Franklin Electric Co Inc (FELE) 2009 Q1 法說會逐字稿

Greetings, and welcome to the first-quarter 2009 earnings release conference call for Franklin Electric Company. At this time, all participants are in a listen-only mode. A brief question-and-answer question will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Patrick Davis, Treasurer for Franklin Electric. Thank you. Mr. Davis, you may begin.

Thank you, Connie, and welcome to the Franklin Electric first-quarter 2009 earnings conference call. With me today are Scott Trumbull, our Chairman and CEO; John Haines, our CFO; Robert Stone, SVP of Americas Water; and Gregg Sengstack, SVP of our Fueling and International Water.

On today's call, Scott will review our first-quarter business results, and John will review our first-quarter financials. When John is through, we will allow some time for questions and answers.

Before we begin, let me remind you that any forward-looking statements contained herein, including those relating to the Company's financial results, business goals and sales growth, involve risk and uncertainties, These include, but are not limited to, risk and uncertainties with respect to general economic and currency conditions, various conditions specific to the Company's business and industry, weather conditions, new housing starts, market demand, competitive factors, changes in distribution channels, supply constraints, technology factors, litigation, government and regulatory actions, the Company's accounting policies, and future trends and other risks which are detailed in the Company's SEC filings included in Item 1A of Part I of the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 2009, Exhibit 99.1 attached thereto, and in Item 1A of Part II of the Company's quarterly reports on Form 10-Q.

These risks and uncertainties may cause actual results to differ materially from those indicated by the forward-looking statements. All forward-looking statements made herein are based on information currently available, and the Company assumes no obligation to update any forward-looking statements.

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

Thank you, Patrick. The major factor impacting our earnings during the quarter was the sales volume decline brought on by the weak global economy. Water Systems represent about 75% of our total sales. During the first quarter, our Water Systems revenues declined by about 16% overall, and by 11% organically before the impact of foreign exchange.

Virtually, the entire organic sales decline occurred as a result of weakness in the US/Canada market, which represents about half of our total Water segment sales. As an indication of overall market weakness, trade association data and our own analysis of market trends indicate that first-quarter industrywide ground water pump sales were down about 33% versus prior year. And while our sales did not decline as much, we were nevertheless impacted by the extraordinary drop in the overall market.

We believe the industry sales decline was caused by the ongoing slump in housing, with new housing starts off by about 50% versus the first quarter of 2008. In addition, we believe that downstream distributor and contractor customers reduced inventories during the quarter, which negatively impacted our shipments.

International sales represent about half of Water Systems revenues, and were up about 3% organically, but were negatively impacted by $12.8 million due to foreign exchange translation. During the quarter, organic sales growth in Asia-Pacific, Latin America and Southern Africa offset the decline in Europe and the Middle East.

Fueling sales represent about 25% of our total revenues, and sales in this segment declined by about 10% during the quarter. Our fueling sales in the US grew by about 2%, with growth of sales in California offsetting an 8% decline in the balance of the country. Fueling sales in international markets declined sharply during the first quarter of 2009, because last year in January and February, we had heavy shipments of vapor control systems to the Beijing area as part of China's program to reduce air pollution prior to the Summer Olympics.

We were encouraged that in March, our overall fueling sales were up 19% versus prior year, as station owners in California continued their capital spending projects to comply with that state's vapor control mandates. And station owners outside of California also moved ahead with upgrade replacement and expansion projects.

To summarize our sales outlook, during the next quarter we expect our consolidated sales to continue declining versus prior year, but at a somewhat lower rate than in the first quarter.

Regarding our Water business in the US and Canada, we believe that the recession will continue to cause our customers to curtail discretionary purchases, and that housing starts will continue to be a drag for the next two quarters. However, we believe the inventory adjustment is winding down and should not be as significant a factor for the balance of the year.

We are forecasting that our international Water sales will be flat organically during the next two quarters, but that our reported US dollar sales will be reduced due to foreign exchange translation rates. Although we don't try to predict exchange rates, we believe it is likely that the translation declines will diminish in the fourth quarter as the dollar gains strength versus the euro and the Brazilian real during the fourth quarter of 2008.

We believe that our fueling sales should meet or exceed prior-year levels during the second quarter as the California conversion continues, but should start to trail prior year in the back half as the conversion winds down. We were encouraged that during the first quarter, in spite of the impact that the 15% reduction in consolidated sales had on our fixed cost coverage, our gross profit margin declined by only 40 basis points from the prior-year level.

We were also encouraged that during the month of March, our Fueling gross profit margin improved by 280 basis points versus prior year. And during the March, our Water Systems gross profit margin improved by 70 basis points versus prior year. These are indications that we are maintaining price levels while we are starting to realize the direct material and labor cost reductions from our vendor and factory consolidation initiatives.

In total, we believe these direct material and labor savings may approximate $8 million to $12 million for the remainder of 2009, with most of these savings being realized in the back half of the year.

In addition to the initiatives that will reduce our direct material and labor costs, we are also implementing initiatives to reduce fixed costs across the Company. Over the last several years, we have expanded our organization as we've quickly transformed our business from being a motor company to a pumping systems company. And now, upon careful examination and motivated by the pressures of the recession, we are finding opportunities to reengineer and lean out what we have put in place and make significant fixed-cost reductions in the process.

We believe for the balance of 2009, these initiatives, together with the impact of the stronger dollar, will result in fixed-cost reductions of about $15 million including the added expenses of the Vertical acquisition.

Most of the savings from these projects will also occur during the back half of the year. Nothing that we are doing to reduce costs will jeopardize our reputation for superior quality and customer service. Our response to this recession will enable us to emerge a leaner enterprise with lower SG&A and fixed manufacturing costs and thus a lower breakeven point.

In addition, after two years of disruptions due to ongoing facility construction and product line transfers, by July 1 of this year we will be more fully utilizing our Linares, Mexico, plant complex and we will have rationalized a major block of higher cost capacity. All told these actions will result in significantly improved margins for the Water Systems business.

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

Thank you, Scott, and good morning. Our fully diluted earnings per share for the first quarter of 2009 were $0.17, a 51% decrease over the first quarter 2008. Earnings per share before the impact of restructuring charges were $0.19, down 46% from 2008.

On a consolidated basis our first-quarter revenue was $149.8 million, down about 15% from the first quarter 2008. As Scott mentioned, the revenue declines we experienced in our Water segment occurred principally in the United States and in Canada and in international markets for our Fueling segment. The strengthening US dollar lowered revenue by $13.3 million versus the first quarter 2008.

Gross profit decreased by 40 basis points to 28.8% in the quarter versus 29.2% in the first quarter of 2008. They bulk of the decline was due to volume. However, this was partially offset by improvements in price versus costs. Operating income before the impact of restructuring charges decreased as a percent of sales by 280 basis points in the first quarter versus 2008 due to the significant loss in sales volume that Scott described above.

As a result of the significant market weakness Water Systems sales declined by $22.3 million or 16% in the first quarter 2009 versus 2008. $12.8 million of this decline was due to translation impacts of the strengthening US dollar against most foreign currencies. As Scott mentioned, the volume decline can be attributed to weak end market demand primarily as a result of the significant residential weakness in the United States and our customers continuing efforts to preserve cash and focus on working capital given the uncertain economic times.

We believe the impact of destocking is slowing, but we will assess this further as the Northern Hemisphere water season kicks off during the second quarter.

Acquisitions contributed $6 million in revenue during the first quarter of 2009. Operating income before restructuring charges for the Water segment decreased in the first quarter by 200 basis points as we lost SG&A leverage in the first quarter due to the abrupt change in market demand for our water products, despite a $2.6 million reduction in SG&A spending before acquisitions in the quarter versus the first quarter 2008.

Fueling revenues in the quarter were down 10% largely as a result of lower international shipments of the Company's products. Operating income in the fueling business declined to 20% of sales before the impact of restructuring versus 23% in the first quarter of 2008. Again, the abrupt change in revenues forced a deleveraging of our SG&A spending in the quarter.

In California our sales were up 15% from the first quarter of 2008 and we believe that nearly two-thirds of the required vapor management retrofit is complete in that state. Of the approximately 4,100 stations remaining we believe we will continue to win a large share and that over 80% of the remaining stations will convert in the second and third quarters of 2009.

We incurred restructuring charges in the first quarter of $0.9 million related to facility relocations and severance and other costs associated with headcount reductions that we initiated in the first quarter. The first-quarter 2009 restructuring charges were primarily cash items.

We expect to take between $5 million and $6 million in additional restructuring charges in 2009 related to the Siloam Springs relocation and other severance costs related to reductions in our global workforce. Approximately two-thirds of these remaining restructuring costs will be non-cash.

Cash and equivalents on hand were $45.2 million at the end of the first quarter 2009 versus $46.9 million of cash equivalents and investments at the end of 2008. The Company continued its focus on liquidity in the quarter and used $24.3 million less cash in operations than it did in the first quarter 2008. Inventory was a $3.7 million net source of cash in the period. In addition, the Company reduced capital spending by $3.7 million in the first quarter versus the prior year.

We ended the quarter with a balance of $58 million on our revolver versus $35 million at the end of 2008 and drew $22 million less on our revolver in the first quarter of 2009 versus the first quarter of 2008. The Company paid $16.8 million net for the Vertical acquisition in the first quarter versus $35.5 million net in the first quarter of 2008 for the Schneider acquisition.

At the end of the first quarter the Company's ratio of gross debt divided by earnings before interest, taxes, depreciation and amortization, or EBITDA, was 2.2 versus 1.8 at the end of 2008 and 2.4 at the end of the first quarter 2008. We believe that cash on hand, internally generated funds, and existing credit arrangements provide sufficient liquidity to meet current commitments and service existing debt. As we have previously disclosed, the Company's revolving loan agreement with its bank is in place until the end of 2011 and we have no scheduled principal payments on our long-term debt until 2015.

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

(Operator Instructions) Michael Schneider, Robert W. Baird.

Good morning, guys. Maybe we can start on Water and I am curious about the seasonality because it's clear the distribution channel is destocking aggressively. If you look at prior years, guys, I am just curious about the sequential move in Water that you expect.

If you look at prior years you basically show $20 million to $22 million in greater sales Q2 over Q1 in Water. Obviously the economy is tough, but you saw that in Q1. So should we expect based on some relief from destocking and maybe some delayed seasonality that that boost is actually greater this year despite the economy? Maybe you could just give us your thoughts on what unfolds here in Q2.

Well, there is no doubt that our sales in Q2 will be higher than they were in Q1, Mike, but whether they will be higher by more than they were in prior years or not -- in other words, the increase will be greater. I guess I would have trouble giving that guidance at this point.

There are no indications that we are going to -- that we can see, that we are going to benefit from a significantly strengthening economy. Year on year housing starts we believe will continue to be down, perhaps not by down as much because the comparisons get progressively easier as the year goes on, but nevertheless will continue to be down.

We think that the inventory destocking in the trade has peaked and that there will likely be some perhaps even inventory build which could work to the point that you are making. But I think our distributors are going to try to work as hard as they can to keep from building inventory and try to rely on their vendors to make availability, rapid availability, for them.

Is there the potential then that as you get into Q2 that you in effect experience all the seasonality in Q2 versus prior years and normal years where you would have experienced some in February/March? Do you have any indication of that in your April orders?

We haven't seen it in our April orders at this point.

Mike, this is John Haines. The other thing to think about on the Water side is this drag of FX, which will continue to be a headwind in the second quarter. So when you look at the real, you look at the euro in 2Q '08 and kind of where it's at now and what you may think it might go to in the second quarter of this year.

In the first quarter it was the $12.8 million drag on the Water Systems revenue line and that is going to continue. There is really no view that that is going to get dramatically better as we go into the second quarter.

Okay. Robert, just sticking with Water, can you -- have you guys analyzed just what rate this industry is running at versus the replacement rate? Because it strikes me, at least on our analysis, that if you look at the replacement rate or the assumed historical replacement rate the industry is running far below that right now.

Do you have any parameters that you can put around it, at least on your analysis, of where this is headed and I guess what it implies for the balance of this year as presumably the replacement rate ultimately drives demand?

Mike, I would say that perhaps some of our prior assumptions were not quite correct. The run rate -- it all depends on what your assumptions are, but clearly I would say the run rate we are experiencing now is due entirely to replacement, depending on what you believe about new housing starts. I would leave it at that.

Okay. And then just on terms now and pricing in the channel, there is typically seasonal discounts that are put into place. I am curious if you have changed your discounting strategy here in the first four months of the year, either offering more or less discounting to try and smooth the seasonality here?

And then also could you just address terms? We continue to hear that terms are stretching quite a bit with distributors as part of pricing negotiations.

I, Mike, was somewhat encouraged that during the first quarter across our Water business our price year-on-year exceeded cost increases. And that is encouraging because we have not seen in our P&Ls the benefit of cost reductions, material cost reductions that we know are coming. Material cost as a percentage of sales in the first quarter was actually up modestly.

We know because we know what prices we have negotiated; that as we go through the balance of the year material costs as a percentage of sales will decline and could be down we think around, by year-end, 100 basis points versus prior year. So we were up in the first quarter, but by the end of the year we will be down in that regard.

Right now we are not, and again on a global basis, seeing an indication of major year-on-year price erosion. We have, for the last several years, had quite a bit of price activity in the form of individual promotions in the market place. That continues but it isn't across the piece greater than it has been in previous years. And as far as terms and that sort of thing, Robert, you want to comment on it?

Sure. Mike, I think there is pressure there for terms but we actually did not see a lot of that in the first quarter. And I think the reason for that is that distributors they were really interested in destocking and it would have taken ridiculous terms to get them to take anything. They were much more focused on freeing up inventory for cash.

It remains to be seen what happens in the latter part of the second quarter, what will happen there. But I suspect it's going to be a matter of, to come back to your other question earlier to, we will see the seasonal demand much more apparent in the second quarter than probably for the remainder of the year and distributors are going to be looking for companies that can deliver.

And on the terms, Robert, I have heard terms as long as a year. Are you willing to offer those and I guess take on that financing risk at this point, especially with this economy?

We have no plans to do that. I actually have not heard of that kind of term with competitive products that we compare against. I can't speak to pipe, wire, or other types of products but certainly in the pump arena I haven't seen that and have no intention of doing that.

And then just --

Mike, our DSO is actually in the first quarter this year down slightly from our DSO in the first quarter of last year.

Okay, but with the falling market demand and declining inventories we wouldn't see longer terms hit anybody's income or statements yet. I am curious just about what is going in, but okay I appreciate that.

Then final question and I will get back in line, just on the Ag and municipal markets could you talk about the higher horsepower markets? Ag was strong last year. Have you seen even greater deterioration in Ag demand than you would have expected? Then same question on pricing; in the higher horsepower markets now that Faradyne has entered these markets have you seen undue or renewed price pressure in that end of the market?

I will address the Ag and municipal side first. I would say there, Mike, that that market segment is at or slightly better than what we had expected, especially considering the destocking that we know is going on. As we discussed before, we have expected that market to be down slightly compared to last year. And so, again, it's at or slightly better, depending on the region, than what we had expected.

In terms of the larger horsepower and specifically Faradyne, that has really not been a factor in the market. We have seen some of the product and gotten some, but we haven't seen any effect from it in the marketplace today.

Okay, thank you.

Anthony Kure, KeyBanc.

Good morning, gentlemen. Just a couple of quick questions, I wanted to address fueling. From the April standpoint do you expect fueling station owners will have the ability to maybe get some more credit easier or have you seen any change thus far, maybe over the last couple of months, in their ability to get credit either because of loosening terms or maybe some impact of some federal stimulus dollars if that is a factor?

Gregg Sengstack, who heads our International Water and Fueling Group, will respond to that.

Okay.

While we do not have direct contact with station owners, I would say that just as a -- you are probably closer to this than we are -- is that generally I think credit is beginning to free up. These are transactions or retrofits that are under $100,000 in size. There are companies that do this business, underwriting for a living.

So I think generally as credit markets begin to ease that the credit would be available. But we don't have any direct contact with the station owners on that subject.

Okay. Moving over to maybe International markets for Fueling. I understand what is going on in China given the tough comp, but just wondering if you see if there is any impact there, again, from their more direct stimulus? And if it's the same answer that is fine, but I was just wondering if that were a factor that you were thinking about there.

We aren't currently seeing anything related to the stimulus package. However, there are mandates in place for the other coastal cities in China to put in vapor recovery systems. We would expect to start seeing more sales of vapor recovery systems towards the back half of this year.

Can you just remind me what the overall opportunity size in China is?

Well, there are tens of thousands of gas stations. The question is at what rate will the government expect those stations to convert over? Certainly the Shanghai and Guangzhou areas, which are the next areas that are to comply, are probably nominally three times the size of the Beijing area. And so I would expect that kind of demand over the next couple of years.

The next wave of larger cities is expected in the next couple, three years and is just a question of how the government is going to enforce those regulations.

And then along those lines, is there a similar approval hurdles like there were in California, or are the standards a little more loose or a little more stringent?

The qualification is with the oil companies themselves. They do their own testing and then you get on an approved list. The number of competitors for this second round will probably be greater. All indications are that it will be a greater number than what was in the first round, but it's a qualification through the oil companies.

Okay. And then just moving over to the cost savings you outlined. Just given the demand environment that you are seeing mostly, obviously, in the US and Canada markets, do you expect or can you put a little color around the majority or the amount that you are expected to maintain or you are factoring in for cost savings moving to the second half of the year?

Well -- go ahead, John.

Anthony, if I understand your question, we have outlined three broad categories of cost savings for the year. The raw material cost savings, which as Scott mentioned we started to see indications of in the first quarter, but the real benefit, this $5 million to $7 million benefit that we outlined, we think will be in the latter half of the year.

The second category of cost of course is the direct labor savings that we get as we move more of our production hours from high-cost facilities in the United States to our Linares, Mexico, facility. Again, we have seen some benefit from that in the first quarter but the bulk of the $3 million to $5 million that we have outlined will be in the latter half of the year.

The real core of the Siloam Springs, Arkansas, move will happen in the second quarter so that is where you are going to see the bulk of that move taking place. And we will see the benefits of that move more in the second half.

Then the final category of costs that we have outlined is really fixed cost reductions, which are a combination of both manufacturing fixed costs and SG&A spending. So we have taken a number of actions in both the manufacturing worlds and in the SG&A world, corporate salaried headcounts.

We have looked at our benefit plans; we have looked at things like matching 401(k); all of those kind of discretionary spending. And we have identified what we believe will be about $15 million of cost reductions from that group of expenses. Again, more skewed toward the back half of the year. So in total we are saying or we are guiding to somewhere in the range of $23 million to $27 million of combined cost reduction.

As I mentioned, on the material cost side we really didn't see a significant amount of material cost reduction in the first quarter; that is all coming. In the first quarter, John pointed to $15 million of fixed savings. That is actually $22 million to $23 million of fixed cost savings in our base businesses offset by $6 million or $7 million of fixed costs at Vertical, the company that we recently acquired.

But in the first quarter we got about $1 million of fixed savings, so we have $14 million of savings coming through from projects that are being implemented in the back three quarters of the year. So again most of the savings that we will benefit from will be occurring as we go through the balance of the year.

Okay. I appreciate the outline; that was helpful. Just what I am, I guess, driving at is do you expect to keep the majority of that or maybe put a little -- given the environment and you touched on pricing already -- but if pricing remains firm, I guess I can surmise that you expect to keep the majority of that given what your comments were on pricing?

Again, our markets are very considerably -- you have got to remember that 50% of our Water business is outside the United States and 25% of our business is the Fueling business. While there are pockets of our business that it's known to be highly competitive, the year-on-year area even in those pockets of our business is not dramatically different than it was in prior years. And in other areas we are in a good position to increase prices.

So we think across the piece that we will be able to retain these cost reductions. (multiple speakers)

Okay, great. And then just last question is a housekeeping question. How much did you say you had left in restructuring for the year?

We said restructuring for the balance of the year would be $5 million to $6 million additional.

Okay, great. Thank you so much.

(Operator Instructions) Paul Mammola, Sidoti & Co.

Good morning. How many of the 4,100 stations left to convert actually have a permit? Do you know that?

Paul, the state released information on April 10 that said 92% of the sites that they believe needed to be converted by April 1 had permits.

Okay. So I mean there is reasonable assurance that this doesn't get pushed anywhere past the next six months?

Well, I will say that there is a bill in the legislature that is having a hearing on Monday about a one-year extension. You have to make your own evaluation, but with two-thirds of the station owners already in compliance I don't know how much traction that will get. That is your call.

Okay. Moving on, you talked a lot about price --

One other thing though on that, the deadline for the installation of the vapor monitoring equipment -- the deadlines for the vapor control equipment, which is -- the vapor control equipment sells for roughly $18,000 a unit -- that deadline is immediate.

Right.

The vapor monitoring, which sells for roughly $10,000, extends into 2010. Many of the stations that have installed vapor control systems have not yet installed the vapor monitoring systems. They are going to move the installation of that equipment out closer to that deadline.

So while the vapor control system, which is the bulk of the conversion, will wind down over, as you were pointing out, certainly over the next, I believe, over the next six months, the vapor monitoring portion of this mandate will continue on into 2010.

On the monitoring are you still assuming that you get a quarter of the stations to install your technology?

That is a reasonable estimate. It is a little bit tough for us to get real clarity of our share because, as Scott pointed out, given the focus on getting the vapor recovery systems in place many people delayed the installation of their vapor monitoring system even if they already have the permit for it.

Okay.

We seem to have some pretty good momentum with our product though.

Okay, that is helpful. Moving back to Water you talked a little bit about price and terms obviously, but is it fair to say that competitors pricing aggressively has not affected you thus far? And have you assumed that that could be a potential road bump, say, in the next six months?

Paul, would you restate your question, please?

Sure, sure. In terms of price --

You are talking about the water business?

Correct. Have competitors pricing aggressively impacted your business thus far and do you assume that could be a potential problem, say, in the next six months? So it sounds like your price is fine you have been somewhat stable. But obviously if the marketplace is trending downwards with lower commodity costs the margin assumption could be too wide is what I am asking really.

It's always dangerous to predict competitive activity.

Did you see it in 1Q? How is that?

Well, as I said, in the first quarter across our water business our prices were up versus the cost increases. We had not at that point actually started to -- our raw material costs were still going up as a percentage of sales in the first quarter. So I would say across our Water business there were pockets of competitive activity, but on balance price exceeded cost and was on the good side of the ledger for us.

We know that certainly in the US we will experience price competition. It has taken the form of periodic heavy promotions, not in the form of reductions in list cost, permanent reductions in list price. And that is always a healthier form for that competition to occur because it's confined in a period of time and usually confined to a few product lines. I think it would probably be pretty optimistic for us to assume that that type of activity is going to diminish in this environment.

I am not sure that it's going to be dramatically more aggressive than it has been in prior years however. I am not prepared to make that assertion at this point based on what we have seen.

Okay, thanks for that color. And then finally what is the utilization rate right now at Linares and what do you project it to be by the end of the year?

In a factory like Linares, because we are not a process industry with defined capacity constraints it's hard to define exactly a utilization rate. But I am glad you asked this question because we built Linares as a 300,000 square foot manufacturing facility. By the middle of June with the capacity that we are moving or the production activities that we are moving out of Siloam Springs down there, we will have put roughly 400,000 square feet of manufacturing activity into the plan from higher cost plants.

But our management team in Linares has been very effective at leaning out processes. And in spite of the fact that we will have moved 400,000 square feet of production activity into a 300,000 square-foot plant we believe that we still will have an opportunity after this round of moves to move 50,000 square feet to 100,000 square feet more production activity down to Linares. That they can comfortably accommodate that much more production activity out of higher cost plants.

So the Linares plant by the middle of June will have accommodated all the production that we had originally built the plant to accommodate. But because of, I think, good management practices, our team down there has created an opportunity for us to move more production at significantly lower costs and at, in most cases, improved quality because the quality that comes out of Linares has been excellent. They have created the opportunity for us to move more production down there.

So given all that is that just assumed to be your most efficient plant mid-year?

Yes.

Okay, thanks for your time.

Michael Schneider, Robert W. Baird.

Can we discuss just gross margins again? You mentioned, Scott, that in March you are up 70 basis points year-over-year in Water, 200 basis points in Fueling. I am curious, in Water I presume you expect that spread to increase as materials fall. Can you give us a sense of what your expectations are for the balance of the year or at some point do you expect to reach 200 basis points or more?

Well, Mike, I hesitate in this environment to give margin guidance. We will describe what we see as the competitive activity and we will describe the situation, but I really hesitate to give specific guidance.

I will tell you this, that it is certainly our expectation that between with some recovery in the market and with the cost initiatives that we have in place and will be putting in place in addition to what we have outlined here that we would see our Water margins grow by a couple of hundred basis points.

Well, maybe put differently so the $25 million in savings that you have detailed in the release and on the call is that evenly spread now through the balance of the nine months because the actions are complete or is there some front-end or back-end loading of those savings?

There will certainly more in the second half than they will be in the second quarter.

Mike, as we also tried to point out these savings on the raw material and direct labor side will, of course, depend on manufactured volumes which ultimately depend on sales volumes, on product mix, on the inventory turns. All of those variables are going to enter into that, but it's safe to assume that the bulk of those identified savings will be in the latter half of the year.

Okay. The Linares savings specifically, or I should say Siloam Spring savings, last quarter you were outlining $8 million of annualized savings. In this morning's release you have $3 million to $5 million for the balance of the year. Does that mean you did experience a fairly significant amount of that $8 million just in Q1?

No, the difference is the $8 million is an annualized number; that is a 12-month number. The $3 million to $5 million is how much we will get this year bearing in mind that the kind of plan for starting up Linares with all of the Siloam production is in June.

Right now we are actually experiencing some cost penalty because we have got still people in Siloam and we are training people in Linares. And just the cost of moving the processes around probably cost us a little money in the first quarter. That will switch after -- by the end of June when all of that production is out and all of it's running smoothly in the Linares facility.

I see. So then as you look then into 2010 that alone will give you another $3 million to $5 million in savings as you enjoy the first half savings in 2010. Is the same true then for the fixed cost reductions? That you are expecting $15 million that there is an equal amount of carryover from those savings in 2010 in the first half?

Mike, the way we look at the fixed cost savings are is that some of those are more kind of one-time. But we believe 80%, roughly 80% of that will carry over into 2010 and beyond.

I think we will get some of the fixed cost; most of the Linares savings will come in the back half. Some of the fixed costs will come in the first half of this year. We will have carryover effect -- we will certainly have carryover effect on a portion of the fixed cost savings as well.

Okay. And then on Fueling, so there is 4,100 stations left, most of which have been permitted it sounds like. Can you tell us, though, as it relates to Franklin sales how many stations are left in your eyes in that I presume you have sold -- you have already booked revenue for a portion of those 4,100 stations given the lead times?

Mike, I would say from our point of view the distribution does not carry a whole lot of inventory, particularly with just the general destocking that you have seen in North America in many businesses. We offer our own inventory. We put it in place in California so it's very close to them. So there may be, I am guessing, four to six weeks of inventory in there on their shelves, so that gives you some sense for what has already been presold of the 4,200.

Gregg, in Scott comments he mentioned that you expect fueling to be flat to up year-on-year in the second quarter. But would you expect sales to be up sequentially from the amount this quarter as well?

Sequentially from the first quarter?

Yes.

Yes, we would expect them to be sequentially up from the first quarter because second-quarter sales last year were $44 million.

Okay. Oh, good point, I am sorry. The vapor recovery, the bill that is pending right now and has a hearing, agree that it probably doesn't have a lot of traction as it relates to the vapor control devices. But the vapor monitoring devices; seems to me that there is a legitimate argument for these station owners to get some reprieve from the monitoring side of the mandate. Any thoughts there, Gregg?

I am not quite sure why that would be the case. One of the issues from the Air Resources Board is are these systems working and when these systems -- they have a lot of wear and tear on these systems and they want to make sure that they are working on a daily basis. So I am not sure that I would necessarily agree that delaying the monitoring side -- it's a smaller piece of the equation and also it's oriented to the larger stations.

And to the degree that you have smaller stations with less flow, they may not require the monitoring at all or if they do it won't be until 2010. It's only the large stations that are mandated this September. The mid-size stations are next September and the small stations will not require this.

Final question, Gregg, just on the litigation with your competitor, could you give us an update on where that stands?

We are not going to comment on ongoing litigation.

Okay. Thank you, guys.

At this time with no further questions in the queue, I would like to turn the conference back over to management for any additional or closing remarks.

Thank you for your attention. Good bye.

This concludes today's conference. We thank you for your participation.