Ladies and gentlemen, thank you for standing by, and welcome to the Franklin Electric Third Quarter 2019 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, John Haines, Chief Financial Officer. Thank you. Please go ahead sir.

Thank you, Ashley, and welcome, everyone, to Franklin Electric's third quarter 2019 earnings conference call. With me today is Gregg Sengstack, our Chairman and CEO. 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'll now turn the call over to our Chairman and CEO, Gregg Sengstack.

Thank you, John. Our third quarter earnings were a record for any third quarter in the company's history. Our earnings per share grew 14% from the third quarter 2018. Our improvement in earnings was led by our Distribution segment, which grew operating income by over 70% as a result of more favorable weather conditions in much of the United States and acquisitions. Our free cash flow after capital expenditures is about 65% higher through the first three quarters this year versus the same period of 2018. Despite these earnings and cash generation improvements, organic sales growth was below expectations in our Water and Fueling Systems businesses. In the U.S. and Canada Water Systems business, groundwater pump sales were up about 1%. Sales of groundwater equipment through the professional distribution channel were up 7% overall, due to increases in transfers to the Headwater segment and down 3% to third-party distributors. Large dewatering pump sales were up 2% due to continued strength in rental equipment and markets. Backlog in this product line is down from the second quarter, primarily due to expanding manufacturing capacity. Sales of other categories of surface pumps were down mid-single digits, coming off a strong second quarter. Moving outside the U.S., our Water Systems business grew organically mid-single digits in Latin America and EMEA. In Latin America, sales were flat in Mexico and up in Brazil, and increased more significantly in the Southern Cone. While Europe continues to be slow, our business in EMEA and Middle East as well as Africa improved meaningfully. You may recall that last year the Turkish lira devalued significantly, impacting our business there. Our Fueling Systems business delivered another record quarter. Sales were up again, up double-digits in the U.S. and Canada. This is offset by an approximate 20% year-over-year decline in business…

Thank you, Gregg. Our fully diluted earnings per share were $0.72 for the third quarter of 2019 versus $0.63 for the third quarter of 2018. Third quarter EPS before the impact of restructuring expenses was $0.73, compared to 2018 third quarter EPS before restructuring of $0.64. Restructuring expenses in the third quarter of 2019 were $0.4 million and were related to various manufacturing and distribution realignment activities, and resulted in a $0.01 impact on earnings per share in the third quarter of 2019. Restructuring expenses in the third quarter of 2018 were $0.3 million related to branch consolidations and other asset rationalizations in the Distribution segment, and resulted in a $0.01 impact on earnings per share in the third quarter of 2018. Third quarter 2019 sales were $348.4 million, compared to 2018 third quarter sales of $341.9 million, an increase of 2%. Sales revenue decreased by $5.8 million or about 2% in the third quarter of 2019 due to foreign currency translation. And we estimate this revenue decline lowered our earnings per share in the third quarter by about $0.02 versus the third quarter of 2018. Water Systems sales were $199.8 million in the third quarter 2019, versus the third quarter 2018 sales of $199.3 million. In the third quarter of 2019, sales from businesses acquired since the third quarter of 2018 were $2.3 million. Water Systems sales decreased about 2% in the quarter due to foreign currency translation. Water Systems organic sales increased by about 2% compared to the third quarter of 2018. Water Systems operating income was $28.4 million in the third quarter of 2019 and in the third quarter of 2018. During the third quarter, the company acquired First Sales, LLC, a manufacturer of water treatment and filtration equipment for the residential and commercial markets. First Sales,…

[Operator Instructions] And your first question comes from Edward Marshall with Sidoti & Company.

So, I'm looking at Headwater on a sequential basis. So from 2Q '19, revenue is about the same. Was there something in the mix, or was there something structurally that changed within your Headwater division that had a much better drop through relative to Q2 of this year?

Yes, Ed. Couple of things on Headwater. We were hurt in the first half of the year on the top line by the weather as we've talked about. It was a much more moderate weather environment really across the country in the third quarter. Our business in the Southeast part of the United States, especially the Driller Services, Inc., business had a really nice quarter. The drop-through, though, the benefit that we saw in operating income was really in the businesses that are all in the western part of the United States, the Western Hydro and 2M acquisitions. Remember that last year, those were the businesses that were going through a lot of the branch restructuring and rationalizations. We closed some branches. We combined some branches. We, otherwise, rationalized some assets there. And despite the fact that, that business had a decline in revenue, they had a really meaningful improvement in their operating income. So, those two businesses combined had almost a 60% increase year-over-year in third quarter operating income. So, it wasn't due really to a lot of top line benefit there, but it was due to a lot of these costs and restructuring efforts. And then that combined with the strength that DSI in the Southeast and combined with the acquisition we did this year, a company called Milan in Michigan, those were all the main drivers for the improved operating results at the Distribution segment.

And if you took the costs last year, why did we see the impact in Q3 and not Q2? I'm just trying to understand that.

Ed, you've got to, again, look at this - yes, we were going through some changes and so there is some stabilization. There is some margin pick up. Q2 was - people were still recovering from a very weak Q1, I think pricing was just a little bit more aggressive out there. So, we saw some stability in margins. We again saw some better execution and we saw some lower fixed cost as well.

So, the structural changes is now, I won’t call it permanent but are more normalizing as we move forward and this is kind of a margin that we should anticipate on a go forward?

These are the kinds of margins we would expect in the season, which would be Q2, Q3 and then keep in mind Q4 and Q1, which is the low season is when we get delevered and while we think we're going to have an improvement year-over-year then last year’s Q4 and Q1 are - of course were - even marginally profitable or marginally lose money.

So, looking off to the fueling business I think, John, you cautioned us last quarter to not get comfortable in the high 20s the mid-20s is more of the range, but the run rate continued. What's –going on is it continuing to be the - positive mix in North America. And how does that look for the balance of the year to 2020?

Yes the OI margin, really two things, it is positive sales mix Ed. So our sales in the U.S. and Canada our fuel management system continues to be very strong and we have a very nice margin profile on those products. The second thing that I've mentioned in the past is - the business does a really good job of leveraging its fixed cost. So, there is not a ton of SG&A add or other fixed cost adds. The business continues to grow to top line so that leverage - it’s helpful though there as well. The caution remains around a mix shift away from maybe some of the more favorable profitability products, geography mix also matters so, in quarters where we might see big spikes in revenue in some of the developing world markets that can impact our margin profile as well. So it was a good - it was not a great growth quarter - organic growth quarter for fueling mainly because of China, but from –an earnings perspective it continues to be very strong.

And then the foreign exchange gain below operating income, it looks like there was a change on the balance sheet. Did you sell something or what's going on there the $2.1 million?

No, the $2.1 million is again is primarily driven by the hyperinflation accounting in Argentina. So the reason we benefit from that is that the hyperinflation accounting rules require us to separate our assets into monetary versus non-monetary assets and liabilities. Our net position in Argentina is a net monetary liability. So that’s unusual and the big portion of that is driven by deferred tax liability. It’s unusual in a sense that many other companies have net asset position, not net liability position. So when the Argentinian peso weakness to the U.S. dollar which it did significantly in this quarter and has year-to-date we will recognize gains. So that’s the rationale for why we have that significant gain in the third quarter. It had a - there was a big movement in advance of this past weekend’s election in the third quarter in the peso to the U.S. dollar.

[Operator Instructions] And your next question comes from Walter Liptak with Seaport Global.

Wanted to ask about the trends that you’re seeing in Fueling Systems in North America, it sounds like the market is pretty robust and should continue. I wonder what kind of project funnel you've got looking into 2020 and do you think this kind of growth rates can continue?

Yes Walter, we haven't gone out with 2020 guidance. I’ll just say broadly with capital is relatively inexpensive and you're seeing I think a secular move by major marketers to acquire and upgrade large networks of stations. And I think that's driving some of the underlying growth. You’re seeing that through us. I think Dover and Ford both reported and they had I think something north of 10% growth as well. I think theirs was driven by North America. So the market's robust. We're all seeing these investments. These major marketers are seeing the returns by making these upgrades to stores. A lot of these stores were upgraded or the forecourts were upgraded over 20 years ago when the last major tank rates came out. So, it's kind of maybe a natural secular time in the marketplace. And then, Franklin is doing well with getting wins and getting market share gains on some of our fuel management system technology which we mentioned earlier. Is what’s resulting in some of the margin improvement in North America as well. So, as long as we continue to see, I think a relatively favorable capital environment. There is some upgrade for the EMV initiative for dispensers. You could argue that that helps us, also argue that hurts us because where the dollars go, but we've all seen some pretty nice lift here in the North American market.

And the China market, that seems to be slowing a little bit sooner than we thought, and maybe a little bit more dramatically. Was it the same issue that was - that you talked about last quarter for underground or was there something else that was going on this quarter to slow sales in China?

Again, two factors seem to be affecting our business in China. One is it’s your comment, I think things are getting done a little faster and with a little bit more for the independent marketers, not the state-owned enterprises, a little bit more with local products than we anticipated. Second factor is, I mentioned really last quarter is that the scale of the capital that the major - the state owned enterprises are allocating to station upgrades has been shrunk or shrunken I guess. And so, what we're seeing is that the station owners or the - state enterprise stations are only investing in the underground piping systems and not so much in fuel management or fuel pumping and some of the other products we are capturing as well. So a couple factors there that slowed it down. A third factor is that we are recognizing their 70th year at the end of the month and at the end of the quarter. So there is some slowdown we know that impact several initiatives, there is a slowdown for several weeks in construction. We think that's what's going to come back a little bit in Q4. The thing we're looking for in China now is that as the piping initiatives kind of winds its way down as we're looking at in station diagnostics as being the next wave for the Chinese state-owned enterprises and other stations to be upgraded. So that there can be a continuous monitoring of the Vapor Recovery Systems. And we see that as being next kind of multi-year initiative and we expect to see some traction there. We just don't know if it's going to be early 2020 or later in the year. So we're having one kind of declining revenue source we should have lift and other revenue source how the crossover is not yet clear for us.

It sounds good. If I can switch over to water, the groundwater business - and so I wondered if you just review with this end market and you know how that tends to trend in the fourth quarter, I think it's still relatively slow and thinking about 2020 could there be a pickup kind of a reversion back meaning after the tough year this year?

Sure, so well two things, one is that two points, it’s been pretty slow I’d say generally kind of flattish. Our sales to third-party distribution because we don't have visibility of their inventories other than anecdotally for the year up a 1% or 2%, but for the quarter we’re down couple of percent. Our best visibility is on our own distribution outdoor sales which - are down year-to-date they were up in the quarter a couple of percent. And I'd say that Headwater’s footprint is more western based. And so, that's where we have the toughest situation in California and just - kind of the Western and some of it is Midwest. Southeastern relatively dry we done relatively well there. Looking at 2020, if we have another 125 year events or year, once a on record I would expect the results to be similar. But if we have a more normalized weather year that will be of course a - it should be a positive driver for us.

I am showing no further questions at this time. I will now turn the call back to Gregg Sengstack.

Again, we thank you all for joining us for our third conference call. We look forward to speaking to you in the New Year for the fourth quarter and annual results. You all have a good week.

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