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Edited Transcript of FELE earnings conference call or presentation 23-Apr-19 1:00pm GMT

Q1 2019 Franklin Electric Co Inc Earnings Call

BLUFFTON Apr 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Franklin Electric Co Inc earnings conference call or presentation Tuesday, April 23, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregg C. Sengstack

Franklin Electric Co., Inc. - Chairman, President & CEO

* John J. Haines

Franklin Electric Co., Inc. - VP & CFO

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Conference Call Participants

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* Edward James Marshall

Sidoti & Company, LLC - Senior Equity Research Analyst

* Matt J. Summerville

D.A. Davidson & Co., Research Division - MD & Senior Analyst

* Michael Patrick Halloran

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst

* Walter Scott Liptak

Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Franklin Electric reports first quarter 2019 sales and earnings conference call. (Operator Instructions) As a reminder, this call will be recorded.

I would now like to introduce your host for today's conference, John Haines, Chief Financial Officer. Please go ahead, sir.

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John J. Haines, Franklin Electric Co., Inc. - VP & CFO [2]

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Thank you, Chris, and welcome everyone to Franklin Electric's First Quarter 2019 Earnings Conference Call. With me today is Gregg Sengstack, our Chairman and CEO.

On today's call, Gregg will review our first quarter business results, and I will review our first quarter financial results. When I'm through, we'll have some time for questions and answers.

Before we begin, let me remind you that as we conduct this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which could cause actual results to differ materially from such forward-looking statements. A discussion of these factors may be found in the company's annual report on Form 10-K and in today's earnings release. All forward-looking statements made during this call are based on information currently available and except as required by law, the company assumes no obligation to update any forward-looking statements.

With that, I will now turn the call over to our Chairman and CEO, Gregg Sengstack.

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, President & CEO [3]

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Thank you, John. 2019 started slightly ahead of our expectations, however, midway through the quarter, business conditions deteriorated meaningfully, particularly in the North America groundwater market. The resulting poor sales, both in our Manufacturing and Distribution segments, negatively impacted mix, delevered our fixed cost base and reduced our year-over-year operating income by over 40%.

In the U.S. and Canada Water Systems business, large dewatering pump sales were up over the last year but below expectations due to customers pushing out about $2 million of orders into the second quarter. Service pumping sales were up as well. While groundwater pumping sales declined 5% on the back of lower intersegment transfers to our Distribution segment, sales of third-party distributors were up over the last year.

Outside the United States, we experienced somewhat of a reversal of last year's Q1 with better-than-expected growth in Brazil and the Asia-Pacific regions partially offsetting weak conditions in Europe, the Middle East and Central America. Europe is slow and the Turkish market is working through the dramatic devaluation in the lira that began last summer.

In Central America, political instability and changes are negatively impacting local market demand, in particular, in Mexico. John will get into more details but weakening currencies reduced our International Water reported revenue by 11% as compared to the first quarter of last year. While our reported top line for Water Systems was down 2%, the mix shift resulted in operating income down over 20% in this segment.

Our Fueling Systems business delivered solid results. Sales were up double digits in the U.S. and Canada and would have been even higher but for the inclement weather delaying planned station builds. We believe we continue to gain share. Our business in China recovered more slowly-than-expected after the Chinese New Year. However, as station operators continue to invest in government-mandated upgrade to double-wall underground piping systems, we remain confident that we will achieve our 2019 planned revenue in the country.

In China, we continue to benefit from station operators choosing to extend their upgrades beyond piping systems to pumping and leak detection systems as well. Sales in India and EMEA were below expectations, principally due to the delays in build programs and credit issues in Africa. Sales in Asia, outside of China, rebounded nicely and business in Latin America grew as well.

Fueling operating income was down year-over-year due to planned investments in the sales and marketing support of the overall business. Turning to Distribution. This end customer-facing business was the one most dramatically impacted by the extreme weather and high levels of precipitation experienced in many regions of the U.S. Weak demand compressed margins, increasing the expected first quarter loss in this highly seasonable business by several million dollars. All indications are there is plenty of work for contractors but that work is being delayed by overall wet conditions.

That brings me to our outlook for the balance of the year, starting with Distribution. We believe that more normal weather conditions will lead to a strong recovery in our Distribution business. While still

early, business in April is ahead of plan. What is less clear is when our groundwater manufacturing business will strengthen. With a late first quarter slowdown, channel inventories may be above normal. Further, if the past is an indicator, promotional activity, meaning lower pricing, will increase in the short term. We are seeing some evidence of this already. Again, overall, the business climate in the U.S. is robust, and we are encouraged by the positive feedback we have gotten from the field.

The outlook for our U.S. surface pump business is good as is the demand for our large dewatering pumps where we have focused considerable attention on expanding and diversifying our customer base, both by end market and geography. While we expect the European water market to continue to be soft, at least in the first half, we are pleased with the traction we are getting with our expanding line of pressure boosting systems. We believe our European water business is doing better than most. With respect to Turkey, given the high concentration of pumps used for ag, the second quarter will provide meaningful feedback as to whether the market has worked through the currency devaluation that started last summer.

Argentina continues to deal with a similar situation. On the other hand, we are encouraged with the strong start to the year in Brazil and Asia Pacific. In our Fueling business, the outlook remains encouraging. The team is positioned to carry forward the strong start in the U.S., our China revenues are recovering back to planned levels and outside of Europe, we generally see good demand.

Therefore, at this point, we believe our consolidated organic growth will be 4% to 6% for 2019. With our Q1 operating income below plan, we have elected to take cost actions to help offset the lower profit realization. In addition, we've reevaluated our price realization, our input cost inflation expectations, our ongoing cost reduction and productivity initiatives as well as our adjusted fixed cost for the balance of the year. Based on this evaluation, we are reaffirming our 2019 earnings guidance of $2.37 to $2.47 per share.

I will now turn the call over to John to discuss the numbers in more detail. John?

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John J. Haines, Franklin Electric Co., Inc. - VP & CFO [4]

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Thanks, Gregg. Our fully diluted earnings per share were $0.19 for the first quarter of 2019 versus $0.45 for the first quarter of 2018. Restructuring expenses were $1.1 million and were related to branch consolidation and other asset rationalizations in the Headwater Distribution segment and continued miscellaneous manufacturing realignments in the Water Systems segment and had a $0.02 impact on the earnings per share in the first quarter of 2019.

First quarter EPS before the impact of restructuring and expenses therefore was $0.21 compared to 2018 first quarter EPS before restructuring of $0.45.

Specifically related to the first quarter of 2018, the company recognized about $5 million of discrete tax benefits related to certain deferred tax positions, which lowered our effective tax rate and created a tax benefit of about 9% in that quarter. The discrete tax benefit and lower tax rate improved earnings per share in the first quarter of 2018 by about $0.11 and without it, our first quarter 2018 earnings per share would have been $0.34.

First quarter 2019 sales were $290.7 million compared to 2018 first quarter sales of $295.6 million, a decrease of 2%. Sales revenue decreased by $12.9 million or about 4% in the first quarter of 2019 due to foreign currency translation, and we estimate this revenue decline lowered our earnings per share in the first quarter by about $0.03 versus the first quarter of 2018.

Water Systems sales were $188.4 million in the first quarter 2019 versus the first quarter 2018 sales of $192.6 million. In the first quarter of 2019, sales from businesses acquired since the first quarter of 2018 were $4.3 million. Water Systems sales decreased about 6% in the quarter due to foreign currency translation. Water Systems organic sales increased about 2% compared to the first quarter of 2018. Water Systems operating income was $19.2 million in the first quarter of 2019 compared to $25.1 million in the first quarter of 2018. Water Systems operating income was lower in the first quarter primarily due to lower sales volume, the result in lost leverage on fixed cost, adverse product sales mix and higher freight cost.

Fueling Systems sales were $60.2 million in the first quarter 2019 compared to first quarter 2018 sales of $58.6 million and were a record for any first quarter. In the first quarter of 2019, sales from businesses acquired since the first quarter of 2018 were $1.5 million. Fueling Systems sales decreased about 2% in the quarter due to foreign currency translation. Fueling Systems organic sales increased about 3% compared to the first quarter of 2018. Fueling Systems operating income was $12.3 million in the first quarter of 2019 compared to $13.7 million in the first quarter of 2018. Fueling Systems operating income was lower in the first quarter as growth from higher sales was offset primarily by higher fixed cost.

Distribution sales were $53.3 million in the first quarter 2019 versus first quarter 2018 sales of $56.2 million. In the first quarter of 2019, sales from businesses acquired since the first quarter of 2018 were $2.8 million. The Distribution segment organic sales were down about 10% compared to the first quarter of 2018, primarily due to unfavorable weather conditions. The Distribution segment recorded an operating loss of $4.3 million in the first quarter of 2019 compared to a $0.8 million loss in the first quarter of 2018. The loss before the impact of restructuring expenses was $3.7 million. The Distribution loss was primarily due the lower sales volume from unfavorable weather, higher product cost not fully offset by sales price increases, adverse geographic and product sales mix and lost leverage on fixed cost from lower sales.

The company's consolidated gross profit was $89.5 million for the first quarter of 2019, a decrease from the first quarter of 2018 gross profit of $99 million. The gross profit decrease was primarily due to lower sales and other impacts previously mentioned. The gross profit as a percent of net sales was 30.8% in the first quarter of 2019 compared to 33.5% in the first quarter of 2018.

Selling, general and administrative expenses were $76.3 million in the first quarter of 2019 and 2018. SG&A expenses from acquired businesses was $3 million, and excluding the acquired entities, the company's SG&A expenses in the first quarter of 2017 were $73.3 million, a decrease of about 4% from the first quarter of 2018 due primarily to the effect of foreign currency translations in the first quarter of 2019 versus the prior year.

It's important to note that management's operating plan earnings per share from quarter was at least $0.10 lower than the Street's consensus. So although the first quarter results are still a significant miss to our expectations, as we have acknowledged, they are not as large a miss as that to the Street consensus. We note this to provide context for our continued belief that we can achieve our full year 2019 guidance of $2.37 to $2.47.

Also, as we've noted before, weather in extremes can drive significant variability in our results, especially in the first quarter, which will always be seasonally lower and more highly subjective to lost fixed cost leverage when revenues decline.

During the first quarter of 2019, the company changed the management reporting for certain transfers of manufactured products between the Water and Fueling segments. This change was made to better align the production of certain products by reportable segment and sales to third-party customers. To consistently compare 2019 results to the prior year, certain 2018 net sales and operating income reclassifications were made. These reclassifications resulted in lowering first quarter 2018 results of Fueling Systems and increasing first quarter 2018 results of Water Systems net sales by about $0.8 million and operating income by about $0.1 million versus what was reported in this period last year. There is no impact on the company's previously reported consolidated financial statements.

In 2019, we believe our effective tax rate, net of discrete events, will be between 18% and 20%, significantly higher than the 2018 effective tax rate of about 12%. This higher tax rate is primarily due to the inclusion in 2018 of discrete tax events that effectively lowered our tax expense for the full year. We do not believe these events will occur -- will reoccur at the same level in 2019.

The company ended the first quarter of 2019 with a cash balance of $54.4 million, which was $4.8 million lower than at the end of 2018. Through our company-wide focus on working capital reduction, our operating cash flow improved by $24 million as compared to the first quarter of last year. The company's working capital ratio, which is inventory plus accounts receivable less accounts payable divided by the trailing 12-month sales, is 480 basis points lower than it was at the end of the first quarter 2018.

As of January 1, 2019, the company adopted the new lease standard and has recognized additional operating liabilities of about $25 million for its outstanding operating leases with corresponding right-of-use assets of the same amount. The impact of this new accounting standard is noncash in nature and does not affect the company's cash position. The company does not consider the impact of this standard to be material to the consolidated results of operation or to the cash flows.

The company had $96 million in borrowing on its revolving debt facilities at the end of the first quarter of 2019 and $119 million in borrowing at the end of the first quarter of 2018. The company purchased about 58,000 shares of its common stock for approximately $2.5 million in the open market during the first quarter of 2019. As of the end of the first quarter of 2019, the total remaining authorized shares that maybe repurchased is about 1.3 million.

On April 22, the company announced a quarterly cash dividend of $0.145. The dividend will be paid May 16 to shareholders of record on May 2.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Mike Halloran with Baird.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [2]

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So let's talk about that ramp from 1Q to 2Q. Prepared remarks made it very clear you were expecting what seems to be a bigger ramp from 1Q to 2Q than normal. Other than some normalization in weather, can you help line out some of those other factors that are driving that?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, President & CEO [3]

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Sure, Mike. Again, I think the normalization of weather given the seasonality of the Distribution business is more pronounced than in our -- before we had Distribution. Also, with the Fueling business ramp from 1Q to 2Q with China and also with the North America business, again, there's been some delay in construction activity. So it gets back to your normalization. My sense is -- again, there's a comment in the prepared remarks, if you look at Europe, I think that's going to be kind of sideways so we're not seeing -- we're not banking on much ramp there. We are thinking that we're going to see some continued strength in Asia Pacific and in areas of South America that I didn't specifically call out. And we're seeing a slowdown in Mexico, we think that's going to recover. Argentina, a little bit more cautious on. But Brazil seems to be doing overall better. And then also with the -- back to North America, the dewatering space, we had some push out, which we expect will be delivered in Q2. So those are some of the smaller items that add up to why we see the ramp -- or why we're expecting a ramp in Q2.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [4]

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So is the 1Q shortfall being essentially consumed in 2Q? Or is it going to take 2Q, 3Q to normalize out at this point?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, President & CEO [5]

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Yes. I'd be careful about saying all of Q1 is going to magically come back in Q2. If we get some normalization; then there hasn't been a lot of lost time in the field. If you don't, there's going to be some days where people basically lost contractor days. But we expect that this is going to be picked up through Q2 and Q3.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [6]

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And then a question on profitability, more of a longer-term thought process. Distribution side and the Water side, the margins have been a little pressured lately. So could you just lay out some thoughts for both segments. How you're looking at those long-term margins at this point for Distribution, for Fueling?

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John J. Haines, Franklin Electric Co., Inc. - VP & CFO [7]

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Yes. Mike, it hasn't changed on the Distribution side. We've kind of said from the beginning that we expect an operating income margin of 4% to 6% in Distribution. We've not achieved that. Many of the efforts that the team has underway around branch rationalizations and other kind of fixed cost rationalizations that are occurring this year and will continue to occur are all directed at the idea of operating income margins being below our expectations. Now the business unit, as you know, from kind of the get-go has had a difficult volume environment. This quarter didn't help that of course. So we're not leveraging the fixed cost base in that business unit the way that we want to either. So it's a little bit about where are the SG&A opportunities and other fixed cost opportunities on the margin side but a lot of it is -- we were expecting more volume here and that more volume would've levered the fixed cost basis there. It would've provided a higher margin as well. I don't think we'll get to the 4% this year. I think we have a decent chance of getting close to the 4%. But those goals that we've established when we did these acquisitions and created this segment are intact and continue to be the same.

On the Water side, as we've mentioned, you've seen a prolonged mix shift going on in Water. We saw it again in this quarter away from groundwater pumping to greater surface pumping. Some of the international units are underlevered meaning that there is a fixed cost base. They're not generating the kind of revenue and profit that we need. I would not give up on that mid-teens operating income margin. I think the range is probably more like 15% to 17%. We had said for a long time 16% to 18%. But I think 15% operating income margins in Water are doable for the longer term.

And then in Fueling, we will have swings that will be product and geographic mix-driven. But generally, we feel pretty good about that kind of low 20s to mid-20s type range on a full year basis. And we don't really see anything right now that would meaningfully deteriorate that for the long term.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [8]

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That's super helpful. And the last one on the cost action side that you guys referenced. Just some help on what exactly -- what kind of actions you're actually taking as well as timing and potential benefits.

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John J. Haines, Franklin Electric Co., Inc. - VP & CFO [9]

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Yes. So the way we approached the first quarter in our business unit reviews, Mike, was to really look at it by business unit and then focus on recovery plans. So the idea was if you missed your operating income target by X dollars then what are you going to do between April and December to try to recover that. So those actions are very different by business unit. Some business units, it's just smooth sailing. They're on their plan and they're moving forward. I hesitate to give you an exact number because there are a variety of different actions, people reduction, not filling open positions, cutbacks in kind of common SG&A categories. There's was a whole litany of actions, Mike, that are on the sourcing side that will be more impactful on gross profits than they will necessarily on SG&A including tariff offset ideas, all kinds of things like that. So part of our confidence in maintaining our full year guidance is not only the volume recovery that Gregg mentioned. That's a critical, critical part of it. But knowing that we've got some of these cost actions and other sourcing actions through the balance of the year that we think will contribute to both a better variable contribution margin and a lower SG&A run rate.

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Operator [10]

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And our next question comes from the line of Edward Marshall with Sidoti & Company.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [11]

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So I just want to follow up on that last question. You talked about some of the actions that you were doing and you're maintaining your sales guidance and you're seeing additional cuts to costs. I'm curious, are you -- with maintaining -- simply just maintaining the guidance for the year. And you've talked about picking up all the shortfall in Q1, I'm curious why you're maintaining just the guidance? And why it's not actually going up from an EPS perspective?

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John J. Haines, Franklin Electric Co., Inc. - VP & CFO [12]

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Well, I guess, Ed, maybe the way I'll take a crack at answering that, as I pointed out in my prepared comments, our expectation was -- for the first quarter was already below what the Street consensus was just because we know in part that the first quarter can be highly volatile. So generally, from our perspective, we missed the first quarter by, call it, $0.10 to $0.12 versus what our operating plan expectation was. So to your question, we think that the $0.10 to $0.12 and combining the 2 actions, the primary actions, the recovery of volume and some of the cost takeouts, we think that we can claw back a decent portion of that in the last 3 quarters of the year. I don't think we're ready yet to say that we think we can go beyond that. Now I think the thing that might drive us beyond that, Ed, would be better volume recovery than what we're kind of assuming, which is, of course, possible when you look at our first quarter results. But we're not -- I would say, we're not really confident in committing to that right now. And our commitment is the $2.37 to $2.47 and even though we had a really bad first quarter, our general thinking is that we can get back to that.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [13]

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Got it. And I guess since you opened the door and you commented on the internal expectations versus consensus for Q1. Can you talk about -- I mean, the consensus is sitting at about $0.74 for Q2. Can you kind of comment on Q2 and maybe your internal expectations, so we're not sitting at this situation again in Q2.

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, President & CEO [14]

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Yes. I would just say, Ed, it's hard for us to give quarterly guidance, and I think the first quarter was a poster child for why we don't want to give quarterly guidance. But relative to the Street's expectation right now, we would say that that's a reasonable expectation and we expect to be slightly better than that for the second quarter.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [15]

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Got it. Got it. Okay. So weather, when you talk about weather impact on the sales for Water, I think you mentioned a $2 million pushout, but I can't imagine that was all of it. Can you kind of talk about or maybe quantify the weather impact that would have affected the groundwater pumping systems in Q1?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, President & CEO [16]

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Sure, Ed. Okay. So 2 different pieces of information. The $2 million pushout related to large dewatering pumps, which is really unrelated to weather, more related to the capital cycles of the rental companies that we sell to. We've seen those get a little less lumpy and a little bit more smooth through the year, which is helpful for them and helpful for us certainly from a production point of view. So that was the pushout I was referring to there.

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John J. Haines, Franklin Electric Co., Inc. - VP & CFO [17]

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The early data that we have on the market is that unit sales in the groundwater channel were down somewhere between 12% and 15% in Q1, that would be shipments for manufacturing. That's the best data we have. So you can figure the dollar sales because there's been some price increase, we may be down 10% and probably double that in March. So I mean that's why what we saw was the really a great start in January, we felt things were going well and then it just deteriorated very quickly in the back half of the quarter. And Ed, again, it gets backs to guidance thing because last year, you may recall, first quarter, we were up 23% in operating income and we raised our guidance and I think where the full year is going to be up. And we ended up taking it back basically to the midpoint of where we actually started the year. So we're always -- lesson is learned on Q1 is it's just a -- it's a tough -- there's a lot of volatility in Q1 and middle of the year, we'll have more information and greater clarity. So we just still don't want to get too far ahead of ourselves or behind on Q1 results.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [18]

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Got it. And you referenced some competitive pressures in Water. And I kind of want to look at it in context of 2 things: one, maybe -- you talk about price. It looks like you're getting that 2% to 5% that you would normally get based on some of the comments you just made. But secondly, I think -- I wanted to talk about the third-party distributors up, and I know I'm kind of cross-referencing between Distribution and Water, but maybe if we could talk about that for a second. Are you -- because of your acquisition in Distribution, are you able to manage your own supply chain a little bit better? Which I guess is the right -- the answer is yes, but third-party distributors up, does that give you some pause because it doesn't seem like that that's what you did with your internal distribution? So just kind of clear that up for me if you could.

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, President & CEO [19]

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Sure. Let me take you through kind of -- well, I think, there are 3 parts of the question. So with -- the reason we want to give indication of the third-party is exactly your point is that, one of the opportunities we have by having this Distribution segment is the supply chain aspects of it. That's really the very interesting part of the value add in this equation. And one that now Headwater is on one ERP system nationally, we're on a different ERP system because Headwater is designed for Distribution and our's is designed for Manufacturing. But at least now we have one system in both instances and we -- they can communicate with each other, and we see real opportunity there in the supply chain. So you are correct. That's why there's really no incentive for Headwater to "buy ahead" and in fact, there's more incentive for them to reduce their capital structure to improve returns on capital. So we use third-party -- our sales in third-party distributors is more of a barometer of how Franklin's business is in channel. And as you commented, our sales to third-party distributors in the channel were up in the Q1. And given the backdrop that we gave you for that channel, we feel pretty good about that. That said, is that -- these distributors buy and they are not may be in the regions that were impacted by weather as the Headwater, which is more of an upper Midwest and West, which is -- we really got clobbered by the heavy rains and then snowpack and snow in California. California, a lot of water, which is good news for the long term, but for the short term, it was tough. So we -- if you look at our sales of third-party distributors and they're up. So we feel good. We feel like that means we are managing the channels well. We are managing the relationship of -- our relationship with Headwater, our relationship to the rest of our Franklin distributors, the people who've distributed Franklin's product in a good way. So that's why we give that data point.

Now with reference to the competitive nature, certainly, in Distribution, margins -- pricing was tough and there wasn't a lot of pump sales in the first quarter, which impacted margins. But more broadly what I expect is that because manufacturers had a slow start in Q1 and they've got inventory in Q2, we're going to probably see more promotional activity from manufacturers to distributors. And as we've seen some evidence already, principally in small pump systems, not so much in larger pumps yet but that remains to be seen. So I caution people that it's one of those situations where you get some price cutting and people try to go for share and then they found out we're not going to get share and things go back to normal. But everybody has numbers to it and so that's what we're expecting maybe a little tougher for our Manufacturing segment in Q2 or -- in that channel.

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Operator [20]

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And our last question comes from the line of Matt Summerville with D.A. Davidson.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [21]

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Several questions. First, can you just provide a little bit of end-market color for your Water-facing businesses in North America in the first quarter? And what you're seeing in April thus far between having the residential versus ag irrigation. And to the extent it makes sense, Gregg, and of course, if you want to work in some regional comments specific to the U.S. that would be helpful as well.

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, President & CEO [22]

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Sure, Matt. As follow-on to Ed's question there is that what we're seeing is residential was down, ag was down more in Q1. We're seeing out-the-door sales through our Distribution segment moving ahead of our plan in the first 3 weeks of April, which was first 3 weeks and we know doesn't make a quarter. But that's encouraging.

And I think to your question about regional, I mentioned earlier, California, which is a -- it is a large pump market. It's also a pump market, it's a large line shaft -- these are -- the motors are on the surface, they're driving a long shaft down to a pump in the -- down in the aquifer. Franklin Electric does not manufacture line-shaft turbine equipment but our headwater business sources line-shaft turbine equipment from other pump manufacturers. So we expect, the California market, given reservoirs are above normal, 150% snowpack, basically, no drought on the map, we'll have a very slow start to the pumping business because there's so much surface water available. The surface pumps will be available, but for submersibles, not so much. Outside of California, if you look at the U.S. drought map, if you look at the beginning of the year, there is still significant drought in the Southwest, that's basically all gone. So as we're going into growing seasons or the planting seasons, excuse me, you're -- it looks like the surface moisture is in pretty good shape. So I would think that would speak well to farmers assuming things dry out enough that they can get into the fields. Is that what you are looking for, Mike -- Matt, excuse me?

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [23]

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Yes. Yes. And I guess just more specifically on ag, I mean, it's been pretty well documented, the magnitude of flooding that we've had in the Midwest, upper Midwest, which I would think, statistically speaking, are pretty important overall ag markets. And to your comments on I guess the pacing of April, are you actually seeing that piece of the business start to recover? Or is it too early to tell just given the things have been, again, relatively wet and relatively cold? I guess I'm trying to handicap back to John's comment around being in the neighborhood of $0.74 in the fourth quarter. I'm looking at it maybe in the other direction in terms of how much risk there is potentially to that outlook.

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, President & CEO [24]

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Sure, Matt. You've covered Franklin for a number of years and I think you've captured the uncertainty pretty well. Keeping in mind the broader perspective of Franklin as a global business, half of our manufacturing revenues outside of United States were sales of our manufacturing product but within this pro channel, which is important as where we're most vertically integrated and a profitable business. Sure, there is a continued pushout because people just can't get in and repair systems anytime soon. And there's some level of "Missing the season," in the Upper Midwest, that would be a negative impact, no question about it. And even juxtapose that with -- as it could be drier in the South and the Southwest, and it's just too early to tell.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [25]

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And then I guess, Gregg, and if you already said this, I apologize. But what is your overall assessment of channel or inventories in the channel both as it pertains to res and ag? If there is any sort of read on that. And I guess, maybe, are you able to talk about the type of price competition you're already maybe beginning to see as I would sort of think it's a little maybe even early on in the quarter to already be starting to see some of that?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, President & CEO [26]

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Yes. I'd said that, Matt, earlier mentioned that we expect this in units, volumes for the data we have, which is somewhat limited, as you know. We say that residential-type product units down maybe 12% range. Ag maybe down around the 15% range in units. So a little less -- down in dollars because of the price increases year-over-year, so call it 10% to 12%. And that's what we saw in Q1 and I would say that it was down even much more in March. As to competition, we've just seen some flyers come out of Street on some promotions for the smaller pumps. And don't know how far it's going to go? How broad it's going to be? Just it was, to your point, a little early in the quarter, but we saw some of that and so -- or saw evidence of that. So I just -- having been through this before, what happens that you see as if there's a slow start for manufacturers and they see some pretty heavy promotion. And you can see some pretty heavy promotion in Q2, maybe not, maybe, but I'd just caution people that we've seen in the past and so we may see it again in this year.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [27]

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And then maybe just one other quick one on Brazil and then one on Fueling. With respect to Brazil, this is the first time that I could remember in a number of quarters, you guys actually speaking positively about that business and, albeit, perhaps coming off of a lower depressed base. Are you convinced at this juncture, Gregg, that, that business has turned the corner? And then with respect to Fueling, can you maybe review your revenue performance in China, particularly as are related to the environmental standard? And whether or not that standard is expected to drive incremental growth in China? Or is China sort of flattening out for -- frankly, for the time being there?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, President & CEO [28]

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Sure. I'll take your first question first, Matt. Brazil, we're powering along for years as you know in Brazil, with the double-digit local currency organic growth and then I guess it was about 2.5 years ago, John, we started -- I mean, Brazil really kind of just deteriorated. And yes, we have a good start to the year. And am I confident? I'm certainly more confident than I was 3 months ago. We'll see how the year unfolds. We're seeing -- we're just seeing a good base in Brazil and it's off of -- as you pointed, off of a lower base. So we're encouraged by that. With respect to China, this is a -- John will share the numbers. It will be great if share them on what we think is going to be base versus incremental on the mandate. John?

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John J. Haines, Franklin Electric Co., Inc. - VP & CFO [29]

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Yes. I mean, Matt, in China, we had kind of said $50 million to $60 million opportunity for Franklin in 2019. We had thought that, that opportunity would be in the same range in 2020 as well. The team is relooking at some of the longer-term forecasts for China. But the 2019 estimate is slightly incremental to 2018. It's not gigantically larger than 2018, but we think we can be more in the mid- to upper 50s there and perhaps beyond that. Unfortunately, as Gregg pointed out, it didn't start really well in China. There was a bigger pause on the New Year than what we have seen in the past or kind of recovery from the New Year, if you will. But we still think that $50 million to $60 million is the right number and we think it will be slightly incremental to what 2018 levels were.

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Operator [30]

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And we do have an additional question from the line of Walter Liptak with Seaport Global.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [31]

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Just to follow on to Matt's question, talking about China. Just -- if you could just talk about the quarter and how things progressed during the quarter. And then the timing of the recovery in China Fueling Systems.

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John J. Haines, Franklin Electric Co., Inc. - VP & CFO [32]

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Yes. So the quarter started fairly well in China for us, Walt. As you know, in China, when the New Year begins, the whole country pretty much goes off-line. And the question was then how quickly it will come back, if you will. And what surprised us a little bit in the quarter was that kind of come back post -- we're all back from holiday now, time to go back to this business and that didn't materialize between the end of the holiday and the end of the quarter the way we thought it would. So we're prepared. We don't believe we're losing any market share. We have very strong customer relationships there. So we believe -- and the work is still there. So there's nothing that is saying that we're missing the count of station conversions or anything like that. So we believe it's all still there and all available for us to win in the last 3 quarters of the year. So that's our view right now.

The only thing that's really changed in our view other than the kind of the less-than-expected first quarter is we have been kind of talking this $50 million to $60 million range for this year, next year and then maybe even beyond. And I think we're a bit more cautious about the beyond at this point in time. Just, we need to see how many stations actually get converted? What the competitive environment looks like? What's the commitment going to be from some of the major oils? The conversions will start moving west in the country, which means we're going to start moving more rural. And that's going to create a whole bunch of different issues for us and other manufacturers, not least of which is the whole compliance and our other -- as you move more rural and west, are you committed to the same spec -- quality spec for this equipment as you would be in the major cities. And we have experienced in China with other conversions where we have seen while the further from Beijing and Shanghai you move the less adhere to our all the technical specs and requirements. So those are all factors that are in our thinking for fueling in China.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [33]

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Okay. And just to be clear, the China part of the business, we're starting to see that recovery in the second quarter or are we still waiting?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, President & CEO [34]

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Yes -- no -- we're starting to see that recover. Yes, seasonally a better time, yes.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [35]

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Okay. All right. Great. And just in the Turkey and Argentina markets, I know these are meaningful. I wonder if you could size those for us in may be percentage or millions of dollars, just how much credit goes through that?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, President & CEO [36]

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Yes. Yes, I mean, today's exchange rates, the business in Turkey is about a $30 million top line business and the business in Argentina will be in the $18 million to $20 million kind of top range -- top line business. The Argentinian economy is kind of struggling through their currency devaluation. There's an election coming up, so there's political uncertainty now that crept into Argentina. So all those things generally are bit of a pause for the business and economic climate.

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Operator [37]

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And we do have a follow-up with the line of Edward Marshall with Sidoti & Company.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [38]

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I wanted to ask this earlier, but -- on fueling and you mentioned -- you had some comments about the conversions moving west and so forth. As I look at your 3% sales growth, I look at another U.S. major competitor here, up 20%. I'm trying to get a sense as to -- on their fueling business, I'm trying to get a sense of what's the differences there. I know they make additional equipment that you don't make. Has that conversion started to move west? And that's kind of displacing you. Are you seeing additional issues with tariffs that you are working around? I'm just trying to get a sense of the disparity between the 2 results?

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, President & CEO [39]

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Can't really comment. I haven't seen releases from -- or if they're out yet for Dover or Fort or I guess, one of them is out. These -- their businesses are substantially larger than ours and they're aboveground with the dispensing piece of their businesses. They may be seeing some benefit from the EMV deadline. I really can't comment too much to their's. We -- but in our business, we feel very comfortable with our plan and we feel very comfortable with the success of our team in gaining wins in the marketplace.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [40]

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So this is less about competition and more about just timing like you said? Okay.

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, President & CEO [41]

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Again, it's difficult for me to respond. I haven't seen the context of their comments. I would just say that if it was specific of China, again, I don't know if they're comparing apples and oranges here because they're looking at aboveground equipment as well as the below ground. We are strictly in the belowground equipment in that upgrade, but for the fuel management system. So it's difficult for me to draw a comparison.

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John J. Haines, Franklin Electric Co., Inc. - VP & CFO [42]

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And I just don't want to imply that it's not competitive. It's clearly very competitive but to date, we don't have any information that would say wow, we're losing share to this competitor or that competitor or as we go into some of the western provinces, we're losing share there. We feel good about our customer relationships both at the big oil and distributor level and really there's not a lot that's changed in that. So we would expect to compete fiercely and win our fair share.

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, President & CEO [43]

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And one other thought is that we had a really strong start last year and others may not have had as strong a start as ours, so they may have a better comp. That could be another explanation. But again...

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [44]

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Yes, that makes sense. And by the way, that number was a global number, so it didn't really give the context may be in China that may be we were alluding to here on this call. So just to be fair, I wanted to clear that up.

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Operator [45]

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And that does conclude today's question-and-answer session. I would now like to turn the call back to Gregg Sengstack for any further remarks.

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Gregg C. Sengstack, Franklin Electric Co., Inc. - Chairman, President & CEO [46]

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Thank you for listening to our first quarter earnings call. We look forward to speaking to you in July after our second quarter results were announced.

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Operator [47]

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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.