Good day, ladies and gentlemen, and welcome to the Franklin Electric Fourth Quarter and Fiscal Year 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 followed at that time. [Operator Instructions] As a reminder, this conference call 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, Bryan, and welcome everyone to Franklin Electric's fourth quarter and fiscal year 2017 earnings conference call. With me today are Gregg Sengstack, our Chairman and Chief Executive Officer; and Robert Stone, our Senior Vice President and President of our International Water Systems Unit. On today's call, Gregg will review our fourth quarter and full-year business results, and I'll review our fourth quarter and full-year 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 with 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 CEO, Gregg Sengstack.

Thank you, John. Our fourth quarter unfolded pretty much as we had anticipated. In the U.S. and Canada Water Systems business, Pioneer brand dewatering pump sales remained strong, more than double the fourth quarter of last year, driven by recovery in the market for oil and gas, as well as the expansion of our business into other end markets. Backlog in the business is strong. Revenue from other surface pumps as well as groundwater pumps declined for a couple of reasons. End market demand appears to be flat. We elected to reduce promotional activity to smooth demand, and our distribution business focusing on their working capital reduced purchases from our manufacturing business. So compared to a very strong finish in 2016, U.S. and Canada water revenues were lower. Outside the U.S. and Canada, we had single-digit revenue growth in Europe, Africa, and Asia. Our business in Turkey continues to do well. And while small, our business in India grew nicely. However, in each of these end markets, we saw margin contraction due to rising input costs. After several years of strong growth in sales and profits, for the last three quarters, our business in Brazil has had a lower quarter-over-quarter sales and profits. Favorable market conditions have been replaced by weak demand and margin compression, particularly this last quarter. Brazil is an important market for us. They have the second largest underground aquifer in the world. At the same time, our team is adjusting the cost structure to address the current realities of the market. Our Fueling Systems business turned in another record quarter. Our business outside U.S. was very strong. Revenue in China doubled. Revenue in every other international market grew double digits, except for India. While we continue to be bullish on the long-term business in India, the…

Thank you, Gregg. Our fully diluted earnings per share were $0.17 for the fourth quarter of 2017, versus $0.47 for the fourth quarter of 2016. In the fourth quarter of 2017, the company incurred $0.04 of restructuring expenses and $0.21 of tax expenses related to the U.S. Tax Cuts and Jobs Act of 2017. So, before the impact of restructuring and the U.S. Tax Cuts and Jobs Act of 2017, we were able to grow our fourth quarter earnings per share by about 14% primarily related to the Fueling Systems performance and discreet tax benefits unrelated to the new tax law in the United States. I'll say a bit more about the new tax law in the U.S. in a couple of minutes. Fourth quarter 2017 sales were $288.2 million, compared to the 2016 fourth quarter sales of $239.6 million, an increase of 20% primarily from acquisitions. Organic increased about 2% when excluding the impact of foreign currency translation. Water Systems sales were $181.5 million in the fourth quarter of 2017, versus the fourth quarter 2016 sales of $177.8 million, an increase of 2%. Water Systems organic sales were about 1% in the quarter when you exclude the impact of foreign currency translation. Water Systems sales in the U.S. and Canada declined by about 3% compared with fourth quarter of 2016. Sales of Pioneer branded dewatering equipment increased by about 80% in the fourth quarter when compared to the prior year resulting from the continued diversification of customers and the strengthening in the U.S. oil and gas end markets. Sales of groundwater pumping equipment decreased by about 9% on weaker residential and agricultural systems sales. Lower sales to Headwater and these were difficult sales comparison in the fourth quarter of 2016. Sales of other surface pumping equipment decreased by about…

Thank you. [Operator Instructions] Our first question comes from the line of Edward Marshall from Sidoti & Company. Sir, your line is now open.

Hey, Gregg, John, how are you this morning?

Good morning, Edward.

Good morning. So, I'm curious in the distribution side, I'm wondering did you potentially lose share in those regions because the OEM wasn't able to supply the channel fast enough?

Yes, we had some disruptions, yes, Edward, in Q3 and Q4 once we were cut off by a couple of OEMs and we had to go and get other OEMs established. And so, yes, at that time we lost some share. And then we got the new supplies [to the] [ph] base. We haven't fully recovered that share, but that is where we're seeing opportunity going into 2018.

Got it. And I thought a big portion of that increased supplier was coming from Franklin OEMs themselves, and looking at the revenues in the two business, Groundwater and Distribution, as it relates to U.S., I'm not seeing the restocking that I might've thought that I would see. Can you kind of clear that up for me?

Sure. We -- no, there was clear pass-through between Franklin manufacturing and the Headwater distribution company in the last six months. What we're looking at was more the disruption on the pump lines that Franklin is -- not deep well submersible pumps, but other surface pump lines is where we are looking to gain traction, to replace product lines that Franklin Electric frankly doesn't have.

Yes, the other way just to think about that. Of our sales or transfers, I guess, is what you should call them, between our manufacturing business in the United States and Headwater were down 11% in the fourth quarter. Part of that because the fourth quarter of 2016 was a pretty strong quarter before we owned the Headwater Company. The other part of it, as Gregg pointed out, is there's really not an economic benefit to do that. And just to transfer inventory or sell inventory to them, and then have them not do anything with that in terms of selling it [at all][ph] into their end markets. So instead of doing that and taking what would be a working capital penalty, if you will, in Headwater, we didn't make those sales. And that was part of the decline.

Got it. And I shouldn't infer from what you're saying here today that there's an issue obtaining certain suppliers or anything, it's just a matter of timing, they just haven't gotten the product to you.

Yes, it was more the latter, because we picked up nine pump companies in the last six to seven months. And we're a new customer, and we're looking for a lot of product, we're looking for training. They had to get out and with our people. So it's just that natural friction that occurs and in switching vendors on a pretty short notice.

Got it. And the fourth quarter unprofitability in the segment, first, is that typical for that business line. And second, was there a loss of potentially rebate activity due to the loss of certain suppliers?

I would say that there's as much gain in rebate activity from new suppliers as the potential loss from old suppliers. I don't have the exact numbers. John, maybe also expand upon that. This is a business where we knew that you'd see losses in the winter months. So this was not in my prepared remarks, that this is not unexpected for this business.

Got it. And I look at the guidance for next year, in 2018, I guess any one-time items or were there acquisitions baked into that line that's all other EPS growth or was that a clean number?

No, the 2.22 midpoint, the only acquisition that's in there is the small Valley Farms acquisition that we did in January, in Headwater, as I know you saw. And that's accretive, but it's not accretive by a significant amount. And then, as we point out, we believe our effective tax rate in 2018 as the basis for that guidance will be about 15% or 13% to 17%, the midpoint being 15%. And that of course includes all of the new benefits, if you will, the [race] [ph] benefit of the new tax law in the United States. So that's all in there. There's no assumption of other really other one-time items in that guidance.

Got it. Thanks very much.

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

Great, thank you. Yes, just first off, continuing on this discussion of the guidance. It seems like there's so many divergent moving parts here. Some things, like dewatering up dramatically, others down significantly. How do you get comfort with the top line guidance or modeling number internally in that environment? Do we expect some kind of normalization here? How should we think about getting to the core of what the consolidated rate of growth is when we've got so many things, it seems like, jumping around pretty dramatically?

Ryan, I'd say that, broadly, we develop our plans, they're developed from the ground up in the business units, and they're rolled up to a corporate number. And to your point, there have been disruptions in the North American market. And we see 2018 to be more kind of normal year quarter-to-quarter and year-to-year growth. When you get outside the United States we have seen weakness, again we've talked about this with Brazil. That one is one, if you recall, last quarter I talked about [indiscernible] push into 2018, it looks like it's going to even push out a little farther, and I'd say in 2019. But we just don't have visibility to when we're going to see business in Brazil start turning north. We do think that Asia Pacific, which is the other business. And Robert surely can talk about it as well is that Asia we had a really strong '16 on weather, we had a similar tough comp for 2017, we see that stabilizing, so we go around the globe when we build that up. We also build up your fueling model the same way. We did point out in my comments that we have this potential option on the China market that could come in stronger than what we had planned. And then with our distribution business, again, we did a rollup, and for the various branches right up through the top, and based on having the products we have in place today, the products -- in place today we went with the number we went with. So that's how we come about with '18. And it's just that there's been some variability '16 to '17, and there'll be some variability, I guess, '17 to '18, because '18 we expect to become more “normal year”. Robert, you want to talk about Brazil and APAC?

Sure. Yes, as Gregg mentioned, in terms of Asia Pacific we had a couple of markets where we had a really strong comp 2016. Pick one market, Thailand, we came off of basically five years of drought in that market. That ended 2017, was a very wet year, unusually wet off of -- compared to unusually dry conditions. So we saw that market contract significantly. Brazil is a combination of things. The economy it still stutters. It still has some political instability. That seems to be getting better. But the significant competition as the market's [indiscernible] has more or less shrunk over the past year-and-a-half. And we see a lot of discounting, which has put a lot of pressure on margins and there's a lack of confidence in the distribution channels to take on the inventories. So that basically everything is almost just [flat] [ph] price transaction in Brazil these days. That looks to get better, we can't say when. But we're still confident that Brazil is a very good market for us and one where we continue to invest.

Okay. Yes, that's really helpful detail. Thank you. My other question just had to do with raw material costs. You did say that repeatedly in your prepared remarks as a margin headwind, albeit maybe less of a headwind than mix. But can you just unpack that for us a little in terms of the outlook. Are raw materials going to be headwind again in '18? And if so, what does the price-cost dynamic look like?

Yes, given the raw material, we look at ground up throughout our whole supply chain network, and we build up incoming price expectations or price -- and also with our commodities as well. And then John can take you through the detail how that roll up translates into inflation in '18, and where we're doing a pricing offset. John?

Yes, Ryan, when we think about raw material increases, they obviously vary by commodity groups, products around the world. But generally we're thinking about 150 to 200 basis points of raw material inflation. And now that's on a comparable basis on a net sales basis. Obviously if you did that on a raw material basis it would be much higher. And then when we think about pricing around the entity, each business unit is different, but our pricing assumptions right now, going into 2018, are between 200 and 300 basis points. Some business is higher than 300 basis points on a comparable basis. So all of our water businesses -- all of our business, but our water businesses probably more specially, are competing in very intense end markets. And if there's an opportunity later to get [technical difficulty] we'll take advantage of that. So, right now the assumptions going in are that will be priced 200 to 300 basis points with something in the range on the same basis of 150 to 200 basis points of inflation.

Got it. Now maybe one list one if I might. In terms of the new business, the Distribution business, how does being in that part of the supply chain impact your ability to manage that price-cost relationship? I would assume that's a positive in that respect, but can you just kind of discuss that a little bit?

Well, the Distribution business has its own P&L. And these guys are focused on making money in their business. And so as all distribution business within Franklin, outside of Franklin, tend to not object too harshly to price increases from manufacturers because that inflates the value of their on-hand inventory in a positive way, it allows them to move price along into the marketplace. So to your point, generally -- and as modest price increases are typically well received within distribution. And again, if reasonable would be passed through to the marketplace.

Got it. Great, well, thanks for your time this morning guys.

Thank you, Ryan.

And our next question comes from the line of Walter Liptak from Seaport Global. And sir, your line is now open.

All right, thanks. Good morning guys.

Good morning.

Just as a follow-on to the first call, so wonder if we could get a little bit more detail on when it was that you took prices up? And you have flexibility to take prices up further throughout the year. And then just as a follow-on to that, any color on the different parts of the business in pricing and where the pressure is coming from, or if there is any pressure? I'm thinking of, in oil and gas, are you able to pass along prices and Fueling Systems, are you able to pass along prices, et cetera?

Yes, Walter, as Gregg said, generally in our water businesses, which is where I think there is the most pressure, there's some pressure between inflation and achieved price, we are able to get price because we're selling primarily through distribution. So, on business units around the world, depending on the end market, other competitive actions, generally we'll take price actions between November 1st and, let's say, March 1st. They're generally centered around the end of the year. And for a lot of businesses globally, including in North America, those price increases are kind of 200 to 300 basis points. The fueling business performs a little bit different. It doesn't have nearly the fragmented competition base in the end market that you see perhaps on the water side. But they basically take the same approach, where they assess the inflation and then go forward price action if they think is necessary to grow margins. So that's kind of the view of it right now. We do, as I said, we do have the ability, and we have in previous years if we get into the June-July timeframe and the inflation curve picks up or the input costs are going up where they are more dramatic than we had assumed and we have the ability to go back through and raise prices. We have done that in the past. We just prefer not to do that for the benefit of our customers.

Okay, great. Thanks for that. And then, as we had turn to distribution and I wonder if we can just take a step back and think about the Distribution business as the core business, the headwaters and I wonder if we can get an idea of how the sales ended in 2017 either in a dollar percentage. Distribution was down 11% but maybe there was M&A that was in there too. I don't know. And then, in 2018, are you thinking Distribution starts to grow next year? Or, there is still more supply chain disruption and revenue declines in 2018?

Okay, a couple of questions there. So, for 2017, we had three businesses we acquired in the second quarter. And John will indication of pro forma as to what we knew in 2016 results that's what we said. The revenues were down in Mid West and Southeast, some of it was loss of some customers because of the pipeline disruption. We think that has now stabilized. And we are beginning to see we are regaining customers with our new suppliers to headwater. So when we talked about 2018, we will have inorganic growth because we didn't own the company in the first fourth four months of the year or it wasn't consolidated within Franklin in the first four months of the year. So while inorganic growth because of the acquisition of Valley, but we are expecting organic growth. That was the guidance I was giving of mid single digits and that would be just year-over-year. That's share recovery and the weather in the West Coast particularly California was less than ideal last year for the market, which is more kind of normal year, we would expect that to be a little bit of a help as well. So that's our thinking around the distribution business' top line for 2018. Okay?

Okay, thank you. Just to ask another one on distribution. You had an offer a little while. I wonder outside of the supply changes, have you made investments into the business? I am thinking of how many sales people do you have now versus before. Are there any profit improvement programs that you are going to put in place to increase profitability in 2018?

Absolutely. And some of those programs will create some dry, but what we are doing is we are getting the back office all on one common platform. So we have visibility across the national network that's going to allow for better supply optimization, allow for better communication on orders between headwaters and one of the largest suppliers Franklin Electric. We are also weeding out various branches and getting them organized under consistent model across the branches to improve productivity at the branch level and to reduce the risk of access and absolute. And this tends to have a general one look and feel under the different flags of the organization. We are continuing extend some roles to some people and management oversight, training additional sales training and incentive. So, we are doing all those things to help grow the business that you would do with any business that we acquire and want to get the leverage out of -- assimilating them into these common platforms and have common program.

Okay. All right. Thanks for taking my questions.

Sure.

Our next question comes from the line of Matt Summerville from D. A. Davidson. Your line is now open.

Thanks. Good morning.

Good morning.

Good morning, Matt.

First, can you comment on your inventory position heading into the year and how that -- I mean adjusting for the distribution business I guess I would ask, but if you kind of remove that from the equation, how are you feeling about your inventory position? I guess I would imagine you want to bleed that down a little bit, how do you to believe it down in your mind, Gregg?

Yes, Matt. It's a great question. We have comfortable level of inventory going to the year. That is clear, and I think that if you look at some of our historical numbers stripping out the distribution company, you pointed out to see $25 million decline in inventory in the year, I think would be a reasonable expectation. We want to do this. Over time we have now kind of -- we'd moved some inventory out of our distribution business into Franklin. We're understanding better -- some of the relationships. We're matching to demand more the market demand than to quarter end activity, which was more the behavior of this industry in the past. And so, if we're going to just keep squeezing that back into the platform and to reducing a raw material acquisition, so we'll see that inventory lead over time; let's put a number out there, like let's call it $25 million at this point, and we will see where we go from there. I think that we had opportunity to improve upon that again over time.

I want to make sure I understand Brazil a little bit better. Can you talk about -- I think you said water overall up 4% to 5% organic in '18. What is the assumption do you have based in for Brazil specifically? Can you talk about the competitive dynamics in the business? Is this a price cutting you are seeing, being brought on by other local OEMs or our Asian competitors starting to come into the market? And I guess does it make sense to think about having more of a roll-up strategy in Brazil, or are you positioned how you need to be positioned? Thank you.

My workforce synergy is pretty well. Until we have some growth forecast within Brazil this coming year. The situation that the primary price cutting is coming from domestic players, and there aren't so many, but there are handful to a dozen domestic players, and everybody is trying to find business. And so, they're cutting their margins for [indiscernible] made an acquisition last year, and we could see that business is suffering, and we see that in their price cutting as well. There is definitely some encouraging from outside suppliers mainly from Asia, but that hasn't been the bulk of the challenge as yet, it's been mainly domestic suppliers who are desperate for volume.

Got it. And then, just one follow-up on fueling; Gregg, you mentioned perhaps some upside to the fueling outlook in 2018, at least from the top line standpoint, I was wondering to the extent you can comment a little bit and what the flow-through of that business looks like? Obviously you had very good margins in the fourth quarter. So I guess may be top line upside, what the read through is to margins, may be what inning we are in, to use a baseball analogy with the underground piping initiative there, please?

Yes. So what's going on is that there is a very large initiative to upgrade the underground piping equipment to double wall piping, and Franklin has a very strong position in double wall piping market. We saw this -- the business began to pick up in '17, gained acceleration in the fourth quarter. And going into '18, it's -- we could see it accelerate even further. I'm always -- you know, I hesitate brand numbers out there, but it could be another three, four points of growth on a fueling business margins, and China are reasonable. There will be little bit less on piping relative to our kind of contribution margins on all of our products, but we should get some decent leverage. But we're already operating this business in the mid 20s. So, [indiscernible] a lot of operating leverage. We are -- pipes expensive to move around the globe, we are increasing manufacturing in China to support the initiative hopefully by into other costs. So I just caution you to do much of leverage calculation on the sales opportunity.

Got it. Thanks, guys.

[Operator Instructions] Our next question comes from the line of Edward Marshall from Sidoti. Sir, your line is now open.

Just a quick follow-up; I went back to the transcript from last year, it looked like 200 basis points in '16 at price and 250 in 2017. I'm just curious with kind of inline with the historic ranges of price increases, are you capturing all the raw material price inflation in that 200 to 300 that you're seeing, or is there additional room for upside there?

The raw material inflation as we are talking about is 150 to 200. The price to offset that we're assuming again depends on the business unit is between 200 and 300. And yes, so the assumption on the raw material inflation would be basically above that kind of roll-up looking at clarities, purchased components; there is also an assumption that goes into that relative to that improvement opportunity, so how much can we take out of the cost from a sourcing perspective. That's all in our thinking right now. Our current thinking is where we do that. So, basically in roll-up, it happens in the November timeframe, and then we update that roll-up into January timeframe.

So, it seems consistent with prior years. Is this in addition to other like traditional just normal increasing in pricing aside from what you're seeing on the input cost side? I mean it just seems like it's your typical 200 to 300 on an annual basis kind of increase for Water.

Well, yes, the price achieved in 2017 was about 200 basis points on the consolidated entity. The assumption for 2018 is to achieve something higher than that net, and that's primarily because we are expecting higher raw material inflation than we saw in 2017.

Okay. Thanks, guys.

And I am currently seeing no further questions. I would now like to turn to go back to Gregg Sengstack, Chief Executive Officer for any further remarks.

Thank you for joining our conference call today. We look forward to speaking to you after the first quarter results are out.

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