business; we estimate 80%-plus of our business is placement. And so when people start turning on pumps, that’s when we’ll start seeing incremental revenue. With California – the valley of California is a large lineshaft turbine market. And we are not in the lineshaft turbine space. Certainly, California is an important market to us. But I would think that to the degree it was wet early in the quarter that would be impacting more the lineshaft turbine players than Franklin Electric, specifically. Texas, I was there last month. It looked to be a little bit dryer, but of course the rain around the Houston area is well documented, as it was in Louisiana. West Texas has been getting some rain. But I don’t want to get into – I don’t follow it on a daily basis. But I say that generally, conditions this year look a little more favorable than the conditions were last year. The Corn Belt, upper Midwest, we had a mild winter. And again, I haven’t tracked rainfall specifically in that area.

Great. Thank you very much.

Thank you. Our next question comes from the line of Ryan Cassil from Seaport Global. Your line is open.

Hey, guys. Good morning.

Good morning.

Good morning, Ryan.

I think most of my questions have been answered here. But perhaps on fueling systems, it sounds like vapor recovery systems were down globally, but you expect those to improve in the second half. Is that just on easier comps, or do you actually see demand improving there?

There’s two parts to that. Domestically, we called out that vapor recovery is declining because outside of the state of California, stage 2 systems are being decommissioned now that ORVR automobiles are considered to be in widespread use. So that will be a decline to a new level, which we expect to see probably within this year, which will reflect our businesses principally in California. Outside the United States, we saw a slowdown in China in the back half of last year. So it will be a little bit of an easier comp in the back half. But we are also expecting to see some additional traction in other parts of the world. India is beginning to look at vapor recovery again after a number of years where they really have been in hiatus. As we know, they have a real air quality problem in India. So they are looking to vapor recovery. So we just think that as we get to the back half, yes, there will be somewhat easier comps. But also we just think the underlying organic demand for vapor recovery is going to continue in many parts of the world.

Okay, great. And then lastly, if I heard you correctly, it sounds like regional distributors are feeling a little bit better about inventories. Is this an opportunity for you guys to reduce your own inventory as we move throughout the year?

Well, we certainly look at inventory as part of our working capital. And we want to keep it in check. Keep in mind that our second key factor for success is primer availability. And having that product on the shelf when the customer needs it is critical to our business. Because we frankly make a lot more margin having the product than we would on return on invested capital by having less inventory. So we are very conscious about having inventory on the shelf when our customer needs it, particularly as we are moving into the summer in the northern hemisphere. We do have a seasonal business, the second and third quarters are the stronger quarters, and so we want to have it there. Naturally, as we cut back to the back half of the year, there may be some opportunity there. But we are very cautious about inventory levels at this time of the year.

Got you. All right, thanks, guys.

Thank you. Our next question comes from the line of Richard Verdi from Ladenburg. Your line is open.

Good morning, and thank you for taking my call. Most of my questions have pretty much been covered, but I just have one question left that would be helpful. When I think about the Franklin story, one of the compelling chapters is the product pipeline. And so I was wondering if you could provide us with a sense of what it might look like in 2016, if it’s geared more to the water systems segment or the fueling side. And then what it might be focused on 2017.

Sure. We have been building a robust pipeline of new products over the last several years. As a matter of fact, last year, we had a record number of new product launched in water specifically. Our fueling business we look at as a system-type business; we continue to innovate and improve on the system in our fueling side. And we spend similar amounts of R&D relative to sales in both businesses. So we are going to continue to come out with product line extensions and new products. We are focused particularly on drives on the water side, drives and controls, because it gives us a systems solution. And so the customer can come to one company and they can get a systems solution where they are going to get a more efficient system. And in the case of larger systems, a lower total cost of ownership because it’s higher efficiency. And because Franklin has this deep knowledge in these applications, as we point out in the Franklin story. We have a deep understanding of these applications and we are able to able to optimize the equipment to help the contractor get exactly what they’re looking for. Our fueling business has been a systems business now for almost a decade. And we have, again, the most complete underground system offering, both domestically and internationally. To the point that a major customer like Shell, with 28,000 stations that they oversee around the globe, again signed up a five-year deal with Franklin Fueling Systems. And we continue to support Shell throughout the world, not only the supply of the product, but also the design optimization of systems for both reducing risk of injury to people in the forecourt, overall safety, and then also of course total cost of ownership. So we’re going to continue to focus on system sales, both in water, fuel. And you are going to see an emphasis on drives and controls over the next 12, 18 months.

Okay, great. Thank you very much. That’s good color.

That’s all the questions that we have for today. So I would like to turn the call back over to Gregg Sengstack for closing remarks.

We thank you for listening to our first-quarter conference call and look forward to speaking with you all again in July.