Franklin Electric Co Inc (FELE) 2008 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Franklin Electric Company Incorporated first quarter 2008 earnings release. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. It is my pleasure to introduce your hoST, Mike Butchko, treasurer. Thank you, you may begin.

Thank you, Joe, and welcome to Franklin Electric's first quarter 2008 earnings conference call. With me today are Scott Trumbull, our Chairman and CEO; John Haines, our CFO; Tom Strupp, Vice President of Franklin Electric, who runs our Water Transfer System business; and Gregg Sengstack, Senior Vice President of Franklin Electric, who heads up our Fueling business as well as our Asia-Pacific business unit. On today's call Scott will review our first quarter results and discuss key issues confronting our Company for the balance of '08. John will review the first quarter financials. When John is thorough, 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 relating to the Company's financial results, business goals and sales growth involve risks and uncertainties, including but not limited to risks 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' future trends; and other risks which are detailed in the Company's Securities and Exchange Commission filings included in the Item 1a of Part 1 of the Company's annual report on Form 10-K for the fiscal year ending September 29, 2007, exhibit 99.1 attached thereto and in Item 1a of Part 2 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 the Company assumes no obligation to update any forward-looking statements.

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

Good afternoon. After my comments John Haines will provide a more detailed review of our first quarter financial results. We're off to a solid start in 2008. Our total global sales in the quarter were up by 35% versus prior year and up 17% organically. Operating income was up 83% and was a record 31st quarter in the Company's history. EPS was up 67%. Our global Water business grew by 36% to $137 million. Our organic growth in Water was 12%. Our Water segment sales in the Americas grew in total by 31% and grew organically by about 15%.

Early in the first quarter we completed the acquisition of Schneider Motobombas in Brazil. With sales of about $40 million annually, Schneider is the leading Brazilian producer of residential, light commercial and agricultural pumps. They distribute their products to installing contractors and end users through a network of roughly 5,000 distribution outlets throughout the country. Schneider does not currently carry a line of ground water pumping products, although their distribution network is well positioned to service ground water pump and motor customers. We estimate the annual Brazilian demand for ground water pumps and motors is about $40 million. During the second quarter this year we will launch the Franklin 4-inch submersible motor and pump product line through the Schneider distribution network in Brazil.

As most of our shareowners know, in the last several years we've changed our go-to-market strategy for ground water pumping products in the Americas, choosing to sell primarily through distributors instead of through OEMs. Our first quarter sales in the Americas of ground water motor and control products grew at a high single-digit rate to distributors and continuing OEM customers. While our sales in the Americas of ground water pumps grew in excess of 20% we believe the overall market demand for ground water pumps , motors and controls in the Americas declined modestly during the quarter due to the housing downturn in the United States. We were encouraged that our ground water pump market share in the Americas continued to grow significantly. Our sales people are reporting evidence of customers switching to Franklin pumps because they can no longer get their traditional pump brand equipped with Franklin motors, implying that our competitors' stockpiles of Franklin motors are diminishing. We were also encouraged that the competitors' price promotions that were so evident at the end of each quarter last year were not as evident during the first quarter this year.

Water segment sales in international markets outside the Americas grew in total by about 40%, including acquisitions, and grew organically by 10%. Our total international Water sales growth -- that is Water sales outside the Americas -- was accelerated by the acquisition of Pump Brands in South Africa and Botswana in June 2007. Over the past several years we've focused on building our Water sales base in developing regions. We define developing regions as Latin America including Brazil; Asia-Pacific; Europe; Middle East; and Africa. During the first quarter, our Water System sales in developing regions represented about 35% of our total Water Systems sales. These sales grew in total, including acquisitions, by 90 % and grew organically by about 14% during the first quarter.

Our Fueling segment continued to grow rapidly, driven primarily by vapor control system sales in California and in international markets. As those of you who follow the Company know, California's past legislation mandating the installation of vapor control systems in filling stations. We estimate that between 8,000 and 9,000 stations in California have yet to install the mandated vapor control systems. To comply with the regulation these stations must install $18,000 each to install vapor recovery systems over the next 12 months and spend $8,000 each installing vapor monitoring systems over the next 28 months. We are one of two approved suppliers of these systems.

During the quarter, we completed phase two of our global manufacturing realignment program. Recall that phase one of the program was completed in 2005 and included the construction of new factories in La Naris , Mexico, Bernoux, the Czech Republic, and Madison, Wisconsin, and the rationalization of capacity in several fueling and motor plants in the United States and Western Europe. Phase two included the expansion of our motor plant in La Naris, the construction of a new pump plant in La Naris, the expansion of our Madison fueling facility, and the related rationalization of motor pump and fueling equipment capacity in several older U.S. facilities. When we started these programs in 2004 15% of our manufacturing headcount was in low-cost regions. Today about 40% of our manufacturing headcount is located in low-cost regions. Looking ahead we anticipate continued solid organic growth for the Company in the range of 12% for this year, and total growth in the range of 25%, assuming that we do not close any additional acquisitions. This growth, combined with spending controls, should allow us to achieve fixed cost leverage in the range of 220 basis points for the year.

Until recently we believed that our already-implemented or planned pricing actions, combined with cost reduction initiatives, would offset the inflation we anticipated in material and labor costs. However, in recent weeks we've seen signs of accelerated material cost inflation driven by rising prices for copper, steel, gray iron and freight. We're monitoring the situation closely with our suppliers and determining the potential need for additional pricing and cost action during the second half of the year. As we indicated with our quarterly communications with investors during 2006, 2007 proved to be a transition year for Franklin that was impacted by acute factors that caused our earnings to decline. But with those factors largely behind us and a new market and product strategy in place, we're confident that we're on the path of ongoing sales and earnings growth.

I will now ask our new CFO, John Haines, to provide some additional color regarding the quarter before we open the call to questions. Tom Strupp, who had been our CFO, has moved over to lead and expand one of our major business units. John joins us from HSBC, where he headed up one of their consumer finance businesses. Prior to that, John held a number of financial and general management positions at GE. He has an MBA from Northwestern, a black belt from GE, as well as a CPA, so he brings both financial and management expertise to Franklin and we're pleased to have him on board. John?

Thank you, Scott, and thank you to all of you on the call for your time and your interest in Franklin Electric. Our sales for the quarter were a record $176 million, $45.5 million or 35% higher than the first quarter of 2007. Our organic growth was 17%; however, after excluding the foreign exchange impact, it was 11%. Our gross profit expanded in the quarter by $12.5 million, or 32% from the first quarter of 2007. About $8.5 million of this was due to the acquisitions. Additionally, we had increased volumes and changes in product mix, which drove $6.6 million of this improvement, along with about $3.2 million attributable to increased pricing. These improvements, however, were offset by about $4.1 million for under absorption of fixed manufacturing expenses and other fixed costs.

We entered 2008 with excess inventories of several of our high-volume product lines. Our 2008 production plan calls for producing significantly less of these product lines than we sell in order to reduce inventories over the course of the year. We also had a negative gross profit variance of $700,000 related to higher freight charges as we feel the impact of higher fuel costs, primarily in North America. So as a result of the under absorption, higher fuel costs and other less-significant offsets, the gross profit margin decreased about 60 basis points for the same period 2007 as a percent of sales.

Selling, general and administrative expenses for the quarter increased $6.9 million, or 23% from last year. This is almost entirely attributable to the new acquisitions, which together contributed $6.1 million of the increase. Selling, general and administrative expenses for the quarter improved about 195 basis points as a percent of sales from the same period in 2007. Fully-diluted earnings per share for the Company was $0.35 for the first quarter compared to $0.21 for the first quarter 2007. Excluding restructuring charges, earnings per share would have been $0.24 in the first quarter of 2007. Restructuring charges in the first quarter of 2008 did not impact EPS, and as Scott mentioned, we have effectively completed phase two of our global manufacturing realignment plan.

In the first quarter 2008, we had a net use of cash from operating activities of $25.3 million versus the net use of cash from operating activities in the first quarter of 2007 of $47.1 million. The primary driver of this cash usage was higher accounts receivable balances, which increased from $69.4 million in the first quarter of 2007 to $99.5 million in 2008, an increase of $30.1 million. $14 million of the increase is a result of acquisitions. Most of the balance is attributable to timing effects of the Company's sales in March were particularly strong, thus increasing receivables. Cash used for investing activities increased to $42.7 million in the quarter from $3.3 million from the first quarter 2007, primarily driven by $35.5 million for the aforementioned acquisition, $6.8 million for additions to our plant and the equipment, as we complete construction of the new pump plant in La Naris, Mexico, and our new fueling electronics plant in Saco, Maine.

Cash raised from financing activities in the first quarter was $34.5 million compared to $51 million in the first quarter of 2007. This reduction is primarily attributable to having more cash on hand at the beginning of the period versus last year. The Company did repurchase about $7.8 million, or 235,000 shares of common stock in the first quarter of 2008.

These comments conclude our formal remarks, and we'd like to now open the call up for any questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question is from the line of Matt Summerville of KeyBanc. Please go ahead with your question.

A couple questions. First, on the Fueling business what are you assuming in terms of the number of stations that upgrade their facilities with Franklin's vapor management system in 2008 versus 2007? And then I guess how many of the stations at this point have received permits and how many of those that have been permitted have gone ahead and selected Franklin and then are essentially in backlog? Could you give a little color on that?

Matt, I think as we indicated on the call last time, in 2007 something less than 1,000 stations converted, and overall since the beginning something less than 1,500 stations had converted through year-end 2007. We don't disclose sales projections of specific product lines, so for me to say what's baked in on these products for 2008 -- what's baked into our forecast, I'm reluctant to provide that information. However, as we indicated, we believe there are 8,000 to 9,000 stations that have yet to convert. If the timing of the conversion is enforced by CARB, then -- as we anticipate that it will be, then they would need to all be converted or at least they would have to have their equipment ready to go within the next 12 months. Up to now I would say a significant majority of the stations that have converted have, we believe, used our technology.

Okay. Across the Company -- and maybe you can speak about Water and Fueling -- how much was pricing up in the first quarter and then what kind of increase are you looking at in Q2? And then I guess if you look at current spot prices for steel and copper and some of the other things you mentioned, when would those -- that type of raw material pricing start to impact your P& if there's no other action taken?

Okay. I think our prices were up in the first quarter a couple of percent in total and that we believe we were able to offset cost increases in the first quarter completely with price. I think we're going to -- because of our -- the structure of our pricing mechanisms for commodity purchases, we can look out over the next 12 months and have a pretty good idea of what's going to happen over a two-quarter timeframe --

Okay.

-- and it looks to me, Matt, like the biggest portion of the inflation that we expect will hit in the third quarter.

Okay. And then I guess your outlook for pricing as far as the actions you've taken in Q2, and I guess, how do you feel about the overall stickiness in the marketplace, especially in the Water business here in North America?

The price increases that we implemented in Water -- which really were not in effect in the first quarter or were not in effect for very much of the first quarter -- were effective. I would say that we had good success in implementing the price increases pretty much across the piece in the Water business.

One question on inventory and then I'll get back in queue. How much progress have you made at this point? It sounded like your utilization rates were definitely down in the first quarter on reducing the inventory in your North American Water business.

We're on track. We're going to drop -- particularly for a couple of our high-volume product lines we're going to drop our inventories quite significantly this year. And really, Matt, when we look at the year we believe that we can accomplish earnings this year within the kind of guidelines that we've provided; 12% organic growth, 25% overall growth in sales without additional acquisitions, roughly 220 basis point leverage effect. And assuming that we are able to manage our costs and pricing so that we don't lose margin on the variable cost side that should pretty much flow through to the bottom line. Then -- and that we can accomplish that at the same time in our Water business bring inventories down a lot, even though we recognize that that will result in underutilization this year, with the idea that next year in 2009 we'll be back to producing what we sell, which will -- that combined with the growth we anticipate picking up this year, giving us a higher level to start next year, we think that gives us a pretty good platform for earnings growth as we go into 2009, as well. So, we're planning to bring inventory down through the -- certainly in our Water business in the Americas through the entire year this year.

Should we expect sequential improvement in utilization rates due to seasonality in the business?

Well, yes, but the year-on-year effect will continue to be behind prior years as far as utilization is concerned.

Yes. Okay, thank you.

Yes.

The next question is from Mike Schneider with Robert W. Baird. Please go ahead with your question.

Thank you and good afternoon, guys.

Good afternoon.

Just building on Matt's question as to the sequential gross margin effect, if we assume production's going to be lower year on year, again, would you actually expect -- and I guess in light of some of the pricing increases that have gone in as of late, would you expect gross margins to actually trend lower even though you're seasonally stronger as the year goes on?

Mike, that will de -- first of all that would not be our expectation, okay, but realizing our expectation will be dependent upon this -- the issue of the run-up that we see coming in copper, steel, gray iron products, and freight and our ability to either, through additional cost reductions or price action recapture those cost increases that are -- we can see that they are going to start running ahead of our budgeted amount as we go into the third and fourth quarter of this year. I'm encouraged that we were successful in increasing prices here recently, based on cost increases, and we'll have to see about how successful we're if that becomes necessary later in the year. But leaving that issue aside, we would not expect to see our margins -- if we can offset that in any increase that's over our budgeted amount with either price or additional cost reduction, leaving that issue aside we would not expect to see margins go down over the course of the year.

Okay. And on this issue -- and I apologize, I'm going to dwell on gross margins here -- with organic growth in the North American market of 15% for you all and it sounds like about 13 points of unit growth, you've been trimming inventories now for the better part of six, nine months, why is it that there still remains substantial, or at least significant inventory to trim?

We built, Mike, in the first half -- in the first half in particular last year we built a lot of inventory. We didn't have a clear picture, or as a clear picture as, in retrospect, I would have liked to have on the size of our competitors' stockpile of Franklin product, and I think we didn't anticipate the housing recession to impact the overall industry to the extent that it did, and we did not want to put any of our customers in a position where they'd be forced to try a new motor product because of our inability to supply. So we built more inventory than, in retrospect, we should have and now we've got to -- and over the course of last year we really didn't reduce that inventory, we just kept it from getting any larger, and it'll be over the course of this year that we'll really address that inventory situation.

Is it also the case that just the Q1 market conditions in North America were softer than you expected or were they essentially on target?

Q1 this year?

Yes.

I would say that we did not have strong expectations for the first quarter this year. I would say they were pretty much where we expected them to be.

Okay. And then if we look over a two-year timeframe now, because 2007 was certainly a transitional period, North American growth was 15% this quarter, a year ago it was -14%, so in effect if you look over a two-year period we're basically back where we started. In light of this strategic change you've made going direct to distribution, is that where you expect it to be -- and I'm asking kind of in the the broader context -- where are you vis-a-vis your strategic plan and how to grow the PMA business you've got for the North American market, at least?

Well, we certainly are not where we intend to end up with respect to our position in the North American market, but I think we're -- I felt late in the fourth quarter we were headed in the right direction. I think we're seeing now that we are to a much lesser extent competing with our own motor. We're no longer -- we're not doing that as much as we were forced to do that last year in the marketplace as our competitors sold their pumps with our motors. As the incidence of that goes down, we're starting to see an acceleration of people converting to our product, our pumps and -- with our motors them, and that's encouraging,. And we think that will continue and we have a target market share that we're shooting for and we're not there but we're on our way. And at the same time our pump business outside of submersibles is starting to grow, as well. As our relationship with distributors matures, as people get comfortable using Franklin pump products, we're looking at our large and small centrifugal business growing. our jet pump business growing more rapidly, and all of this is encouraging.

Plus, we are not as efficient as we are going to be as far as a pump manufacturer is concerned. We have an extensive backlog of cost reduction initiatives, which right now our pump business is not as profitable as our motor business, but I think we're going to have an opportunity over time to close that gap as we bring our new pump plant in La Naris, Mexico -- that plant will be on-line in the second quarter of this year -- and as we ramp that product pump -- plant up, as we transfer quite a bit of business that currently is being produced in Winnipeg in Canada down to the La Naris plant to further increase its utilization, we're going to, I think, see our pump manufacturing costs -- manufacturing costs come down. We have a good backlog of design-modification projects which will reduce the material costs in our pump significantly. So, I guess I'm providing long-winded answer to your question that I think we're proceeding down the path that will get us to where we wanted to be at the time we made this change.

And again, sticking to gross margins, so can you refresh us or update us, I guess, on the Fueling business. With the growth you've seen there is it the case now where the gross margins in Fueling are actually accretive to the Company's average?

Yes, and I think you'll be able to see that in our segment reporting.

Okay. All right, I'll get back in line. Thank you.

Yes.

The next question is from Ned Borland with Next Generation Equity Research. Please go ahead with your question.

Good afternoon, guys. Sticking with inventory for a second., do you have any visibility into the dealer channel inventory and how's that looking?

I'm sorry, Ned, would you repeat the question?

I'm asking about the level of inventories at the distributor level and how that looks?

Oh, I'd have to say only anecdotal evidence. I would say that from -- my impression is that inventory at the distributor level in the Water Systems business is not unusually high for this time of year. Typically, March is a month where the pump manufacturers try to make sure that their distributors have their shelves full of their products, and so March is usually one of the heavier shipping months of the year, and I'm --so I'm sure that there was an effort to fill the distribution channel in March this year because we're coming into the heavy purchasing season and that's -- so that's just the way it is in this industry. But given that that's the way it's been for a number of years I don't think you'd see that this year inventories and distribution are particularly heavier than normal. And I think at the contractor level, because the contractors do carry some inventory, you'd actually see the inventories being down because contractors -- we're coming into the second year of pretty slow business for them and they're just not carrying as much inventory as they may have. So I don't think out there in the channels there's an excess of inventory.

Okay. And then on the sales or revenue guidance for 2008, I seem to remember back in February we were talking about an organic range of 12% to 15%, now we're looking at better than 12%. It seems you took the high end of the range down a bit. What was the reasoning behind that, just conservatism or --?

There was no positive intent in that, Ned. The 12% to 15% -- I would still be comfortable with a 12% to 15% range at this point. We just decided -- we communicated it in the range of 12% this time.

Okay, fair enough. And then on the Fueling sales, can you give us some color as to how much of the sales in the quarter was international versus domestic?

Well, I don't know that we've disclosed the mix in the Fueling business -- geographic mix, so I would be inclined right now not to disclose that information.

Okay. Thanks, that's all I had.

Okay.

Next question is from Matt Summerville with KeyBanc. Please go ahead with your question.

Scott, early on your comments you mentioned that you felt that the opportunity down in Brazil, or in the Latin American market, leveraging the distribution channel that Schneider brings to the equation relative to your core business could equate to about $40 million a year. First, I want to make sure I have that figure straight and then second, how significant of an event is this going to be in the second quarter as you essentially fill the channel down there?

The $40 million figure is our estimate of the total ground water pumping market in Brazil.

Motors and pumps?

Motors and pumps and it would be the larger pumps and motors and the 4-inch pumps and motors, as well. We've had range -- estimates in the range of $40 million to $50 million for that market right now and growing. Initially we're going to introduce the 4-inch product down there and sell it to the Schneider distribution channel, and we think that the Schneider distribution channel probably have reach into a customer base that would be $10 million to $15 million. So, our expectation is to capture, over the next 18 months, a significant percentage of that potential customer base while we assess our strategy for launching larger pumps and motors down there to go after the overall market potential. So I would not interpret my comment that we are going to quickly achieve a $40 million sales base. I think we're looking more at a market potential in sales achievement like I described and it will be a -- filling the pipeline down there will be helpful but it's not going to be a major impact on our second quarter.

Okay. With respect to the big motor business here in North America, can you talk about what you're seeing in terms of overall demand there?

Actually the demand in North America -- or in the Americas, which we described as up 15% in total, that is with the smaller product, that's the 4-inch related residential product not growing at that rate and the larger product, the bigger motors and pumps growing at a rate somewhat faster than that, because generally speaking, the residential market is down in the U.S. and the ag market is up so far this year and seems to be doing pretty well compared to a weak year last year, so we're seeing a nice bounce back in our ag segment so far this year.

Okay. As far as -- I'm trying to remember back to your fourth quarter call, I think you had indicated that you were starting to see in January against a very easy comp some positive compares in your core North American business. As we move throughout the quarter can you talk about overall tempo as far as the industry itself and then how -- what out-the-door sales are looking like so far in April maybe relative to last year?

Okay. The industry was up quite a bit, at least as far as manufacturers' shipments to distribution were concerned, because the only industry numbers that we have reflect manufacturers' shipments to distribution. They don't reflect distribution shipments to contractors. But the industry was up nicely in January and then declined in February and March, and so if -- and the reason the industry was up in January is because it was such a comparison. January of 2007 was down over 30% from January of 2006, so it was a really depressed comparison as we came into 2008 and then in February and March it was -- the industry was back down again, so I don't know. And I think we would expect to see in unit shipments -- and again these are focused primarily -- what we have good visibility on are 4-inch PMA and pump end shipments, which tend to be in the residential market. Right now our outlook is for that segment of the market to be down modestly in 2008 versus the depressed 2007 levels.

Okay. And then just can you give a little more color on business friends as far as you see them so far in April, Scott?

Well, March was a very strong month for us in our Water business in the Americas. I'm sure that's where your question is focused. And after a strong month we typically have a bit of a falloff in April and I would say that we haven't seen as much as a falloff in April as one might expect after a very strong March.

Is that true internationally then, as well? I was kind of asking about the Water business more broadly.

I would say yes. Across the piece it was a -- March was a very solid month for us and April appears to be on track, so I'd say yes, across our Water business that statement holds.

With respect -- just to go back to Fueling, can you may be talk about what other states specifically are looking at additional legislation around vapor recovery or vapor management and maybe beyond that if it's not an entire state considering something, are there major municipalities around the country that are looking at this and what sort of timeframe are we looking at for some of these other, either states or major municipal areas to move forward?

Matt, I'm going to let Gregg Sengstack, who is responsible for our Fueling business respond to that.

Hey, Matt.

Hey.

As you see in the press -- and we basically are seeing the same information you are -- you'll see a city like Phoenix start talking about going to ORVR-type technology, Atlanta, certainly up in the New England states and the nescom states, we call them, the New England region, they all have -- are looking at this on an individual basis. There just hasn't been enough impotice at this point that I know of where there's been a tipping point in any one of those states with the new EPA regulations requiring lower parts per million in solution. That may be a tipping point for a couple of these states, but really you know as much as we do on the domestic side.

Internationally -- Ned was asking about the international business, we've done quite well in China this year. Clearly China's concerned about cleaning up their air,not just in Beijing but other major cities, as well. Some of that is being promoted by the fact that they have the Asian games there and the expo in the next couple years. We're seeing initiatives in Korea. Continue to see steady business in Taiwan, other parts of Asia. In Europe you're seeing it and England and Spain are undergoing a mandate to put in vapor recovery. And there's as many vapor recovery sites outside of the United States as there are inside, so we're seeing good opportunities outside the United States. But specific to your question in the U.S.. you see it in the popular press as much as we do and I know of no other initiatives that haven't been shown in the press.

Is there a qualification process in places like England and Spain and in China similar to what you had to go through with CARB?

I think you would characterize the -- California as being unique upon itself. As a matter of fact many other areas or regions of the world look to CARB and will often say that the systems have to be CARB-certified for them to be put in their locales. There are processes in other countries to qualify but I would say they're probably not quite at the level CARB is at for this ORVR retrofit. It's really unique to the United States and to California specifically.

So with this England and Spain thing you mentioned, can this be meaningful to the Fueling division -- or Fueling segment's organic revenue growth in 2008 and 2009? And I guess having more background in the business than obviously I have is there a propensity then for a lot of other folks in and around the EU to look at this, or at least Western Europe?

I would say with Western Europe there's already a fairly significant installed base. England has more of an opportunity than, say, Spain necessarily from a standpoint that they're more accepting of an American-style nozzle. Our nozzle's currently not certified in England and we are looking other options for Western Europe. They generally use a different style nozzle that's used in the United States. Our nozzles are much more commonly used in Asia, India, South America, but the needs in Europe are fairly specific to Europe and we are evaluating using -- applying our technology to European operations, but that's about as specific as I want to get at this point.

Okay. As far as -- I just want to make sure I understand your organic growth of, we'll say 11% excluding currency. If I completely exclude any contribution from an acquisition, what did your core growth look like?

I don't think we've offered up that number.

No, but Scott, typically when a company reports organic growth they don't pro forma the acquisitions in that number.

Okay?

So I guess I'm just trying to get a more pure view of your core business overall, if that makes sense.

Well my problem with that is for instance, we buy a company like Monarch and the day we buy them, we're making decisions about, okay, are we going to channel this customer to buy the Monarch brand or are we going to channel the customer to buy one of the Franklin brands. If we chose to channel the customer to buy one of the traditional Franklin brands, then we would reflect organic growth in our traditional business as that, but if we choose to channel them to the Monarch brand, then we're decreasing our reported organic growth. And when we have businesses that overlap quite a bit, I think the only way that I was comfortable presenting organic growth figures was to look at the acquisitions and then pro forma those growth numbers in.

Okay. Now that you've gone through that logic, Scott, I agree with the rationale there that makes sense. I just wanted to make sure that I had a clear picture on that. That's all I have, thanks.

Okay. The next question is from Mike Schneider with Robert W. Baird. Please go ahead with your question.

Scott and Gregg, maybe we can go back to Fueling for a second. So if 8,000 to 9,000 stations have yet to comply and 1,500 were done by the year end, do you have an estimate of what was done in Q1?

Well we're trying to avoid, Mike, being put in a position where we're reporting our quarterly sales of conversions just because there is a competitive aspect to that. So, I think it's not -- you don't have -- you can start to draw your own conclusions based on the data we've provided.

Well have you lowered your estimate as to the total opportunity set here from 12,000 stations to something around 10,000, because either about 2,000 stations were converted in Q1 or a number of stations for the potential opportunity has come down.

First of all, we and -- there is no one that knows precisely how many stations there are in California that need to be converted, okay, but we have not implied by the numbers that we've provided that somehow we've gathered new information that causes us to conclude that number of stations is less. And so 8,000 to 9,000 -- we tried to present a range where we were certain -- we were relatively certain that number of stations to convert would not be less than that range.

Okay, and just trying to read one level deeper here.

There is no implication from those numbers that we have found that somehow there aren't as many stations or something like that. It's just that the 12,000 number is an estimate. We do know how many we've shipped and we have an idea of what share we have, and -- but in providing that guidance of 8,000 to 9,000 stations remaining the idea was to provide a guidance where we were relatively confident that we're not providing numbers that are higher than they're likely to be.

Okay. And then in terms of what you've shipped, presuming there is a lead time on these nozzles and the ISDs, if there are 8,000 to 9,000 stations yet to be converted or comply, presumably though you've sold many of those systems into the channel during Q1, correct, in anticipation of the services to be --?

Well, the 8,000 to 9,000 is the amount that remain as of -- our estimate, which may prove to be conservative, but our estimate of the remaining stations to be converted as of April of this year.

I guess a different way to put it -- I'm sorry if it wasn't clear -- so the amount you have yet to ship though, is that reflected in the 9,000 or presumably you've shipped more product in anticipation, or I should say in advance of the actual installation do your distributors and installers?

Mike, we are shipping -- this is Gregg -- we're shipping product into distribution as it's required by distribution for sale to the end user.

What's the rough lead time. or how much inventory do your distributors stock? That's a different way of asking it.

Yes, I would say our distributors' stocking levels are probably -- are not significantly different than they would be in other industries. What would you say is your experience with distribution in other industries?

I would say 30 to 40 days, probably.

I wouldn't quarrel with that number. It may be a little bit more, I doubt if it's a little bit less. Distributors are distributors around the world and they operate based on turns and they know that we have availability because Franklin Electric historically has been a company that's always focused on availability of inventory, as Scott mentioned earlier in this call.

And then, Gregg, to confirm. we've learn in the channel -- but I do want to make sure we've got it correct -- both nozzles and both ISDs have been approved from yours and your chief competitor now, so with that, have you been able to assess your market share in the -- I'll call it the going-forward state, that is with all products approved and really the end customer having full choice across products, or is your market share view based on prior -- the prior situation where not all products and ISDs were approved?

I don't know if we've expressed a market share view, I would just say that you are correct that there are two approved systems. People have a choice.

Okay. And have you seen any significant pricing discrepancy between the two systems?

As I understand it today our system is slightly more cost effective than our -- the competitor's system for the vapor recovery portion. I would say that for the in-station diagnostics piece they're probably similar.

Okay. And your ISD, now that it's been approved with your nozzle, have you seen the adoption rate, or can you comment on the adoption rate of the Franklin ISD because it was not the incumbent per se, correct?

The only comment I would make to that is that no one could file a permit for a system until it was approved and it was approved just before the end of the year and so, yes, we are not the incumbent. We've got some catching up to do.

Okay. I'll get back in line. Thank you.

There are no further questions in queue. I'd like to turn the call back to management for closing comments.

Thank you for your attention and we'll look forward to talking to you at the end of the next quarter.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.