Ladies and gentlemen, thank you for standing by, and welcome to the Franklin Electric reports Fourth Quarter and Full Year 2019 Sales and Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference to your speaker today, John Haines, Chief Financial Officer. Thank you. Please go ahead sir.

Thank you, Joel. And welcome everyone to Franklin Electric's fourth quarter 2019 earnings conference call. With me today is Gregg Sengstack, our Chairman and Chief Executive Officer. On today's call, Gregg will review our fourth quarter business results, and I will review our fourth quarter financial results. When I'm through, we'll 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'll now turn the call over to our Chairman and CEO, Gregg Sengstack.

Thank you, John. As we expected our revenue and operating income were essentially flat to the fourth quarter of last year. Organic growth in both Fueling Systems and Distribution offset negative organic growth in Water Systems. Fueling Systems led the way with another record quarter on strong volume in the US and mix. Distribution sales were also a record; however, the segment's fourth quarter operating loss was similar to last year. Our Water Systems business saw modest top-line growth globally, but not enough to offset lower large dewatering pump sales in the US. Recall that environmental regulations, the requirement to move to Tier-4 diesel engines in 2019 drove large Pioneer pump sales in Q4 of 2018 making for a very tough comp. For the year, consolidated sales were up 1%; operating income was down 3%; and earnings per share were down 9%. While 2019 earnings were below plan in last year, I am pleased to report that our focus on working capital resulted in free cash flow conversion of 163% of net income or about $3.35 per share, a record for any year in our history. Returning to the fourth quarter, I will start with Distribution. The business continued to improve in Q4 with organic growth of about 6%. However, this came at a cost as our team moved out some more commodity type materials at lower margins resulting in an operating loss in the quarter, similar to the in the loss fourth quarter of last year. In our Water Systems segment, revenue from our US surface pump product line declined modestly in the quarter, while US groundwater product line revenue grew modestly. Our US large dewatering pump revenue trailed last year's record results as continued push out of orders and slowing demand in rental and oil and gas end…

Thank you, Gregg. Our fully diluted earnings per share were $0.42 for the fourth quarter of 2019 versus $0.51 for the fourth quarter of 2018. Four quarter EPS before the impact of restructuring expenses was $0.43 compared to 2018 fourth quarter EPS before restructuring of $0.52. Restructuring expenses in the fourth quarter of 2019 were $0.8 million in the water segment related to various manufacturing realignment activities and resulted in a $0.01 impact on earnings per share in the fourth quarter. Restructuring expenses in the fourth quarter of 2018 were $0.7 million, primarily related to branch consolidations and other asset rationalizations in the distribution segment as well various manufacturing and realignment activities in the water and fueling segment, and resulted in a $0.01 impact on earnings per share in the fourth quarter of 2018. Fourth quarter 2019 sales were $320.1 million compared to 2018 fourth quarter sales of $316.7 million, an increase of 1%. Sales revenue decreased by $5.8 million or 2% in the fourth quarter of 2019 due to foreign currency translation and we have to make this revenue decline lowered our earnings per share in the fourth quarter by about $0.02 versus the fourth quarter of 2018. Water Systems sales were $188.2 million in the fourth quarter of 2019 versus the fourth quarter of 2018 sales of $196.9 million. Water Systems organic sales decreased by about 3% compared to the fourth quarter of 2018. Water Systems sales in the US and Canada increased by 10% overall compared to the fourth quarter of 2018, primarily due to lower sales volumes of the watering equipment. Sales of the watering equipment decreased by nearly 50% due to lower sales in rental channels and a surge of sales in the fourth quarter of 2018 driven by regulatory demand. Sales of groundwater pumping…

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

Gregg and John, good morning. So, I wanted to ask about the ISD impact as it relates to China. And I'm curious what your -- what the guidance is baking into from the negative effects of that situation?

Sure. So, as we look at it, we had our ISD system approved late in 2019. We had a handful of installations in late 2019. We expected several million dollars less than 10 in 2020 of ISD installations and that's effectively kind of what we've pushed out or taken out. This is a -- the opportunity long-term for ISD is always -- is going to be as we see it more significant than the double wall piping initiative. Our revenue per station we expect would be about double, and we think that it would be a longer term than the couple of three years we saw for the double wall pipe. So, we think it's going to be a more systemic growth in the business in China over time.

Got it. And previously you've talked about Buy Local, is that a theme that ISD -- will affect ISD or is that just on the underground piping systems?

No, I think my view is that if you go back to the time when that specification for double-wall pipe was reopened, it was when there was a pretty contentious trade environment with U.S. And it seems that trade tensions are at least directionally trending down, and given that the electronic sophistication or the sophistication of the product for ISD, I suspect that there's going to be -- and this is also again a government mandate and the whole idea is for government connection and oversight of fueling station operations. We would expect that there’s going to be a pretty good situation for Western technology generally.

Got it. And as I look into 2020 and we talk about, you've given us some good margin to rather top-line guidance. I am curious if you could talk about the margin in fueling. John, I think you've said in the past you anticipate at the high 20s which is where it's been trending is likely too high. Just any clarity you could provide on them.

Yes. And our guidance assumes mid-20s fueling margin for 2020.

Okay. And then, John, do you have the -- you said Latin America was up 20% in water. Do you have the constant currency impact in Latin America? Have you done that math?

Well, the 20% is what we would call the organic growth, which would take the FX out.

Okay. So that is constant currency, okay.

Yes. That's the -- that takes out both the acquisition impact and which is zero because we've lapped the IRP acquisition, and it takes out the FX. So the FX impact if you look at that table on page 3 of the release was about $3.7 million or 12% in the quarter for Latin America. So, if we take the total, if we take the reported growth and add that back, that's how we get to the 20%.

Got it. Perfect. And then the last one for me. When you look at your guidance for 2020, you talked about the cadence being first half weaker, second half stronger. I'm just curious about the Q1. You had a pretty soft Q1 in 2019. Do you anticipate that to be down year-over-year and if you could frame that up.

Yes. I mean we're intentionally not giving guidance in the first quarter, Ed, for these reasons. It's difficult for us to predict. What we can say to you is that we do expect a weak first quarter, but as you rightly pointed out, we had a weak first quarter in 2019. So, I think the best that we could say is that as Gregg said in his comments, fueling is going to move to the right throughout the year. So, we have some tough comps there and we don't expect fueling to be up. We don't -- we expect for sure that our dewatering equipment sales are going to be down fairly significantly. They are also facing some very difficult comparables. The balance of the water businesses and our distribution business should have a decent quarter. So, we're not optimistic about the first quarter, Ed, but we're also not prepared to give specific quarter guidance either.

Our next question comes from Walter Liptak, Seaport Global. Your line is now open.

Hi, thanks. Good morning, guys. I'll throw it on China. I think you mentioned that China was down 30% in the fourth quarter, and so I wonder if you can give us an idea directionally is that down more in the – and are starting to see any turn in China this quarter?

Yes. So, our thinking for China is, no we don't see any turn, maybe the second part of that question first, Walter. We’re concerned about -- we think the opportunity is great. The pipe in containment opportunity is basically one [ph] that demonstrates -- the ISD opportunity is a great opportunity for our company. But given the economic uncertainty, the virus uncertainty kind of the situation on the ground as we understand it they are right now, we just see this opportunity pushing right in 2020. So, we think it's there. We think we'll win our fair share, but we think it's going to be the latter half of the year as opposed to the first half of the year. Now what we can say is that our estimate for revenue in China is dropping to about $30 million in total from $45 million in 2019 and about $53 million in 2018. So, a meaningful decline there, and again just re-emphasis on a back half loaded.

Okay. Great. I also want to ask about just generally the comments about the first half being weaker because of fueling and some of the water retail -- I'm sorry rental. Those are a couple of year more this better mix product. So as we're modeling this out, I guess the profit mix should be back half weighted too, is that right>

Yes and, Walter, that's why we want to point that out at in our prepared remarks is that we just see that as you pointed out correctly, the fuelling business and the water business which are higher margin businesses when they're going and particularly way the dewater business is going. Those are the businesses we expect you're going to start the year slow. We do expect the water business to do is certainly better than last year's first half of that. So that's lower margin business, sale and water distribution. So that's why we see the mix and the expectations for earnings to accelerate through the year, but to start the year slow.

Okay. Got it. And then last one on Argentina. Thanks for pointing out the volatility around but the currency, is there anything that you're doing differently in 2020 to mitigate the currency or how should we think about the kind of impact that Argentina currency could have on 2020?

Yes. We - a couple things. We do have hedge positions in place, Walt, that are really protecting us for the downside of the pesos strengthening against the US dollar that's a catastrophic kind of situation for us not to be over excited about it or dramatic about it. But so we do have positions like that in place. I think the key learning is less working capital, settle accounts payable. As I pointed out, one of our issues here is that we've got product coming in from all over the world both Franklin facilities, non Franklin product and settling those APs quicker is really important and that should be made easier by the fact that we're trying to lower the level working capital everywhere. So if we have less inventory that should contribute to that as well. So those are some of the things we're doing, but it is highly volatile; the peso to the dollar and Argentinian peso to the dollar loss about 30% just in the third quarter. And then it went beyond that lost additional value in the fourth quarter. So we will do what we can to live in that kind of volatile world.

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

Thanks. Can you maybe put a little bit of a finer point on the earnings cadence as you expect throughout the year? Clearly, the first quarter sounds like it's going to be the low point. I guess I'm wondering if the underlying trends in fueling and dewatering shift out that normal Q2, Q3 high earnings watermark for the company. So maybe put that in a little bit of context because I guess I am having a hard time given that North America groundwater has such an easy comparison in the first half of the year. And given that is at least in my opinion a pretty good margin business for the company especially in the AG motor only stuff that you guys sell. I guess I'm just having a little bit of a hard time with the earnings came, so maybe can you put a finer point on that?

Yes. Matt, I guess I would say that we certainly expect the first quarter to be the low point. As you know, the distribution business had a poor first quarter in 2019 but the first quarter is still the off quarter for distribution. So even if we recover in the first quarter, the first quarter is never a great quarter and then as Gregg pointed out, the comp is easier in North America for the balance of water and we would expect that to improve for sure but those products margins are not the same as what we see when we talk about fueling and the dewatering, large dewatering. So that is really the caution that we have. I think that the piece being in the second and third quarters from an earnings perspective will remain the same. I do think the fourth quarter will be significantly better than the first quarter. And that's kind of the way we're thinking about it right now.

Got it. And then with respect to Pioneer, I believe in the past you publicly stated in 2018 that business did around $120 million in revenue. Can you maybe talk about how it performed in 2019 and what your underlying assumption is for that piece in 2020?

Yes. Matt, we can. In --and let me just get to the right page here. Yes. In 2019, we did about $109 million full year in Pioneer that includes all the international operations in the rental business. That same number for 2018 was about $119 million. And in 2020, we see that going down just marginally or being pretty close to flat. So we're not expecting growth in that business in 2020.

Got it. And then with respect to the profit outlook for distribution. I think when you originally made the forward moves into the channel; you talked about that business getting into an operating profit range of 4% to 6%. Obviously, you're below that in 2018; below that again in 2019. What's the sort of expectation you have for that business in 2020? And do you need to make incremental structural changes to the business to generate that level of profitability?

So, Matt, we are planning for the distribution business to be within that range in 2020. Many of the structural steps to get there were taken in 2019. And that's why we want to convey in my comments that things have settled down. The focus is on the West. I think we have to step back and say that in 2019 and what were really tough market conditions, the distribution business actually was flat organically, and that had to do with focus by the leaders D Davis and his team on cross-pollination, getting into businesses that are, yes, less impacted by the cyclicality of the weather impacts for example, the Ag business, as you point out earlier. So they're getting more into turf and treatment and wastewater to grow that business and then and looking forward to opportunity to have a more warmer weather year to grow the business in the area of commercial pumping systems and line shaft turbine pumping systems, which are more focused on the west and the margin profile of the West is generally more positive when we strike there. So we think of the structures in place; the teams in place, obviously, it's not a way down in hand. It's been a pretty competitive pricing environment with the weak business --the weak general climate, business climate in 2019. We've got a little bit upside down. We acquired some commodity products in the middle of summer when pricing was a little stronger. And as it pointed out we sold some of that off. We will continue to have some margin pressure, I think, in Q1 until we come into the season. But expecting more normal year, our plan is for the business to be within the range that we originally talked about three years ago.

And then maybe lastly in terms of pricing overall for the company, what the average realization was in 2019 and what you're expecting for 2020?

Yes. Our realization in 2019 was just over 200 basis points, Matt, and we're assuming something consistent with that in 2020. End of Q&A

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Gregg Sengstack for any closing remarks.

Thank you for joining us today on our conference call. We look forward and speaking to you in April after the first quarter results are polished. Have a good week.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.