Franklin Electric Co Inc (FELE) 2015 Q3 法說會逐字稿

Good morning and welcome to the Franklin Electric Company third-quarter 2015 earnings conference. (Operator Instructions) And as a reminder, this conference call is being recorded.

I would now like to turn the conference over to Mr. Jeff Frappier

Thank you, Latonia, and welcome, everyone, to Franklin Electric's third-quarter 2015 earnings conference call. With me today are Greg Sengstack our CEO; Robert Stone, Senior Vice President and President of our international water systems unit; and John Haines, our CFO.

On today's call, Greg will review our third-quarter business results and then John will review our third-quarter financial results. When John is through, we will have some time for questions and answers.

Before we begin, let me remind you that as we conduct this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which could cause actual results to differ materially from such forward-looking statements.

A discussion of these factors may be found in the Company's annual report on Form 10-K and in today's earnings release. All forward-looking statements made during this call are based on information currently available and except as required by law, the Company assumes no obligation to update any forward-looking statements.

During this call, we will also discuss certain non-GAAP financial measures, which the Company believes help investors understand underlying trends in the Company's business more easily. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release, which you can find on Franklin Electric's website.

With that, I will now turn the call over to our CEO, Greg Sengstack.

Thank you, Jeff. Third-quarter revenue, down 16%, was a couple of percent weaker than anticipated due to 2 factors. First, the translation impact from the further weakening of emerging market currencies. And second, the further weakening in the price of oil and gas, which depressed demand for Pioneer brand pumping equipment and for mud tanks manufactured in the UK at our fueling business in the [years in] North Sea oil production.

However, with reduced input costs, restructuring, and other cost take-out initiatives, [headwind] mix, and some price, we were able to hold the reduction in adjusted operating income to 17% and our operating income margin of 12.7% was equal to Q3 last year. This is a marked improvement from our second quarter.

On a sequential basis, while our third-quarter revenue declined 6% from the second quarter, our adjusted operating earnings increased 18% and our earnings per share increased 29% as compared to the second quarter.

Now turning to end markets. With more quote normal weather in the US, we have seen our groundwater business stabilize and we are gaining traction with the reset of our distribution as residential pump sales are approaching last year's level.

However, with the record rainfall in the second quarter, irrigation pumping system sales, while recovering a little from Q2, remain depressed, down over 20%. And inventory levels in the central region of the country, while improved, are in our view still above normal.

Demand for our surface pumps in the US and Canada market continue to be weak. Our wastewater and water transfer pump sales were below last year, in part due to a tough comparison and also due to a weak demand in Canada, exacerbated by the weak Canadian dollar. (inaudible) is a normal season for this business this year.

In Europe, water system sales in local currency continued to be flat to last year, with no real catalyst driving the market. In the Near East, after a solid first half, our business in Turkey has been negatively impacted with the political unrest in the country.

In Latin America, we continue to do well -- up 8% organically. As we move into the summer in the Southern Hemisphere, our business in Brazil is up in local currency, holding up well in very weak economy. The integration of Bombas Leao is going right on plan, and through pricing actions and productivity gains, we have recovered some lost margin.

Our Southern African and, to a lesser extent, Australian water business are being negatively impacted by the reduction in metal prices, particularly copper. Copper mines are being shuttered and mining activity in Southern Africa and Australia is generally not robust, impacting the sale of Pioneer brand products. Excluding Pioneer sales, our Southern Africa and Asia-Pacific water businesses had another solid quarter, up 7% organically.

Turning to fueling, excluding the impact of foreign currency translation and reduced demand for storage tanks that support North Sea oil production, fueling system sales grew organically in the quarter. In the US and Canada, fueling system sales growth accelerated from mid single-digits in the first half of the year to 8% in the third quarter.

In the rest of the world, sales were up slightly, with weakness in China, India, and Europe being offset by growth in other regions. With tight expense control, our fueling system's operating margin expanded, even with the 4% decline in reported revenue.

Looking forward, we anticipate fourth-quarter revenue to be down 10% to 12% as compared to the fourth quarter last year. Similar to the third quarter, we expect the decline to be directly attributable to the impact of exchange rates and weak demand for oil and gas drilling.

Outside of these two factors, we are expecting continued organic growth across both segments. With this revenue profile and with cost improvements, more favorable mix, and some price, we believe adjusted operating income will be up significantly and adjusted earnings per share will be in the range of $0.34 to $0.37.

I would now like to turn the call over to John Haines, our CFO.

Thank you, Greg. Our fully diluted earnings per share as reported were $0.43 for the third quarter 2015 versus $0.46 for the third quarter of 2014. As we note in the tables in the earnings release, the Company adjusts the as-reported GAAP operating income and earnings per share for items we consider not operational in nature. We believe presenting these matters in this way gives our investors a more accurate picture of the actual operational performance of the Company.

Non-GAAP expenses for the third quarter of 2015 were $1.7 million and included $1.3 million in restructuring costs, primarily related to the continuing European restructuring and the realignment in Brazil. There were $0.4 million of other non-GAAP expenses related to business realignment costs, primarily severance, and targeted fixed-cost reduction actions and retired executive pension cost.

The third-quarter 2015 non-GAAP adjustments had a net EPS impact of reduced earnings by $0.02. There was a $0.04 reduction in EPS for non-GAAP items in the third quarter of 2014. So, after considering these non-GAAP items, third-quarter 2015 adjusted EPS is $0.45, which is down 10% compared to the $0.50 adjusted EPS the Company reported in the third quarter of 2014.

It is worth noting that the Company estimates its 3Q 2015 adjusted earnings per share was negatively impacted by $0.06 due to the translation impacts alone of foreign exchange. As Greg noted, we saw a significant deterioration versus the US dollar of many key currencies which we do business in, including the euro, the Brazilian real, the South African rand, and the Turkish lira during the quarter. This duration causes the earnings in these units to be translated back to fewer US dollars.

Water system sales were $173.5 million in the third quarter 2015, a decrease of $43.1 million or about 20% versus the third quarter 2014 sales of $216.6 million. Sales from businesses that were acquired since the third quarter of 2014 were $2.4 million or about 1%.

Water system sales were reduced by $24.2 million or about 11% in the quarter due to foreign currency translation. Excluding acquisitions and foreign currency translation, water system sales declined about 10% compared to the third quarter 2014.

Water systems operating income after non-GAAP adjustments was $24.5 million in third quarter 2015, down $6.5 million versus the third quarter 2014. The third-quarter operating income margin after non-GAAP adjustments was 14.1%, down 20 basis points from 14.3% in the third quarter of 2014.

Fueling system sales represented 25% of consolidated sales and were $59 million in the third quarter 2015, a decrease of $2.5 million or about 4% versus the third-quarter 2014 sales of $61.5 million. Fueling system sales decreased by $3.2 million or about 5% in the quarter due to foreign currency translation. Fueling system sales were up about 1% after excluding foreign currency.

Fueling system's operating income after non-GAAP adjustments was $15.4 million in the third quarter of 2015 compared to $15.7 million after non-GAAP adjustments in the third quarter of 2014, a decrease of about 2%. The third-quarter operating income margin after non-GAAP adjustments was 26.1%, an increase of 60 basis points from the 25.5% of net sales in the third quarter of 2014.

The Company's consolidated gross profit was $76.8 million for the third quarter of 2015, a decrease of $12.4 million or about 14% from the third quarter of 2014 gross profit of $89.2 million. The gross profit as a percent of net sales was 33% in the third quarter of 2015, and increased about 90 basis points versus 32.1% during the third quarter 2014. The gross profit margin increase was primarily due to lower direct material costs and an improved sales mix of water systems product.

Selling, general, and administrative, or SG&A, expenses were $47.7 million in the third quarter 2015 compared to $55.6 million in the third quarter of the prior year, a decrease of $7.9 million or about 14%. The Company's SG&A expenses decreased in the quarter, primarily due to lower marketing and selling-related expenses as well as lower costs for incentive compensation. Approximately half of the lower SG&A expenses was related to foreign exchange.

The tax rate before discrete events was 27% in the third quarter 2015 and we believe 27% is a good estimate for the full year 2015. The Company ended the third quarter of 2015 with a cash balance of $84.9 million, which was $25.8 million higher than at the end of 2014. The cash balance increase was attributable to cash generated from operations of about $60.3 million or 105% of the year-to-date reported net income.

The Company had about $20.5 million of borrowing on its revolving debt facilities at the end of the third quarter 2015 and had about $45.7 million of borrowings at the end of the third quarter of 2014. The Company purchased about 1.3 million shares of its common stock for approximately $37.1 million in the open market during the third quarter 2015. Currently, the total remaining authorized shares that may be repurchased is about 2.5 million.

This concludes our prepared remarks prepared and we would now like to turn the call over for questions.

(Operator Instructions) Joe Ratigan, KeyBanc Capital.

This is Shane Roark on for Joe. First, in the water business, how much of the decline was agriculture versus the residential business?

Yes. As we've discussed a little bit earlier, the residential is down single digits; ag down a little over 20%.

Okay.

And that is in the US market. Excuse me. I think your question related to US and that is the US market.

Yes. That was what I am most interested in. And then I understand typically, you see some pull forward into the end of the year as distributors look to hit volume and discount targets. What are your expectations there this year? Do you think that could be a little softer since it has been a weaker year?

Sure. At the end of the year, people are looking at their overall volume and targets. But as you point out, certainly for this year, it has not been robust in the markets and there's just generally less incentive for people to do that.

Okay. And then I guess the last one I have here -- you had some really strong fueling margins. I am curious: how much of that is mix versus what is sustainable going forward; how should we think about that?

Yes. The fueling business, as we have been discussing for the last several quarters, has done a really nice job at leveraging their fixed cost. And so even though their revenues, after the impact of currency, are not up significantly this year, they haven't grown their fixed cost in a dramatic way.

So we would say that the margin improvement that you see there is a combination of some mix shift, for sure, but it is also a combination of leverage on fixed cost. I would remain cautious about fueling margin above 25%. That is not where we have think for the long term they will be. But somewhere in the low 20%s is a reasonable expectation for that business unit.

Mike Halloran, Robert Baird.

On the fourth quarter here, the underlying trends expecting to turn positive on a year over year basis, excluding FX, excluding the oil and gas side for your water segment. Maybe you could talk about what you are seeing underneath the portfolio that would suggest some growth there as you hit the fourth quarter and maybe parse it out by some of the end markets.

It seems like your -- is it better-than-normal sequentials? Or we are just at the point where it is normal sequentials as you get to next quarter? Just a little more color there would be helpful.

Yes, Mike. I think yes, maybe a little better than normal. I'd say a little bit better than normals last year. As they are going into the fourth quarter last year, currencies were changing dramatically; end markets were changing for us in the US marketplace.

And so that's why we're saying the business is really stabilized now. And we are seeing recovery of our North American residential business. We are seeing ag is not down as much, even down as much as the [synertivic] guys talking about.

For us, again, we are more of a replacement market there. We are seeing European business stabilizing -- or relatively flat. But the Middle East, there has been a lot of disruption over the years. And so, again, if there is -- at a near-normal conditions there, we expect that to kind of continue to be okay.

Brazil has slowed down in the second quarter. We are beginning to see that picking up a little bit; activity coming in the back half of the year. Our groundwater business in Brazil has continued to post record revenue. The one we acquired -- Bombas Leao.

Again, Southern Africa has been relatively soft because of commodities. We would expect that to, again, be balanced to recovering slightly. So really what we are doing is we are lapping a lot of the headwinds in currency, we are lapping the headwinds in oil, we are lapping the headwinds in our distribution reset, and we are expecting something more of a normal level here next year.

And when you look at that distributor reset, I know you mentioned inventory level is still a little bit above normal. How close are you guys, do you think, bleeding through the remaining of that inventory, so that whatever incremental demand is out there starts flowing through a lot more quickly?

Well, I think that generally, distribution, given the year, has been pretty cautious about buying. And so there is still end demand pulling through. I think outside of the center of the country, inventory levels are normal. So it is really in the center and I would think that would bleed through here yet this year as a carryover to the first quarter. It is a little tough for us to have that visibility.

But I think that with everybody -- with the dramatic decline in irrigation, I think everyone has been cautious. So I don't think there is a whole lot of interest in building inventory. I do think there has been an orderly bleed-down out of it.

David Rose, Wedbush Securities.

Thanks for taking my call. I was wondering if you can walk us through the cost savings for 2015 so far. And 2016, if you can kind of quantify the benefit from the cost actions and give us an update on what your expectations are for those savings in 2016.

Now David, what we said on the fixed cost, as you saw, when we talk about fixed cost in the Corporation, we are talking about the combination of low fixed costs that are in our cost of goods sold, fixed manufacturing costs, plus SG&A. That in its entirety is down about 14% when we look at it in third quarter, quarter over quarter.

That improvement is a combination of some of the restructuring actions that we have taken, including discrete fixed-cost actions at some of our business units that have had the most significant revenue challenge, have taken actions relative to their fixed-cost selling and marketing and other costs. And then of course, a portion of it is FX as well. So we estimate around 50% or thereabouts of that 14% reduction is related to FX.

As we look forward, for the full year and then beyond, we are hopeful to be in a fixed-cost range -- a combination, again, of those two categories. Somewhere in the $302 million to $305 million annual run rate is kind of how we see ourselves ending this year.

So now, there is going to be some give back in 2016. There is a portion of that that is variable compensation that we'll have to add back. You will start to lap some of this FX. That will have some impact. But when you compare that to the 2014 total of about $324 million, we are significantly below and we feel like we will be positioned significantly below that.

So the key question for us is: what are the right things to add back, perhaps, for example, on R&D. We cut back a little bit on some of the R&D effort that we had intended this year simply because of the year we were having. Some of that will come back. And -- but -- the point is, we are still -- we feel like in a much better run rate position as we end 2015 and enter into 2016 on that total fixed-cost base.

That is helpful. Then maybe quantifying a little bit more as we think about next year. I know you haven't provided any guidance and you won't really provide a ton of guidance on the matter, but how should we start thinking about the assumptions to get to revenue growth next year, excluding FX?

You need a recovery in oil and gas. Maybe you can kind of walk us through some of the same items that you talked about in fourth quarter, but think about next year.

Yes. I would say, David, that we haven't started to talk about 2016 yet. We will do that more in our fourth-quarter release. We are working on some roll-ups of that right now. I think generally, some of the things that are in our thinking are one: we are going to lap some FX, specifically the euro.

We have seen the euro drop, but maintain or be pretty steady. The developing region currencies are a little more difficult, as you know, to try to predict. But we will lap some of that FX in 2016.

We can't imagine that we would have a weather quarter or a weather year in the United States like we had this year. As we have discussed, it was extreme from our perspective. So hopefully, we are not going to see that in 2016.

Fueling: we have a lot of confidence in. There is some choppiness this year in terms of China, India. But that business is well positioned for organic growth, at least in the mid single-digits, if not the upper single-digits.

And then the final thing is that you ask about oil and gas. And we are not real confident there. We don't see an inflection point that is going to drive the growth of that Pioneer brand of equipment significantly higher in 2016. So that remains a headwind for us.

So after giving you any specific advice, I would say, unless Greg has some others, those are the key things that are kind of in our minds right now is we are thinking about 2016 top line.

Okay. And then lastly, with that said, does that -- is your thinking, then, you will take additional cost actions above and beyond what you have already discussed?

I don't think we will take -- we will initiate new cost actions, Dave. But I think what you will see is sequentially, us get better in cost of goods sold on an input material basis as we sequentially move through the balance of this year and into 2016. Most of the restructuring efforts that we have announced will start to pay back more. We will complete what is happening over in Europe with the final move of a couple areas -- manufacturing areas to the Czech Republic.

As Greg said, the integration and the actions that we are taking in Brazil are on track. And every quarter that we go into the future, we'll get a little bit more benefit from that. So I wouldn't characterize it, though, as incrementally new initiatives to take fixed cost out.

Kevin Bennett, Sterne, Agee.

Greg, first question -- and hopefully this is the last time we have to ask this. On the distributor reset, I was wondering if you are pretty much done there? And then also if you had regained the lost market share that you had in the central US.

Yes, Kevin. This certainly will be hopefully the last time you ask the question. Where we had some pockets of weakness, which were the upper Midwest, we now have covered and also in -- so that is in place. And then in central Texas, just kind of the last piece, we are working on some things there that will be in place, we expect, by the end of the year.

So yes. We have the geography covered to our satisfaction and our team is now focused on regaining some share. And we mentioned in our second quarter that we had seen a little bit of share loss. We are seeing the recovery in residential. Ag will come, but it has been clouded, obviously, with the weather conditions that we have had this year.

Sure. That's perfect. And good to hear. Secondly, on Brazil, your sales were up organically about 3%, which is certainly nice to see, given the well-publicized macro headwinds going on down there. I was wondering if you could provide some more color on what is going on with Franklin specific to kind of offset the economic weakness that Brazil is seeing.

Sure, Kevin. We have a really good business in Brazil. We started in Brazil -- well, back up. Franklin has been in Brazil through other pump companies back in the 1980s and the 1990s. As a matter of fact, one of the reasons that we were very interested in acquiring Motobombas Schneider in 2008 is because they had at one point about 20% of the Brazilian groundwater market -- residential markets -- with Franklin Motors. So they had distribution reach.

And Motobombas Schneider has a great residential and surface water business. And again, they have about 5,000 dealers that they do business with around the country. And so we knew that we could very quickly bring in our products from offshore and take them through that market. So we are gaining share in the Brazilian market with Motobombas Schneider's branded products.

I would say that we did see that shift up meaningfully in the second quarter. And that is where I think we said that we got -- the Brazilian economy caught up with us. But we are seeing Schneider beginning to get more traction. We're moving this summer and that product line is doing very, very well.

Leao, the company that we acquired last year, is right in our fairway. It's a groundwater business. We saw the opportunity that with our leadership team in Brazil operate that business, we could take what has been recognized as a leading brand in Brazil in Bombas Leao And really driving it forward.

And so we are seeing that today. With the integration and the coordination between the two businesses, two brands, and one operating team, we are seeing really strong results with Leao, bucking the economy. And I don't know details about the agricultural business in general in Brazil, but we are finding our Leao business is doing very well.

That's (technical difficulty) So Greg, is that something that you are worried about going forward, just given the economy in Brazil? Or do you think you guys will continue to be able to buck the trend?

Well, gravity catches all objects. But with that said, I think that we are going to see is that the residential business will follow the economy. We are believing that we are, through market share gains, softening that effect on the residential side.

With the groundwater business, we had a company, again, that has a great brand; 50-year tradition. It just needed some leadership and some capital and some investment in inventory. And we are doing that. And I think that that, along with the macro trends, that Brazil has got this enormous agricultural economy. They have enormous access to underground water -- groundwater.

So it is a natural export from Brazil is water through agricultural goods. And also through beef and so on. So we think that we are in a pretty good situation with our businesses there today.

Great. Then last question for me is on M&A, it has been a quiet year. And I am wondering if you kind of have any update if things are progressing, if your pipeline remains full, or if that is kind of cooled off a little bit.

The -- we have an active pipeline. Many of the opportunities we look at are in countries outside United States and Western Europe. And when you have a major change in exchange rates, people in those countries are often thinking kind of in US dollar terms. So that makes valuations very difficult to have a meeting of the mind. And we expect that that will -- that is going to take a little while for people to kind of readjust their thinking to what are the new exchange rate realities.

So we have deals in the pipeline and we have an active pipeline. We continue to look. It has been a little quiet this year with everything else that has been going on.

Ryan Cassil, Export Global Securities.

On the Pioneer side, I think you said you're not really expecting too much of a change in demand there. But perhaps you could talk a little bit about pricing, whether you are seeing any pressure there or whether it is getting incrementally worse as we drag through this period.

Ryan, this is Robert Stone. I will speak to that. There has been some pricing pressure on Pioneer as particularly as rental fleet companies that tried to liquidate some of their products. Initially, that was outside North America. Now some of that is coming back into North America. So that has put some pressure on those products.

But in truth, those products really are not in high demand now because most of those were oil- and gas-related. So that business wasn't really going to be there for us anyway.

Okay. Okay. And then on the groundwater side -- perhaps you touched on this already, so I apologize. But I know you talked about the inventory and distributor reset, but just on the end customer demand, are you sensing things are turning the corner there and things are improving in the residential side? Any color you could give us there for the fourth quarter?

Yes. Sure, Ryan. We are seeing that the gap -- the weakness in residential has diminished in Q3. Again, we saw a pretty abrupt decline in demand in Q2 with both ag and residential, particularly in the center of the country.

So residential, we are seeing it moving back near more normal rates for us. We have addressed a couple holes in our distribution that we are seeing. That is helping us. With the ag business, again, the decline was not as dramatic as Q2. It is still down. We were hoping for a little bit more of a season, but effectively, there just wasn't a lot of demand for irrigation as compared to last year, particularly because of the center of the country.

With that said, one advantage we have relative to capital equipment providers in this industry, the ag industry, is that we are a replacement item. So when pumps get turned on, the ones that are already installed, and they fail, then we are going to get that replacement business.

And that is where John was commenting earlier that we get to some kind of more near-normal weather, people may not be putting in new systems, per se, but they still got to maintain their existing systems. And we have always used as a target, our [roll on is] about 80% of our business is replacement. So we would expect to see more normal volumes in the next year.

Okay. Thanks. And then just last question. Your inventories ticked down here sequentially. And as we get through this distributor reset, should we expect to see those inventories continue to work their way down here over the next couple quarters?

Ryan, I think we have seen a nice move, as you pointed out, sequentially. We went from $220 million in the second quarter of combined consolidated inventories to about $209 million in the third quarter.

I don't know that the inventories are necessarily going to be that impacted by the distribution reset. As I am sure you know, the inventories are a bit seasonal, so you see a run up in the second quarter and third quarter, generally, to accommodate the northern hemisphere of businesses.

I think that the more significant thing that you are going to see is that just a better job in terms of managing inputs, managing our finished goods inventories. This concept of availability and emergency replacement parts is very important to the value prop that Franklin has.

But I think we all agree that we can manage these inventories a little bit better. I think you are seeing that in a variety of different ways across the Company. So we will continue to see incremental inventory improvement, but I don't know if I would attribute it to a particular end market as much as I would just management's attention and effort to manage it a little bit better.

Ryan Connors, Boenning & Scattergood.

Thanks for your time this morning. I wanted to get your take on a strategic question for the industry, having to do with the supply and demand environment in the energy-related, call it, fluid handling space. Obviously, the market is a collection of niches, but there is some fungibility between applications.

And now that we have seen this kind of dramatic decline in volumes, if we assume that the lower energy price environment hangs around for a while, maybe even a number of years, and the industry had been built up to serve a larger market, will we get to a point where there needs to be supply curtailments industrywide? Or is that something that can be managed through shift changes and things like that?

Ryan, as you are talking about energy, I am thinking about you are talking about oil and gas, and you are talking about the exploration side. So I am not going to address this from the fuel dispensing part of our business, where we are. The underground systems related to use of automobile.

So then you look at the oil and gas sector and you say, okay, where Franklin touches that space, it is principally through our Pioneer brand product line. And we had some challenges, actually -- scaling, in our own case, last year. We saw some costs in scaling last year to address the surge.

So in our own case, we sacrificed margins to deliver revenue because we didn't want to expand our footprints beyond what we have in place already. So that our footprint is pretty well sized for the business it is today. That piece is now, as you pointed out, gone years before that industry recovers.

But for us, in the case of our Pioneer business, we were looking for the diversification and getting Pioneer deeper into mining, which has also been a little bit weak, as we pointed out and you all have commented to. But Pioneer is also involved in municipal sewer bypass and these are businesses in the US that are pretty upbeat. I think that there have been others in the industry have talked about the municipal investment that is required over the next decade.

So for us, we are feeling pretty good about the business where it stands today. I think your broader question related to oil and gas is probably better served asking people that are a little deeper in that business. Because we are going to continue to put out, again, new products and we are going to continue to innovate across Franklin, including Pioneer, to address our underlying demand.

But if you are scaling, as you pointed out, the niches that people play in, I think it is probably -- you ought to be directing or somebody that is deeper in that space will have a better answer for you.

Okay. So just if I could paraphrase for yourselves, you feel like there is enough alternative avenues to redirect your volume that it shouldn't be an issue.

Oh, absolutely. And again, in the case of Pioneer, we had this tremendous volume run in the last couple years and the top blown off of that. But now we got a business that because of the lack of revenue in the oil and gas space, it is a much more diversified business. And it's a sustainable base that we can grow from, so we are going to roll with it across the globe. And as I said, municipal and in the construction industry and mining industry.

And again we have a number of new products. A lot of it is not even (inaudible) product niches we have in Pioneer as well.

Okay. Great. Well, that's great. And then the other question I had was regarding Forex and exchange rates. You mentioned -- you used the term new exchange rate reality when you were talking with Kevin a minute ago about the M&A environment there.

And I wonder, a lot of these -- yourselves and others are looking -- when you kind of back out the Forex stuff to give us a better picture of the organic run rate of the business. But if we truly are in environment for a number of years where the dollar is going to be a lot stronger, how does that structural shift in the currency environment impact your business or your strategy or how you are running the Company, if at all?

Well, I think there is a couple things. John pointed out earlier from the standpoint of comps, that we were going to be lapping on the [news] comp. From our point of view, that made these developing regions less expensive to buy businesses going forward.

Again, there has got to be a meeting of the minds, but we are patient and we know a lot of people in this industry. And people know us as a good acquirer. So it makes those businesses less expensive in dollar terms potentially to acquire.

It also reduces the cost base for our Company because you may know that -- you tracked this for a couple years. You know that we've moved a lot of our manufacturing into lower-cost regions and made it even more competitive. So we don't have as big a cost footprint in the US or in even Western Europe. So that helps us from a cost point of view.

But at the end of the day, 5 billion people are in developing or growth regions of the world. They need water. They need fuel. They are going to move in the middle class over time. When they do that, they consume more water; they consume more fuel. And that is all good for us.

So I don't know if it is going to be a year or 5 years or 10 years, but we feel we are well positioned. We have a good cost base that has been helped by this situation. We can potentially move some manufacturing around, even further help it. And we are inside these countries doing business, not trying to import into them, and that is also good for our business.

Matt [Sommerville], Olympic Global Advisors.

This is actually Nick Chen for Matt this morning. Thanks so much for taking our question.

You guys had already provided some commentary just surrounding the new Preferred footprint. I was hoping you could give a little bit more color about how the Company is actually been received by the new distributors and just sort of what that relationship is like.

I think that you are talking about our new distribution footprints? Is that your question?

Yes. Absolutely.

Yes. Because we're no longer doing business with Preferred. So we are doing business with other distribution. And if you go back in history, these are individuals that have -- our owners-operators that have known us over the years. We have done business with them in the past. We've maintained relationships with these people in the past. And they have maintained relationships with the end market.

In this industry in the US, there is not a whole lot of examples of exclusive distribution. Distributors carry often more than one line and contractors often buy from more than one distributor.

So we maintain these relationships. We reestablished business with several partners. We expanded business with several partners and we have believed that they have also expanded their business. We are seeing our numbers with the end contractors. So the short answer is that it has been well received.

There are no further questions in queue at this time. I would like to turn the call back over for any closing remarks.

We thank you for following the Company and look forward to speaking to you after the first year on our Q4 results. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.