Franklin Electric - Q3 2016
October 25, 2016
Transcript
Operator (participant)
Good morning, ladies and gentlemen, and welcome to the Franklin Electric Company third quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone, and an operator will be happy to assist you. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host for today's conference, Mr. Joe Ruzynski, Treasurer of Franklin Electric Company. Sir, you may begin.
Joe Ruzynski (Treasurer)
Thank you, Bridget, and welcome everyone to Franklin Electric's third quarter 2016 earnings conference call. With me today are Gregg 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, Gregg 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, Gregg Sengstack.
Gregg Sengstack (CEO)
Thank you, Joe. Our company delivered solid results in the third quarter, with 3% overall sales growth. Our fueling system organic sales decline of 1% was more than offset by the 5% organic increase in water system sales. Our water system sales growth continued to be led by higher groundwater sales in the U.S., combined with strong water system sales in Latin America and Asia Pacific. Our organic sales growth, along with stable input costs, increased prices, and a favorable sales mix drove our adjusted earnings per share up 7% for the quarter. John will cover more of the financial highlights for the quarter in a moment. Turning to end markets, the U.S. and Canada groundwater business again showed a nice improvement over last year with 13% growth. Sales of residential groundwater systems increased 17%.
With all the focus on weak crop prices and wetter weather in key growing regions, we are pleased that our agricultural pump sales increased 2% in the quarter. Our surface pumping business in the U.S. and Canada declined in the quarter due to weak sales of large dewatering pumps. Overall, revenue in our water business in the U.S. and Canada was up 2% compared to the third quarter of 2015. Outside the U.S. and Canada, water system results were similar to what we saw last quarter. Excluding the impact of foreign translation, we achieved organic growth of 8% in the third quarter. Revenue growth in Latin America was strong and broad-based. Business in Brazil continued at a record clip, delivering 9% organic growth. Mexico, Guatemala, Chile, and Ecuador all saw over 20% growth rates in the quarter.
Growth in Asia Pacific revenue continued unabated with generally favorable weather conditions in Southeast Asia and solid performance in Australia, propelling the business forward. Europe, Middle East, and Africa water system revenue was flat last year. In local currency, our business in Turkey had record results, but political and economic turmoil in the region remains, and the lower price of oil has reduced investment by the public sector, particularly in Saudi Arabia. After 17 quarters of organic growth, our fueling systems revenue, excluding foreign currency translation, declined 1% organically. However, the U.S. and Canada team delivered another solid quarter of 5%. Our fueling team strategy of total system solutions continued to gain traction and share. Outside the U.S. and Canada, fueling systems organic sales were down about 10%, a significant portion of which were underground storage tank sales in Europe.
In addition, most of the gas stations outside North America are controlled by major oil companies. While we saw some markets with revenue growth in the quarter, like China and Africa, we estimate the weak price of oil has curtailed downstream spending by the major oil companies, and some plant shipments have been delayed. Looking forward, for our water systems business, we expect the fourth quarter to have a similar pattern to the third quarter. Even with the soft ag market, we expect the U.S. and Canada water systems business to continue to grow with our new drive, control, and pressure-boosting systems gaining broader acceptance. Outside the U.S. and Canada, we anticipate continued strong performance in Latin America and, to a lesser degree, Asia Pacific against the tough comp from last year. And much like Q3, we expect Europe to be steady.
While we are mindful of the political and economic uncertainties in the Middle East, we expect to see some improvement in end markets in the Gulf region. For our fueling systems business, we expect continued mid- to high single-digit revenue growth in the U.S. and Canada. Outside the U.S. and Canada, we expect our fueling business to deliver revenue growth as well. Against the backdrop of a weak global economy, Franklin employees around the globe are executing on our strategy. Our global footprint, which is a focus on developing regions, increased our exposure to foreign translation headwinds, but it has also positioned us well to support and capitalize on the inherent growth from the use of water and fuel as an outcome of increased standards of living in those regions. Further, with our improvement in profitability over the last year, we're spending more on new product development.
Listening to our customers, we are focused on system solutions that are safer, more efficient, connected, and provide value at your lowest total cost of ownership. From a financial perspective, we believe that our 2016 results will be in line with our guidance of $1.60-$1.70 adjusted earnings per share, which we're now narrowing to $1.62-$1.67 per share. I will now turn the call over to John Haines, our CFO.
John Haines (CFO)
Thank you, Gregg. Our fully diluted earnings per share is reported to be $0.50 for the third quarter of 2016 versus $0.43 for the third quarter of 2015. 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. Non-GAAP items for the third quarter of 2016 netted to a gain of $1.4 million. We sold the land and building of the old manufacturing facility in Brazil during the quarter and recorded a gain of $2 million U.S. dollars. This was offset by about $600,000 of other restructuring and non-GAAP-related manufacturing realignment costs and other retired executive pension costs. The third quarter 2016 non-GAAP adjustments had a net EPS impact that improved earnings by $0.02.
Non-GAAP expenses for the third quarter of 2015 were $1.7 million and included $1.3 million in restructuring costs, primarily for the continuing European and Brazilian manufacturing realignments, and $0.4 million for other non-GAAP expenses related to business realignment costs, primarily severance in targeted fixed cost reduction actions and retired executive pension costs. The third quarter 2015 non-GAAP adjustments had a net EPS impact that reduced earnings by $0.02. So after consideration of the non-GAAP items, third quarter 2016 adjusted earnings per share is $0.48 versus the third quarter 2015 adjusted earnings per share of $0.45, an increase of 7%. Water system sales were $182 million in the third quarter of 2016, an increase of $8.5 million or about 5% versus the third quarter of 2015 sales of $173.5 million.
Water systems organic sales growth was also about 5% compared to the third quarter of 2015, as the impact of foreign currency translation was not significant. Water systems operating income was $30 million in the third quarter of 2016, up $6.9 million or 30% versus the third quarter of 2015 as reported, and up $3.7 million or 15% versus the third quarter of 2015 after non-GAAP adjustments. The third quarter operating income margin was 16.5%, up 320 basis points from 13.3% in the third quarter of 2015. The third quarter operating income margin after non-GAAP adjustments was 15.5%, an increase of 140 basis points from the 14.1% of net sales in the third quarter of 2015 after non-GAAP adjustments. Fueling system sales were $57.8 million in the third quarter of 2016, a decrease of $1.2 million or about 2% versus the third quarter of 2015 sales of $59 million.
Fueling system sales decreased by $0.3 million or about 1% in the quarter due to foreign currency translation. Fueling system sales declined about 1% after excluding foreign currency translation. Fueling systems operating income was $15.2 million in the third quarter of 2016, down $0.2 million or about 1% compared to $15.4 million in the third quarter of 2015 as reported, and down $0.1 million or 1% compared to $15.4 million after non-GAAP adjustments in the third quarter of 2015. The third quarter operating income margin was 26.3%, an increase of 20 basis points from the as-reported 26.1% of net sales in the third quarter of 2015. The third quarter operating income margin after non-GAAP adjustments was 26.5%, an increase of 40 basis points from the 26.1% of net sales in the third quarter of 2015 after non-GAAP adjustments.
The company's consolidated gross profit was $85.5 million for the third quarter of 2016, an increase of $8.7 million or about 11% from the third quarter of 2015 gross profit of $76.8 million. The gross profit as a percent of net sales was 35.6% in the third quarter of 2016 and increased about 260 basis points versus 33% during the third quarter of 2015. The gross profit margin increase was primarily due to favorable pricing, lower gross material costs, and sales mix. Selling general administrative expenses were $55.4 million in the third quarter of 2016 compared to $47.7 million in the third quarter of the prior year, an increase of $7.7 million or about 16%. Roughly half of the company's SG&A expense increase in the quarter, or about $4 million, was due to higher variable compensation expenses.
Marketing and selling-related expenses increased about $1 million to support sales growth, and research, development, and engineering expenses increased by $0.8 million in the quarter. The tax rate before discrete events in the third quarter of 2016 was about 27%, flat to the third quarter of 2015 tax rate before discrete adjustments. The effective tax rate as a percentage of pre-tax earnings for the third quarter of 2016 was about 25%, primarily due to the favorable impact from equity compensation share-based payments. The tax rate before discrete adjustments as a percentage of pre-tax earnings for the full year of 2016 is projected to be about 26%. The company ended the third quarter of 2016 with a cash balance of $79 million, which was about 3% lower than at the end of 2015.
The cash balance decreased primarily due to higher capital expenditures and seasonal working capital requirements in the Northern Hemisphere. The company generated about $71 million in cash flows from operations in the first nine months of 2016. The company had no borrowings on its revolving debt facilities at the end of the third quarter of 2016 or at the end of 2015. The company did not purchase any shares of its common stock in the open market during the third quarter of 2016, and as of the end of the third quarter of 2016, 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 $0.10 per share payable November 17, 2016, to the shareholders of record on November 3, 2016.
This concludes our prepared remarks, and we would now like to turn the call over for questions.
Operator (participant)
Thank you. Ladies and gentlemen, if you have a question at this time, please press star and the number one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question is from Edward Marshall with Sidoti & Company. Your line is open.
Edward Marshall (Analyst)
Hi, Gregg and John. How are you guys? Good morning.
Gregg Sengstack (CEO)
Good morning, Ed.
Edward Marshall (Analyst)
I wanted to talk about maybe the geographic mix, and I'm wondering if there are more profitable regions around the world than others, especially as it relates to the water division.
John Haines (CFO)
Yeah, Ed, I would say that any region where we have a concentration of groundwater pumping equipment, so that maybe is more product mix than it is geography mix, but our Asia Pacific business is a highly profitable business because it has that concentration. Generally, our European business is a highly profitable business because it has that concentration as well. So any of our geographic regions that have a greater concentration of groundwater versus surface equipment where the company, as we've discussed in the past, is more vertically integrated from a supply chain perspective, are generally going to be more profitable and have higher margins than those that are more concentrated in surface pumping equipment.
Edward Marshall (Analyst)
Got it. When I look to, say, continental Europe, and then if you include the Middle East in that number, is there a way to break out kind of what you're seeing in continental Europe versus the Middle East in general as it relates to water from a growth perspective?
John Haines (CFO)
Ed, as we discussed in our remarks, it's been kind of ongoing for several quarters. Europe's flatish. We'd say that in the Middle East, again, Turkey had a record quarter of local currency that's been impacted by the strengthening dollar and the weakening Turkish lira. Where we've seen weakness has been in the Gulf region, and particularly in Saudi. We thought we'd start seeing sales actually kind of in the back half of the first half of this year, and it just didn't really materialize. And it's clear that Saudi is reducing infrastructure spend, spilling over into a couple of the other smaller countries in the Gulf region as well. We're just not seeing the infrastructure spend. We are encouraged that we are beginning to see some inquiries as we're coming into the back half of the year, particularly now, as I mentioned, in the Q4.
Edward Marshall (Analyst)
Right. Now, how much would you attribute to that, the political versus, say, the infrastructure spend on oil? And I guess they're somewhat related, but.
John Haines (CFO)
That's tough to call. Robert, do you have a point of view on that?
Robert Stone (SVP and President, International Water Systems Unit)
Yeah, they're very much intertwined. Certainly, war has impacted us in the Near and Middle East. The political situation in Saudi has been, in our opinion, relatively stable, but oil prices just are killing their economy, and they don't have the cash, quite honestly, to spend on infrastructure and other developments.
Edward Marshall (Analyst)
Right. And as we look forward, and I know that with respect to the more positive comments to 4Q in those regions, as we look out into 2017, I mean, do you think that is it contingent on what happens in energy, or is this a replacement demand that you see that can kind of offset some of that? Or kind of how do you see that playing out? How are you planning for that to play out, say, in 2017 and beyond?
John Haines (CFO)
Sure. Ed, broadly, as we've discussed several times, we have a very large replacement component, and that exists throughout the globe in our water business. It's a very large replacement market. Generally, that's why availability is so important, why we have products out in the regions, why we can't have distribution to have product closer to the customer. And so as we look at that from a broad point of view, we'd say that it's more related to economic factors, weather conditions, and overall GDP growth. We would expect in that region, if you see some stability in the environment, then we would expect to see improving sales. I think the oil price has kind of worked its way through in the region of, say, the Gulf. I'd say that as we go into 2017, our comps, obviously, to Saudi will be easier.
Around the globe, for those areas of the globe that have had this kind of trickle-down effect of the lower oil price, we should see easier comps as we go into 2017. It's pretty much worked its way through in our sectors.
Edward Marshall (Analyst)
Got it. And finally, I'm just looking at the fourth quarter SG&A expense, John, if I could. I know seasonally it tends to be a little bit weaker heading into 4Q, but you've ramped up kind of that compensation expense into the back half of the year as things kind of improved a little and reverse some of what happened last year. So, looking into the fourth quarter. Could you kind of give any specific guidance as it relates to SG&A, maybe as a % of sales or something that you kind of consider that the fourth quarter is, just because of the seasonality in that number, it throws it off a little bit?
John Haines (CFO)
We haven't historically, Ed. I think that as we look at the fourth quarter, on a total fixed cost basis, which would be both SG&A and the fixed cost that's in our cost of goods sold, I think we're thinking something pretty much in line with the third quarter. In total, that number was $79 million in the third quarter, and we think it'll be $79-$80 million in the fourth quarter. The big swinger that happens in the fourth quarter, as you know, is we can really lock down some of the compensation reserve balances in the fourth quarter as we get a much clearer picture of where we're going to be to some of the targets. Last year, in the back half of the year, we were actually lowering those types of reserves.
This year, in the back half of the year, we're actually increasing those types of reserves. That becomes a meaningful mover for our back half and more specifically for the fourth quarter.
Edward Marshall (Analyst)
Great. Thanks for the details. Sorry about putting you on the spot there. I appreciate it. Thanks, guys.
Operator (participant)
Our next question is from Ryan Connors with Seaport Global. Your line is open.
Ryan Connors (Analyst)
Hey, good morning, guys.
John Haines (CFO)
Morning, Ryan.
Joe Ruzynski (Treasurer)
Hi, Ryan.
Ryan Connors (Analyst)
Just a clarification on fueling. Did you say you're expecting growth in the international market in the fourth quarter?
John Haines (CFO)
That is correct. We're expecting, yeah, we're expecting growth in the fourth quarter and fueling in our international markets.
Ryan Connors (Analyst)
Okay. And could you just kind of help bridge the gap on sort of what you see changing from third quarter to fourth quarter, and then any color on sort of the competitive dynamics you're seeing in the fueling side? I know there's some potential consolidation in the space and whether or not you're seeing any impact on the competitive market as things were challenging in the quarter?
John Haines (CFO)
Yeah. To respond to the first part of your question, we saw some push-out of orders in India, which we expect to see going in Q4. We saw some push-out of orders in Australia and the Asia market more broadly, which we expect to improve in Q4. We will have a little easier comp on the underground storage tank, which is not a major part of the business, but at the margin was part of the sales falloff with North Sea oil production coming down in Q4 of last year, so that'll be a little bit easier comp. But we just generally see that took a little breather here at Q3 internationally, and we expect to see that start picking up in Q4.
With respect to your question about competitive dynamics, again, the consolidation effectively is in the dispensing space, which we don't play in, and it has yet to actually occur. I think Dover completed the acquisition of Tokheim, a dispenser company. I believe their pending acquisition of Wayne is still subject to review by antitrust authorities. So certainly, there's no consolidation yet that's occurred, and it's in the dispenser space, which we don't currently operate in.
Ryan Connors (Analyst)
Sure. Thanks for that. And then on the U.S. side, there's been a thought that there's been some increased refresh in the developed markets as they've changed out some of the financial payment systems. Do you guys think you're seeing any benefit of that, and can you gauge what the impact is and if there's any follow-on effect as we move forward here?
John Haines (CFO)
Sure. I mean, we've continued to get steady organic growth in our U.S. market as we continue to gain traction with our products. And I do think you can look at the changeout of payment systems as being somewhat of a double-edged sword. On the one hand, it diverts capital to do that changeout. On the other hand, if you look at there was a major upgrade of underground tanks in the U.S. market back in the late 1990s, and that's when many stations were refreshed at the same time when they put in double-walled tanks in the 1990s. Those tanks were all those stores were all now 15, 18 years old. And so I think that you're just seeing, as you point out, just a general refresh. People are looking at payment systems, putting in the dispensers, doing kind of ground-up restorations of stations, moving stations.
Stations that were built 20 years ago may not be in the right areas for where the population is today. So you just generally see it's been a good favorable market for us. We believe we're continuing to gain share with our approach to the total system package, the ability we can deliver an underground package to a customer that's complete end-to-end from the tank to the dispenser. So it's been generally favorable conditions for us, and we just came from a trade show, and it was an upbeat show.
Ryan Connors (Analyst)
Great. Thanks, guys. I'll jump back in queue.
Operator (participant)
Our next question is from Matt Somerville with Alembic Global Advisors. Your line is open.
Matt Summerville (Analyst)
Thanks. Morning. Couple of questions. First, what drove the magnitude of strength you saw on the residential side of the business as it pertained to groundwater? I believe you said it was up 17% in the quarter. That may have been against an easy comp, but if you could just clarify that and then similarly comment on your experience in ag in Q3 versus kind of how the comp looked there as well.
John Haines (CFO)
Sure, Matt. On the residential, our business was very strong east of Mississippi, which is where you have the majority of residential pumping systems. We have a strong distribution base. We are recovering share of some share that we lost, and we're building share based on some new product introductions. We've had a refresh in our drives with our new SubDrive Connect. And so generally, Franklin is just more visible in the marketplace, and it's paying off. When you look at ag, as you point out, I mean, ag kind of broadly west of Mississippi. We've got rains, which precluded probably that kind of second growing season or the second irrigation season that often we see in the central region of the country. Certainly, the wet weather has improved the climate in California. It's reduced drilling activity in California.
So we see kind of generally west of Mississippi a little bit softer environment. But as we've talked before, we have a large replacement component to our business. So even again, with crop prices where they are and those wetter conditions, we had a positive year-over-year comparison.
Matt Summerville (Analyst)
What have you seen in 2016 overall in both water and fueling in terms of price realization versus 2015? I recognize it's early, but these are discussions you're probably starting to have now. What are your plans in terms of pricing for 2017?
John Haines (CFO)
Matt, we saw in the quarter about 80 basis points of improved price over last year's third quarter on a consolidated basis. All of that was in water, and almost all of that was in our international unit, including in Brazil. The price environment in North America on the water side remains very difficult and competitive, and our price in fueling in the quarter was down from last year as well. So as we look to 2017, to answer your question, I don't think our expectation is going to be too different than what we historically put into our annual operating plan. I think it'll be something in the 200-225 basis points assumption.
We're optimistic that we will recover more in North America as we kind of get through this ag situation, which is weighed heavily on price, and we're confident in many of our international markets' ability to get price. So I'd say if anything, versus what we normally would be looking at this time of year, maybe it's backed up 25-50 basis points, something like that as we look at 2017. I mean, North America water is still very competitive. We're happy with the growth we've got there, but it's a very competitive end market.
Matt Summerville (Analyst)
Then maybe similarly, if you can comment on what you're seeing. There was some commentary in the prepared remarks and released, just a little more specificity perhaps on input costs and what the outlook is there moving into 2017. I guess at the end of the day, what I'm trying to kind of get to is what the leverage, the incremental margins should look like in these businesses as we move into next year.
John Haines (CFO)
Yeah, a lot of that will depend on mixed and realized price. Matt, what I can say to you is as we look at the fourth quarter on an input raw material cost, we're still expecting to be in a deflationary position versus last year's average price, but it's going to be a tighter one than what we've experienced so far year-to-date or experienced in the third quarter. In terms of 2017, we haven't fully vetted 2017 from a full margin perspective, and I think it's probably better to kind of leave that to another day when we can talk more candidly about our guidance there. But I think the key moving parts are we still expect that we'll get some raw material benefit.
For example, when we look out at our forward purchases of copper and other steel, we feel pretty good about where we're at on some of that. But mix, as I said, will play an important role in that as will the achieved price.
Matt Summerville (Analyst)
Great. Thanks, guys.
Operator (participant)
Our next question is from Ryan O'Donnell with Baird. Your line is open.
Ryan O'Donnell (Analyst)
Good morning, guys. Thanks for taking my questions.
John Haines (CFO)
Hey, Ryan.
Ryan O'Donnell (Analyst)
Just starting on the water side, can you guys just give an update? I know you mentioned pricing is still pretty tough in North America. Just how inventory levels look at the distributors, how the reset is going for you guys?
John Haines (CFO)
Really, we have the distribution in place across the country that we need, so really, that's kind of 2015-type news in our mind. And clearly, with the achievement on, particularly, the residential side and again, kind of broadly east of Mississippi, I think it's showing we're getting good traction, and I think it's also a reflection of the product development we've had as well.
Ryan O'Donnell (Analyst)
Yeah. Okay. Yeah. And then just on the inventory levels, how those look into year-end, and then any chance you guys, given the better year, you might see more customers reaching for some of those year-end discounts and quantity discounts and things like that?
John Haines (CFO)
Yeah. I think that we don't hear a lot about real excessive inventory levels, Ryan. I think the channel inventory levels in the core groundwater distributor market in North America are not bad. They're about right. So yeah, I think there's the possibility. We're certainly expecting growth in the fourth quarter in our core water business in the U.S. How much growth is the key question? And I think there's the possibility that those distributors could be reaching for some of their year-end incentives. So I think that's all in play as we go through this quarter.
Ryan O'Donnell (Analyst)
Okay. That makes sense. And then just given some flooding in certain areas of the U.S. and Hurricane Matthew, obviously, in the past couple of weeks, is there any chance you guys see a benefit on some of the big dewatering pumps and things like that, or is that not really baked into your guidance at this point?
John Haines (CFO)
It's not baked into the guidance. Our distribution in the Southeast could be better than it is. And it's still, again, for the pump rental companies that do have product while many of those pumps that we sold for fracking, they redistributed those pumps to other locations. So I wouldn't think we'd see much of the margin. We haven't heard a lot from our guys on that. It was a little bit of a disruption for our groundwater business in the Southeast, obviously. You lose power, and it's just the inability to get in to do the normal work. That now appears to be behind us. We've heard people have moved back to kind of their normal business here and certainly in Florida, and I expect the Carolinas to follow.
Ryan O'Donnell (Analyst)
All right. And then last one for me, just on the Pioneer side, any change to kind of rental channel CapEx and things like that and the outlook into next year?
John Haines (CFO)
What I would say, Ryan, is not a ton of change. It's not a very good outlook. Let's put it that way. I think if anything, it's marginally worse for us now than it has been. But what we're seeing is our large rental customers still kind of dealing with a fleet that is in excess of what they need and trying to manage through that. So we're busy. Our intention is to find new outlets and find new distribution capability that we can tap into. So that view, our business in that area, I would not say looks much better. So what we've been doing, we've been refocusing activity to other channels, municipal industrial, and so we're expecting Pioneer to have a higher top line next year than this year.
Ryan O'Donnell (Analyst)
Okay. Appreciate the time, guys. Thanks.
Operator (participant)
Our next question is from Edward Marshall with Sidoti & Company. Your line is open.
Edward Marshall (Analyst)
I just want to follow up on Matt's question on pricing. We talked about the international being the driver to the price right now, and North America is difficult. If I think about what's been going on in the industry, and you talk about one of your competitors had divested a business, the valve business, and talked about the cash and the influx of cash to grow, among other things, their water business, I'm curious about how you're preparing for, say, pricing pressure in North America to intensify, and then also maybe what that might do from an international perspective as well where you're not seeing that price pressure yet.
John Haines (CFO)
Yeah. You're speaking, I believe, to Flowserve as a divestor. This is their business where we directly align with them is a relatively small part of their business. The competitive nature, and I expect the competitive nature of the North American market to really be similar to where we are right now. I don't expect it to change much with their decision to divest valves. And outside the United States, we really don't run up against Flowserve in very many markets because of our more groundwater focus and their focus in other areas.
Edward Marshall (Analyst)
Got it. Thanks, guys.
Gregg Sengstack (CEO)
Let's be a little clear, though, too, that the pricing environment internationally is also highly competitive. We have been able to get price in areas that are seeing a fair amount of inflation.
Edward Marshall (Analyst)
Like Brazil?
Gregg Sengstack (CEO)
Exactly. Exactly.
Edward Marshall (Analyst)
Okay. Thanks, guys.
Operator (participant)
Thank you. I'm not showing any further questions, so I'll now turn the call back over to Mr. Gregg Sengstack for closing remarks.
Gregg Sengstack (CEO)
Thank you for joining us today, and look forward to speaking to you after our fourth quarter in the new year. Have a good week.
Operator (participant)
Ladies and gentlemen, this does conclude the program, and you may now disconnect. Everyone, have a great day.