Franklin Electric - Q4 2016

Transcript

Operator (participant)

Good day, ladies, and gentlemen, and welcome to the Franklin Electric Company Corporate Fourth Quarter and Fiscal Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If anyone should require operator assistance at any time, please press star, then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host for today, John Haines, Chief Financial Officer. You may begin.

John Haines (CFO)

Thank you, Sonia, and welcome everyone to Franklin Electric's Fourth Quarter 2016 Earnings Conference Call. With me today are Gregg Sengstack, our Chairman and Chief Executive Officer, and Robert Stone, the Senior Vice President and President of our International Water Systems unit. On today's call, Gregg will review our fourth quarter business results, and then I'll review our fourth quarter financial results. When I'm 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 statement. During this call, we will also discuss certain non-GAAP financial measures, which the company believes helps 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 Chairman and Chief Executive Officer, Gregg Sengstack.

Gregg Sengstack (Chairman and CEO)

Thank you, John. The fourth quarter of 2016 rolled out in line with our expectations, with overall organic sales growth of 10%. Water Systems organic sales growth of 9% was led by double-digit growth in North America. Sales in Latin America, including Brazil, continued to grow organically at a mid-single-digit rate. Sales in Europe, the Middle East, and Africa also grew a healthy 9%. However, record local currency sales in Turkey were muted in U.S. dollars due to the weakening Turkish lira. In Asia Pacific, we continued to post record sales, up 3% over a strong comparable for 2015. In the U.S. and Canada, Water System sales were up about 13% compared to the prior year fourth quarter.

In the fourth quarter of 2016, sales of groundwater pumping equipment grew by about 18%, with significant increases in the sales of products for both residential and agricultural applications. We believe there were three reasons for this strong finish to the year. First, we had an easy comp to 2015 due to weather. Second, as the industry was having a better year, distributors stretched to achieve annual sales goals. And third, we have recovered and in some regions, increased our market share. In Brazil, our second-largest single-country market behind the U.S., our team continues to grow the business and achieved another solid quarter in a tough economic environment with less-than-favorable weather conditions. Our business in Europe is steady and growing, with our focus on expanding our distribution footprint.

In the Middle East and North Africa, which includes Turkey, where we again had record results, the stabilization of world oil prices led to a recovery of our business in oil-producing nations. Southern Africa remains depressed as we continue to experience weak end-market demand in the industrial and mining sectors. Strength in Southeast Asia continues to drive our Asia Pacific results, even as the drought appears to be breaking there. Our fueling business delivered a record quarter. Sales were the highest for any quarter in the segment's history, and earnings were a record for any fourth quarter. The fueling team delivered 13% growth in the U.S. and Canada. Major marketers that specify Franklin are actively building new stations, and our team continues to convert other marketers to Franklin and earn additional incremental business.

The international fueling business recovered from the third quarter sales decline by delivering growth of 5%. This growth was across all regions and product lines, except for Europe, where our tank business continued to experience weak end-market demand. Overall, 2016 came in pretty much in line with our original expectations, with organic sales growth of 5% and earnings of $1.66 per share. For the year, we experienced a nice recovery in our U.S. and Canada water business and had record sales in Latin America. Business in Europe was steady. Business was choppy in the Middle East and Africa. In Asia Pacific, we had record performance, and again, for 2016, our fueling business posted record results with strong growth in the U.S. and Canada leading the way.

Despite a meaningful amount of global uncertainty due to the current political and economic climate, our outlook for 2017 is positive. We currently see the company's total net sales increasing in the 3%-5% range. Overall, despite our current assumption of about a 2% currency translation headwind due to the strengthened U.S. dollar versus many key international currencies, most notably the euro and Turkish lira, we expect our organic growth after considering foreign exchange impacts, to be in a range of 5%-7%... We expect our 2017 adjusted earnings per share to be between $1.77-$1.87, after considering foreign currency translation will impact our adjusted earnings per share by about $0.04 compared to 2016. I will now turn the call back over to John. John?

John Haines (CFO)

Thank you, Gregg. Our fully diluted earnings per share, as reported, were $0.37 for the fourth quarter of 2016 versus $0.33 for the fourth 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 fourth quarter 2016 were $0.7 million and included $0.3 million in restructuring costs, primarily from Brazilian manufacturing realignments, and $0.4 million of other non-GAAP expenses, of which $0.3 million was related to retired executive pension costs. The fourth quarter of 2016 non-GAAP adjustments had a net EPS impact that reduced earnings by $0.01.

Non-GAAP expenses for the fourth quarter of 2015 were $0.9 million and included $0.5 million in restructuring costs, primarily for the Brazilian manufacturing realignment, and $0.4 million of other non-GAAP expenses, $0.3 million of which was retired executive pension costs, and $0.1 million related to business realignment costs, primarily severance and targeted fixed cost reduction actions. The fourth quarter 2015 non-GAAP adjustments had a net EPS impact that reduced earnings by $0.02. So after consideration of the non-GAAP items, fourth quarter 2016 adjusted earnings per share is $0.38 versus the fourth quarter 2015 adjusted earnings per share of $0.35, an increase of 9%.

Water Systems sales were $177.8 million in the fourth quarter of 2016, an increase of $14.6 million, or about 9% versus the fourth quarter of 2015 sales of $163.2 million. Water Systems organic sales growth was also about 9% compared to the fourth quarter of 2015, as the impact of foreign currency translation was not significant. Water Systems operating income was $22.6 million in the fourth quarter of 2016, up $2.6 million or 13% versus the fourth quarter of 2015 as reported, and up $2.3 million or 11% versus fourth quarter of 2015 after non-GAAP adjustments. The fourth quarter operating income margin was 12.7%, up forty basis points from 12.3% in the fourth quarter of 2015.

The fourth quarter operating income margin after non-GAAP adjustments was 12.9%, an increase of 30 basis points from the 12.6% of net sales in the fourth quarter of 2015 after non-GAAP adjustments. Fueling Systems sales were $61.8 million in the fourth quarter of 2016, an increase of $5.7 million, or about 10%, versus the fourth quarter of 2015 sales of $56.1 million. Fueling Systems sales decreased by about $0.7 million, or 1%, in the quarter due to foreign currency translation. Fueling Systems sales increased about 11% after excluding foreign currency translation.

Fueling Systems operating income was $15.4 million in the fourth quarter of 2016, up $1.3 million, or about 9%, compared to $14.1 million in the fourth quarter of 2015 as reported, and up $1.4 million, or 10%, compared to $14.1 million after non-GAAP adjustments in the fourth quarter of 2015. The fourth quarter operating income margin was 24.9%, a decrease of 20 basis points from the as-reported 25.1% of net sales in the fourth quarter of 2015. The fourth quarter operating income margin after non-GAAP adjustments was 25.1%, flat from the 25.1% of net sales in the fourth quarter of 2015 after non-GAAP adjustments.

The company's consolidated gross profit was $81 million for the fourth quarter of 2016, an increase of $11.9 million, or about 17%, from the fourth quarter of 2015 gross profit of $69.1 million. The gross profit as a percent of net sales was 33.8% in the fourth quarter of 2016 and increased about 230 basis points versus 31.5% during the fourth quarter of 2015. The gross profit margin increase was primarily due to favorable pricing, lower direct material costs, and fixed cost leverage from higher sales. Selling, general, and administrative expenses were $55.5 million in the fourth quarter of 2016, compared to $45.1 million in the fourth quarter of the prior year, an increase of $10.4 million, or about 23%.

Roughly half of the company's SG&A expense increase in the quarter, or about $5 million, was due to higher variable compensation expenses. Marketing and selling-related expenses increased about $4.5 million to support sales growth, and research, development, and engineering expenses increased by $1.1 million in the quarter. As you look at the income statement below the operating income line, other expenses in the fourth quarter of 2016 include the reversal of an indemnification receivable related to a contingent tax liability for $1.9 million, recorded at the time of a foreign acquisition. A similar amount was also reversed, and the benefit was recorded in the income tax provision.

The tax rate as a percent of pretax earnings for the fourth quarter of 2016 was about 18% after discrete events, primarily due to the favorable impact from equity compensation, share-based payments, and the reversal of the contingent tax liability, offset by adjustments to the company's valuation allowance against certain state deferred tax assets that are not likely to be realized. The tax rate as a percentage of pretax earnings for the full year of 2017 is projected to be in the 25%-27% range. The company ended the fourth quarter of 2016 with a cash balance of $104.3 million, which was about 28% higher than at the end of 2015. The cash balance increased primarily due to higher earnings.

The company generated about $115 million in cash flows from operations in 2016. The company had no borrowings on its revolving debt facilities at the end of either 2016 or 2015. The company did not purchase any shares of its common stock in the open market during the fourth quarter of 2016. As of the end of the fourth quarter of 2016, the total remaining authorized shares that may be repurchased is about 2.2 million. This concludes our prepared remarks. We would now like to turn the call over for questions. Sonia?

Operator (participant)

Thank you. Ladies, and gentlemen, if you have a question at this time, please press star, then 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 comes from Edward Marshall of Sidoti & Company. Your line is now open.

Edward Marshall (Senior Equity Research Analyst)

Hey, guys. Good morning.

John Haines (CFO)

Hey, Ed, good morning.

Edward Marshall (Senior Equity Research Analyst)

I'm curious how you see the 3%-5% sales growth playing out at the segment level for both water and fueling into 2017.

John Haines (CFO)

Yeah, Ed, it's not totally different than what we've talked about. The 3%-5% is, of course, considering certain FX assumptions that we have. You know, at the beginning of the year, those could always change, but, you know, fueling should be a little bit higher in total. You know, we're thinking of fueling more as we talked in, you know, call it 6%-8% or even better. International water units, as we've seen, might be a little bit better than the 3%-5%. The mature market water units, like Europe, North America, more in that range. So, really, our outlook is more tempered by an FX view than it is really anything else.

We feel pretty positive about the momentum we have entering 2017, and in most, maybe not all, but in most of the end markets we're competing.

Edward Marshall (Senior Equity Research Analyst)

Got it. Within the discussion of gross margin, at least in the comments in the release, you talked about lower material costs as a positive for the gross margin in the fourth quarter. Can you talk about what maybe those materials were, that you saw the benefit from, and do you plan that that might continue?

John Haines (CFO)

Yeah, Ed, the material—remember that the material cost that passes through our cost of goods sold is on a three- to four-month lag, right? So it's an input cost, say, in early third quarter or mid-third quarter, turns to an output cost or a cost of goods sold charge in the fourth quarter. So the materials that we are seeing inflation on, which I think is really what your question is, is really in a lot of the steel categories, stainless steel, cold rolled steel. Certainly, we're seeing inflation there. We've seen inflation on copper, for sure. We've seen inflation on purchase components. One of the key purchase components that we have are finished motors that we then attach to our pumps and in many of our surface pumping products.

So we are anticipating inflation as we roll into 2017, both on an input and an output basis. On an input basis, right now, we're thinking somewhere in the 225 basis point range, when we look at the basket of products that we are acquiring as we enter 2017. Now, there's a lot of assumptions with that. Now we can make some of that up, we think, with sourcing improvement projects and value improvement projects, be it either sourcing or engineering. But we're gonna need to get some price, which we feel pretty confident in our ability to do, to offset some of that inflation headwind as we enter 2017. So that's kind of the view of it right now.

Edward Marshall (Senior Equity Research Analyst)

... Do you think you'll capture all of that within price? I mean, you seem to do a pretty good job of that recently.

John Haines (CFO)

Yeah, we do. We think we can get all of that net inflation offset with price.

Edward Marshall (Senior Equity Research Analyst)

Good. I wanna talk about maybe the cadence, too, and this will be the last question. But, you talk about some stocking and from the distributors, they wanted to make some of the rebates in the fourth quarter. I'm kind of thinking about the first quarter and what that might mean, from a performance perspective. Could you kind of talk about maybe what you anticipate and maybe how January and I guess, most of February has trended so far from you at the distributor level? Let me talk about the cadence for 2017 as far as the earnings profile.

Gregg Sengstack (Chairman and CEO)

Sure. You know, again, Ed, you know, we've really moved away from doing quarterly guidance, but we can talk about the business broadly. You're talking specifically to the U.S. groundwater market. And so to the degree that people buy up in the quarter, in, you know, the fourth quarter, you know, that's obviously gonna put some dampening on the first quarter. The degree that, you know, it's been wet, it's been well documented and very wet out west and, through the central part, that may slow things down. Of course, that could also set us up for, depending on, again, how the weather patterns dry out or change over. You know, if it dries out over, you know, the middle of the quarter, that can start, you know, people start pre-watering for planting.

But normally, you see that more in the kind of April, May timeframe. So it's a little tough to call, you know, to slice that thin here in the U.S. market. You know, more broadly, we don't see that kind of volume change year-to-year. If you go around the globe, you know, in Europe, you don't see that kind of cyclicality. We just have a normal seasonality. We did see very strong buying in Turkey towards the end of the year. I suspect that'll make things a little slow at the beginning of start for Turkey. But again, we've been more, our results in Turkey have been affected more by currency than anything else.

You know, and then you look at the other markets, it's summertime down in the south, in the southern hemisphere, so you know, that business continues to do well. So it's a little tough to parse it out, but I'd say to your specific comment to the U.S. groundwater market, people bought and depending on how the market rolls out in the first quarter or second quarter, how the weather rolls out, that'll determine the quarterly results.

Edward Marshall (Senior Equity Research Analyst)

Got it. Appreciate your comments. Thanks, guys.

Operator (participant)

Thank you. Our next question comes from Ryan Connors of Boenning & Scattergood. Your line is now open.

Ryan Connors (Managing Director)

Great, thanks for taking my questions. I wanna just kind of remain on the same theme there a little bit and just get into the competitive dynamics, especially around the agriculture space. It just, I know, Gregg, that you mentioned you know, an easy comp, and you mentioned some share gain. But it really does seem like you know, the growth you're able to achieve here in that market is bucking a broader trend of pressure out there in that market. So can you just kind of give us some color on why you think that is to that magnitude?

Gregg Sengstack (Chairman and CEO)

Yeah, and again, Ryan, you know, it is those three things. I mean, let's face it, 2015 was, you know, while it was or at that time, our third best year in Franklin's history, it was not a strong revenue year, particularly in North America. It seemed a long time ago, but it, you know, we had the second wettest second quarter in U.S. history. There was little demand. We saw the, you know, general kind of decay in farm prices, not a lot of business for people putting out new installations. Of course, you know, we have a very large replacement market, which is what helps us go through some of these low points. But, you know, we've kind of worked through that.

We've worked through some distribution changes, and so we saw 2016 as unfolding, as gaining momentum through the year, based again on easier comp, based on our continued focus on this channel. This is what we do. This is, you know, this is Franklin's home base. And we saw that. You know, we have limited information on share numbers. We saw that through some share gains. So, you know, we really finished the year, you know, very well, and we just, well, let's come into 2017 and see how this year unfolds. And yes, you know, crop prices have been down. They're coming up maybe a little bit. Yes, we've been in a, you know, what, three-year decline in farm income. Don't know where that's gonna go.

But again, we have this replacement base that's out there, and a commitment to this industry. So I think all that sets us up to be in the position we're in.

Ryan Connors (Managing Director)

Got it. And then I had one other somewhat of a housekeeping question for John, actually. You know, deferred tax liability numbers, I see it about $40 million, which is not an immaterial number. Can you talk about that in the context of the you know, potential tax you know, tax system changes we might get from the new administration, and whether that's, I mean, there are folks out there saying that anybody with a sizable deferred tax liability, that's potentially a pretty nice tailwind. So can you give us your context on that?

Gregg Sengstack (Chairman and CEO)

Yeah, Ryan, we've been watching, obviously, what is being discussed and bantered about very carefully. I can't say that we necessarily try to associate it to specific liabilities or assets that we currently have on our balance sheet. What I can say more broadly, relative to some of the discussion that's happening, is that, you know, we're a net exporter from the U.S. So we export more product out of the U.S. than we import into it. And based on what we understand, we would view, you know, efforts to lower the statutory federal income tax rate, exempting exports from the U.S. from federal income taxes and potentially new rules regarding the repatriation of earnings from overseas operations, all is positive, based on what, you know, we read in here.

However, new tariffs, border taxes, the elimination of deductions for federal tax purposes of the cost of imported goods into the U.S., along with the corresponding retaliation that other countries may exercise on goods they import from the U.S., are all negatives. Net-net, some of the math that we've done, again, tied to being a net exporter is positive, but this is, you know, all conjecture at this point in time. There's a lot that needs to be sorted through. I think that last point I make there relative to how others may respond to this is a really big unknown.

So on the, you know, on the surface here, you could say, wow, this is all great, until somebody in Europe starts taking some different actions, or Asia Pacific, which we export into, or really other, any other part of the world which we export to. So, that's, that's kind of our current thinking on that.

Ryan Connors (Managing Director)

Got it. Got it. No, that, that's helpful. That's helpful color. I appreciate it. Thanks, guys.

Operator (participant)

Thank you. And our next question comes from Ryan O'Donnell from Baird. Your line is now open.

Ryan O'Donnell (Equity Research Associate)

Good morning, guys. Thanks for taking my question.

Gregg Sengstack (Chairman and CEO)

Good morning, Ryan.

Ryan O'Donnell (Equity Research Associate)

So, just starting on the water side, I know you guys mentioned, you know, offsetting some of the commodity increases with price. Have you guys gone out with that price increase, and is there any potential for stocking ahead of that as well? Was that seen in the fourth quarter or still kind of ahead of us?

John Haines (CFO)

Yeah, we have, in most of our end markets, announced price increases. Depending on the amount of inflation and the actual effects, Ryan, there may be additional price increases, but generally, those price increases are announced late or early in the year. It's hard to say if you can attribute some of the U.S. growth specifically to those announced price increases.

You know, as Gregg said, we would think that more of it was really driven by the fact that 2016 was a much better year, and that many of these distributors who were on volume incentives were closer to achieving those volume incentives, and therefore would stretch out. But coming price increases in their thinking, they may have been as well.

Ryan O'Donnell (Equity Research Associate)

Gotcha, that makes sense. And then on the fueling side, just thinking about kind of the cadence through the year, do you guys expect any impact from the push out of the EMV regulations here in the U.S.? And then, you know, internationally, obviously a pretty lumpy, project business. Just curious how, you know, China and India are looking into 2017.

Gregg Sengstack (Chairman and CEO)

Ryan, to your first question, it's been interesting because one could say that EMV is helping to drive business, and one could say EMV is taking capital away from our business. So let me give you two examples. If you have a gas station where you're looking and say, "Okay, my dispensers are at an age, my station's at an age, you know, I'm gonna do a whole basically ground up from the tanks update of the station," you know, we're gonna benefit from that. And with generally lower price of fuel, people have less working capital tied up in their station, then they say, "Okay, I have the capital available to do stations like that." And that would be, you know, generally good for us.

Flip side is you say, "Okay, really what I'm gonna do is focus on dispensers, and so I'm focusing on dispensers, and I'm not gonna do the rest. And so I'm spending on EMV," and that would maybe take away dollars from the underground or from doing others. So, you know, pushing this out for us, I think, would be... There may be actually kind of a net benefit, but I, it's really tough for us to have visibility to each upgrade as to what's driving the decision. We have just a number of marketers who are expanding their footprints, they're, you know, they're consolidators, and, you know, it's a good climate, and they're just investing, and that's where we're getting the growth.

And so I don't get a lot of feedback from our team that says that EMV is really moving the needle much either way for what we are doing. Outside the U.S., to your point, it's been lumpy. And, you know, while we're getting, you know, some confidence with the stabilization of oil prices, you know, outside the U.S., the model is very different. Because, you know, as opposed to major marketers that we have in the U.S., outside the U.S., you see a lot more gas stations are owned by oil companies. And when the price of oil is down, they're not spending, you know, they're not spending on infrastructure or on their gas stations. And the countries that those oil companies, where there is oil, aren't spending on other infrastructure.

That's why we saw in our water business, for example, in Saudi, we really didn't see a whole lot of business out of Saudi for about nine months, as they kind of just got readjusted to the new oil price. So you take that over to the fuel business, and you see that, you know, the oil companies just took their foot off the pedal, and so we had, you know, a very flat year, after currency, outside the U.S. Now, we do think that, you know, our premise remains, will remain to be shown to be true, and that is that when you're in developing regions, that's where the people are, and that's where the infrastructure needs to be.

And so as the price of oil stabilizes, we see that we're gonna have, you know, a continued really high growth business in our fueling business outside the U.S. And we're seeing India, we're seeing some very steady business coming out of India. We're winning tenders there, and we're seeing our business in China has been improving to get to your specific questions about India and China. So, it was a flat year in 2016, but with the oil prices stabilizing, we're seeing outside the U.S., we remain optimistic that our fueling business growth rates will return to historic levels.

Ryan O'Donnell (Equity Research Associate)

... Got it. That's great color. And then last one from me, just on the capital deployment side, as the cash flow remains strong, any change to how you guys are looking at the M&A pipeline versus buybacks and just kind of your thoughts on that? Thanks.

Gregg Sengstack (Chairman and CEO)

Really no change, Ryan. You know, continue to want to deploy capital on accretive acquisitions. That's our primary focus. Our CapEx situation will be a little bit better in 2017, we think, than it was in 2016, so maybe in the low to mid-thirties. Our view of share repurchases has not really changed. You know, we're gonna try to offset the dilution impact of awards that we make, but, you know, we'll be smart about that relative to price. So, the real focus remains on acquisitions, and we continue to manage a pipeline and, you know, try to find the right the right value equation for Franklin.

Operator (participant)

Thank you. Our next question comes from Matt Summerville from Alembic Global Advisors. Your line is now open.

Matt Summerville (Sell Side Analyst)

Morning. I hopped on the call a few minutes after you started your prepared remarks, so I apologize if you've already covered this, but it sounded like there was some year-end buy-up in North America or in the U.S. Is there a way for you guys to quantify that? And then, Gregg, you've talked in the past whether it be geographic region, i.e., Europe, maybe with a deadline coming, I believe, in 2017 or 2018, but other country-specific sort of regulatory drivers that may influence your fueling business. Can you speak to that again today in terms of what you're seeing there?

Gregg Sengstack (Chairman and CEO)

Sure, and, on the U.S.... The question on the U.S. pro channel or space, again, threefold. You know, we had easy comp, we had distributors that therefore, they, you know, they had better confidence that they're gonna hit some, you know, numbers in 2017, so there was some buyup for that. It's difficult for us to parse out, what's end market and what's buy. You know, inventory seems to be okay and probably a little high in the channel, but again, that's anecdotal. With respect to your question on fueling and regulatory initiatives, you know, we're not really participating in the European initiative per se. I mean, a lot of that's been done, and it's been done over a series of years.

You're talking about the vapor recovery initiative in Europe. We are hearing some rumblings or more rumblings out of India about doing something with vapor recovery more broadly. But what we found in India is that it often develops over a long period of time. So I wouldn't expect anything near term to happen, but we are getting some indications that they are very sensitive to the fact that they need to do something about their air, and more aggressively. And this is a low-hanging fruit and has a pretty straightforward approach to helping dramatically improve air quality in major cities through vapor recovery systems. So we're optimistic. We have systems that we can put in India that are at the right price point. The question is timing.

I'd say that generally speaking, I'd be cautious about getting too ahead of ourselves in India.

Matt Summerville (Sell Side Analyst)

Just to follow-up on pricing, John, can you comment on what your price realization was across the company in total in 2016, and what you are anticipating in terms of pricing in 2017?

John Haines (CFO)

Yeah, in 2016, across the entire consolidated entity, it was just over 200 basis points, Matt. A little more in fueling, a little less in water. Our expectation for 2017 is it more in the 250 basis point range.

Matt Summerville (Sell Side Analyst)

Got it. And then I guess back to one of your comments, John, regarding Franklin being a net exporter. I can sort of see that in the fueling business. Can you talk about how you would be a net exporter in your Water Systems business, if indeed you are? Can you talk about the relative balance you have there?

John Haines (CFO)

Yeah, fueling is certainly a key exporter. Many of the products that we sell globally are manufactured in Madison, Wisconsin. The other key plant that we have in the U.S. on the water side, Matt, you may recall, is in Wilburton, Oklahoma, where a lot of the large diameter motor and pump equipment that supports ag, we're talking about encapsulated product here now on the motor side, 6- and 8-inch is manufactured in that facility there. And it is, you know, reaching end markets virtually everywhere around the world. So those two are the biggest drivers of the export.

We have not shared, you know, kind of a net water export versus a fueling export, but that's kind of the picture of where that's coming from here in the U.S.

Matt Summerville (Sell Side Analyst)

That's helpful. Thanks, guys.

Operator (participant)

Thank you. And our next question comes from Ryan Cassil at Seaport Global. Your line is now open.

Ryan Cassil (Managing Director)

Good morning.

Gregg Sengstack (Chairman and CEO)

Morning, Ryan.

Ryan Cassil (Managing Director)

A lot's been covered here, but I think you talked about industrial and mining perhaps being weak in various regions. Can you just give some general color on what you're maybe seeing there, you know, early in 2017, and if you think, you know, there's really more opportunity for growth there at this point, you know, versus more challenges ahead?

John Haines (CFO)

Well, industrial and mining, principally, are developing regions, and Robert's been back in Southern Africa, so I'll put the question to Robert.

Robert Stone (SVP and President of International Water Systems)

Yeah. Ryan, it's, it's a little better than last year at this time. We're seeing some pickup in activity from the mines that we deal with in, Africa, Southern Africa, in particular. Not much yet, really, in Australia or South America. So while it's a little better, it's, it's only a little better.

Ryan Cassil (Managing Director)

Okay, great. So fairly muted assumptions then, I guess, in the, in the 2017 outlook for that, for those businesses?

Robert Stone (SVP and President of International Water Systems)

Yes.

Ryan Cassil (Managing Director)

Okay. And then lastly, for me, you know, is anything you're seeing from a valuation standpoint with respect to M&A? You know, I think people are feeling a little bit better about some of the end markets, but are you seeing it in valuations, I guess, at this point?

Gregg Sengstack (Chairman and CEO)

Well, I'd say that what we're seeing is that, there seems to be more interest, both domestically and internationally, to engage, in discussions about, around M&A. You know, you see top-line multiples, for, you know, large public acquisitions. We deal mostly in the private market, almost exclusively in, with, private companies. And I just, I think that, you know, people, are looking at, their business, are looking at their own individual situations. Much of this is situationally related, so you have a, you have a transition between two generations. You have, families that are looking to have a liquidity event. That seems to be more the driver than necessarily valuations. I don't know how much is on people's minds in the U.S. with to potential U.S. tax policy changes.

I really can't get in the mind of sellers on that. But generally speaking, you know, we know the people we know in our industry. They're family businesses, that's more driven by kind of family events necessarily than strict valuation. John, you've talked to the street quite a bit. Do you got anything, any broader view on that?

John Haines (CFO)

No, I would just say that I still, I don't think internationally, Ryan, that it's changed a lot. You know, I'd tie it back again to a strong dollar. Some of these international deals, as we've talked about, are in another currency that's lost a lot of value to the dollar over, you know, call it 12, 18, 24 months, whatever it is. And, I think that means, you know, people's enthusiasm for the transaction, just because they had an expectation of what they were gonna net in proceeds. And, I think that impacts how they think about the transaction.

Ryan Cassil (Managing Director)

Okay. Fair enough. Thanks, guys.

Operator (participant)

Thank you. Ladies, and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Gregg Sengstack, Chief Executive Officer, for any further remarks.

Gregg Sengstack (Chairman and CEO)

Thank you for participating in our fourth quarter conference call. We look forward to speaking to you about our first quarter results, in late spring.

Operator (participant)

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