Jul 30, 2013
Executives
Jeff Frappier R. Scott Trumbull - Chairman and Chief Executive Officer John J.
Haines - Chief Financial Officer, Principal Accounting Officer, Vice President and Secretary
Analysts
Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division Michael Halloran - Robert W.
Baird & Co. Incorporated, Research Division David L.
Rose - Wedbush Securities Inc., Research Division
Operator
Good day, ladies and gentlemen, and welcome to the Franklin Electric Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded.
I would now like to introduce your host for today's conference, Jeff Frappier, Treasurer. Please go ahead, sir.
Jeff Frappier
Thank you, Danielle, and welcome, everybody, to Franklin Electric's Second Quarter 2013 Earnings Conference Call. With me today are Scott Trumbull, our Chairman and CEO; John Haines, our CFO; and Gregg Sengstack, President and COO.
On today's call, Scott will review our second quarter and year-to-date business results and then John will review our second quarter and year-to-date financial results. When John is through, we will have some time for questions and answers.
Before we begin, let me remind you that any forward-looking statements contained herein, including those relating to market conditions or the company's financial results, costs, expenses, expense reductions, profit margins, inventory levels, foreign currency translation rates, liquidity expectations, business goals and sales growth, involve risks and uncertainties. These risks and uncertainties include, but are not limited to, general economic and currency conditions; various conditions specific to the company's business and industry, new housing starts, weather conditions, market demand, competitive factors, changes in distribution channels, supply constraints, effective price increases, raw material costs, technology factors, integration of acquisitions, litigation, government and regulatory actions, the company's accounting policies and future trends and other risk which are detailed in the company's SEC filings and are included in Item 1A of Part I of the company's annual report on Form 10-K for the fiscal year ending December 29, 2012, Exhibit 99.1 attached thereto, and in Item 1A of Part II of the company's quarterly reports on Form 10-Q.
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 except as required by law, the company assumes no obligation to update any forward-looking statements.
I will now turn the call over to our Chairman and CEO. Scott?
R. Scott Trumbull
Thank you, Jeff. We're pleased to report that our sales and earnings per share during the second quarter were the highest for any quarter in the company's history.
This record performance reflects the successful implementation of 2 of the company's long-term strategies. The first is to build distribution networks in developing regions, where the markets for our Water and Fueling products are growing most rapidly.
We achieved organic sales growth of about 9% in developing regions during the quarter led by robust demand in Latin America and Asia-Pacific. The second is to provide a value proposition for our customers worldwide, such that we can more than offset inflation with a combination of tight cost controls, productivity improvements and price.
During the second quarter 2013, our gross profit margin increased by 170 basis points, which enabled us to achieve record earnings while continuing to invest in initiatives that will spur the company's growth in the future. Our Water Systems sales in the U.S.
and Canada represented 44% of our consolidated sales and grew by 6% compared to the prior year. Residential and light commercial is our largest end-use category in the U.S.
and Canada, and Water and Waste Water sales in this market increased by 9% compared to the second quarter prior year. This increase was driven by strong wastewater pump sales and a general increase in housing construction and renovation activity.
Our U.S./Canada Water sales were penalized by a double-digit reduction in our Pioneer mobile pumping equipment product line. The sales reduction is attributable to a slowdown in demand for mobile pumps in the upstream oil and gas market.
Based on our order backlog, we're expecting our Pioneer sales to turn around and grow at a double-digit rate during the back half of the year. Our sales of irrigation and industrial pumping equipment in the U.S.
and Canada declined by about 2%, and this is in the U.S. and Canada, compared to the second quarter of 2012.
Last year much of the U.S. was experiencing abnormally dry weather, which contributed to heavy shipments of groundwater pumping equipment.
This year, drought conditions persist west of the Mississippi, but it's been unusually wet in the East. Based upon feedback from our customers, we believe that distributor inventories in the West are in line with demand.
But our distributors in the East are concerned that their inventory levels may be too high, unless weather conditions normalize and demand levels increase. Our Water Systems sales in the Middle East and Africa represented 12% of our consolidated sales and grew organically by about 4%.
Our sales in the Gulf region continued to increase by more than 40%, as the governments in both Saudi Arabia and the U.A.E. are supporting investments in groundwater-based irrigation projects.
Sales in Botswana and Zambia increased dramatically in the second quarter, and we're preparing to open a new distribution center in Zambia during the fourth quarter. We experienced a high-single digit organic sales decline in the near East, including a double-digit decline in Turkey.
We believe the sales decline in Turkey is mainly due to the timing of customer orders because our sales in Turkey grew at a double-digit rate in the first quarter and are projected to grow at a double-digit rate in the third quarter as well. Water sales in Latin America represented 11% of our consolidated sales and grew organically by 10%.
Our sales in Brazil continue to grow rapidly due to the successful launch of Franklin submersible pumps and motors, customer acceptance of the many product line upgrades that we've implemented over the past 2 years and robust general market conditions. We plan to move into our new factory in Brazil during the second quarter of 2014.
The new plant will provide additional capacity and improved manufacturing efficiency. Also, we will be opening new distribution centers in São Paulo, Brazil and Bogota, Colombia by the end of the third quarter this year.
Water Systems sales in Europe represented 8% of our consolidated sales and grew organically by 2% compared to the prior year. We're seeing sluggish demand growth for our products across Southern and Western Europe due to the weak general economic conditions in that part of the world.
However, our sales in Eastern Europe grew by over 30% in the quarter from a small base. Our Water sales in Asia-Pacific represented 6% of our consolidated sales during the second quarter and grew organically by 15% compared to the second quarter prior year.
Over the past several years, we've focused on building a strong distribution network in Southeast Asia and those efforts are paying off. Most of our Asia-Pacific sales growth occurred in Thailand, the Philippines, and Indonesia, as populations in these regions are increasingly turning to groundwater sources for their freshwater requirements, and I will add that we are benefiting from our recently opened distribution center in that region.
During the second quarter, Fueling Systems represented 19% of our consolidated sales and grew organically by 6% compared to the prior year. Our Fueling sales grew organically by 10% in international markets, as customers outside of North America continue to invest in Franklin pressure pumping systems for transferring gasoline from their underground tanks.
Our electronic fuel management products are also achieving growing acceptance among international customers. Our Fueling sales in the U.S.
and Canada grew organically by 4% as growth of our pumping, fuel management, pipe and containment product lines were offset by declines in dispensing equipment and tank truck hardware. Turning to our outlook for the third quarter.
We expect that during the third quarter of 2013, our Water Systems sales and adjusted operating income will improve by 4% to 7% versus the third quarter of 2012. This forecast assumes that due to high U.S.
distributor inventories in the eastern portion of the country, our groundwater equipment shipments will be flat compared to the prior year in the U.S., while we will continue to experience robust growth in international markets. Additionally, we estimate that our Fueling Systems sales will grow by 6% to 9% and adjusted operating income will grow by 4% to 7% compared to the third quarter prior year.
Last year during the third quarter, Fueling sales mix was very favorable, resulting in an operating income margin spiking to 24%. Year-to-date, the Fueling operating income margin is 19%, which is 70 basis points higher than the prior year.
While we are anticipating that Fueling's operating income margin will be significantly higher in the third quarter than it has been year-to-date, we are not forecasting that it will match the prior year. Overall, we're expecting our consolidated third quarter sales to grow by 5% to 8% and our adjusted EPS to grow by 6% to 9% compared to the third quarter of 2012.
I'll now turn the call over to our CFO, John Haines.
John J. Haines
Thank you, Scott. As we have previously announced, the company executed a 2-for-1 stock split effective March 18, 2013.
All of the information, commentary and analysis we are providing to our shareholders in the earnings release and this conference call are using post-split share information. Our fully diluted earnings per share were $0.58 for the second quarter of 2013 versus $0.52 for the second quarter of 2012.
As we note in the tables in the earnings release, the company adjusts the as-reported GAAP operating income and earnings per share for items we consider not operational in nature. We believe presenting these matters in this way gives our investors a more accurate picture of the actual operational performance company.
In the second quarter 2013, we made non-GAAP adjustments that totaled about $900,000. These adjustments included $500,000 of expense primarily related to the relocation and other cost of our new engineering center and headquarters in Ft.
Wayne, Indiana; $200,000 related to integration costs of the previously announced Flex-ing acquisition in Franklin Fueling Systems; $100,000 of legal fees incurred in connection with the CARB litigation; and $100,000 in other legal and advisory costs related to potential acquisition transactions. These second quarter 2013 non-GAAP adjustments round to an EPS impact of $0.01.
In the second quarter of 2012, there was approximately $800,000 of cost related to the Pioneer acquisition that also resulted in a $0.01 charge to EPS. So, after considering each of these non-GAAP items, second quarter 2013 adjusted EPS is $0.59, which is 11% higher than the $0.53 adjusted EPS the company reported in the second quarter of 2012.
Overall, the 2013 second quarter revenue, gross profit, operating income, net income and earnings per share were records for any quarter in the company's history. Water Systems revenues were $213.7 million in the second quarter 2013, an increase of $10.9 million or 5% versus the second quarter 2012, sales of $202.8 million.
Sales from businesses acquired since the second quarter of 2012 were $6.2 million, or 3%. Water Systems sales were reduced by $2.2 million, or about 1% in the quarter due to foreign currency translation.
Water Systems sales growth, excluding acquisitions and foreign currency translation, was about 3%. Water Systems operating income after non-GAAP adjustments was $43.3 million in the second quarter 2013, an increase of 6% versus the second quarter 2012.
The second quarter operating income margin after non-GAAP adjustments was 20.3%, an increase of 10 basis points compared to the second quarter of 2012. This margin increase was primarily the result of lower raw material, direct labor and variable costs, partially offset by higher costs for key growth initiatives of the company.
These initiatives include the startup of a pump rental business in the United Kingdom, opening 4 new distribution centers in developing regions, sales and marketing costs for the new artificial lift product line, and the rollout of the Franklin Control Systems high horsepower drive and control products through the U.S. Water Systems distribution channel.
Combined, these initiatives lowered the Water Systems' second quarter 2013 operating income by about $1.2 million. Fueling Systems sales were $49.7 million in the second quarter 2013, an increase of $5.8 million or about 13% versus the second quarter 2012 sales of $43.9 million.
Sales from businesses acquired since the second quarter of 2012 were $3.1 million, or about 7%. Fueling Systems sales were increased by $0.2 million, or less than 1% in the quarter due to foreign currency translation.
Fueling Systems sales growth, excluding acquisitions and foreign currency translation, was about 6%. Fueling Systems operating income after non-GAAP adjustments was $11.1 million in the second quarter of 2013 compared to $9 million after non-GAAP adjustments in the second quarter of 2012, an increase of 23%.
The second quarter operating income margin after non-GAAP adjustments was 22.3%, an increase by 180 basis points compared to the 20.5% in net -- of net sales in the second quarter of 2012. Operating income margin after non-GAAP adjustments increased in Fueling Systems primarily due to fixed cost leverage on increased sales and a favorable product sales mix during the quarter.
The company's consolidated gross profit was $94.6 million for the second quarter of 2013, an increase of $10.3 million or about 12% from the second quarter of 2012 gross profit of $84.3 million. The gross profit as a percent of net sales was 35.9% in the second quarter of 2013 and 34.2% for the second quarter of 2012, a 170 basis point improvement.
The higher gross profit margin increase was primarily due to fixed cost leverage on higher sales and lower raw material, direct labor and other variable conversion costs. Selling, general and administrative expenses were $53.2 million in the second quarter of 2013 compared to $46.8 million from the second quarter of prior year, an increase of $6.4 million or about 14%.
SG&A expense as a percent of sales increased 120 basis points from the prior year. SG&A cost increases related to businesses acquired since the second quarter of 2012 were $1.7 million.
Nearly all of the remaining increase occurred for selling and research and development activities associated with the key growth initiatives I had previously noted. The tax rate as a percentage of pre-tax earnings for the second quarter of 2013 was about 25%, a decrease of about 300 basis points from the second quarter 2012 tax rate of about 28%, primarily due to the completion of income tax audits and the favorable resolution of matters previously under review.
The effective tax rate before the impact of discrete events for the second quarter of 2013 is 28%, which we also believe is a reasonable estimate of the full year 2013 rate. The company currently estimates that total non-GAAP adjustments to full year earnings in 2013 will be approximately $2 million to $2.5 million, resulting primarily from restructuring activities related to the Flex-ing acquisition, the relocation of the company's headquarters and other miscellaneous manufacturing realignments in North America and certain other international locations.
The company will continue to provide quarterly reconciliations and explanations of all non-GAAP related items. The company ended the second quarter of 2013 with a cash balance of $77.1 million, which was $26.2 million less than at the end of 2012.
The cash balance decreased, primarily a result of capital expenditures of $37 million, additional purchase price paid for the Impo acquisition of $5.6 million and normal seasonal working capital needs, offset by the addition of new debt totaling $25 million related to the new corporate headquarters and engineering laboratory being constructed in Fort Wayne, Indiana. The company purchased in the open market about 88,000 shares of its common stock for $2.8 million in the second quarter of 2013.
Additionally, about 196,000 shares of stock with a value of $6.5 million were surrendered in connection with employee stock options, exercise for taxes and the intrinsic value of the stock option. The company has no outstanding balance on its revolving debt agreement at the end of the second quarter 2013 or 2012.
Franklin Electric announced on July 26 that the Board of Directors declared a quarterly cash dividend of $0.775 per share payable August 22, 2013, to share owners of record on August 8, 2013. On July 25, 2013, the Superior Court of California, County of Los Angeles, issued a final statement of decision in the case titled "People of the State of California versus Franklin Fueling Systems, Inc."
In the decision, the court found on behalf of Franklin Fueling Systems and issued a complete defense verdict. This case, which was tried in late 2012 and early in 2013, originated when the California Air Resources Board and the South Coast Air Quality Management District filed civil complaints in the Los Angeles Superior Court against the company in the second half of 2010.
The complaint's related to a third-party supply component, part of the company's Healy 900 Series Nozzle, which is part of the company's enhanced vapor recovery systems installed in California gasoline filling stations. This concludes our prepared remarks, and we'd now like to open the call up for questions.
Operator
[Operator Instructions] And our first question comes from Matt Summerville from KeyBank.
Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division
A couple of questions. First, as you think about your water business and Scott, you mentioned right in the beginning of your comments, about the effort to build out the distribution footprint.
I think in the past, you've sized up the global submersible's addressable market or market availability, somewhere in the range of $5 billion, I don't know if you have a newer figure on that. But I guess I'm trying to get a sense over the last 3 or 4 years, what you've done via M&A, what you've done organically?
How much more market are you now able to address that you were not just a couple of years ago?
R. Scott Trumbull
Oh, well, we are looking at, company-wide, a total addressable market of about $6.3 billion. About $5 billion of that, a little over $5 billion of that, is Water, and about a little over $1 billion of it is Fueling.
As we -- we've tracked acquisition versus organic growth over the last 5 years, we're -- we -- just looking at those numbers, and it was about 60% organic growth and about 40% acquisition growth over that period. And I -- we increased -- we would say that we increased our addressable market when we acquired Pioneer Pump.
That was a new product line, the mobile dewatering systems product line. But generally speaking, we've been using -- we were at about $5.2 billion and we now think we're up to about $6.3 billion addressable market for the company.
We have about a 12% market share -- 12%, 13%, 15% market share. And a little higher, perhaps, in Fueling and a little lower in Water.
And that share has been growing steadily since we entered the pump business.
Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division
As you mentioned earlier, inventory west of the Mississippi looks okay, inventory east, maybe not so much. Are you seeing then a geographic dispersion in terms of price pressure or discounting that we need to be thinking about?
R. Scott Trumbull
Not -- I would say, not -- first of all, we had -- did see in the U.S., more discounting activity at the quarter end in the second quarter this year than we did last year. Somewhat more.
And -- but I wouldn't say that we saw a disparate behavior, in that regard, geographically. There are regions of the country that are just always more price competitive than others.
And that didn't change. But I don't think that we saw -- got concentration of discounting activity.
It just was -- there was just somewhat more pretty much across the board in the U.S. and Canada in the -- at the end of the second quarter.
Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division
And then with respect to the AG irrigation business down slightly in Q2, I -- that doesn't surprise me. How are you thinking about it in the back half of the year as far as comparisons?
And then probably layering in a little bit of the fact that the planting season, I would imagine, overall, got pushed to the right little bit. So what should we be thinking for AG and irrigation?
R. Scott Trumbull
I think we view the third quarter AG irrigation in the U.S. and Canada as a difficult comp.
And as I mentioned, we're -- we would view a flat performance as pretty good in the U.S. and Canada for our AG irrigation business in the third quarter.
And in fact, our forecast is anticipating that it will be off somewhat. Now if you look at drought maps, it's really very telling.
There was a drought in the western part of the United States last year and that is continuing this year. And we're continuing -- we feel that in the West, as I mentioned, our inventories are probably in line.
And demand is -- it's another good year for our products, our AG irrigation products. But last year, much of the eastern part of the United States was in drought.
And this year, it's exactly the opposite. I mean there are -- there's been heavy rainfall, particularly in the southeast.
And that has not -- that's been difficult. And I think coming off such a good year, our distributors prepared for another good year early in the season.
And that, in the East, really hasn't materialized. So I really do believe most of our distributors in the East would say that they went into the third quarter with higher inventory than they would want and that they'll probably be in an inventory sell down, which will have an effect on our sales -- our irrigation sales in the eastern part of the United States in the third quarter.
I might add though, globally, our AG -- or industrial and irrigation segment of our business is up modestly. So while we've been -- we're down modestly overall in that segment in North America, other regions of the world have grown so that we're -- our overall AG business, on a global basis, is up modestly.
Matt J. Summerville - KeyBanc Capital Markets Inc., Research Division
What did you see in the quarter -- this will be my last question, what did you see in the quarter in your grey water business? If you said that and I missed it, I apologize.
R. Scott Trumbull
Okay, our wastewater business was up dramatically, very strong double-digit increases, which resulted in our -- our residential and light commercial segment was up 9% in the U.S. and Canada, driven with our -- our clean water business was pretty flat, where our wastewater business was up quite dramatically.
And it's the same weather patterns that have influenced our irrigation business in the East that helped our wastewater business. Also, we're really running against very easy comparisons in the -- on the wastewater side.
I think you probably know, the industry was down dramatically last year and it's bouncing back this year.
Operator
And our next question comes from Mike Halloran from Robert Baird.
Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division
Then tagging along in that, could we get the same thoughts on the groundwater trends? I mean, exclusive of the AG business, which you've gone into a fair amount of detail on, just the core residential side versus maybe the larger inch products there.
What kind of trends you're seeing across those end markets? And if you've seen any sort of different trends, acceleration, deceleration as you work through the second quarter?
R. Scott Trumbull
Yes, I mean, our waste -- our Water residential light-commercial, Water, wastewater business was up high-single digits on a global basis. So that segment of our business is growing nicely and that's nominal growth.
So I -- if you backed out the currency, it's probably a double-digit increase. Our industrial and irrigation segment, the larger pumps are up 1% or 2% on a global basis.
So most of our growth this year is coming in the residential light-commercial area and we're flat to up modestly in the industrial and irrigation part of the business. And a lot of the growth, on the residential side, as I mentioned, is in wastewater -- the wastewater pumps.
We're also getting really attractive growth performance out of our business in Brazil and a lot of that is smaller residential light-commercial-type pumping systems as well. So I'd say wastewater in North America and residential light-commercial kind of clean Water pumping systems in developing regions with Brazil probably being the biggest star.
Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division
I suppose I should have narrowed down. I was specifically talking about U.S.
groundwater, regular water, not wastewater trends, and how those track through the quarter?
R. Scott Trumbull
Yes, I would say our groundwater shipments in the U.S. and Canada, in total, were up low-single digits.
Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division
And did you see any difference or trends as you tracked through the quarter? Or were those pretty consistent as you worked your way through?
R. Scott Trumbull
You mean, month-by-month in the second quarter?
Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division
Yes, or even month-by-month through the front half of the year and if you saw any change in patterns or anything?
R. Scott Trumbull
Okay. Well, of course, the first quarter is always weaker than the second quarter.
But what -- I would say, we came in pretty close to forecast in our business in the first quarter and pretty close to our forecast in our -- for our groundwater business in the second quarter as well. There's always an uptick at the end of the quarters in both businesses -- in both quarters, I mean.
I mean, usually March is the strongest month in the first quarter, and June is the strongest month in the second quarter, and that was certainly the case this year as well.
Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division
So in other words, you're saying it's tracking pretty consistent with normal seasonality at this point?
R. Scott Trumbull
Yes.
Michael Halloran - Robert W. Baird & Co. Incorporated, Research Division
Okay. And then on the rebranded Cerus business, any update on that piece and where the main efforts are going right now to integrate it with your core product portfolio and how that's progressing?
R. Scott Trumbull
Yes. We are in the process of training our sales force on the water side of our business and our distributor sales forces to sell the Cerus product line of higher horsepower drives, controls, starters.
And in many instances, when somebody -- an end-user buys a pumping system, the water well contractor will drill the well and install the pump and motor. But in many instances, a electrical contractor might be called in to install the drive and control package.
And we're sort of taking a different path. We're training up our distributors to be able to do the entire installation.
And this is being very well received in -- among our customer base. And our sales, our Cerus sales, of course, we haven't lapped full year of ownership yet, but year-on-year, Cerus' sales through the groundwater pump distribution channels are up dramatically.
And we think long term, this is going to be a big area of growth for us. So right now, we're incurring some material extra costs flying people all over the country to training sites to learn the details of this product line, how to install it, how to service it, how to sell it.
But we're very encouraged by the reception that we're getting and the early sales results.
Operator
And our next question comes from David Rose from Wedbush Securities.
David L. Rose - Wedbush Securities Inc., Research Division
A couple of questions that I may have missed here. It seems like you talked about additional distribution in Bogota, but you didn't mention anything in India.
Did I miss that? Has that been pushed out?
And Australia, I don't think you mentioned that. And then into U.K., you have 4 locations up.
The last time we spoke that you were potentially thinking about a fifth location. Maybe you could provide us some thoughts on your expansion into the back half of this year.
And then, as it relates to your guidance on that dewatering business, it's clearly a higher margin business for you. So what are your thoughts as you -- what went into your thoughts, I guess, is a better way to ask in terms of your guidance for the third quarter on the margin side, given that you probably have a meaningful lift on your watering margin business?
R. Scott Trumbull
Okay. First, we are -- we indicated, I think, that we're opening -- actually, we're opening 5 new Water Systems -- or 5 new distribution centers.
Four of them are Water Systems distribution centers in developing regions, including São Paulo, and Bogota, Zambia and Delhi, India. And all of those will be opened by the end of this year.
And they're -- we're on track with acquiring the real estate, hiring the people and starting to fill the warehouses and get feet on the street to sell those products, bearing in mind that most of our groundwater shipments are really emergency replacement shipments. Difficult to predict the precise mix of product that needs to be available in the market to serve it well because of the emergency replacement nature of the demand pattern.
So when we have a distribution center in a region of the world, we always see a significant increase in sales because of the improved availability of our product. And so we -- we're kind of identifying those large developing markets that we believe can justify the overhead of a Franklin distribution center and we're building out those distribution centers in those markets.
And these are the 4 that we're opening this year. So we're excited about having these things up and operating as we go into next year.
Another initiative of the company has been to enter the pump rental business. And we elected to enter the pump rental business in the U.K.
because, quite frankly, we have the -- we were approached by an experienced management team and -- that has deep knowledge of the pump rental market in the U.K. and contacts, et cetera, and we felt that we could -- we should fund them, because we had an interest in entering the pump rental market anyway, and this was an opportunistic event that came along and we knew the U.K.
is a fairly large pump rental market. It was a good place for us to get exposed to this business.
We've looked at it in the past. It is -- pump rental is a highly profitable, high-EBITDA margin business if done well.
And we have opened actually 3 distribution outlets in the U.K. with the fourth on the books.
And we're expecting, as I think we said, that we'll be at breakeven as we go into the fourth quarter with these and we would expect them to be a contributor to our earnings as we go into 2014, these particular outlets in the U.K., a contributor. And if -- as we learn the business, we would expect to expand this business both in the U.K.
and in select other markets -- international markets around the world. We don't really have a plan right now for entering the pump rental business in North America where we have strong distribution and a good customer base.
But in the international markets, we think that, that's the way to build distribution in those markets. So those are the kind of distribution-related initiatives of the company right now.
Was that responsive, David?
David L. Rose - Wedbush Securities Inc., Research Division
Yes, that's helpful. You didn't -- I think there's one other point we hadn't heard in the call is a little bit more color on the artificial lift stations, if I may ask?
R. Scott Trumbull
Yes. We have -- most of the people who follow the company know Franklin has developed a artificial lift system, a system for dewatering oil and gas wells.
Many oil and gas wells, in order to function, have to have the groundwater pumped out of them. And most the, Franklin included, groundwater pumping companies have not had systems that would operate at the depths that are required to dewater an oil and gas system.
We've developed a cost effective, very reliable system for doing that. The product was in beta test last year.
We declared it commercial at the beginning of this year. The way our customers in this market work, they are interested in our system but are interested in seeing it operate in a few wells that they may own for a year or so before they'll agree to go with it broadly.
So we have known that 2013 was going to be a year of making a few installations -- demonstration installations with customers. We think that these installations are going well.
We're encouraged that in the back half of this year, we have several installations going in with customers that, with success, could become very material customers for Franklin in probably the back half of 2014 and beyond. So we see this business building as we go into 2014 and becoming a more material part of the company.
But for 2013, it's really not -- it won't really be an important part of our growth story in 2013.
David L. Rose - Wedbush Securities Inc., Research Division
But no change in your outlook for the first quarter?
R. Scott Trumbull
No, no change in our outlook.
Operator
Thank you, and that is all the time we have for questions. I would now like to turn the call back to CEO, Scott Trumbull, for any further remarks.
R. Scott Trumbull
Thank you very much for attending our conference call, and we look forward to speaking with you at the end of our third quarter.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program.
You may all disconnect. Everyone, have a great day.