Good day, ladies and gentlemen and welcome to the Franklin Electric Second Quarter 2017 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 be given at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the call over to Mr. John Haines, Chief Financial Officer. Sir, you may begin.

Thank you, Chelsea. And welcome everyone to Franklin Electric’s second quarter 2017 earnings conference call. With me today are Gregg Sengstack, our Chairman and Chief Executive Officer; and Robert Stone, Senior Vice President and President of our International Water Systems unit. On today’s call, Gregg will review our second quarter business results and then I’ll review our second quarter financial results. When I’m 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. With that, I will now turn the call over to our Chairman and Chief Executive Officer, Gregg Sengstack.

Thank you, John. We are pleased with the overall performance of our Company in the second quarter, in which we achieved solid organic growth in both our Water and Fueling Systems segments. In the U.S. and Canada Water Systems business, we had organic growth in all three product lines, groundwater, surface and dewatering. Following little delay due to record rains in the west, groundwater pumping equipment sales strengthened throughout the quarter as weather generally turned hotter and dryer across many regions. Surface pumping equipment sales continued to show steady single-digit sales growth and dewatering equipment sales and backlog continued to accelerate with strengthening demand in domestic gas fuel service as well as international markets. Outside the U.S. and Canada, the story was mixed. Sales in Asia Pacific were down 10% as the drought in Southeast Asia has ended. In Brazil, the political turmoil, economic malaise finally caught off our business and we saw similar [ph] sales decline. The rest of Latin America was basically flat. While business in Europe, the Middle East and Africa was generally up, our revenues remained below plan due to lack of orders coming from the Gulf states. Our Fueling Systems business had another strong quarter on the topline. However, margins were down due to mix, both product and geography. The U.S. and Canada markets continued to do well. As I mentioned last quarter, we continue to gain share with major marketers and see increased customer traffic on our Site Builder and FFS PRO University platforms. Outside the U.S. and Canada, fueling sales have improved across Europe, Africa and Asia. Our business in China is strong as the national initiative to replace the existing underground piping systems with more environmentally safe double wall piping systems is accelerating. Our new U.S. Distribution segment had a good initial quarter. While we estimate pro forma sales were down a couple of points due to weak weather-related demand in the west, margins were better than plan, as cost synergies were realized ahead of schedule. The multi-quarter back-office integration of the acquired entities is on schedule. Looking forward, we’re raising our annual guidance by $0.10 based on the following. First, the $0.06 gain on our previously held equity investments was not entirely in our original guidance. Second, about 10% of our sales is in euros and overall half of our manufacturing business revenue is outside the U.S. Therefore, the dollar decline generally should lift our reported results. Most importantly, however, we see strengthening demand across many markets while at the same time, remain cautious of the timing of recoveries in the Southeast Asia, the Gulf and in the Brazilian end markets. I will now turn the call back over to John.

Thanks, Gregg. Our fully diluted earnings per share were $0.64 for the second quarter of 2017 versus $0.50 for the second quarter of 2016, an increase of 28%. Second quarter 2017 sales were $305.3 million, an increase of 21% compared to 2016 second quarter sales of $252.1 million. Water Systems sales were $203.4 million in the second quarter 2017, an increase of $8.8 million or about 5% versus the second quarter of 2016 sales of $194.6 million. Water Systems sales decreased by about $1.8 million or about 1% in the quarter due to foreign currency translation. Water Systems organic sales were up about 6% compared to the second quarter 2016. Water Systems sales in the United States and Canada were up about 10% compared to the prior year second quarter. Sales of dewatering equipment increased by 25% in the second quarter when compared to the prior year, resulting from the continued diversification of customers, new channel development, and international sales of the Pioneer branded equipment. Sales of other surface pumping equipment increased by 8% in part due to wet weather conditions in the upper Midwest and Canada. Sales of groundwater pumping equipment increased about 5%. Water Systems sales in markets outside the U.S. and Canada overall declined by about 1%, due primarily to the impact of foreign currency translation. International Water Systems sales were led by improved sales in Europe, the Middle East and Africa, but were offset by lower sales volumes in the Latin American and Asia Pacific markets in the quarter compared to last year. Water Systems operating income was $32.8 million in the second quarter 2017, up $1.3 million or 4% versus the second quarter 2016 and operating income margin was 16.1% compared to the 16.2% in the second quarter 2016. Fueling Systems sales were $61.4 million…

[Operator Instructions] Our first question comes from the line of Nish Damodara with Robert Baird. Your line is now open.

Can you hear me, guys?

We can hear you, Nish

This is actually Mike. We must have had our lines crossed up. So, a couple of questions first, maybe just some initial thoughts on the Distribution side, how that integration is going so far, the comments for that, it’s head of expectation, maybe just a little bit more on what you have done so far and kind of what the next steps are?

Sure, Mike. Initially, obviously, we’ve got cost out that we’re not going to be private -- private ownership cost on the business, we’re on four separate -- actually three separate platforms right now from ERP point of view. So, once we get some level of reporting across the platforms into the corporate office from Denver, we are working on standardizing the operations platform, standardizing logistics, getting all the employee benefit plans in line, just typical things you will do when you’re integrating acquisition. In this case, we are integrating into each other as opposed to into Franklin. So, those processes are all under way. So, when you look at being on a standard platform, the ERP system, say within 12 months, look at having all the benefit plans lined by the end of the year and we look at getting greater visibility to the inventory levels because this involves our managing inventory, working capital. And so, our operations team is doing that as we speak. So those are kind of activities. And the cost out was really on the side of kind of the owner cost you see typically in the private business rationalizing those on a relatively quick basis, so that we could get to a running operating expense on a go forward basis.

Makes sense, the margins were certainly an encouraging start there. Any thoughts on the channel now that you’ve had it in the full for few months? What are your channel partners, the customer base saying at this point, any worries on the competitive side yet?

I think you see the range of responses that we talked about in our earlier call and you see range of response from okay, we see this is the new order and the same space is calling on nascent, [ph] nothing change from that point of view to more of a wait and see attitude. We’d say that generally if you look at the first half of the year buying patterns of all Franklin Electric’s manufacturing customers are pretty much similar to prior years. We had a couple of situations where we had suppliers to headwater choose not to continue to supply; that’s opened up other opportunities for us with other suppliers which we’re more pursuing and have pursued. So, it’s kind of I think the normal start-up activity and not much different than what we described at our last call.

Okay, that makes sense. And then, strong Water trends in North America in the quarter, any sense for inventory through the channel, probably in a pretty fair spot at this point?

Yes. I’d say that, this is [indiscernible] weather, as you follow Franklin for number of years. When it dries [ph] out, demand goes up pretty quickly, and we are responding but I suspect that channel inventories are reasonable to maybe a little low. And as people are addressing [indiscernible] came up a really wet start to the year. People had strong inventories last -- at the end of the last year really to Franklin part. [Ph] They’re coming in and they don’t feel pretty good and then when the heat comes on, so does demand. Not so much in the California market, because they have so much surface water that they are using, which is basically kind of for free. So, the California market is going to continue to rely on surface water until those surface water rights depleted, then we’ll start seeing more shift to groundwater, again we expect back half.

Last one for me then on the dewatering side. Good to see that turn in the corner. What are the thoughts on sustainability on that side?

Yes. We’re really pleased with the level of backlog. And touch wood, it’s been doing really nice. We’re seeing it again across both the gas fuel service and I think after a couple of years of not buying much capital equipments, there’s a need for new pumps, there’s need of repair parts; this is good for us. So that’s going well. We are seeing -- we’ve increased our reach within the North American market and other channels; and then internationally, the business is picked up. So, we’re encouraged, but one quarter is not a trend. The backlog has been lengthening out and we’re very optimistic with that business.

Thank you. And our next question comes from the line of Edward Marshall with Sidoti & Company. Your line is now open.

Hi, guys. I just wanted to follow up with that distribution margin for a second. First, I wanted to see if that’s clean number, was there any step up in inventory adjustments from the consolidation? So, secondly, as you discussed outperforming expectations, I’m curious, is this sustainable or did you outperformed [ph] in the quarter?

We think it’s sustainable, Ed. This is John Haines. There’s really no accounting adjustments per se in that $3.7 million of realized in the Distribution segment. So reporting, I guess what I want to make sure we all understand though is that this is a U.S. primarily groundwater business. And as Gregg just said, it is sensitive to weather swings and it is seasonal. So, the second quarter of every year probably is going to be the best quarter profitability wise for that segment, although the third quarter can certainly be good as well. So, there’s really nothing unusual I would say about the reported results. And I’ll just reminder this all, this is the second quarter and it will be sensitive to weather fluctuations.

Okay. So, are you saying -- just to kind of read between the lines here, are you seeing, it’s a low single-digit margin in a normalized kind of the unseasonally strong quarter?

Yes. We said initially and continue to believe that the Distribution segment should be a 4% to 6% operating income margin business. And I think that’s what we’re trying to achieve for the long term. That 4 to 6 operating income margin business will then translate into a return on invested capital, what we think is asset. [Ph] So, you’ll see quarterly fluctuations in that operating income margin, like you do in our Water Systems segment, but that’s what the long-term objective and goals are for Distribution.

Got it. John, I apologize, I missed what you said on the tax rate in your prepared remarks. Could I ask you to repeat that?

Yes. The tax rate in the quarter was 19%. We’ve been kind of talking about something in the 26% to 27% range. The discrete item that lowered that in the quarter were gain -- this gain that we are talking about on acquiring the controlling interest in the Distribution segment entities; that drove some tax benefit. We also had some uncertain tax positions in foreign jurisdictions that we were able to free up in the quarter; that drove some of the benefit as well. So, effectively, we kind of went from mid 20s call it, both in our guidance and the prior year to kind of high teens 19%. We think that mid-20s number’s the best number to use right now for the balance of 2017.

Got it. And the cash flow quarter, generally 2Q is really good free cash flow quarter; this is kind of not stacking up the prior few. I am curious, is this a recognition of cash with the inventory adjustments for Water to Distribution, is that the right way to think about maybe what happened on the cash for the quarter?

No, I don’t think those adjustments that you are referring to that really had a big impact on the cash flow at all. When you look at our cash flow statement, what you see is kind of change in receivables and inventories, the pieces are little bit different but they are basically about the same as they were last year. Our accounts payable accrued expenses are much lower this year than they were last year. Some of that’s just timing of inventory receipts, timing of other compensation payments that we make throughout the year. The other part of this is some of our tax liabilities, to get some of these discrete tax benefits that we take, we have tax liabilities, then those liabilities go once we take that benefit. So that’s part of what we see below -- or not below line but in the other section of that cash flow section. As Gregg pointed out, I think our biggest opportunity is inventory management, not only in Distribution but in our Water Systems and Fueling Systems, payments as well, we continue to push on a better working capital and inventory management.

Thank you. And our next question comes from the line of Ryan Connors with Boenning & Scattergood. Your line is now open.

Great, thank you. I had a question on the Distribution side and I recognize this is issue you can’t talk too much about, but in terms of the pipeline and your strategy there on the forward integration, still trying to get an idea of whether headwaters was more of a one-off and a situation that opportunistically made sense or whether this is something that you’re really going to push to we should expect that business to grow through further acquisition going forward? Can you just give us an update on your thinking there, Gregg?

Yes. Sure, Ryan. Thanks for the question. You look at, again, we talked about headwater, these first three significant distributors all had transition challenges from one generation to next. And five of the six leaders I pointed out were all of the ages 65 and looking for an exit strategy. So, it’s important for us to have stability there, and so you look at that as being a starting point. That said, we had several people contact us; we are evaluating this model as we go. The first job for the team, made very clearly within the team is we need to get these businesses integrated and hit the ROIC numbers that we modeled; based on that performance we’ve encouraged to do more. And so, we’re going to see how this unfolds. We think it’s a very interesting additive strategy to our manufacturing plant in a market very, very well where there are a number of privately held companies where there is not necessarily a logical successor or whether there is a capital of family to create a transaction. So, we see this as being a new platform; we see this being a platform that needs to prove itself out. We’re confident will do that; and as it does that, we’ll look at other opportunities.

Okay. That’s helpful. And then my other one was, I may have missed it, but I didn’t hear you say too much about ag in general in terms of the quarter and the outlook and the order war there. Can you just give us an update on that particular market?

Yes, Ryan. The big story in the United States as we’ve talked about U.S. and Canada on the dewatering side and surface; groundwater was up 5 within that. We didn’t really see a lot of increase in ag. Ag was pretty flat to slightly down. Most of the benefit we saw on groundwater in the U.S. and Canada was related to residential systems. So, now, some of this may be the way inventories built in the channel and then runs down, but the second quarter was not particularly strong ag quarter for Franklin.

Thank you. And our next question comes from the line of Ryan Cassil with Seaport Global. Your line is now open.

Sorry, if I missed this. But, in the Water Systems side, I think we are targeting 5% to 7% growth for the full year, even with the slow start in Q1. Just looking at first half results now and the tougher comps in the second half, is that still what we are targeting or was there a change within the guidance on some of those underlying assumptions?

Ryan, we still think we’re going to be able to hit the lower end of that or optimistic we’re going to hit lower end of that. We did have a slow start. It’s principally offshore. Robert Stone is here, he can give you a little travel run around the world of how the first unfolded and how we are looking at the second half in our international markets because that will be the driver of the achievement of that original guidance. Robert?

Sure, very mixed bag around the globe. South East Asia for us was off. Gregg mentioned in his comments about the weather change. Going forward, that looks to be a continued headwind for us. Europe is mixed, gets some help from currency. Brazil and South America generally are struggling economically. So, we think we’re going to have some continued challenge there as well. The some bright spots though, we were actually up in a couple of areas including Africa, and parts of the Middle East were a little bit better than last year. Southeast Asia, if I go back to that was also a very tough comp against prior year. So, probably, our forecast would say that the back half of the year, we’re going to be about -- maybe not as bad off in Southeast Asia in the back half of the year as we were in the first half.

Okay, thanks for the color there. And then on headwaters, the profitability was great to see in Q2. I thought we are targeting sort of 4% to 6% margins 2018 and beyond, and 2017 was going to be about breakeven. Have you changed the thinking there where we could be or should be above that for the remainder of the year, are you thinking there could be some offset that still keeps us flat, any thought there?

Again, we’re in the summer season in the U.S., so second and third quarters are going to get the leverage on operating expenses; that will back off in the fourth quarter and first quarters; it [ph] can break even for the quarter or for the year that includes the fact that we’re deferring from profit inventory and some higher interest expense. I think this time we’re a little more confident it’s going to be above that number. But 4 to 6 is a number we have talked about and with the return on invested capital, pretax in the mid teens. So, those are the goals. John, do you want to add anything to that?

I don’t think you will see 6.3% on margins in the back half of the year. So, to Gregg’s point, I don’t think our view of this has really changed. Maybe doing some of the integration a little bit quicker, but you would all expect the second quarter, as I said earlier, to be good. And I don’t know that for 2017 profitability that our thought could really change that much, margin wise.

Okay, thanks, appreciated. And then last one, just looking at the Fueling Systems side and understanding there is a little bit different, some differences in the offering but one of your competitors had commented that there was going to be a delay with the EMV cycle, particularly in the developed markets and yet you guys don’t seems to be -- that seems to be where you’re stronger and they were maybe stronger internationally where you guys were weaker. Could you just comment on sort of some of the competitive dynamics there you are seeing and whether or not you expect the impact from some of those EMV dynamics?

Yes. To be clear, we actually were stronger and actually in the quarter have been domestically -- both were up. But EMV does have some impact; for us, it’s probably a slight positive with the delay that’s allowing people to do other upgrades in their gas stations on types of product that we sell. Again, our U.S. business was up about 5%, U.S. and Canada, and internationally stronger than to get the 8% organic in the quarter. We are really seeing good strength across the globe. We have really nice results year-over-year in Europe, Africa, Middle East. Asia was up a little bit, China was up a lot, and it’s not because of the -- there is initiative of other way to China to re-pipe fuel stations in China. We are always little cautious with China because these things can turn on and turn off pretty quickly but it looks to be a multi-quarter, multi-year initiative. Our margins on products like piping and containment and hardware are lower than margins on electronics and pumping systems. That explains in part the lower margins in our results compared to last quarter -- last year, but still very strong in the 24% range. So, we’ve seen with EMV -- we’ve had continued good single-digit organic growth in the U.S. with EMV being delayed, internationally we’re seeing a nice rebound and strengthening in all major feeders for us with the exception of Latin America.

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

Thank you. Good morning. I want to ask a couple of follow-up questions just on the headwater group of businesses. Gregg, I thought it was interesting you mentioned that some of headwater suppliers have decided that they no longer want to do business with that entity. I’d be curious as to what you think for logic and rationale behind that might be? And then conversely, have you had other distributor customers that you don’t own, come back to Franklin and say the same thing, we don’t want to do business with Franklin anymore? And I guess, at the end of the day, what does all of that net out to, nothing, a slight positive, a slight like negative, what’s your view there?

Yes. I’m not in a position to comment about other companies’ strategies for why or why not they want to continue to do business -- we are not -- they want to continue to -- with new business, we’re not doing business for standard relationship with headwater. It’s interesting specifically as Xylem decides to discontinue to supplying headwater; we got that news in early May. And the interesting thing there is we had 10 other suppliers step up in the play to replace. So, Franklin had a drop in replacement for about a third to 40% of that product line, and we have a number of other suppliers that have products that here that [indiscernible] hydro wasn’t able to really promote or pursue, because they had this relationship with Xylem, now they can. We’re viewing it as being maybe a short-term, the disruption we’re not seeing whole lot longer term. It’s going to be good for us, because we have more options to supply to the end user. We have not heard anything from our other customers or people saying they’re not going to do business with this, that I can’t report on. I really can’t get into the strategies with other companies.

And then with respect to the cost synergy side of the equation, are you able to put a number and a timeframe on how much you anticipate to be able to pull out through integration, consolidation et cetera of these entities? And then similarly, Gregg, maybe moving over to the top line with the acquired businesses, what’s your sort of trajectory on being able to start to see, which are always harder to get top line synergies as a result of these moves?

Yes, Matt, I’ll take the second portion of your question first. And you’re exactly right, top line synergies are tough. And you think about acquisitions and you think about integrating them into your existing base business. Here, we’re creating new platform. And so, the synergies we’re looking for on the top line are really kind of across these different distributions businesses, some of which have specialties and areas like turf or commercial or water treatment and others didn’t have those type of expertise. That’s where we see some nice cost synergies. I don’t want to put a number on to your point, because they are finically allusive. We are optimistic with this quite a good of opportunity on the top line. With respect to OpEx synergies, I’ll turn the call over to John, who will do that -- do that math, so we have visibility, John?

Yes. Matt, one of the challenges of trying to give some targets on any kind of synergies, so you have top line as Gregg described and also have potential for sourcing synergies, OpEx synergies. We’re dealing with on historical basis here that where companies run in a very different way than a way we’re going to run these companies. So, it’s a little bit hard for us to capture a range of numbers what we think they are. That’s why we are going to sit with the 4 to 6. The 4% to 6% operating income margin we think is the way to think about the profitability of this. There are some synergy assumptions in that, as Gregg said, so far so good on those synergy assumptions. But I don’t want to get out in front of ourselves here until we get through a few quarters of operating this entity and kind of get some victory of our own behind this where we can really understand the cost base, really understand the sourcing processes, as an example, and establish a better baseline that is a Franklin baseline, and not one that we’ll rely on kind of what the past was which was -- could have been anything really. So, the 4 to 6 is I think appropriate guidance measure right now in profitability for that segment and that’s what we will stick to for the moment.

Then, lastly maybe just a question on pricing versus raw material costs. Can you comment on what your sort of pricing realization expectation is in the water business or what you’ve seen thus far in 2017? And maybe if you could bifurcate that, North America versus international and then the same question with respect of doing overall?

Yes. Second quarter pricing was similar in both segments; water and fueling, Matt, it was about 175 basis points. Our expectation is closer to 200 in both segments. We are seeing more raw material inflation year-to-date in 2017 than we saw last year. But, we’re also seeing some inflation on other variable components. We mentioned freight as an example, fueling as an example, as fueling chase these opportunities in China, getting the supply chain straight there and making sure that we are optimizing. That’s an important part of their margins. But overall, I would say we are slightly behind on pricing. Generally, the international units are ahead and the U.S. unit, water unit is behind. And it is the way we think about that geographically.

[Operator Instructions] And our next question comes from the line of Jose Garza with Gabelli and Company. Your line is now open.

I guess you just kind of answered my question, but I guess if you want to just give context, I guess in terms of the Fueling segment relative to the Water segment guides and just in terms of the pricing?

Yes. The pricing, as I said, they achieved about a 175 basis points, so therefore, for the quarter and that they have some raw material inflation that they are facing into as well. The bigger issue as Gregg pointed out on the Fueling margins in the quarter, and I don’t -- we said all along do not expect high 20s kind of margins out of the Fueling segment. It’s really more about products and geography mix. We had a really good product mix in the second quarter of 2016; they drove that 27%. We have a decent mix in 2017 and it’s coming lower, down to that 24% range this year. So, more fuel management systems is always good. We have less management systems than we had last year as an example. So, the fueling margin, I wouldn’t say, we are real concerned about price, commodity, inflation there, it’s really more about geography and product mix right now.

Okay. So, I guess, do you expect that to pick up a little bit more in the second half relative to Water?

On price realization?

Yes.

Yes, I would expect Fueling products realization to be ahead of Water. Yes.

Thank you. And I’m showing no further questions at this time. I would now like to turn the call back to Mr. Greg Sengstack, Chief Executive Officer, for any closing remarks.

Thank you for joining us on this second quarter conference call, look forward to speaking with you at the end of our third quarter.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.