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Edited Transcript of FELE earnings conference call or presentation 24-Oct-17 1:00pm GMT

Q3 2017 Franklin Electric Co Inc Earnings Call

BLUFFTON Oct 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Franklin Electric Co Inc earnings conference call or presentation Tuesday, October 24, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregg C. Sengstack

Franklin Electric Co., Inc. - Chairman, CEO and President

* John J. Haines

Franklin Electric Co., Inc. - CFO and VP

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Conference Call Participants

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* Edward James Marshall

Sidoti & Company, LLC - Research Analyst

* Matt J. Summerville

Alembic Global Advisors - MD & Senior Analyst

* Michael Patrick Halloran

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Ryan Michael Connors

Boenning and Scattergood, Inc., Research Division - MD & Senior Analyst of Water and Environment

* Walter Scott Liptak

Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Franklin Electric Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. John Haines, Vice President and Chief Financial Officer. Sir, the podium is yours.

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John J. Haines, Franklin Electric Co., Inc. - CFO and VP [2]

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Thank you, Brian, and welcome, everyone, to Franklin Electric's Third 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 third quarter business results, and I will review our third 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 will now turn the call over to our Chairman and CEO, Gregg Sengstack.

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [3]

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Thank you, John. We are pleased with the overall performance of our company in the third quarter, in which strong organic growth in both our Water and Fueling Systems segments drove record sales in earnings per share. In the U.S. and Canada Water Systems business, we had organic growth in all 3 product lines: groundwater, surface and dewatering. While we believe the overall groundwater market was essentially flat to up a couple of percents, our groundwater business was strong due in part to share gains as we replaced products of our competitors who elected to not continue to supply our distribution company. Surface pumping equipment sales continue to show steady single-digit sales growth.

Dewatering equipment sales nearly doubled and backlog continued to increase with the strengthening demand in domestic oil and gas field services.

Outside the U.S. and Canada, the story continued to be mixed. Sales in Asia Pacific were down 4% as we continue to face difficult comparables to the third quarter last year, most notably in Southeast Asia. We're encouraged by sales growth in Australia, Korea and China during the quarter.

Sales in Latin America were weak across the entire region, principally due to continued weak economic conditions. Southern Africa results were also below expectations for generally the same reasons. However, business in Europe, the Middle East and North Africa was up strongly across all product lines, even with continued weak demand in the Gulf States.

Switching over to fueling. Our Fueling Systems business continued to have strong organic growth, delivering another record quarter. The U.S. and Canada fueling revenue grew 10% as we continued to gain share with major marketers. Last week, our fueling team introduced several new products at the Annual Petroleum Equipment Trade Show, including an extension to our tank gauge line, a new watertight 4-port electrical conduit system called cable type and other products to address new regulatory requirements. Innovative new products were a critical part of our organic growth success.

Outside the U.S. and Canada, fueling sales have improved across all markets with the exception of India, where there has been limited tender activity and Latin America. Our business in China continues to strengthen and growth is accelerating as the national multi-year initiative to replace existing underground piping systems with more environmentally safe, double-walled piping systems continue to gain traction.

After a strong second quarter, our new U.S. distributions segments third quarter results were below our plan. The estimated sales were down about 6% as compared to the third quarter of 2016. Sales were negatively impacted by supply interruptions, as old supplier relationships ramped down and new supplier relationships ramped up. Changes of this nature require increased sourcing, logistics, customer support and training, increasing operating expenses over the short term. The Headwater team responded very well to these challenges, and customer loyalty is high and growing.

To a lesser extent, wet weather in the Southeast also had a negative impact on the distribution segment sales. Lastly, the multi-quarter back-office integration of the acquired entities is on schedule.

Looking forward to the fourth quarter and beyond, we are confident in our fueling team's ability to deliver strong organic growth globally, particularly in the U.S., Europe and China. We are also encouraged by the underlying strength of our Water business in the U.S., Canada and EMENA. However, offsetting these strong results, distribution segment operating expenses will be higher-than-planned in the fourth quarter and it appears that the recovery in our water business in Brazil and Southeast Asia regions will be pushed into 2018. Therefore, we are narrowing our 2017 guidance to $1.88 to $1.92 per share. I will now return the call back over to John. John?

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John J. Haines, Franklin Electric Co., Inc. - CFO and VP [4]

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Thanks, Gregg. Our fully diluted earnings per share were $0.52 for the third quarter of 2017 versus $0.50 for the third quarter of 2016, an increase of 4%. In the third quarter of 2017, the company's earnings per share were $0.53 before restructuring expenses compared to 2016 third quarter EPS of $0.48 before restructuring expenses, a 10% increase.

Third quarter 2017 sales were $311.1 million, an increase of 30% compared to 2016 third-quarter sales of $239.8 million. Water Systems sales were $196.5 million in the third quarter of 2017, an increase of $14.5 million or about 8% versus the third quarter 2016 sales of $182 million.

Water Systems organic sales were also up 8% compared to the third quarter 2016 as foreign exchange was not a significant factor in the quarter. Water Systems sales in the United States and Canada were up about 11% compared to the prior year third quarter. Sales of Pioneer-branded dewatering equipment increased by about 90% in the third quarter when compared to the prior year, resulting from the continued diversification of customers and strengthening in U.S. oil and gas end markets. Sales of groundwater pumping equipment increased about 10% on broad-based strength in both residential and agricultural systems.

Another contributor to the increase in the U.S. and Canada groundwater equipment sales in the quarter is the replacement of other OEM products in sales to Headwater. As Gregg noted, certain pump and motor suppliers elected to discontinue sales to Headwater, and this has resulted in higher sales of Franklin Electric products, as well as the products from other existing or new pumps suppliers in their place to the Headwater company.

Sales of other surface pumping equipment increased by 4%, primarily in irrigation and agricultural related products. Water Systems sales in markets outside the United States and Canada overall increased by about 5%. The impact of foreign currency translation was not significant.

International Water Systems sales were led by improved sales in Europe, including higher sales of Pioneer-branded equipment in the Middle East and Africa, but were offset by lower sales in the Latin America and Asia Pacific markets in the quarter compared to last year. Water Systems operating income was $28.3 million in the third quarter of 2017, down $1.7 million or 6% versus the third quarter 2016, and operating income margin was 14.4% compared to 16.5% in the third quarter 2016. Water Systems operating income before restructuring was $29.3 million in the third quarter of 2017, up $1.1 million or about 4% versus the third quarter of 2016 and operating income margin before restructuring was 14.9% compared to the 15.5% in the third quarter 2016. The decline in operating income margin is primarily related to product sales mix shifts.

Fueling Systems sales were a record $63.5 million in the third quarter of 2017, an increase of $5.7 million or about 10% versus the third quarter of 2016 sales of $57.8 million. The impact of foreign currency translation in the quarter was not significant.

Fueling Systems sales in the United States and Canada grew by about 10% during the quarter. The increase was across all product lines, with particular strength in piping and containment systems.

Outside of the United States and Canada, Fueling Systems revenues grew by about 18%, led by stronger sales in Europe and Asia. Fueling Systems operating income was $17.1 million in the third quarter of 2017, up $1.9 million or about 13% compared to $15.2 million in the third quarter of 2016, and third quarter operating income margin was 26.9%, an increase of 60 basis points from the 26.3% of net sales in the third quarter of 2016.

Distribution sales were $68.1 million in the third quarter of 2017. Management estimates that third quarter distribution sales declined by about 6% from the third quarter of 2016, primarily driven by supply chain disruptions and weak end-market conditions in the Southeast region of the United States. Distribution operating income was $2 million in the third quarter of 2017, and the third quarter operating income margin was 2.9%.

The company's consolidated gross profit was $103.8 million for the third quarter of 2017, an increase of $18.3 million or about 21% from the third quarter of 2016 gross profit of $85.5 million. The gross profit, as a percent of net sales, was 33.4% in the third quarter of 2017 and decreased about 220 basis points versus 35.6% during the third quarter of 2016. The gross profit increase was primarily due to higher sales. The decline in gross profit margin percentage is partially attributable to the inclusion of the distribution segment, which impacted the margin by 70 basis points, and the balance is due to product and geographic sales mix shifts, and to a lesser extent, higher raw material costs.

Selling, general and administrative expenses were $71 million in the third quarter of 2017 compared to $55.4 million in the third quarter of the prior year, an increase of $15.6 million or about 28%. The increase in SG&A expenses from acquired businesses was $15.8 million. Excluding the acquired entities, the company's SG&A expenses in the third quarter of 2017 were flat to last year.

Restructuring expenses for the third quarter of 2017 were $1 million, reduced diluted earnings per share by approximately $0.01 and were related to ongoing efforts in Brazil. Restructuring for the third quarter of 2016 resulted in income of $1.7 million and increased diluted earnings per share by $0.02, principally due to a gain on the sale of property in Brazil.

The company ended the third quarter of 2017 with a cash balance of about $60 million versus about $104 million at the end of 2016, down primarily due to acquisitions and increased working capital. Inventory levels at the end of the third quarter of 2017 were $303 million (sic) [$301 million] versus year-end 2016 of $203 million. About $65 million of inventory increase is due to the distribution segment acquisitions.

The company realized discrete income tax benefits from stock-based compensation in the third quarter of 2017, which lowered the consolidated effective tax rate to be about 19%. The company believes 25% to 28% before discrete items is a reasonable estimated effective income tax rate for the remainder of 2017. The company had $69.5 million in borrowings on its revolving debt facilities at the end of Q3 2017 and no borrowings at year-end 2016. These borrowings were primarily to fund the distribution acquisitions made this year and for seasonal working capital needs. The company did not purchase any shares of its common stock in the open market during the third quarter of 2017. As of the end of the third quarter 2017, the total remaining authorized shares that may be repurchased is about 2.2 million.

Yesterday, the Franklin Electric Board of Directors declared a quarterly cash dividend of $0.1075 per share, payable November 16, 2017, to shareholders of record on November 2, 2017.

This concludes our prepared remarks. And we'd now like to turn the call over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Mike Halloran from Robert W. Baird.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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So could you guys talk a little bit about the distribution channel right now? Do you think that you found the right run rate going through the second and third quarter here in terms of you may have some puts and takes with who is supplying you guys the pump motor combinations? Do you think you've found in the right run rate of business here? Or do you think that there's a little bit more disruption in the channel that's still ahead?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [3]

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Mike, I'd say that the second quarter was not materially impacted because we had inventories on hand of both suppliers that were going to leave us and suppliers that were joining us hadn't yet shipped. The third quarter was disrupted because we just -- turning on that much supply for that many suppliers in a relatively short period of time given the trading going and all was tough in the third quarter. We're seeing convergence now a bit increasing. So I'd say that that's pretty much behind us. I expect in the fourth quarter we're still going to see a little bit of drag. But we have these suppliers in place to move forward. And the team is in place to move forward as well.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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So it sounds like you're saying that the -- from a channel-partner perspective that it is starting to stabilize here. And then from a cost perspective, the headwinds you guys mentioned in the quarter feels like a little bit of a drag in the fourth quarter, but that also should be normalized as you move past the fourth quarter.

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [5]

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That's a good summary.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6]

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Okay, great. And then could you talk a little bit about pricing on the -- in your water business as it stands today? Not only just in terms of pricing but then also the price cost side too?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [7]

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Yes, let me speak to, that's okay John. I will need to speak of kind of the pricing and generally I'd say, alluding to the North American market, I'd say that we're seeing kind of the typical cycle we see where there is quarter-end promotional activity. I'd say the pricing -- we're seeing situations in the country where we see -- where we will have significant discounting and then it will abate. And so that's what we're seeing in North America. I'll turn it over to John to talk about our general pricing and cost structures. John?

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John J. Haines, Franklin Electric Co., Inc. - CFO and VP [8]

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Yes. Mike, on a year-to-date basis, we still have a price over the raw material inflation, input inflation that we see. Our Water business has achieved in the neighborhood of 170 basis points of price in the third quarter, and that's consistent with what our feeling is as well. So we are -- we have -- we continue to have a spread because of the raw material inflation that we've seen, but it's not as significant a spread as we have seen in prior years. So as we look, maybe less so to the fourth quarter, but as we look out into 2018, that will be a more significant factor for our company.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

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And then last one on my side. Pretty robust dealing top-line trends, both domestically and internationally. Can you just dig in a little deeper on the drivers on that side? It certainly sounds like it's sustainable going into the fourth quarter?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [10]

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Sure, Mike. So what we're seeing in the domestic market is, to some degree, I think we're benefiting. We've been asked this question before, just being at the trade show last week, you got some confirmation. We seem to be benefiting from the fact that this EMV pushout is allowing a more steady rate of overall station upgrades, not just focused on card readers, which is just generally good for us. In addition, there are increasing regulations around tightness of sumps, under dispenser sumps -- sumps for -- where you're putting the fuel in the tank. And so that testing is going to, I think, again, drive some organic growth over the next several years as people need to upgrade their equipment in a normal course of fashion for maintenance purposes. We are continuing to see also share gains in fuel management systems. And we -- as I pointed out in my prepared remarks, we've expanded our fuel management line with 2 additional products so that we now have a complete suite of -- on our new platform for the market. There was really a positive buzz about that at the show as well, as well as the cable type, which again is a way to keep water out of these underground sumps. This new cable type system that our team introduced. Outside the United States, we saw strength really across the globe and we're seeing, again, this regulatory move in China for the -- upgrading the pipe systems to double-walled piping, and we feel we're well-positioned to do that. We're seeing increasing order activity, we expect that to continue to Q4 and beyond in China, seeing strength in Europe. So we're really seeing strength kind of across the markets, with the exception of Latin America in the fueling space, and expect that to continue.

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Operator [11]

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Our next question comes from the line of Edward Marshall from Sidoti & Company.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [12]

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So last time we were updated, I think you talked about pump and motor suppliers Grundfos and Xylem kind of stepped aside. Are there any -- during the third quarter were there any additional suppliers that kind of decided not to supply to the distribution houses?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [13]

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Sure, Ed. Initially, Pentair continued to supply us, and then later in the third quarter, they elected not to. It wasn't as large of a supplier as Xylem and not even, I think, as large as Grundfos, but they have elected to discontinue supplying Headwater. And then there's a smaller company, Flint & Walling that's elected to discontinue supplying Headwater.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [14]

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Okay. Okay. And how much collectively do these four suppliers make up of that Headwater Distribution unit? Do you have that?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [15]

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John?

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John J. Haines, Franklin Electric Co., Inc. - CFO and VP [16]

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Yes, it's going to be in the neighborhood of $30 million of annual purchases. Without question, Ed, the largest one was the Xylem relationship with Western Hydro in the western part of the United States, Grundfos, Pentair, Flint & Walling were much, much smaller. So if Xylem was in the low 20s last year in terms of total supply, so when you combine the other 3, we would say it's in the $30 million range.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [17]

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Got it. Okay, so I looked at the margin in the quarter. And I just want to talk about maybe, I guess last quarter maybe you over-earned, in this quarter you under-earned and then maybe not, talk about the fourth quarter, looking at some higher operating costs. Just kind of get a sense of maybe what that margin might like look like on a normalized basis within a distribution unit. Has it not changed, has it shifted?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [18]

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No, our view, Ed, is not really changed in terms of the margin expectations for the Headwater unit. When we first did the -- announced the transactions, we said that we would expect kind of 4% to 6%. We were kind of on the high end of that in the second quarter, we're below that in the third quarter. I think the factors that we're pointing out, which are transitionary in our minds are, as we go through these supply changes, it creates a tremendous amount of end-market disruption, and that disruption really is impacting the top line. So we're trying to convince contractors to stay with our distribution company and convert to products. Our competitors are trying to say, well, switch your distribution company and stay with the products that you have historically bought. So especially in a place like California, that is an ongoing battle. That's going to lead to price pressure, of course, and it's going to lead to volume uncertainties. The other thing that that drives is the fact that to win that competitive situation in the marketplace, we're going to have to spend more from an SG&A perspective. We're going to spend more on things like training, salespeople, promotional type of activities, advertising type activities. All those kind of things are going to go into that. So see that as transitionary through the third quarter and through the fourth quarter. I think the other thing that didn't help our third quarter margins, Ed, was we lost a little bit of leverage in the Southeast. Our unit that we call Drilling Services Inc. or DSI, that's primarily based in the southeastern part of the United States, and it was unfavorable conditions there from a weather perspective, it relates to pre- and post-hurricane. So from a revenue and a leverage perspective, we lost a little bit there that I think also contributed to those third quarter results.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [19]

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Got it. I think when you acquired these businesses, I think the conversation was, look the sales representative limited distribution unit was more important than the OEM. Talking about, I guess about Western Hydro, maybe some of the discussion you had there, is there any -- are you finding that still to be true? Is there any way you can talk about a retainment rate? How many of these customers you're actually retaining versus market share loss potential?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [20]

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Sure, Ed. And again, with the Franklin Motor, that product is available outside of Headwater. And so it can be purchased from other distributors, and for preferences around Franklin motor, people can get that in a number of locations. But what we're seeing on the pump side and with the Headwater customer base, and again, the Western Hydro has a pretty diverse customer base beyond just the boreholes submersible products that Franklin is most well-known for. We're seeing conversion rates, we estimate in the high 60% to low 70% at this point and growing, so we feel we're retaining a fair number of customers. It's not -- it's very difficult to measure exactly, but we have tracked it from a couple of different ways and we're confident that our conversion rates now are moving to the 70s, and as we now have more products on the shelves from other pump suppliers, that we're going to see those conversion rates continue to grow.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [21]

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What's your target for that rate?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [22]

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We want it to be over 100%, right? We want to get the customers back and get more. So the team out there is interested in growing the business, they're growing it with Franklin, they're growing with the other (inaudible) other products. So their focus is to grow their business in this channel and supporting also commercial activity and other contractors that have bought from Hydro in the past.

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Operator [23]

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Our next question comes from the line of Ryan Connors from Boenning and Scattergood.

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Ryan Michael Connors, Boenning and Scattergood, Inc., Research Division - MD & Senior Analyst of Water and Environment [24]

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I wanted to talk a little bit about the margin in the water business. You mentioned quite a bit about the mix shift there. I know there's a lot going on with Pioneer growing like it is and a lot of puts and takes there. Can you just kind of walk us through, Gregg, a little bit about the details of that mix shift and how we should think about the margin there going forward once the mix, if this ever happens, if the mix kind of "normalizes?"

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [25]

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Ryan, given the complexity of your question, I am going to turn it over to John.

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John J. Haines, Franklin Electric Co., Inc. - CFO and VP [26]

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Ryan, the adjusted operating income margins for Water for the quarter dropped by about 60 basis points. A big part of that is due to product, what we call products and I guess, to some extent a geography mix shift. You're right, Pioneer had an outstanding quarter, not only in the United States, but internationally as well. That's a great thing from a growth perspective. But the Pioneer business just doesn't have the same type of core margins, operating income margins that the rest of our Water segment does. So we're looking at meaningful differences there. We've targeted 16% to 18% for Water operating income margins. We think that's doable, but it will be sensitive around these types of mix shifts. So Pioneer is a big driver in the quarter. Other big drivers though are, we had a big quarter in Europe, Middle East and Africa, that Gregg mentioned. A big portion of that was in Turkey. Our business in Turkey continues to do really, really well. And kind of same story, just not the same margin profile or margin environment there in that market that we see in other key groundwater markets around the world. We had a nice growth rate in pump product and pump components in Europe in the quarter as, again, driving part of that 20% organic growth. Again, we've talked about really everywhere around the world, pump products don't have the same type of margin profile that the electrical or motor products have. So that was an issue as well. So we saw nice organic growth, but we saw big portions of that organic growth coming from products or coming in geographies that just aren't as high a margin. Now there are improvement efforts going on. I think the key factor is what we were talking earlier about with Mike is, offset this inflationary pressure that we see with price. Many of our international business units have raised price and are actively achieving higher price, and that's really the best opportunity that we have to do that. But that's a little bit on what's going on with the Water margins in the quarter.

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Ryan Michael Connors, Boenning and Scattergood, Inc., Research Division - MD & Senior Analyst of Water and Environment [27]

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Okay. That's super. My next question was kind of a bigger picture question. But I wanted to give you a chance to address it on the call, because it seems to come up more and more. It just has to do with the long-term impact of electric vehicles and so forth on the Fueling Systems long-term outlook. Can you just give us your perspective on that issue, Gregg?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [28]

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Sure, Ryan. It does get a lot of press and lot of attention. Obviously, with Warren Buffett's decision recently to get into (inaudible) has certainly -- he's been a pretty savvy investor over the years. And you look at this -- that the information that's available out there, the number of cars that are on the road today is going to double, maybe even triple, if you look at various sources, like the IMF, over the next 20, 25, 35 years. The vast majority of those cars are going to be in places like China, India and other developing regions. And those regions are already struggling with having insufficient infrastructure to support the demand for electricity. So as we look at it, even though cars are going to get more efficient, there's just going to be a lot more cars on the road, and liquid fuel is the best way to power a vehicle. I mean, putting the issue about CO2 emission on the side, I'm saying if look at all energy sources and where they're going to be applied, liquid fuels fit very well in rolling stock as opposed to maybe electricity being for heating or cooling ability and so on. So as we've looked at various profiles for demand for growth of energy, energy growth is going to be somewhere up 25% to 50%, depending on what numbers you look at over the next 25 to 35 years. All these energy sources are going to required, even with renewables gaining additional traction and coal being -- maybe not significant growth in coal but we're going to see it in the renewables. But the automobile is going to be powered by liquid fuels as we see it and kind of as the industry see it and I think people look at this on a global basis for a number of years.

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Ryan Michael Connors, Boenning and Scattergood, Inc., Research Division - MD & Senior Analyst of Water and Environment [29]

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Got it. That's helpful perspective, Gregg. And then my last one is more of a housekeeping for John, I guess. Why no buyback in the quarter, John? The stock got a really nice dip after the last quarter, which ended up being transitory. So I was surprised that you guys didn't jump is there a little bit. Any color there?

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John J. Haines, Franklin Electric Co., Inc. - CFO and VP [30]

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Yes, I think, Ed -- sorry, Ryan, as we've discussed in the past, we have an idea of where we want to buy, and it's based on our view of the forward multiple, and it just didn't reach that point in the quarter. It's not for reasons that we're thinking strategically about it, we absolutely want to buy or offset our dilutive share impact each year, but we also are thinking about it in terms of where the price is relative to a forward multiple, and that's the primary reason.

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Operator [31]

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And our next question comes from the line of Matt Summerville from Alembic Global Advisors.

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Matt J. Summerville, Alembic Global Advisors - MD & Senior Analyst [32]

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Maybe just on the dewatering business, up 90%. I know that's against an easy comp. But just to help put it in perspective? Can you parse out how much of that growth is being driven by, #1, sort of the rebound in drilling activity particularly shale? #2, what you've done internally to grow the business from a geographic and margin and customer diversification sort of initiative? And then #3, if that business saw a measurable uptick related to the hurricanes?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [33]

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Yes. Matt, couple of things. One is that we're seeing the growth in Pioneer, both domestically and internationally. So that gets to the diversification of the customer base. The sales in Pioneer -- when the sales were at a lower run rate or maybe a little over 55%, close to 60% domestic, and then over 40% international. Yes, we've seen a little bit more surge in the U.S. market, but our international component of Pioneer is significant and growing in several markets rather overseas. With respect to the domestic activity, we are, as John has pointed out and as we pointed out in our earnings release, seeing a stabilization in oil and gas. We're seeing more end-market demand for Pioneer as metal companies are expanding their suites. We say its oil and gas because of the type of mix of products that people are buying that tend to be the larger products, which will be oil and gas. With respect to the hurricanes, there's really -- that was really not such an event for us because we're not in the rental business in the U.S. The rental companies, when they see an event like that, they start moving equipment in anticipation of the event. So they would benefit from that. We would benefit from kind of the after effect of having the equipment heavily used in a short period of time for potential parts and additional equipment and fleet over the next, say, 12-to-18 months. But we have no immediate pops from a weather event like that, that we could measure. John, do you have?

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John J. Haines, Franklin Electric Co., Inc. - CFO and VP [34]

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Yes, I just would add, Matt, is that we saw strength in the U.K. and we saw strength in South Africa. We did win a tender in the U.K. that was worth about USD 1 million from an environmental agency there for pump products that shifted in the quarter. I think the other point I'll make about the international markets is, you know, we've been cultivating relationships in many of these ag -- in these international markets for many, many years relative to the Pioneer product. And some of those are just coming now to fruition. It's a fairly long sales cycle, convincing cycle that these products make sense and it's versatile and reliable and those all kinds of things. So it's not that surprising to us that even places like Australia and South Africa and Europe where we've been pushing Pioneer for a while, that we're starting to see some fruits from that effort.

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Matt J. Summerville, Alembic Global Advisors - MD & Senior Analyst [35]

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And then just a follow-up. Maybe you can give a bit more of a detailed assessment in terms of what you're seeing in Latin America and South Africa in your traditional sort of non-dewatering business, I know you mentioned South African dewatering. So kind of looking at the markets that those businesses are participating in, how you're growing relative to those. So if you can talk about market share is a component to the answer? And then, I guess, what sort of gets the Brazilian business reinvigorated? Things, for a lack of a better term, are still pretty messy down there from a government standpoint.

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [36]

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Okay. So, Matt, you've identified one of the bigger issues in Brazil, Latin America. The political situation there is not very stable, that drives a lot of economic uncertainty. People won't buy if they don't know what the future looks like. Clearly, the distribution network we have in Brazil allows us to put many products in and everywhere in Brazil. The economy is just poor at this point and we're coming into the irrigation season. We should see a pickup there seasonally. From a share perspective, we're doing just fine. We don't see us having lost any share. In fact, we've probably gained some share over this past year. The integration of Bombas Leao has gone very well and is fully integrated now into our business in Brazil. Argentina is very soft for a variety of reasons, also some political instability. We have a good share there, but that's off, I expect that to come back in the next year or so. In Africa, you talk about a place with some political instability, that's certainly driving a lot of uncertainty. Our end markets there are primarily ag and mining. Mining has recovered a little bit in Southern Africa, not very much, but better than it was a year ago. We've got a lot of headroom growth opportunity for share gains in Africa outside of the country of South Africa. There's a lot of opportunity there. The challenge is getting to the buyers and gets a build out for distribution in that area. And just get after it; the economies are very soft right now.

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Matt J. Summerville, Alembic Global Advisors - MD & Senior Analyst [37]

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Got it. And then just maybe one final follow-up, just on the fueling business. I think this is maybe the second quarter in a row you sort of called out the double-walled pipe initiative that the country is undertaking. Gregg, how long do you anticipate that being a tailwind for Franklin? And then, I guess, in terms of your success, what has your flow share been if you're able to track that thus far associated with that specific initiative?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [38]

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Yes. So we would say that that is a multi-year initiative. With China, we're always cautious that they can turn these things off as quickly as they can turn them on, but the regulations are in the book, they are building up throughout the country. There's a thought that it needed be done in 3 years. I don't think that -- if you talk to people on the ground in China they think they can get all that done in three years, given their reputation, so this is maybe up to kind of a 5-year initiative. And it's going, I think, continue to ramp during that period at a nice pace. Looking hopefully above 10% pace, kind of during that period maybe more. The share, I mean, right now, the double-wall requirement, there aren't many people in the world that have the product line that could qualify. So we're in a good position there. But I don't want to speculate on what the initiative is, but we have a meaningful position.

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Operator [39]

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(Operator Instructions) Our next question comes from the line of Walter Liptak from the Seaport Global.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [40]

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Just a couple of follow-ups. Maybe the first follow-up from Matt's question on the double wall. Have you talked about a market opportunity over that 5 years? What's the total market size of spending?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [41]

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Yes, we have not done that. I'm always a little cautious on these major initiatives. We had a tremendous run-up in California for those people that followed the company back a decade ago when we saw conversion. And then the financial crisis hit and it basically stopped the conversion. So -- but the market size here is in the tens of millions of dollars, and overall size over the 5-year period would be north of $100 million, maybe more than that. So it's certainly encouraging, we're getting nice traction, we're seeing good growth, but it is a country that can kind of turn on and turn off initiatives rather quickly and abruptly. So (inaudible) qualification. But it is a multi-year, tens of millions, essentially hundreds of millions of dollars, certainly not a billion, opportunity.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [42]

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Okay. All right. Great. That's good color. The second thing is just a follow on, on the fueling business, the comments about it continuing into the fourth quarter and into 2018. I wonder about the projects in the pipeline. What kind of visibility do you get from your engineering firms or from your customers about how long the tail can be for that business?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [43]

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Walter, it's difficult. We have visibility anywhere from a few days to a few weeks to a few months. Obviously, our salespeople are out talking to our customers and we're getting some sense for their build rates, their upgrade rates of stations and that's which is anomalies, let's say about half of our business is where you're going to see significant builder upgrades, maybe a little bit more than half and the other portion is maintenance type items or replacement items or smaller jobs. So we have some visibility out a few months. I'd certainly say from -- in the North American market, more significantly the U.S., at the trade show last week, there seemed to be a lot of optimism about this year being better than last year and next year looking to be even stronger. There seemed to be a fair amount of capital available to appropriate for station upgrades, which is all good naturally good news for us. I pointed out earlier in the call that the EMV push out takes a little focus off of the need to upgrade just the credit cards or the card readers and the sensors, and can look more broadly at the gas stations. I'd also say let's have a -- this is my own view, a secular opportunity here because a lot of tanks were upgraded, a lot of stations were upgraded last -- back in the late '90s, those stations are now approaching 20-year lives. They are stations that have tanks in the ground that are older than that. And so as demographics change in the U.S. market, as people are going to bigger stations, you're seeing the major marketers getting bigger and investing and buying, and that's also good for us. But the visibility we have, to answer your question directly, is limited to a few weeks to a few months, and it's limited to our conversations with these end marketers and what we think and hear that their capital plans are for 2018. But we remain very optimistic that 2018 is going to be a good year domestically and internationally in part driven by traction in Europe and traction in China that we talked about earlier.

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Operator [44]

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And I am currently showing no further questions. I would now like to turn the call back to Gregg Sengstack for closing remarks.

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, CEO and President [45]

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Thank you, Brian, and we appreciate everybody listening in our conference call today. And we look forward to speaking to you after the first of the year for our fourth quarter results. Have a great day. Thank you.

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Operator [46]

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