Franklin Electric Co Inc (FELE) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Franklin Electric Company Inc. 2015 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Mr. Jeff Frappier, Treasurer. Sir, you may begin.

Thank you, Amanda and welcome everyone to Franklin Electric's first-quarter 2015 earnings conference call. With me today are Gregg Sengstack, our CEO, and John Haines, our CFO. On today's call Greg will review our first-quarter business results and then John will review our first-quarter financial results. When John is through, we will have some time for questions and answers.

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

During this call we will also discuss certain non-GAAP financial measures which the Company believes help investors understand underlying trends in the Company's business more easily. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release which you can find on Franklin Electric's website.

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

Thank you, Jeff, and good morning, everyone. The first quarter started strong but slowed measurably in the back half. While our GAAP earnings per share were 17% higher than last year, our operating earnings were well below our expectations and guidance for the same two reasons cited by most global companies, material strengthening of the US dollar and dramatically lower oil prices.

These two factors accounted for the majority of the $9.5 million decline in our adjusted operating income. The impact of these two factors was greater than we originally forecasted and overshadowed our continued positive organic growth across many markets. Specifically, the strengthening of the US dollar reduced our reported sales 7% and adjusted operating income by about 10% as compared to the first quarter of last year due to translation effects.

In addition, our Pioneer Pump unit, which derives the vast majority of its domestic revenue either directly or indirectly from the upstream oil and gas market, saw sales decline by 50% in the US as compared to last year. Even with the continued growth in offshore sales, total Pioneer brand Pump sales declined by over 30% during the quarter. Most of the balance of the decline in our adjusted operating income is the result of two additional factors.

First, raw material costs at several of our overseas units increased since these units purchase some raw materials that are priced globally in US dollars. We have implemented price increases in those units to offset the cost increases. We should start to see the impact of these price increases during the second quarter.

And second, with the challenge of weak demand due to multiple factors in the US market, we incurred higher promotional costs in the quarter. So while we continue to be impacted by currency and a soft oil and gas market, we are taking steps to move our profitability back to historical levels.

Turning to our Water Systems business in the United States and Canada which represented 35% of consolidated sales in the quarter, the silver lining of the Pioneer brand dewatering pump sales decline was the variable margin on Pioneer products is back at historical levels and in line with the balance of our surface pump product lines. The sales from other surface water pumps increased during the quarter where we continued to get traction with new products.

And groundwater pump channel sales declined by 6%. As I mentioned last quarter, groundwater demand continues to be uneven. In general, groundwater distributors are cautious to take inventory even with promotions and there are still relatively high levels of inventory at groundwater pumps in the key irrigation markets like West Texas and many other parts of the lower Midwest and central plain states where it has been wet and the growing season started later than normal.

In Latin America excluding acquisitions and poor foreign translation, our sales grew 16% with record results in Mexico and in Brazil. However, this entire increase was wiped out when translated back to US dollars. In Brazil, the integration of the Bombas Leao business which we acquired last June continues on plan. Overall, margins were impacted in Brazil due to higher input costs both from domestic sources and products imported in dollars. We have taken pricing actions to offset those costs.

Moving to Africa, our team in Southern Africa turned in a solid quarter with revenue up 20% in local currency over a relatively easy comparison to last year. They are not expecting that kind of growth in Q2 as we expect the seasonal slowdown in the second quarter to be exacerbated by a weak corn crop and depressed crop prices. However, our new distribution center in Zambia is operational and should help offset the weaker market in South Africa.

Moving to the Middle East and North Africa, there are a lot of moving parts in the business. Our business in Turkey which principally sells Impo branded products and buys and sells in three currencies, the Turkish lira, the euro and US dollars, had record sales in local currency but again saw margin compression due to input costs. Here again the local team is continuing to take actions to address this issue.

Overall, when we include export sales into the region from our European operations, sales declined in the region before translation by about 5% due to lower sales in Saudi Arabia and continued political unrest in the region.

In Asia-Pacific we saw a similar sales decline before translation by 5%. We view this decline to be more from customers delaying orders as we sell products in several markets in US dollars and for other reasons although business in China albeit small, was not robust in the quarter.

Revenue at our Pluga joint venture business in India is behind plan. We have taken steps to address this situation.

Europe, like Latin America and Southern Africa, had strong organic sales, up 15% before translation but after considering a 26% negative impact of foreign currency translation before the sales actually declined 11% with earnings taking an even bigger hit. Some of this is attributable to the previously discussed move of production from Germany to the Czech Republic with strong demand we have had to incur additional costs to maintain deliveries. We expect these costs to abate by midyear.

A few comments on our Fueling Systems business. After double-digit sales growth last year, our Fueling Systems business slowed down this quarter. However with organic growth before translation of 5%, our fueling teams posted record operating income in the first quarter. In the US and Canada, Fueling Systems sales were up 5% before translation with fuel management systems and service station hardware posting double-digit gains due in part to new product introductions.

Internationally, Fueling Sales before translation grew approximately 5% as well across all regions and most product lines, again led by fuel management systems, fuel pumping systems, and service station hardware.

There were three pockets of weakness internationally each contributing about 1% headwind to consolidated Fueling Systems sales. First, storage tanks in the UK to support oilfield activity in the North Sea have declined with the decline in oil prices. Pumping system sales in Russia have declined due to the contraction in the Russian economy and the sensing system sales in China which we believe is due to the publicized investigation of corruption within the Chinese state owned oil companies.

As we look forward to Q2, we see most of the factors that contributed to our weak performance in Q1 namely the impact of the strong dollar and weak oil prices continuing. Further in the US, unfavorable early-season weather and higher than normal inventories will be a drag in our groundwater sales. Offsetting these headwinds are strong organic growth in Europe in developing regions, pricing actions and fixed cost controls that we have in place.

Because of these factors, we estimate that our second-quarter 2015 Water Systems net sales will be flat to the second quarter of last year and our Water Systems adjusted operating income to decline by 6% to 8% as compared to the 33% decline in the first quarter. We expect our Fueling Systems segment where we have seen a general slowdown in quote and order activity from two principal markets, India and China, net sales and adjusted operating income to be flat to grow 3% as compared to last year's second-quarter results. Overall, we expect our second-quarter earnings to be within a range of $0.54 to $0.58.

I would now like to turn the call over to John Haines, our CFO.

Thank you, Gregg. Our fully diluted earnings per share as reported, were $0.41 for the first quarter 2015 versus $0.35 for the first quarter of 2014. As we note in the table to the earnings release, the Company adjusts the as reported GAAP operating income and earnings per share for items we consider not operational in nature. We believe presenting these matters in this way gives our investors a more accurate picture of the actual operational performance of the Company. When current transactions are related to previous period transactions that were called non-GAAP, the current period impact is also called non-GAAP to be consistent.

Non-GAAP expenses for the first quarter of 2015 were $0.8 million and included $0.5 million in restructuring costs primarily for the continuing European manufacturing realignment started by become the Company last year and $0.3 million of Other non-GAAP expenses related to retired executive pension costs.

The Company acquired the minority shareholdings of Pioneer during the first quarter. This transaction created several significant financial benefits for the Company. The first was the reversal of a deferred tax liability created in 2012 when the Company acquired a controlling interest in the Pioneer subsidiary and realized a gain on the then equity investment in Pioneer.

The first quarter tax benefit -- this first quarter tax benefit of about $4.8 million was treated as a non-GAAP adjustment to the Company's earnings because the transaction in 2012 that gave rise to the gain and the tax liability was treated as a non-GAAP adjustment as well. The first quarter 2015 non-GAAP adjustment had a net EPS impact that reduced earnings by $0.09. There were no adjustments to EPS for non-GAAP items in the first quarter of 2014.

So after considering these non-GAAP items, first-quarter 2015 adjusted EPS is $0.32 which is down 9% to the $0.35 adjusted EPS the Company reported in the first quarter 2014. It is worth noting that the Company estimates in the first quarter 2015 adjusted earnings per share were negatively impacted by $0.04 due to the translation impact to loan of foreign exchange.

As Gregg noted, we saw a significant strengthening of US dollar versus many key currencies which we do business in including the euro, Brazilian real, the South African rand and the Turkish lira during the quarter. The strengthening causes the earnings in these units to be translated back to fewer US dollars.

Consolidated net sales in the first quarter of 2015 were $225.7 million, a decrease of $5.7 million or about 2% compared to the first quarter of 2014 sales of $231.4 million. The incremental impact of sales from acquired businesses was $8.9 million or about 4%.

Sales revenue decreased by $16.5 million or about 7% in the first quarter of 2015 due to foreign currency translation. As I said, this translation effect reduced our adjusted earnings per share by about $0.04 in the first quarter.

The sales change in the first quarter of 2015 excluding acquisitions and foreign currency translation was an increase of $1.9 million or about 1%.

Water Systems sales were $179.2 million in the first quarter 2015, a decrease of $5.4 million or about 3% versus the first quarter 2014 sales of $184.6 million. Sales from businesses acquired since the first quarter of 2014 were $8.8 million or about 5%. Water Systems sales were reduced by $13.8 million or about 7% in the quarter due to foreign currency translation.

Water Systems sales excluding acquisitions and foreign currency translation were flat to the first quarter of 2014.

Water Systems operating income after non-GAAP adjustments was $19.7 million in the first quarter 2015, down $9.6 million versus the first quarter 2014. The first-quarter operating income margin after non-GAAP adjustments was 11%, down 490 basis points from 15.9% in the first quarter of 2014. Operating income after non-GAAP adjustments decreased in Water Systems primarily due to foreign currency translation and reduced sales of Pioneer branded equipment for the oil and gas industry.

The strengthening US dollar, as Gregg said, also lowered margins in foreign business units due to the increased cost of US dollar sourced product in advance of offsetting price increases. Additionally, higher promotional activity in the US contributed to the decline in operating income and operating income margins.

Fueling Systems sales represented 21% of consolidated sales and were $46.5 million in the first quarter 2015, a decrease of $0.3 million or about 1% versus the first quarter 2014 sales of $46.8 million. Fueling Systems sales decreased by $2.7 million or about 6% in the quarter due to foreign currency translation.

Sales from acquired businesses were $0.1 million. Excluding acquisitions and the impact of foreign currency translation, Fueling Systems sales increased about 5% compared to the first quarter 2014. Fueling Systems sales growth was primarily from fuel management systems and pressure pumping systems, partially offset by a decline in sales of dispensing systems and storage tanks.

Fueling Systems operating income after non-GAAP adjustments was a record $9.8 million in the first quarter of 2015 compared to $9.2 million after non-GAAP adjustments in the first quarter of 2014, an increase of about 7%. The first-quarter operating income margin after non-GAAP adjustments was 21.1%, an increase of 140 basis points from the 19.7% of net sales in the first quarter of 2014. The increase was driven by a positive product sales mix.

The Company's consolidated gross profit was $71.5 million for the first quarter of 2015, a decrease of $6.6 million or about 8% from the first quarter of 2014 gross profit of $78.1 million. The gross profit as a percent of net sales was 31.7% in the first quarter of 2015, a decline of about 210 basis points versus 33.8% during the first quarter 2014. The gross profit margin decrease was due in large part to the same factors that impacted the Water Systems operating income after non-GAAP adjustments.

Selling, general and administrative expenses were $55.2 million in the first quarter of 2015 compared to $52 million in the first quarter of prior year, an increase of $32 million or about 6%. The increase in SG&A expenses from acquired businesses was $2 million. Excluding the acquisitions, the Company's overall SG&A expenses in the first quarter of 2015 increased by $1.2 million or about 2% to the prior year first quarter.

As we said, the Company acquired the remaining minority shares representing about 30% of Pioneer Pump during the first quarter for about $20 million. This transaction created significant benefits below the operating income line that are accretive to the earnings per share of the Company. The first was a reversal of deferred tax liability already mentioned that was created in 2012 when the Company acquired the controlling interest in the Pioneer subsidiary and realized a gain on the then equity investment in Pioneer.

This first-quarter tax benefit of about $4.8 million was treated as a non-GAAP adjustment because in 2012, we treated the gain as a non-GAAP adjustment we are now consistently treating the reversal of the tax liability related to that gain as a non-GAAP adjustment and reducing our reported earnings per share in the first quarter by $0.10 as indicated in the table on page 2 of the earnings release.

The Company also realized a gain on the redeemable noncontrolling interest liability in the first quarter of this year of about $2.7 million which is included in Other income. This purchase transaction also resulted in other tax benefits of about $2.5 million which were expensed through the Company's earnings in prior years as well as a current period benefit of about $1 million related to the 2015 gain. Because these benefits were not called out as non-GAAP adjustments, it burdened the then reported earnings of the Company when reported, we are not now calling out the reversal of non-GAAP adjustments to ensure the treatment and disclosure is consistent.

Due primarily to the tax items just mentioned above related to Pioneer, the first quarter of 2015 had a net tax credit. Removing these discrete items the tax rate for the first quarter of 2015 was 27% and in the first quarter of 2014 was about 25%. The full-year 2015 rate is estimated to be about 27% before discrete events.

The Company ended the first quarter of 2015 with a cash balance of $69.6 million which was $10.5 million higher than at the end of 2014. The cash balance increase is primarily due to borrowing on the revolver to fund the Pioneer purchase and working capital needs.

The Company had about $70 million of borrowing on its revolving debt facilities at the end of the first quarter 2015 and had about $15 million in borrowings at the end of the first quarter 2014. The Company purchased about 51,000 shares of its common stock for approximately $1.7 million in the open market during the first quarter 2015. The total remaining authorized shares it may repurchase is about 820,000.

This concludes our prepared remarks. We would now like to turn the call over for questions.

(Operator Instructions). Mike Halloran, Robert Baird.

Good morning, guys. So could you talk about some of the pricing initiatives and the cost initiatives you guys are doing out there? What about the product categories or the environment enables you to take some of these pricing initiatives and have them be successful as the first question? And secondarily just kind of go through some of the fixed cost changes you guys are making?

Sure, Mike, I will speak to the pricing first. If you take an economy like Brazil where inflation is not 1% or 2%, it is more in the high single digits and where the economy, they are accustomed to seeing when their input costs increase, seeing pricing actions it is pretty straightforward. We will follow [WEG] for example when they are changing the motor pricing along with our pump pricing and we can also do that on imported products.

Similarly in Southern Africa where we are in a competitive market where the vast majority of the product is coming in from Europe and or the United States or other areas of the world, again there is an expectation that you are going to respond with market-based pricing based on the cost of the imported goods. It kind of goes on throughout the developing regions of the world, there are these expectations and you can move on pricing.

With respect to fixed cost, certainly we are continuing to integrate in Brazil, as I mentioned Leao, that has been a nice acquisition, it is moving on schedule. We have talked earlier about the fixed cost take-out we are doing in Europe with the consolidation of facilities there. We are balancing in North America, the balance of the fixed costs but also increasing promotional activity, which you can look at as being variable but is part of our SG&A expense. So we are balancing that to maintain demand and maintain sales in the marketplace.

But those would be the kind of some general buckets. John, do you have anything else you want to add to that?

I would just say, Mike, on the fixed cost side, there is a couple of specific projects in the US relative to facilities that we are working through right now. Those will have some benefit in 2015 and as Gregg said, it is the balance of trying to drive the organic growth with taking out fixed costs where it makes sense. So I think we will stay very attentive to that and make sure that these efforts to lower -- structurally lower, some of the fixed cost that we have continues to progress.

Thanks for that. And then could you just provide an update on how the distribution channel changes are going in North America?

Sure, as you may recall, we announced changes early last year in 2014 that impacted the business principally east of the Mississippi River and west of the Rockies. We are continuing to see good traction in those areas. We announced a change at the end of last year for the central region and that is under way and it is unrolling. We are getting positive feedback from the field but we have an admittedly tough situation with respect to weather, with respect to ag and so that is going to be a little slower to come about. But we are clearly getting the traction we had expected east of the Mississippi and west of the Rockies.

Still good. In line with expectations less the weather which leads to my last question here, maybe just give us a sense for how much inventory you guys think is in the channel. Is it a month or two of inventory that you guys need to work through, maybe not even remotely that high and kind of what the core underlying demand looks like if you can kind of strip out the weather somehow.

Okay, we don't have that level of visibility, it is all anecdotal. So I will make the following observation specific to agricultural activities. If you follow the irrigation companies for example, their sales have been reported to be off in the mid-20% and that is mostly I would think new activity and let's say new activity for them is about half their business. New activity for us would be maybe 20% of our business because 80% of our sales are principally replacement. So you would say the math would work out to maybe a 10% impact on the irrigation piece of our business.

We saw that our sales decline was in the mid-single digits so you sense that there is just a level of inventory and again I think there is a level of conservatism because a couple of growing seasons like this where people are just very cautious about taking additional product. I can't give you a specific number beyond that.

No, but that is certainly helpful in triangulating. Appreciate the time, guys.

David Rose, Wedbush Securities.

Good morning, gentlemen. Thanks for taking my call. If I can just bang on a couple of these and then I will get back in the queue with some additional ones. Maybe a little bit more on the distributor change in the central region. Have you started it, how far along are you because I got the impression you were underway at the last call. Can you give us a little bit more color in terms of how much longer you have given where you are in the process?

Sure. I mean we are underway. We have all of our new distribution appointed and it is just a question I think of distributors that we used to do business with working off inventories, the distributors that we have added start selling our product in addition to the products they were already selling. And we mentioned on the last call we have kind of worked through the first half of the year that region. Certainly as I said, weather hasn't been our friend but I'm not going to pound on it either as being a reason. It just takes a little time for people to work through this. Again, we saw in our move on the Coast that we are getting the traction we expected this year.

So how are you measuring? What are the metrics that you have seen on the Coast that provide you comfort? Is it sales per distributor, is it profitability, is it a combination of the two?

Yes, it is the growth of sales with our new distribution partners or distribution partners that we did business with in the past that have rejoined us, as seeing their growth and seeing the growth relative to the prior years.

And we have this groundwater market share measure, Dave, that we have discussed in the past that is an independent compilation of at least specific products and that is something we watch and so far we have been kind of neutral or flat in the first quarter year-over-year. So that is another indication of kind of what our share is doing versus what else is happening out there. I think as Gregg said, all of it is clouded by this backdrop of not so ideal weather conditions and that we have to deal with that and everybody else does as well. But it is difficult to parse through or specifically say this is because of weather or this is because of new distribution or this is because of another factor but generally it is going the way we thought it would.

Okay. Then maybe we can switch gears a little bit on the impact from Pioneer going forward. You had a larger piece of it so I am assuming it is going to be given where the pump sales are down 50%, it is going to be negative on the margin front in the second quarter versus the first quarter. Is that fair?

Well, again, they are down 50% in the US, down 30% globally. The Pioneer margin in the back half of last year contribution -- variable margins -- were low because we were adding a lot of costs to outsourcing. We no longer have to do that.

So the Pioneer margins on a variable basis are consistent with our service pumping margins. But overall, we are going to get delevered on the Pioneer fixed cost and we have taken steps to reduce fixed costs there as well but when you have a 50% decline in one market and a 30% decline overall, it is not going to respond that fast on your fixed cost base because we want to maintain a base to continue to grow that business as we have successfully done outside the US.

Okay, that is helpful. The last one and I will get back in the queue is can you give us a little bit more color on the big spike in the debt? I am assuming some of it was for the debt from the Pioneer piece but what was the remainder of that?

So the borrowings that you saw, David, three things coming at us, the minority Pioneer purchase that we discussed, then we have our first installment on the Prudential term debt so there is a $30 million installment coming up on that in this month. And then just seasonally when you look at our Company, this was seasonally when we have the highest investments in working capital. That higher debt was mainly anticipation of those three things.

Okay, great. Thank you. I will get back in the queue.

(Operator Instructions). Edward Marshall, Sidoti & Company.

Good morning. So you mentioned the actions to control fixed costs and I just want to maybe circle back to that if I could and I don't know that you quantified the benefits that you anticipate or maybe even better, the timing of those cost actions that you plan to take. Do you have any kind of understanding maybe to put some numbers around those targets for me?

We haven't issued specific benefits. Ed, when you look at our SG&A generally you will see 4% to 5% growth in SG&A. The benefits from the European restructuring that is underway, we talked about that a little bit. Some of the other stuff we are just not at the point of disclosing specific benefits but as I said, there are actions, some of them related to facilities here in the US that we have started to take action on that will have some incremental benefit to our fixed costs. Not measured in tens of millions but measured in millions that we will start to see the benefit from.

And anything on the timing of that or is it just too early to tell?

No, I think you will start to see some of that in the back half of the year. We will certainly start to see some of the benefits from the European restructuring in the back half of the year as we get through most of the moves and the disruption of that. Some of the other stuff that is going on you will start to see benefit from in the back Of the year.

Okay. When you talked about taxes, I note the $4.8 million gain, I think you gave some others in there as well, I know you said there was a $2.5 million gain in Other and then there was another $1 million gain on that in the tax line. Can you kind of walk me through kind of how you got back to the 27% effective again because I missed a lot of that?

Yes, what we are saying is that when these gains run through the tax line, they are discrete items so the 27% is what our Company would view as the effective tax rate before the discrete items. If you consider the discrete items then we would call that a blended tax rate and the 27% for all of 2015 might be more in the 24%, 25% range.

But what we are talking about relative to this Pioneer transaction was there was a deferred tax liability that was reversed that was the $4.8 million, that related all the way back to the transaction in 2012 and that is what we called out as the dime reduction because when we did it in 2012, we called it non-GAAP so now the reversal or the benefit of it we are going to call non-GAAP in 2015.

The second piece is there is actually two pieces. It is $3.5 million of discrete tax items in total, $2.5 million of that was taken in previous periods and burdened the previous period's earnings and then $1 million of it was taken in the first quarter so what we are saying is that because that tax item burdened the previous quarter's earnings, when we reverse it now we are not going to call that out as non-GAAP. And that is related to the gain on the final minority purchase.

So we paid basically $20 million for that minority position in Pioneer but we had a liability of about $23 million established, so two pieces that are flowing through there. One is the absolute gain of $2.7 million which is in Other income and then this $3.5 million of deferred tax liability or reversal of deferred tax liability that is in the tax line.

Okay, got you. So there is about $4.8 million of additional -- I'm sorry, a $8.3 million of unusual what I would characterize as unusual tax items in Q1?

The 2.7 and the 3.5.

Got it. Okay. Mobile pump I think you said was down 50% in 1Q. Is that first of all Pioneer? Secondly, did that trend continue into queue?

The 50% decline was in the North American market. Overall decline was 30% and we expect sequentially the second quarter to have higher revenue than the first quarter. We also expect that there will be a decline year-over-year in the second quarter from the second quarter of 2014.

Okay. Based on the timing of the remaining acquisition of that 30% of Pioneer, first, was that consolidated priorly and then reported back as a minority interest or were you only receiving 70% of Pioneer? Secondly (multiple speakers)

We consolidated all of that and then reported a portion of our earnings, deducted a portion of our earnings out from the minority interest.

Got it. So essentially the revenue line will be a like comparison on the top line going forward?

Say that again, Ed, I am sorry.

So essentially it wouldn't be, I wouldn't look at an additional 30% coming on from Pioneer in that business. Essentially you have been consolidating 100% of that?

Yes, that is correct.

And then finally when I look at the fueling guidance, does that include the impact of FX, like you included on the water business?

Yes, it includes our current view of FX, Ed, yes.

And so when I look at maybe the large zones that might be of interest to you, I guess India and China probably smaller and I know you called those out as negatives for the Fueling division. But when I look at the two biggest impacts, would it be Brazil and Europe would be the two places that I think would have the biggest impact overall on the Company? And maybe not necessarily the Fueling business but the Company as a whole and is also right to think that maybe that had less of an impact of the Fueling business and more on the Water side?

Let me answer -- maybe approach this a little differently. The Fueling business like the Water business, the Water business is about 45% we will call US Canada and then 55% the rest of the globe. Fueling business is similarly weighted maybe just almost 50-50. The Fueling business has pretty big positions in India and China, larger in China than India actually. The Fueling business is not particularly strong in Brazil although we do have a decent business in Latin America outside of Brazil.

So as you think about the Fueling business, the slowdowns we were seeing as we pointed out, we have a business in Fueling that makes large underground tanks that are also used above ground and out in the oil fields in the North Sea. That piece has been impacted.

We see a slowdown in Russia because of the Russian economy and we are seeing a slowdown in China which we believe is related to some of the political issues within the Chinese oil companies. In India, the businesses lumpy. It comes in tender business over a period of time and we had a strong tender year last year, we are not seeing that just yet this year. But the Indian new year started April 1, so we will see how that unfolds. We wanted to point that out to people.

Generally the Fueling business has maybe been a little soft in Europe but most of that has been the Russian business. So that is kind of the view of Fueling.

Now if you look at Water, we have had again great growth throughout Latin America where we have a very strong position and we are expecting continued growth. We have a solid business in Southern Africa, we had a lot of disruptions last year that have settled down now. We've got a nice, solid position there. We have a very solid business in the Middle East, North Africa. Again, we deal with political challenges there but we have a very solid base and you just have to kind of deal with the fact that Libya is off-line this year, you have unrest in Yemen and so on but then Algeria is doing very well. So we see that.

We have made a conscious effort to invest in our business, in our water business in Europe. We are increasing our pump distribution in Europe and so we are very pleased to see the organic growth in Europe and again in local currency, a lot of this doesn't come back to US dollars unfortunately.

Then we look at our APAC business and again, we saw it check up in the Q1, but some of our APAC business is in dollars so we realized that these customers are going to pull back maybe let their inventories go down but eventually they've got to buy and we expect Q2 to be a good quarter in Asia-Pacific.

Then you can look at our news release and you get the general feel for the percentage of our business in each of those regions and you can put that into your thinking.

Great. Thank you, guys.

Kevin Bennett, Sterne, Agee.

Good morning. First off in Water, can you remind us about the timing of the ramp in surface from the URI National Pump acquisition? I'm just wondering when the comps are going to get a little bit easier in that piece of the business?

Yes, the URI acquisition, I don't know the exact date but it was about a year ago and the ramp really came in the back half of the year so the comps will be easier the back half of the year and the margin comps will be better as well.

So the topline comps will be tougher in the back half but the margins will be easier?

I'm sorry, yes, the topline will be tougher but the margins will be better.

Got it. Perfect. Thanks, Gregg. And then on the promotions in North America, is that primarily related to the weak ag markets as well as the distributor reset or are you seeing weakness in the residential piece as well?

Well, we commented that our residential business was off a few percent so it wasn't naturally robust. And I should say it would be general activity certainly again the ag market is a big part of that because it is the central region, it is where we focus our attention right now. I would say it is a little bit of both but I wouldn't say that the residential market is way off. It is slow.

Okay. And then lastly, Gregg, your organic growth rate total Company has been kind of in the high single digits in recent years. I'm wondering if you think any of the headwinds affecting your business right now will affect that longer-term or are all of these things temporary?

That is a big question from the standpoint of breadth. When you look back and you say okay, what has been Franklin strategy over the years? And our strategy has been to grow through geographic expansion, product line extensions, serving the markets globally. We are very fortunate to have almost 40% of our revenue coming from developing regions in our Water business, not quite that much in Fueling but Fueling is growing rapidly in those regions as well and that is where 80% of the people are and that is where as people move into the middle-class, they are going to consume typically more water, they are going to consume more fuel and that all I think bodes well for continued strong organic growth.

We have seen in the North American market where we have a repositioning our distribution. We expect then to see good organic growth there. Keep in mind, we continue to have robust product pipeline of introductions as well so that could be a product line extension as I mentioned. So we think that is also a good piece of our organic growth.

But when you have currencies move tens of percent relative to the dollar, they just don't come back to dollars but the underlying growth we have, we don't see abating. As a matter of fact, an argument could be seen as the world economy stabilizes and we begin to hit on more cylinders, could actually accelerate.

Sure, that is helpful and then last question kind of what you mentioned. Do you have any update on the artificial lift that you guys are working on given what oil and gas has done are you slowing down on that?

We continue to invest at a level consistent with prior years in artificial lift. With the gas price in North America I believe south of $3, there is not a lot of demand here. Gas prices outside North America is higher. We have better connections again in China with the oil companies. In India and Turkey, these are markets that have higher prices and have more immediate demand so we are continuing to put test systems in these markets, we haven't had a major pop yet. But we continue to focus and we have these connections with closer to the field and so we remain optimistic and we will continue to invest in the business.

That is great. Thank you, guys.

I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.