Franklin Electric Co Inc (FELE) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Franklin Electric First Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Patrick Davis, Treasurer. Mr. Davis, you may begin.

Thank you, Chuck, and welcome to Franklin Electric's first quarter 2010 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 Fueling and International Water. On today's call, Scott will review our year-to-date business results, and John will review our year-to-date financial results. When John is through, we will have some time for questions and answers.

Before we begin, let me remind you that any forward-looking statements contained herein, including those relating to market conditions or the Company's financial results, expense reductions, profit margins, inventory levels, foreign currency translation rates, liquidity expectations, business goals and sales growth, involve risk and uncertainties. These risk and uncertainties include, but are not limited to general economic and currency conditions, various conditions specific to the Company's business and industry, weather conditions, new housing starts, market demand, competitive factors, changes in distribution channels, supply constraints, technology factors, litigation, government and regulatory actions, the Company's accounting policies and future trends and other risk which are detailed in the Company's SEC filings and are included in Item 1-A of part one of the Company's Annual Report on Form 10-K for the fiscal year ending January 2, 2010, Exhibit 99.1 attached thereto and in Item 1-A of part two of the Company's quarterly reports on Form 10-Q.

These risk and uncertainties may cause actual results to differ materially from those indicated by any 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. I describe our performance in the first quarter as encouraging. Consolidated net income increased by 87% and by 95% before restructuring charges. Consolidated sales increased by about $10 million or 7%, but this increase was after a $9 million reduction in fueling sales.

Recall that during the first quarter last year, we enjoyed surging sales of fueling equipment in California due to an environmental mandate in that state. The California sales surge started to abate in the second quarter last year. So going forward, year-on-year sales comparisons will be less impacted by the sales surge.

Water Systems represented about 83% of our total sales during the quarter and all of our Global Water Systems business units achieved solid revenue and earnings gains. Our Global Water sales increased by 17% organically and by 8% excluding the impact of foreign exchange.

Over the past several years, we've focused on building our sales base in developing regions such as Latin America, Asia Pacific, and Southern Africa. During the first quarter, our sales in these regions represented 35% of our total Water Systems sales and grew by 34% versus prior year. And as an additional point of comparison, sales in Latin America, Asia Pacific, and Southern Africa were up by 22% compared to the first quarter 2008.

Water Systems operating income before restructuring charges increased by about 80% and operating margins improved by about 500 basis points compared to first quarter 2009. Again as an additional point of comparison, our overall water sales in the first quarter 2010 were down about 7% compared to the first quarter 2008 excluding the impact of acquisitions.

First quarter 2010 operating income before restructuring charges was up about 25% compared to the first quarter 2008 as our water operating margins were 300 basis points higher than they were during the first quarter 2008. So while our water sales are not quite back to 2008 levels, they are rebounding nicely and our margins are up sharply. About half of our first quarter Water Systems sales were in the US and Canada, and these sales grew by about 9% overall and 6% excluding the impact of foreign exchange.

We believe that this organic growth in the US and Canada can be attributed to two factors. First, while distributors reduced inventory during the first quarter last year, we believe they increased inventories modestly this year. Second, sales of our electronic water pressure control product line are growing rapidly due in part to the very successful launch of our new Sub-Drive 2W product line. The Sub-Drive 2W product uses proprietary Franklin technology to provide well owners with a low cost easy to install methods retrofitting their water well system to provide constant pressure even during peak demand periods. In addition, in March we implemented a price increase on Water Systems product in the US that we estimate will average about 2.5% across our product line.

International Water Systems business units accounted for about half of our total water sales during the quarter and grew by about 25% overall and by 10% without the impact of foreign exchange. As I mentioned earlier, much of the international growth occurred in developing regions.

Fueling Systems accounted for about 17% of our total sales during the quarter and declined by 25% due to the surging California vapor control sales during the first quarter prior year. Fueling operating income declined by 39% due to lost leverage on the lower sales base.

We were quite encouraged that our first quarter fueling sales outside the California grew by about 19% with international fueling shipments up 57% compared to the first quarter prior year. While all international regions were up, shipments to vapor control equipment to China were particularly strong. I should also mention that we increased our Fueling Systems prices on a global basis by about 3% during the quarter.

Looking forward, during the second quarter we currently anticipate that our consolidated sale will grow in the high single-digits and our operating income margin before restructuring expenses will improve by 100 to 200 basis points compared to the second quarter 2009. We believe that our second quarter Water sales will grow by about 10% and that water operating income margins before restructuring expenses should increase by 100 to 200 basis points compared to second quarter 2009.

We also believe that fueling sales will be flat in second quarter prior year as international fueling growth should be sufficient to offset a more modest year-on-year sales reduction in California. Fueling operating income margins before restructuring expenses are anticipated to increase 50 to 100 basis points versus the second quarter 2009.

So in summary, we're encouraged that we are seeing a slow but steady recovery of our markets here in the US and Canada and stronger sales growth in our international markets. The sales growth combined with the lower cost structure coming out of the recession are allowing us to enjoy the benefits of operating leverage. While we believe this formula will be operable during the first half of this year, we're mindful that rising commodity costs such as copper, steel, and resin materials may start to pressure margins in the back half of the year while watching material cost carefully determine if additional pricing actions may be necessary later in the year.

I'll now turn the call over to our CFO, John Haines who'll provide additional information regarding our financial performance during the quarter.

Thank you Scott and good day. Our fully diluted earnings per share were $0.31 for the first quarter 2010, an increase of 82% compared to 2009 first quarter earnings per share of $0.17.

Earnings per share before restructuring charges were $0.37, an increase of 95% compared to the prior year. First quarter 2010 sales were $160 million, an increase of 7% compared to 2009 first quarter sales of $149.8 million.

Water Systems revenues increased by $19.2 million or about 17% overall from the first quarter of 2009. The Water Systems sales increase excluding foreign currency translations was $9.2 million or about 8%. Internationally, Water Systems sales excluding currency translation were up 10% versus the first quarter of 2009. As Scott indicated, sales revenues increased in all international markets with the most significant improvement in Latin America and Asia Pacific.

Fueling Systems sales declined by about 25% during the first quarter of 2010 compared to the same period in the prior year. This decline was due entirely to a decline of vapor recovery equipment sales in California and was partially offset by a 57% increase in international sales, most significantly in Mexico and China.

The Company's consolidated gross profit was $50.4 million for the first quarter of 2010, up $7.2 million from $43.2 million in the first quarter of 2009. Correspondingly, the gross profit margin increased to 31.5% for the first quarter of 2010 from 28.8% for the first quarter of 2009.

For the consolidated entity, operating income before restructuring expenses was $14.6 million or 9.1% of sales in the first quarter of 2010, up 66% from the same period in 2009. During the first quarter 2010, consolidated SG&A expenses increased by $1.4 million or about 4% compared to the first quarter 2009, primarily as a result of compensation related charges and higher professional service expenses.

Water Systems operating income before restructuring expenses was $18.9 million in the first quarter of 2010, an increase of 80% versus the first quarter of 2009, primarily as a result of higher revenue and leverage on flat year-over-year fixed costs. The first quarter 2010 Water Systems operating income margin before restructuring was 14.1% and improved by 500 basis points compared to the prior year first quarter. The Water Systems operating income in the first quarter 2010 includes a $1.2 million gain on the sale of land and building in South Africa. This gain was partially offset by increased cost for slowing moving inventory versus the first quarter of 2009.

Fueling Systems operating income before restructuring expense was $4.3 million compared to $7 million in the first quarter 2009, and operating margins were 16.3% of sales in the first quarter 2010 compared to 19.8% of sales in the first quarter 2009. The decline is primarily attributable to reduced operating leverage.

Restructuring expenses for the first quarter of 2010 were $2.2 million and reduced diluted earnings per share by approximately $0.06. Restructuring expenses include pension charges, severance expenses, and manufacturing equipment relocation cost and primarily relate to the closure of the Siloam Springs, Arkansas manufacturing facility that we had previously announced. Approximately $1 million of these expenses were non-cash.

The company estimates that additional pre-tax closing cost of $1.8 million to $2.6 million will be incurred mostly in the second quarter of 2010 for the closure of the Siloam Springs facility. We estimate that about 90% of these second quarter charges will be non-cash.

The other income, expense and income tax lines on the income statement as reported include the impact of the reversal of an uncertain tax position for $2.7 million related to an acquisition in a prior year. The adjustment for this reversal of the uncertain tax position did not have an impact on net income. The uncertain tax position was originally recorded as a receivable from the sellers' per the terms of the purchase agreement. The receivable and the tax liability related to the uncertain tax position were reversed in the first quarter of 2010 as the statutory limit for audit of a tax return expired.

Excluding the reversal of the uncertain tax position, other income expenses would have been about $400,000 income and income taxes would have been about $3.4 million of expense. The Company projects that its effective tax rate will be 32.5% for the remaining quarters of 2010.

The Company ended the first quarter of 2010 with cash on hand of about $70 million compared to about $50 million of cash on hand at the end of the first quarter 2009. Cash flow from operations for the first quarter 2010 was a use of cash of about $12.6 million compared with use of cash for the first quarter of 2009 of $1 million. The increase is attributable to the growth in accounts receivable during the quarter of about $29 million compared to about $50 million in the prior year. The growth is consistent with the increase in 2010 sales and payment of customer discounts earned in 2009.

The company had no borrowings outstanding on its revolving credit line at the end of the first quarter 2010. Inventory balances were $141.3 million at the end of the first quarter 2010 and were 16% lower when compared to $168.9 million at the end of the first quarter 2009.

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 improved versus the year end 2009. We believe the cash on hand internally generated funds and existing credit arrangements provide sufficient liquidity to meet current commitments in 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 principle payments on our long-term debt until 2015.

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

Thank you. (Operator Instructions). And our first question comes from Mr. Joe Radican of KeyBanc. Go ahead sir, your line is open.

Hi, good morning guys. I am stepping in for Matt this morning. Let me start with Water. Can you give us a sense of how Water has progressed through the quarter and are you able to quantify at all how much you saw of a pre-buy ahead of that price increase and/or seasonal restocking versus any kind of uptick in real end market demand?

You got to bear in mind that about half of our Water business is in the US and Canada and about half of it is in markets around the world with 35% being in the developing regions that we focused on most intensely over the last several years, Latin America, Asia Pacific, and Southern Africa. So we have to segment the answer to your question along those lines. In the US and Canada, let me let Robert Stone who runs our US, Canada business respond to that with respect to the sales in the US and Canada. Robert?

Sure. Joe, I would say that the Water pattern we saw in the first quarter was very typical what we have seen in other first quarters. There was certainly little bit of a buy up in anticipation of a price increase, but nothing unusual relative to prior years in that regard. I would say that in the US and Canada we would estimate that the inventory buildup was very modest, probably less than 5% of our sales to that channel. That channel's out-the-door sales can vary quite dramatically depending on various product lines. But we would guess that our out-the-door sales of our products were very much in line with purchases in the same period.

And I would say then also that the -- if I look at Latin America, the other thing you have to keep in mind is that the seasonality in those markets being in the opposite hemisphere is completely different and those markets are winding down at this time a year rather than building up. But to come back to the inventory build up, I would say we did not have a dramatic build up even including the consideration of seasonal build up at this point in the year.

One point that would tend to verify that is that our sales as we've gone through April had been I would say very solid. We had nice sales gains in April in our US Water business not at all indicative of an inventory build up in March. I also want to hasten to say that the reality is even though we are encouraged by what we've seen in April, we are not -- the second quarter is very heavily a function of shipments in June.

Typically, we'll see the shipments in June almost equal to the shipments in April and May combined. So, we are not really going to know how the quarter is. I don't want to give the wrong impression. But, I think it's a good data point that our shipments in April have been very solid in the US and Canada. Gregg, do you want to comment on international?

When you move outside of the Americas and move over to Europe, we had a very good start in Western Europe to the quarter. It slowed some later in the quarter and again the spring has been a little bit late in coming in Europe and been wet and obviously with some of the financial issues I'm sure that could some people some pause. The Middle East has continued to strengthen.

In Southern Africa, I'd say we started a little slower, but we are coming on stronger now. The mines are beginning to come back online. We are seeing more industrial activity in Southern Africa, so we are seeing that accelerating. Asia continues to do well. As Scott has pointed out, has been fairly steady throughout the quarter and we are beginning to see some seasonality. In Australia as Robert pointed out, when you are in the Southern Hemisphere, they begin to slowdown as we enter into their winter. But the rest of Asia is generally strong and doing well for us.

One final comment on US and Canada to Joe is that I would say the buy up that we saw ahead of the price increase and truth was more modest relative to what we would have seen in prior years and I think that's indicative of distributors' reluctance to build up a bunch of inventory. That helps our April certainly.

Great, thanks. And then on the Water margins, if you exclude the sales of land and the building that you called out, they seemed a little light at least sequentially versus a relative -- a slightly lower revenue base, but was that all related to the inventory costs that you mentioned or is there something else going on there and how should we think about margins kind of going forward sequentially from here?

Well, I indicated that we expect margins in water to be 100 to 200 basis points higher in the second quarter than they were in the second quarter of prior year. I'd also say that while we had a specific event that effected water margins through the sale of some property in Southern Africa. Over the course of the quarter there are other specific events that occur. I thought that we had a little disproportionate spending during the quarter in what we called PAR or maintenance type projects. We had I would just say it's somewhat of an unusually large increase in our obsolescence reserve during the quarter. So, while we had this one item that seemed to look like a gain, was a gain, we got other items that I thought during the quarter would have perhaps gone the other way. So I don't want to overplay that $1.2 million gain as a major factor, but necessarily improved our margins net net during the quarter.

Okay. And then on the fueling side, how much revenue did you get in California? I think you had said that you are expecting about $3 million and are you seeing any new installs on [bigger] management or ISD from the lagging stations that needed to comply, or are we up basically at a run rate replacement activity here which should be relatively stable I would think going forward?

Gregg, why don't you comment on that?

We did not see very much activity at all about lagging stations. There is another deadline in September of this year for a number of stations to comply with the in-station diagnostics. But beyond that we are in a more of a run rate mode in California with replacements. We would expect that run rate mode to grow over time because most of this equipment was installed. As Scott pointed out, the 2008 and early 2009 time period, it is durable equipment, but it will wear out over time and so we will expect our replacements to continue to grow over the next couple of years.

Okay, great. Thanks very much guys.

Thank you. And our next question comes from Mr. Mike Halloran of Robert W. Baird. Go ahead sir, your line is open.

Good morning.

Good morning.

Good morning.

Back on the Water margin side, what would you view as a sustainable 1Q water margin to build off of because you have the gain on one side and then you have the slower moving inventory, was there any mix shift or anything like that in the quarter?

I'd have to say that the Water margin for the -- first of all, we are not happy with our margins in Water, okay. I mean the major initiative of the company is to improve margins in our Water business. So, I want to make that point immediately. But having said that, I -- the margins that we had in the first quarter of this year were in line with our expectations for the first quarter of this year. And as I said, I mean there was a gain -- I said there happen to have also been a series of other things that happened during the quarter that I felt on balance -- I wouldn't make a great deal or point that you see that gains sort of put us over the top for the quarter because I don't feel that way at all. I don't think that's an accurate assessment.

In terms of mix that you asked about Mike, one thing we saw in the first quarter was less Ag sales which means less large through a large diameter motor sales and of course those products have very nice margins. We also saw a nice pickup in our electronic controls as Scott mentioned earlier products and those products sold decent margins as well. So there is a bit of shift there. But the thing in South Africa, the gain is worth about 90 basis points and as we think forward as we said in the past, this is a solid mid-teens to upper mid-teens business and that's the number one priority for the Company, the number one initiative we have going on and as we talked on in many quarters now, there are lots of different things that we are doing to affect that.

And what I'm really driving at, if you think about a 35%, 40% incremental margin which I think you guys have said is reasonable in the past and depending on where you fall in this first quarter margin, if it's closer to the 14% than it seems like that a 100 to 200 basis points achieved throughout for the next quarter is very reasonable and some of the volume trends that you are thinking about might even prove conservative?

Yes, Scott pointed out that the number one risk that we are facing in to for the balance of the year, this is probably more a second half issue than it is a second quarter issue, is the commodity raw material increases. So as we look at copper, steel, the resins -- oil based resins and things like that, that's a headwind that we have in front of us. But volume helps for sure and as we continue to enjoy the benefits of fixed cost reductions, we should have margin improvement for sure.

And then as long as you are talking about on the pricing side, could you just give a little bit more color on the environment and I think you commented that about you are expecting 2.5% or so in pricing to stick this quarter. Can you just give a little bit more color about what the environment looks like, why things are sticking with distributor and other expectations are and things like that?

Well, commodity costs started to increase in the second quarter last year. I mean they as you know fell precipitously for a period of time prior to that, then started to rise and we and our competitors buy the same things. We buy products made out of steel, we buy products made out of cable -- copper, we buy products made out of plastic resins. And while we are in our -- on our P&Ls and join half of the past costs the way they flow through our P&L, that's going to turn around and eventually we've been holding off our suppliers, but eventually our suppliers are going to enforce increases because their costs have gone up dramatically and that's going to start flowing through our P&L. And we have seen that where we've come through a period in especially the US, Canada industry of intense rivalry quite frankly because of a strategy change that Franklin has initiated some time ago, several years ago, that caused a very dramatic market share shift in the industry.

Well, those shares are now stabilized and I would say the period of intense rivalry caused by massive share shifts is somewhat in the past. It's still very competitive business and we earn our stripes every day, but it's a more stable industry environment than it has been in the past and with that has come an ability based on rising raw material costs to recapture those costs with price and the market that we serve is a fairly fragmented market. And so I think that would be my analysis of the pricing scene that's out there. We've come out of a period of intense rivalry where we and our competitors all took a bit of a beating. The market share situations have stabilized and we are starting to see that reflected in the pricing in the industry.

Yes, I would add that within the US and Canada, there are still areas of the country where we see very intense discounting, but those are more isolated than in the past. Certainly, there are also product lines that from time to time and on a seasonal basis we see intense discounting, but that is also to a lesser degree. Outside the US if speak to the other Americas businesses, they are very competitive as well. The competitiveness in those areas has not changed significantly over the period of time that Scott was addressing. They have been competitive, but they also recognize the material prices just go up and price increases are necessary. And we have not asked for more price really than we expect to realize in terms of cost inflation.

Great. I appreciate it.

Thank you. And our next question comes from Mr. Ned Borland of Hudson Securities. Go ahead sir, your line is open.

Good morning, guys. Just a follow-up on the second quarter Water margin issue and not to be the dead horse too much here. But, it does strike me as a little bit conservative if you expect to get price, you haven't seen too much re-stocking, there is the raw material issue, but I mean are there any other issues in the first quarter that kind of carry into the second quarter, or is there any sort of foreign exchange hit or anything else that you are seeing there?

Not really, I can think of no disruptive or the issues that you described as discontinuities to what we've been experiencing here. So I think we're looking at the second quarter that hopefully will be in line and we expect to be in line with the guidance that we've given. Sales up in Water about 10% and contribution or operating income margins being up 100 to 200 basis points.

Okay. And then maybe on the international fueling opportunities, if you can give us a little color on what's happening in China and where we are in that process? I mean, are we sort of in the early innings there still?

Ned, what's going on in China currently is that there is the similar upgrade that we saw in Beijing is now occurring in Shanghai and in the South. I am sure part of that is precipitated by the World Expo and the Asian Games that will be coming here this summer. So that has been what's been driving part of the China business particularly for the vapor management where we saw about half of the increase as Scott talked about internationally was coming from China for vapor management. We continue to see in China is growth in our pressure systems, in our pressure pumping systems and also in our fuel management systems, our tank gauging and we are seeing that really across all of our international markets. We are seeing pressure pumping, tank gauging and piping systems. We've seen strong double-digit growth in all those product lines outside of China.

Vapor management, we are again, still stuttering along in Korea. The mandate in Australia is going to be slow to come online. We talked earlier in a couple of calls about the mandate in Europe that's going to be over the next several years and when we see little pockets of activity otherwise. But generally the China business continued, I expect it will probably abate some in the second half, but we're seeing our other product lines accelerating as well.

In the United States, virtually every gas station has converted from the technology that was in existence before which was suction technology that gasoline was drawn to the surface using suction to pressure putting a motor and pump down in the tank and moving the gasoline to the surface using pressure. Now, of course Franklin is because the only UL approved motor for that kind of installation. So essentially every gas station in North America uses a Franklin motor and we've gone into the pump business.

But on top of that the piping equipment, which is a very important in the sump, in the connections and all the underground system that we build and the leak detection systems that we build, are basically designed for pressure systems. And while the US has converted to pressure, outside the US, it's still probably 80%, in total 70% suction. And so there is a major conversion opportunity that is occurring. I mean this is an important story for our Franklin Fueling Systems that this conversion outside the US is ongoing. It allows you to produce and build a lower cost gas station, it allows you to pump gas faster, it allows you to build a larger station. Just recently Shell has specified pressure as the design for their stations globally going forward and so as that conversion occurs, yes, we can sell pumps, yes we can sell motors; we can also sell our whole system and including the leak detection systems that go with that.

I sometimes worry that people because of the California story think that the only growth driver for our fueling business is the vapor recovery technologies that we have. While in fact our core technology has I think a very attractive long-term because this isn't a revolutionary conversion that's going to occur over a short period of time. It's the conversion that grinds on over time, but it's an attractive growth driver for our fueling business.

That's good color. Thank you.

Thank you. And our next question comes from Mr. Paul Mammola of Sidoti & Company. Go ahead sir, your line is open.

Hi, good morning everyone.

Good morning, Paul.

I was wondering if from the cost side, do you think you've seen the full benefit of the move down to Linares or is there more to go on a year-over-year basis as we go through 2010?

There is no question that there is more to go. First of all, on the fixed cost side, you don't really see the fixed cost benefit of a facility consolidation until you finally actually vacate one plant and complete the move into another and our Siloam plant was still operating in the first quarter of this year. So we're going to see a fixed cost gain now that that plant is completely shut down and all the costs associated with having that facility in place are behind us.

And secondly, we didn't start capturing the direct labor benefit until relatively late in the year last year. So, we're picking up something like $1.8 million or so a quarter in direct labor savings and we're not there in the second quarter last year and we're really not there until very late in the year last year. So we've got that to look forward.

And third as I have indicated before, because of really excellent work on the part of our manufacturing people in Linares, we've been able to lean out the processes in that plant and create additional space that will allow us to move additional manufacturing volumes into that plant over the course of this year and into early next year. And so, I think we've got three layers of benefit that we're going to see as we go through this year.

Okay, that's very helpful. Sorry to take you back to margin. But, as you look at that forecast of an extra 100 to 200 basis points on year-over-year margin next quarter, I guess what are the variables in your mind, the top variables, is it cost or is it really how much leverage do you get basically in June?

It's both, it's contribution margin and it's volume, no question about -- those are the drivers -- fixed costs are, we know what our fixed costs are going to be pretty well. And our Water contribution margin is right around 44% and will it go, if it moves down to 43%, that's a pretty material change. It moves up to 46%, and that's a very or 45% and that's a very material change. So we watch that like a hawk and the volume we get obviously at that kind of contribution margin level, the volume doesn't have to fluctuate very much to have a fairly big impact on our overall profitability.

Okay, understood. And then finally, I think John you mentioned the high thrust market, could you talk a little bit more about what's going on there and maybe what you expect for the remainder of the year?

Yes, I will take that if -- or Scott you want to speak to that?

Well, first of all, the high thrust market, again we have to bear in mind that about half of our Water Systems sales are in the US and Canada, and half of them are in markets all over the world where we sell this product and the drivers of the high thrust market in the US and Canada are very different than the drivers elsewhere in the world. Usually when we get that question, the question is really asking tell me about the high thrust market in the US and Canada, and so I'll let Robert respond to that.

Paul, firstly the irrigation season this year has been miserable. It's been very wet in the major Ag areas across the country and so there have not been the same sales of larger motors that are typically used in the Ag area in the first quarter and what we have to see is how that impacts sales in the second quarter. There has been some price pressure in some of these product line areas I think driven mainly by competitors' inventory situations. That's probably something that will work itself out over a period of time. We are seeing a little price pressure there again within the US and Canada. I would look at most of that as being short-term issues rather than anything long-term.

Okay, thanks for your time guys.

That really is one of the important items that we're going to be watching in the second quarter is what happens in the Ag market. We did have in some of the areas where there is usually early irrigation, it was particularly wet in the US this year and our Ag sales although year-on-year only down mid-single digits, I mean it wasn't that the -- that was though compared to a pretty weak first quarter prior year. And so, we think that that has the potential to turn around and turn around quickly, unfortunately largely dependent upon weather, but it has the potential to turn around quickly and that could be a very major factor. Really we view it as an upside if that comes through for us as we go through the second and third quarters of the year.

At this time, I am showing no further questions. I would like to turn the call over to management for any closing remarks.

Thank you for your attention. Good bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.