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Executives

Patrick Davis – Treasurer

Scott Trumbull – Chairman and Chief Executive Officer

John Haines – Chief Financial Officer

Robert Stone – Senior Vice President, North America Operations

Gregg Sengstack – Senior Vice President, Fueling and Asia Pacific

Analysts

Ned Borland – Next Generation Equity Research

Paul Mammola – Sidoti & Company

Matt Summerville – KeyBanc Capital Markets

[Bryan Myer] – Robert W. Baird

Franklin Electric Company Inc. (FELE) Q4 2008 Earnings Call March 2, 2009 5:00 PM ET

Operator

Greetings and welcome to the fiscal 2008 and fourth quarter earnings release for Franklin Electric Company. (Operator Instructions). It is now my pleasure to introduce your host, Mr. Patrick Davis, Treasurer for Franklin Electric. Thank you. Mr. Davis, you may begin.

Patrick Davis

Thank you, [Manny], and welcome to the Franklin Electric fourth quarter 2008 earnings conference call. With me today are Scott Trumbull, our Chairman and CEO, John Haines, our CFO, Robert Stone, SVP of Americas Water and Gregg Sengstack, SVP of our Fueling and Asia Pacific business unit. On today's call Scott will review our fourth quarter and full year 2008 results and discuss the key issues confronting our company for 2009. John will review our fourth quarter and full year 2008 financials and when John is through we will allow some time for questions and answers.

Before we begin let me remind you that any forward-looking statements contained herein including those related to the company's financial results, business goals and sales growth involve risk and uncertainties including but not limited to risk and uncertainties with respect to general economic and currency conditions, various conditions specific to the company's business and industry, weather conditions, new housing starts, market demand, competitive factors, changes in distribution channels, supply constraints, technology factors, litigation, government and regulatory actions, the company's accounting policies and future trends and other risk which are detailed in the company's Securities and Exchange Commission filings included in item 1A of Part 1 of the company's annual report on Form 10-K for the fiscal year ended December 29, 2007, Exhibit 99.1 attached thereto, and in item 1A of Part 2 of the company's quarterly reports on form 10-Q.

Of note, the company's 2008 10-K will be filed this Wednesday, March 4th. These risks and uncertainties may cause actual results to differ materially from those indicated by the forward-looking statements. All forward-looking statements made herein are based on information currently available and the company assumes no obligation to update any forward-looking statements.

I will now turn the call over to our Chairman and CEO, Scott.

Scott Trumbull

Thank you, Patrick. After a record third quarter we experienced an abrupt change in market trajectory during the fourth quarter. Through the first nine months of 2008 our sales increased by 32% and our operating income increased by 78%. During the fourth quarter our sales declined by 1% and our operating income before restructuring charges declined by 21%.

In our Water segment, acquisitions increased fourth quarter sales by about 10% but this growth was more than offset by an organic sales decline of 6% and negative foreign exchange translation effects of 7%. The organic sales decline occurred in the United States where according to trade association data the market for water systems products fell by approximately 15% during the quarter. While we continued to gain share during the quarter we were nevertheless impacted by the drop in the overall market.

We believe that demand in the overall market fell for several recession-related reasons. First, U.S. new housing starts fell by approximately 40% versus the fourth quarter 2007. We estimate that about 15% of our total Water segment sales are tied to U.S. new housing starts. For planning purposes we are assuming that new home construction will continue to decline by 30 to 40% through the first half of 2009. In the back half of 2009 we believe that housing starts will meet the depressed prior year levels.

Second, as the banking crisis unfolded and credit availability became an issue, we believe that distributors and contractors focused on reducing their inventories and therefore curtailed their purchases of additional pumps and motors. We expect that these downstream inventories will continue to be reduced into the first quarter and that inventory levels will stabilize as the spring construction season approaches in March and April.

Our sales of water systems products in international markets, which represent about half of our total water system sales, were flat organically but declined by 7% due to the impact of the strengthening U.S. dollar on our translation rates. During the fourth quarter we had organic sales growth in Latin America and Europe, Middle East and Africa, but this was offset by a decline in Asia Pacific.

In our fueling segment, fourth quarter sales increased by 6% versus prior year. All of the increase was organic and was driven primarily by increased sales of vapor control and monitoring systems in California due to that state's vapor control mandate. We estimate that as of year end 2008, 45 to 50% of the 11,200 filling stations in California have already installed vapor control systems and that Franklin has supplied over 90% of the systems that have been installed to date.

During the fourth quarter we noted a reduction in the monthly system installation rate. We believe that station owners are having difficulty arranging debt financing for the installations. As a result of this slowdown while we had previously forecasted that our sales for the California mandate would start winding down in the second quarter of 2009, we now believe that our California vapor control sales may continue, albeit at a slower installation rate, into the third or fourth quarter.

Although during the fourth quarter a competitor's vapor control system was approved for installation in California, we expect to continue supplying the majority of the roughly 4,500 to 5,500 remaining installations.

For us the bright spot for the quarter was gross profit margins which increased by 140 basis points. The gross profit improvement occurred in both the Water and Fueling segments and was driven primarily by declining raw material costs. Raw materials and freight represent about 70% of our manufacturing cost structure. Most of the materials that we purchase are made of steel, copper, aluminum or plastic resins. Prices for these commodities have declined significantly during the fourth quarter. We believe that raw material cost reductions will become increasingly evident in our financials during the year as we realize vendor price reductions and as we burn off inventories with a higher cost base.

While gross profits increased by $1.7 million in the fourth quarter our SG&A expenses increased by $4.2 million. SG&A spending from recently acquired companies accounted for $2.3 million of the increase. Most of the remaining increase related to one time expenses such as transaction costs, sales force realignment costs and one time compensation costs. We're taking appropriate steps to reduce SG&A spending levels exclusive of acquisitions in 2009.

It's clear that given weak and uncertain market conditions that we are experiencing thus far in 2009 our emphasis is on protecting our liquidity and reducing our costs. Our most important opportunity for liquidity improvement is increasing inventory turns. We increased turns in 2008 and plan to increase turns by another 16% in 2009. This will improve our liquidity by about $18 million.

In addition, because our plants are relatively new and our equipment is in good shape, we're well positioned to hold capital spending below depreciation without having to sacrifice quality, productivity or new product introductions. Our depreciation and amortization runs about $25 million per year and our capital spending plan for 2009 is $19 million.

In addition to improving our liquidity we've initiated programs to reduce our costs and breakeven point. Our global procurement organization is implementing an organized and aggressive program to insure that we capture our share of the cost reductions that our vendors have received as a result of falling commodity prices.

We are well down the road with these programs. By June 1 we will have transferred an additional 500,000 man hours of production activity from higher cost plants to our new facility in Linares, Mexico. This will reduce our direct labor costs by about $16 per man hour or about $8 million per year on an annualized basis. We expect to achieve fixed manufacturing cost reductions as well through our Lean manufacturing initiative, we freed up sufficient space in Linares to accommodate an additional 350,000 man hours of activity, which we plan to fill by the first quarter of 2010.

In addition we've cut the Park Meadow spending budgets, deferred merit increases for 2009, taken steps to reduce our healthcare costs, and reduced our global salary headcount by about 6%. While we are prepared to take additional steps to reduce our costs if warranted by the recessionary market conditions, our people are focused on mitigating the impact of the recession by continuing to provide excellent quality, service, and sales support for our customers and by earning a larger share of the market.

Now I'll turn the call over to John Haines, our CFO who will provide additional color on the quarter.

John Haines

Thank you, Scott. Our fully diluted earnings per share for 2008 were $1.90 a 56% increase over 2007. Earnings per share before the impact of restructuring charges were $1.96 up 47% from 2007. For the fourth quarter earnings per share was $0.15 in 2008 versus $0.23 in 2007, a decline of 35%. However, the quarterly earnings per share before the impact of restructuring was $0.21 in 2008 versus $0.29 in 2007, a decline of 28%.

On a consolidated basis our fourth quarter revenue was $152.1 million down about 1% from the fourth quarter 2007. As Scott mentioned the organic sales decline in our water segment, slower growth in fueling and the impact of a strengthening U.S. dollar all contributed to this flat sales result.

For the full year, gross profit increased by 170 basis points, operating income before the impact of restructuring charges decreased as a percent of sales by 160 basis points in the fourth quarter versus 2007.

For the full year 2008 operating income before the impact of restructuring charges increased as a percent of sales by 180 basis points. Despite the significant market weakness globally our water systems segment sales only declined by $4.2 million or 4% in the fourth quarter of 2008. Eight million dollars of this decline was due to translation impacts of the strengthening U.S. dollar against most foreign currencies.

Our water systems customers tell us they are focused on cash and the preservation of working capital given the uncertain economic times. As a result they've lowered the levels of our products they have normally carried in inventory and we believe this was a key driver of our lower water sales in the fourth quarter.

For the full year our water system segment grew revenue by 19% primarily as a result of acquisitions. Operating income before restructuring charges for the water segment decreased in the fourth quarter by 90 basis points and was effectively flat for the full year compared to 2007. As Scott mentioned, we lost some of the SG&A leverage in the fourth quarter due to the abrupt change in market demands for our water products.

Our fueling businesses rate of growth slowed in the quarter, revenues in the quarter were up 6%, however, operating income was up by 16% primarily as a result of the California Vapor Recovery Initiative. For the full year our fueling business grew revenue by 40% and operating income before restructuring expenses by 89%, again on the strength of our market share in California.

It's important however, to also note that our fueling business revenue growth in China nearly tripled in 2008 as we continue to win over new markets for our vapor management and other fueling products internationally.

Finally, as it relates to the vapor recovery management systems in California, Veeder-Root introduced a competitive system in the fourth quarter. As we have said we believe that through the end of 2008 we have over a 90% market share position and that we will continue to win a large share of the remaining station conversions in California.

However, today we filed a lawsuit in California which alleges that in their effort to obtain market share, Veeder-Root has engaged in unfair, unlawful and misleading marketing practices. The lawsuit seeks to stop these practices and to prevent adverse effects on our business in California.

We incurred restructuring charges in the fourth quarter of $2.1 million, almost entirely related to the Siloam Springs Arkansas relocation to Linares, Mexico that we announced in December last year. Nearly all of the fourth quarter 2008 restructuring charges were non cash and related to pension costs for personnel impacted by the facility relocation.

We expect to take between $4 and $6 million in additional restructuring charges in 2009 related to the Siloam Springs relocation and other severance costs related to reductions in our workforce. Approximately two thirds of these remaining restructuring costs will be non cash.

Cash in equivalents on hand were $46.9 million at the end of 2008 versus $65.3 million of cash equivalents in investments at the end of 2007. We ended the year with $35 million on our revolver balance versus zero at the end of the 2007. This was partially due to the fact that we had kept cash available in Europe at the end of the year anticipating the Vertical acquisition which we completed in January for $19.9 million.

For the year ended 2008 the company's key debt covenant ratio of gross debt divided by earnings before interest, taxes, depreciation and amortization or EBITDA, was 1.8 versus 2.1 at the end of 2007. The current covenant limit for 2008 is 3.5.

We believe that internally generated funds and existing credit arrangements provide sufficient liquidity to meet current commitments and service existing debt. As we have previously disclosed, the company's revolving loan agreement with its banks is in place until the end of 2011 and we have no scheduled principal payments on our long-term debt until 2015.

Our accounts receivable balances increased just under 5% at the end of 2008 versus 2007 in part due to higher international sales which generally carried longer payment terms. We have not observed any meaningful slowdown in our customers' payments to us.

Overall inventory for the consolidated energy increased from year end 2007 by 9% to $169.9 million primarily in our fueling systems group which had a 46% year-over-year increase due to our efforts to support the vapor recovery retrofit in California.

The company has made solid progress in our efforts to reduce inventory in our water systems units in 2008, specifically our Americas Water Unit lowered their finished goods inventory by 28% year-over-year and many of our water units are implementing Lean, [Tyzan] and other single piece flow initiatives that should benefit us even more in 2009.

As Scott indicated, inventory turn improvements remain a significant liquidity opportunity for the company in 2009 and will be a key focus of management this year.

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

Question-and-Answer Session

Operator

(Operator instructions)

Our first question is from the line of Matt Summerville – KeyBanc Capital Market.

Matt Summerville – KeyBanc Capital Markets

[Break in audio] Provide similar color as to what you're seeing in your key international markets through the first couple of months of the year?

Scott Trumbull

Of course the most pronounced effect has been on dollar translation and as I mentioned the translation effect that cost our sales to the client by about 7% in our water segment during the fourth quarter and that really, that rate hasn't changed much in the first quarter of this year.

But beyond that we, while our sales in our international markets organically were flat in the fourth quarter, based on what we've seen so far it appears that the first sign that they were down modestly organically in the first 60 days of the year.

Matt Summerville – Keybanc Capital Markets

Okay and then with respect to fueling have you seen any change on the part of station owners ability to get credit now versus what you were experiencing I guess in the fourth quarter? And how comfortable are you that we haven't seen in fueling any real demand impairment?

Scott Trumbull

I don't think that the impact of the – there's evidence that the impact of the banking crisis is greater now in the first quarter than it was in the fourth quarter. And I also don't see any reduction in the determination of the regulators in California to enforce the vapor mandate that's in place, and that as we said there's 11,200 stations in California somewhere between 90 and 100% of them will convert and some percentage won't convert; they'll go out of business.

And that all those stations are going to convert and it would be very optimistic for us to assume that in light of the fact that we now have a competitor in the market that we would maintain the same market penetration on the remaining roughly 4,500 stations that are going to convert that we have had on the first roughly 5,500 stations that have converted, because now there's a competitor in the market.

So we are not, and nor have we ever projected that we would maintain a 90% plus share of the market with a competitor and in the market. So as I've indicated or we indicated – I indicated in my remarks and we indicated in our press release, we do however, anticipate that we will continue to supply the majority of the remaining conversions.

Matt Summerville – KeyBanc Capital Markets

As we think about how to model fueling in 2009, what quarter would you believe would be the high water mark in terms of revenue and fueling given the dynamics impacting that segment right now?

Scott Trumbull

I'm going to turn – I'm going to let Gregg Sengstack respond to that one, Matt.

Gregg Sengstack

Yes, Matt, given the slowing that we saw in the fourth quarter as compared to the third quarter of last year and the likelihood that this California initiative is going to extend out, then toward the back half of the year we're going to be picking up the California in-station diagnostic or ISD sales, we're expecting the back half to see more international sales of vapor recovery, particularly with respect to the initiatives in China in both the Shanghai and Guangzhou areas. So I'm not sure that I can say there's going to be a high water mark, we would have initially thought it would have been first quarter or certainly first half, but that's a little clouded depending on the rate of conversion in California.

Matt Summerville – KeyBanc Capital Markets

Are you seeing any signs that your business in China – well, are the same issues that are impacting California at all at play in China, with regards to just the general crunch and the banking system? And I guess how good do you feel about your ability or the fact that you're looking for higher international volumes in the second half of the year, in fueling?

Gregg Sengstack

In fueling, the sense is in Asia and China in particular, that the business is going to happen. It may start a little bit later, but given that the Asian games World Expo are coming in 2010, that the initiatives that were mandated by the Chinese government in the Shanghai and Guangzhou areas are going to happen much like they happen in Beijing before the Olympics.

Matt Summerville – KeyBanc Capital Markets

What are your competitive win rates in Beijing, or what did they look like? And I guess how are you looking at Shanghai and Guangzhou, in a similar fashion?

Gregg Sengstack

We had a greater than 50% share in Beijing from our information and we would expect that we have similar economic opportunities in the southern regions as well. I would say that anecdotally on the water side, our business not directly to your question, but in China is that the impact in the housing market we have seen slowdown in apartment building and construction and we have a very small water business today in China, but we do see where that side of the business is slowing down and where the banking has affected the construction market, but we are not getting indications at this point that it's going to affect the fueling industry.

Matt Summerville – KeyBanc Capital Markets

And then just one question on raw material costs and I'll hop out of the queue. You mentioned that you expect the rate of benefit to increase through the first half of the year, in terms of lower raw material costs, Scott, how much of that downward pressure in input prices do you anticipate actually being able to capture and then this sort of feeds into my next question, which is in the fourth quarter what did you see in terms of pricing and what are we looking at early on in the year?

And I'm speaking to the water business now, obviously.

Scott Trumbull

Our cost reductions fall into three categories; one is the raw material cost reduction that will flow through. We buy some commodities directly, copper being the principal commodity that we buy directly, and then we buy – much of what we buy beyond that are products that are made directly from the commodities, so we're going to capture for the roughly $20 million of copper that we purchase annually, most of the commodity price decline.

However, not all because we did have some forward contracts all of which were below the average price for 2008. So all of which locked in a deflation in copper prices, but a number of which were over the current spot price. So – but we'll capture the majority of the copper reductions and beyond that, we – I hate to put a number out there of the remaining roughly $300 million of purchases of products that are made out of these other materials, what we will capture in the way of a price reduction, we just have chosen not to disclose that number for competitive and market reasons.

But we would expect that you know, Matt, very well how much the commodity prices have come down and those commodity costs are probably 30 to 50% of the cost of our vendors and we're going to want to capture as much of that as we can. And we're negotiating with them now and we're having a good deal of success in that regard but the price reductions will phase in over the course of the first half of this year and then they have to get through inventory, so I would say the major impact of the reductions will start really showing up in our financials as we go into the back half of 2009 and that's when we'll really start to see the reductions.

The second area of reduction is in our fixed spending and we have targeted a double-digit million dollar reduction in fixed spending this year, to over and above what happens to raw material costs and then the third factor is in the direct labor cost benefit that we will get when we move the manufacturing in Siloam Springs down to our plant in Linares and I identified that as about an $8 million annualized cost reduction again that will hit in the back half of the year.

So our success formula for this year is that while in the back half of the year we anticipate our fueling sales will start to fall off as the California surge winds down. Our cost reductions in the water business are going to be very significant and will enable us to improve margins to the extent that we can offset with water margins the decline in the sales volume that we'll see overall in fueling as the surge winds down.

Now as I say that's our success scenario a lot of things have to come together to make that work including a sales volume scenario that is not – does not reflect a dramatic reduction in sales in our water business as a result of this recessionary market condition that we're facing right now.

But, that's basically the way our plan for the year is structured.

Matt Summerville – KeyBanc Capital Markets

And then just to comment on what you're seeing on pricing Scott, in the market on water and if you've announced or implemented any additional actions beyond what you did in '08 in fueling.

Scott Trumbull

Okay. Our – first of all, as you know 2007 was a disruptive year for us pricing wise in water, 2008 the scenario improved and overall price was a positive factor as far as margins were concerned in 2008. And as we came to the end of 2008 we saw a, I would say a modest increase in promotional pricing activity.

And our expectation is that there will be a modest increase of promotional pricing activity through at least the first half of 2009. But we're not seeing that math as a major factor in our margin equation for the water business.

In other words it has not been important enough to make us change our basic thinking around the equation that I mentioned to you at this point. That okay?

Matt Summerville – KeyBanc Capital Markets

Yes and then just pricing on fueling, Scott.

Scott Trumbull

Gregg, do you want to talk.

Gregg Sengstack

Yes. We made a price change in the third quarter of 2008. We've made no pricing changes since then.

Operator

Your next question is from the line of Ned Borland – Next Generation Equity Research.

Ned Borland – Next Generation Equity Research

Back to fueling here for a second. I mean if you've got 50 to 55% of the stations yet to retrofit, I'm just trying to get a sense for how to look at the first half. I mean are we trending now in the first quarter more towards like third quarter '08 levels or is it more consistent with the fourth quarter levels in fueling.

Scott Trumbull

Yes Ned I would say that given the inventory that was in the system in the fourth quarter and the slowdown in the end markets, I would say that it looks like first quarter will be more like fourth quarter than the third quarter of last year.

Depending on when the regulators come out and to what degree they come out with what actions they are going to take on the fining side or on enforcement after April 1st will then I think give greater clarity to how the balance of the year will unfold.

Ned Borland – Next Generation Equity Research

Okay. So some of the laggards could fall into the second quarter and beyond is what you're saying?

Scott Trumbull

Yes. We think for sure Ned that the tail is going to go right in 2009 which means that more of these than we had originally thought will go into the second quarter and perhaps more will even go into the third and fourth quarter, but a lot of that is going to depend on the enforcement actions that the state takes and it's hard for us to really necessarily predict that in this environment.

Ned Borland – Next Generation Equity Research

Okay and can you give me a sense to what your non California portion of fueling did in the fourth quarter?

Scott Trumbull

I'd say in general the fueling business did okay in the fourth quarter that activity was basically steady but we've gone into a fairly hard winter and we've gone into I think a period where I think again new station construction may actually be delayed but generally speaking the market held up well in the fuel business outside of California.

Ned Borland – Next Generation Equity Research

Okay and then just finally on some of these SG&A actions that your taking. I want to get a sense for how it flows through throughout the year.

Scott Trumbull

Okay. Our expectation is that – as I mentioned that we would reduce the combination of SG&A and fixed manufacturing significantly and it would build throughout the year. In other words that the back – that the reductions in the back half will be greater than the reductions in the first half because of the timing of the facilities consolidations which would drive down the fixed manufacturing expenditures. We do expect SG&A spending to be equal to or less than prior year levels during the first quarter.

Operator

Your next question is form the line of Paul Mammola – Sidoti & Company

Paul Mammola – Sidoti & Company

Are there any areas of the water products business that are stable or buoying at this point, maybe in the terms of waste water fresh water or in any of the brands?

Scott Trumbull

I'm not sure I understand the question, but are you saying are there any areas that we're experiencing some growth?

Paul Mammola – Sidoti & Company

Sure some growth or stable. I know that you commented that the broad business was down 15% or the industry. So for your businesses was there anything that was stable if we talk in terms of fresh water versus waste water or an AGG or any of the brands if you thought in terms of Monarch Little Giant.

Scott Trumbull

Okay. Well internationally in the fourth quarter as I mentioned our basically the international business which is about half of our water systems business I would describe as stable. We did see a decline in Asia Pacific, but a lot of our Asia Pacific volume is export and the buyers tend to play with currency fluctuations and place orders when it's opportune for them from a currency perspective.

And we think that was a major factor in our – in a chunk. Several of our Asian markets in the fourth quarter, but in Latin America and in Africa and in the Middle East we continue to see pretty good increases to offset the Asia decline.

So I'd say half of our business which is outside of the water business which is outside of the U.S., I'd describe in total as stable through the fourth quarter. In the U.S., I would say that Robert do you want to comment on that?

Robert Stone

Sure. Paul, we've had a number of new product introductions over the past couple of years and several of those are taking off pretty nicely. Given our share position in some of the AGG markets we think we've got some very good growth opportunities there we've made some small acquisitions recently to help shore up our product portfolio in those areas and I think we've got some good opportunities there.

We have not forecasted the AGG market to be bigger this year than last year but again we've got good growth opportunities in terms of share in those areas. Our dry products have been very successful we'll have to try to maintain that momentum but in those areas we've had good success and they're stable.

Paul Mammola – Sidoti & Company

Okay that's all very helpful. And then on the fueling side do we know or would you share how many insoles there were in the fourth quarter or conversions rather?

Scott Trumbull

We have not for competitive reasons chosen to disclose that.

Paul Mammola – Sidoti & Company

Okay. So see if you can work with me here. Say it's in the 1,300 to 1,400 range, there is 4,500 left that puts you around three grand left to install. If 1Q is running at a 4Q rate that means you're going to have 3000 plus stations in March and beyond.

So I guess the question is what do you expect to fall in 2Q and beyond and past that April 1st deadline?

Scott Trumbull

Well I think that if your saying is that your math is there are 3,000 stations at the end of the first quarter you would think that there is going to be – to the degree that there are fines and enforcement actions for those that want to keep their fueling business they are going to do those relatively quickly in Q2.

So then there will be probably another group that says I don't have the financing at reasonable rates I need to put this off I'm either going to stop pumping fuel or I'm just going to get out of the business and then may come back later in the year when they have financing arranged or feel the economics are awarded to go ahead and do the conversion.

So it's a little tough to tell how the market is going to react to what the regulators do.

Paul Mammola – Sidoti & Company

Okay Gregg, so I guess what can the gas stations do to get past that April 1st deadline at this point? Is there any sort of leniency from the regulators do you know?

Gregg Sengstack

We have not seen a published leniency and I can't answer for the regulators but somebody can stop pumping fuel for a period of time until such time they either have the financing in place or the money in place to go ahead and proceed.

Operator

Our next question is form the line of [Bryan Myer] – Robert W. Baird

[Bryan Myer] – Robert W. Baird

So first we can get back to the expected savings from the headcount move to Mexico. You said you'll hit the $8 million run rate it looks like in the back half of the year. I guess then is it fair to assume for the full year the benefit is roughly $4 million or are you going to realize some lesser benefit in the first half such as it's something like $6 million for the year?

Scott Trumbull

I suppose it'd be – there will be more in the back half than in the first half. And the savings – the easy to quantify savings I mean we know how many man hours of work we're transferring down. We know what the labor costs are in the two arenas so that's a pretty easy calculation to make.

In addition there will be these fixed manufacturing costs savings because we're – the number of fixed manufacturing dollars that have gone through Siloam will be reduced by a significant extent through this change and we're not adding that much on Linares, so there is going to be a fixed cost savings as well.

[Bryan Myer] – Robert W. Baird

Okay and then continuing with this them, you guys said that or kind of hinted that you'll be – or that you had the space to move 350,000 more man hours to Linares and that could be done by 1Q 2010. If you do the same math there that's another $5.6 million in annualized savings, do you start to realize that kind of at a run rate in 1Q '10 or is 2Q 10?

Scott Trumbull

Well I would say by two Q '10 we should have both the Siloam Springs and the whatever additional savings as a result of the other roughly 300,000 man hours of activity that we would move down Linares.

[Bryan Myer] – Robert W. Baird

Sure and then I would expect then that if your expecting to complete that by 1Q '10 that you'll also have some smaller benefit in the second half of 2009 as a result of these additional 350,000.

Scott Trumbull

Yes although during the move we actually incur some cost penalties because what we'll do is we'll bring on the troops in Linares and we'll be going through training and what have you and we'll not have let the troops elsewhere go and so there is a period of when we're going through this of where our cost are actually a little bit higher than they normally would be.

[Bryan Myer] – Robert W. Baird

Okay fair enough and then switching gears to your comments on inventory in the channel I think you guys had said that you kind of expected depletion to I don't know if cease is the right word, but at least kind of stabilize here in the first half or even the first quarter.

And now that we're already two thirds of the way through the quarter I guess my question is have you seen the ramped destocking kind of flatten out already or is that still on the horizon for you guys.

Scott Trumbull

Okay what we – what we said was that we saw the destocking continuing into the first quarter but that inventory levels would stabilize as we approached the construction season which for this industry the early part of it starts in March.

So I would say up to now we've continued to see destocking. And that we anticipate that the inventory reductions will start to – distributors and contractors start feeling better about keeping inventory when they have a backlog and by the time March and April comes around they will have a backlog of jobs to work against.

[Bryan Myer] – Robert W. Baird

Sure. Okay and then one last one here just getting back to kind of the end market during the fourth quarter. It sounds like AGG was probably still a decent market for you guys in the quarter has been all year, wondering if more of the commercial, industrial, municipal kind of applications slowed down during the fourth quarter along with obviously the residential PMA stuff.

Robert Stone

Yes Brian this is Robert. The – we don't play terribly strongly today in some of the industrial municipal. Anecdotally, we have heard that that business came, it slowed down dramatically but that was not a big factor – it is not a big factor in our sales so we were not largely affected by that at the end of '08.

Operator

Your next question from the line of Matt Summerville – Keybanc Capital Markets

Matt Summerville – KeyBanc Capital Markets

Just a couple more questions, first can you just talk about what you're seeing Scott or Robert from a competitive standpoint with [Fairdine's] larger motor now begin out in the market and then just a house keeping question. What should we assume your tax rate is in 2009?

Robert Stone

As to the larger thrust rating motors Matt, we have seen almost nothing of the product. We understand that they've some inventory and they've sold a few and that they are giving several away but we have not seen any major impact of that and in fact we know that several distributors are still trying to source our motor from other OEMs or other distributors to have it available.

Matt Summerville – KeyBanc Capital Markets

Okay and then the tax rate.

John Haines

Thirty five percent is a good estimate for '09 Matt.

Matt Summerville – KeyBanc Capital Markets

Okay and then just one final one I think it was you John, in your prepared remakes you had mentioned a lawsuit that you're – or that you've initiated I guess in California I would assume that is probably somewhat of a matter of public record, are you able to comment on that in more detail around what your particularly – or what your asserting in particular in that lawsuit?

John Haines

Well we – the lawsuit is filed today so if it's not already it will shortly become a matter of public record so you can see that Matt. But we're not going to comment broadly about the lawsuit but we will say what our claim is and what it's based on is that we believe that Veeder-Root in an effort to gain market share has started to deploy what we view as unfair and illegal marketplace practices.

And what our lawsuit is attempting to do is to stop those practices and to prevent any further or any harm at all against Franklin. So that's what's in the lawsuit and that's what the litigation is about that was filed today.

Scott Trumbull

Well, this will be the end of our call. Thank you for your attention.

Operator

Thank you ladies and gentleman. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Franklin Electric Company Inc. Q4 2008 Earnings Call Transcript
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