Franklin Electric Co Inc (FELE) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Franklin Electric Co., Inc. Q2 2015 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)

I would now like to turn the conference over to Jeff Frappier, Treasurer of Franklin Electric. Please go ahead, sir.

Thank you, Candace, and welcome, everyone, to Franklin Electric's second-quarter 2015 earnings conference call. With me today are Gregg Sengstack, our CEO; Robert Stone, Senior Vice President and President of our International Water Systems unit; and John Haines, our CFO.

On today's call, Gregg will review our second-quarter business results, and then John will review our second-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 the Company's website.

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

Thank you, Jeff. Given the level of detail in our news release earlier this month and our earnings release we issued an hour ago, I am going to focus my prepared remarks on the principle reasons behind our 13% decline in revenue and 40% decline in earnings as compared to the second quarter of last year.

After a weaker than expected April, in the middle of May, I traveled to West Texas to see firsthand the market situation. The good news was that I was able to meet with a lot of contractors. The bad news was that I was able to meet with a lot of contractors.

They simply could not and, with the rain, did not need to get out in the field to drill wells and install and/or work-over pumps. This was before the record rains that came in June. This was a consistent theme throughout the great plains and Great Lakes regions of the country.

This situation has, in some locations, particularly in the central region of the country, delayed contractor conversions and resulted in some market share loss, which we view as temporary. We view the share loss as temporary due to a couple of factors.

First, we already have seen that east of the Mississippi River, we reelected to reset our distribution a year ago. Even with the heavy snows last winter in the Northeast and heavy rains this spring in the Ohio Valley, our overall groundwater sales are up over last year.

Second, on the West Coast, where our former distributors' inventory of our products is now completed, we are seeing an increasing number of contracts converting their business to our new distributors.

One comment to California -- while the drought in California is well-documented, we believe the rate of installations of new wells is actually fairly flat. There are only so many drillers and drill rigs around. What is happening is that the backlog for installations is extending out beyond a year. So, while demand is high, sales are steady due to drilling capacity.

So with the second-wettest second quarter in recorded history in the US compounded with cool temperatures, we have had the perfect storm in the US pump market, frankly, which account for a little over half of our revenue shortfall in the quarter. The other principal volume shortfall in the US was weaker than forecasted sales of Pioneer branded mobile pump equipment, principally used to support oil and gas exploration.

During the back half of the quarter, customers called to push out confirmed orders into the third quarter, resulting in even softer sales than expected.

Turning to our international markets, after several years of double-digit sales growth in Brazil, the shrinking economy finally caught up to us, and our sales were basically flat year over year. While we did not Bombas Leao, the groundwater pump company that we acquired last year, for the entire second quarter of 2014, if we had and on a pro forma basis our overall Brazilian business would have had another record sales quarter as demand for Bombas Leao groundwater pumps continued to grow.

Even with the soft results in Brazil, our Latin American business had a strong quarter, as did our other developing regions, with the Middle East and Africa up 7% and Asia-Pacific up 24% in the quarter.

The last factor that negatively impacted our forecasted results was more than expected weakness in fueling system sales in China and India. After 16 consecutive quarters of year-over-year improved Fueling Systems earnings, the solid 8% growth of Fueling Systems sales in the US, as well as growth in other regions and all product lines, was just not enough to overcome the weakness in these two important markets.

In addition to the profit shortfall from lower sales, our consolidated earnings were further depressed as we have not yet fully recovered the inflationary costs in markets that source product material in US dollars. We did see improving margins in those business units throughout the quarter, but we're not yet back to last year's levels. Further, we lost absorption in production as we strive to lower inventories, even with declining sales, and are pleased that during the quarter our cash flow from operations improved $33 million as compared to the second quarter of last year.

With these results, we have taken a number of actions to adjust our cost structure to the lower sales run rate and, as we announced in our release this morning, taking the softness in our Brazilian business as an opportunity to accelerate the integration of Bombas Leao. While we have no control over weather, exchange rates or the price of oil, we continue to make good progress in those areas under our control, clearly gaining traction with our new distribution footprint in the US, expanding our global reach in developing markets, introducing new and innovative products in the markets that we serve and prudently managing our fixed costs. And even with the current headwinds, we believe our underlying organic growth rate continues to be in the mid to high single digits.

With that, I want to give you our view of the balance of the year. Looking forward, at current exchange rates, currency will remain a headwind for the balance of the year. And at current oil prices, demand for Pioneer branded dewatering pumps should be sequentially better, but will be relatively weak for the balance of the year. In the US, where weather conditions are slowly improving, we believe it's reasonable to assume that market demand for pumps will be no worse than the first half of the year. As I mentioned earlier, we are seeing evidence of a recovery in our market position.

Outside of the US, we continue to have strong organic growth in our water business, particularly in developing regions, where we get 40% of our revenue. While we are not currently expecting a recovery in our Fueling Systems volumes in China this year, we expect the global demand for fueling equipment to continue at 2014 levels. Given the sales forecasts, which should lead to better overall margin mix, pricing actions to recover inflationary costs and fixed cost reductions, we believe that our earnings in the back half of 2015 will equal our results for the back half of 2014.

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 $0.33 for the second quarter of 2015 versus $0.55 for the second quarter of 2014. As we note in the tables in the earnings release, the Company adjusts the as-reported GAAP operating income and earnings per share for items we consider nonoperational 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.

Non-GAAP expenses for the second quarter of 2015 were $1.7 million and included $0.8 million in restructuring costs, primarily for the continuing European manufacturing realignment started by the Company last year and $0.9 million of other non-GAAP expenses related to business realignment costs, primarily severance, and targeted fixed cost reduction actions and retirement pension costs.

The second-quarter 2015 non-GAAP adjustments had a net EPS impact of reduced earnings by $0.02. There was a $0.05 reduction in EPS for the non-GAAP items in the second quarter of 2014, primarily retired executive pension costs. So after considering these non-GAAP items, the second-quarter 2015 adjusted EPS is $0.35, which is down 42% to the $0.60 adjusted EPS the Company reported in the second quarter of 2014.

It is worth noting that the Company estimates that 2Q 2015 adjusted earnings per share was negatively impacted by $0.05 due to the translation impacts alone of foreign exchange. As Gregg noted, we saw a significant strength in the US dollar versus many key currencies which we do business in, including the euro, Brazilian real, South African rand and Turkish lira during the quarter. This strengthening causes earnings of these units to be translated back to fewer US dollars.

Water Systems sales were $191.6 million in the second quarter of 2015, a decrease of $35.1 million or about 15% versus the second-quarter 2014 sales of $226.7 million. Sales from businesses acquired since the second period of 2014 were $8.3 million or about 4%. Water Systems sales were reduced by $19.5 million or about 9% in the quarter due to foreign currency translation. Excluding acquisitions and foreign currency translation, Water Systems sales were down about 11% compared to the second-quarter 2014.

Water Systems sales in the United States were down across all of our product groups and were led by a 60% decline in Pioneer branded dewatering equipment followed by a 24% decline in groundwater pumping equipment. As Gregg noted, the second quarter of 2015 has the second highest level of precipitation in recorded history in the United States, according to data collected by the Department of Commerce. In Texas, which is a critical groundwater market for Franklin Electric, it was the highest level of reciprocation for any second quarter on record.

Water Systems operating income after non-GAAP adjustments was $25.4 million in the second quarter of 2015, down $17 million versus the second quarter of 2014. The second-quarter operating income margin after non-GAAP adjustments was 13.3%, down 540 basis points from 18.7% in the second quarter of 2014. Operating income margin after non-GAAP adjustments decreased in Water Systems, primarily due to fixed cost deleveraging from lower sales and lower production rates and related burden absorption in the quarter.

Fueling Systems sales represented 23% of the consolidated sales and were $55.8 million in the second quarter of 2015, a decrease of $2 million or about 3% versus the second quarter of 2014 sales of $57.8 million. Fueling Systems sales decreased by $3 million or about 5% due to foreign currency translation. Fueling Systems sales were up about 1%, excluding foreign currency translation and acquisitions.

Fueling Systems operating income after non-GAAP adjustments was $12.7 million in the second quarter of 2015 compared to $13.9 million after non-GAAP adjustments in the second quarter of 2014, a decrease of about 9%. The second-quarter operating income margin after non-GAAP adjustments was 22.8%, a decrease of 120 basis points from the 24% of net sales in the second quarter of 2014. The decrease in basis points was primarily due to deleveraging fixed costs.

The Company's consolidated gross profit was $80.2 million for the second quarter of 2015, a decrease of $19.2 million or about 19% from the second-quarter of 2014 gross profit of $99.4 million. The gross profit as a percent of net sales was 32.4% in the second quarter of 2015 and declined about 250 basis points versus 34.9% during the second quarter of 2014. The gross profit margin decrease was due in large part from deleveraging of fixed costs on lower sales. Selling, general and administrative expenses were $56.3 million in the second quarter of 2015 compared to $60 million in the second quarter of the prior year, a decrease of $3.7 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 second-quarter 2015 decreased by $5.7 million or about 10% to prior year's second quarter, a portion of which was related to foreign exchange.

The tax rate for the second quarter of 2015 was 25%, and we believe 27% is a good estimate for the full year of 2015 rate before discrete events.

The Company end the second quarter of 2015 with a cash balance of $63 million, which was $3.9 million higher than at the end of 2014. The cash balance increase was attributable to cash generated from operations of about $7 million compared to the first half of the prior year when cash used in operations was about $26 million.

The Company is also announcing today a restructuring effort impacting the operations in Brazil. This effort is primarily being done to fully integrate the Bombas Leao acquisition, which was completed in June of 2014, and rationalized other aspects of the existing operations in Brazil. In total, the Company expects to take a pretax charge for business realignment costs of between $4 million and $5 million at today's exchange rates. The charges will be reflected as non-GAAP adjustments in future earnings releases and will be primarily for severance, cost to eliminate redundant commercial sales activities, asset write-offs and fees for legal and tax services incurred specifically for the rationalization of the Brazilian legal entities. The Company expects to incur these costs from the third quarter of 2015 through the end of 2018. The expected payback is less than three years. Approximately 10% of these costs will be non-cash.

The Company had about $4 million of borrowings on its revolving debt facilities at the end of the second-quarter 2015 versus zero borrowings at the end of the second quarter of 2014. The Company purchased about 73,000 shares of its common stock for approximately $2.5 million in the open market during the second quarter of 2015. Currently, the total remaining authorized shares that may be repurchased is about $714,000.

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

(Operator Instructions). Joe Radigan, KeyBanc.

First, on the Water segment, in regards to margins, for three quarters in a row now, you have been well below what you would consider structural margins in that business. And so how should we think about the back half of the year? Can favorable mix and some of the restructuring savings -- can that get you back to more that midteens or above structural margin range that you've talked about in the past, even with declining revenue, or should we consider maybe second-quarter margins are more appropriate for the back half of the year?

I think a lot of it depends on the top line, of course. With the type of volume declines that we've seen in the second quarter and that we are -- what we are currently saying right now is that as the volume declines, the 8% to 9% that it did in the first half, in the second half, we believe that a variety of factors will get us back to even profitability. From a water margin perspective, we would expect to be back in the midteens. I don't know if we will be back in that 16% to 18% range we provided as the range we see the Water segment operating in, but we should be back in the midteens or better. And the key there is to recapture some of this lost leverage on the fixed cost.

So just by way of reminding or restating what Gregg said, we have -- the loss leverage is the biggest driver of this. We have dialed back production rates, which, of course, means lower absorption and inventory levels at low absorption of fixed costs. We have price actions that continue to impact us more favorably sequentially as we move through the year. Part of those price actions are to offset US dollar inflation in those business units that have experienced that and procure product based in US dollars.

We have the fixed cost reductions. We have made reductions in several of our business units from just a pure headcount perspective. We are closing a facility in the US in Saco, Maine, which is one of our fueling facilities. We continue to get incrementally better performance out of our European unit as that restructuring effort that we announced last year continues to get a little bit better.

And then the last thing, of course, is, as I just said, we are going to kick off an effort to accelerate the integration of Bombas Leao in Brazil, and that will take some time to get done. We will start to see benefits of that immediately. But all of those things are net positives for the water operating income margin. But at the end of the day, it will be really what the topline does.

Okay. That's helpful. Thanks, John. And then I'm surprised the surface water products were down double digits in the quarter. Just given the weather, I would think some of that inventory would have been worked through just with the excessive wet weather for some of that stuff. How big is that HVAC-related business? And then is that -- how is the inventory overhang there? Have you pretty much worked through that, or is that going to extend through the end of the year as well on the surface side?

There's a couple of factors going on. We don't disclose the individual product lines. The HVAC business -- again, when it's cool, that's when you are not going to be using those products, and it has been relatively cool in many parts of the country that would use condensate products. And you also have dewatering products, subpumps and so on. And it's interesting. All the rain we got in the Midwest, it only came late in those markets in the upper Midwest where we have some strength and we began to see some movement of product late in the quarter, to move along there.

And the other part of our surface dewatering business is Pioneer, and that obviously is (inaudible). I'm sure there are some incremental sales of Pioneer pumps to deal with some of the flooding. But there again, we are principally focused for dewatering and construction, and municipal bypass, oil and gas, hurricane type events, and that is set to occur this year.

So the surface business was down. And again, when you think with all the rain and everything in the central part of the United States, we would have seen a little bit more strength. We did, late in the quarter, in the upper Midwest.

Okay. And then on the fueling side, you've got pretty tough revenue comps in the back half of the year. If you exclude the FX headwind that you will have in that business, I mean do you expect to grow on a year-over-year basis in the back half of the year in 2015 versus last year?

To your point, FX is a headwind for fueling. We do price the dollars in many markets outside the United States, but it is a drain. We are saying that, as we look at it right now as being flattish, we don't see the catalyst of China coming back online. We have a very solid business there and particularly with vapor recovery, and it has just been going sideways with the events in China.

India is lumpy. So it's a question of when they put up new orders for bid and when that comes online. And Europe has been a little bit slow. Some of it is our tank business in Europe. We have these -- a small business of underground storage tanks. And actually many of them go into the North Sea oil, and so that has been a negative headwind in oil. It's not a highly profitable business, but it does affect the top line but not so much the margins.

So I think we've got some headwinds there that are saying that we are looking at a flattish back half. As you point out, fueling has been on a real roll for four years, taking a little respite right now.

Okay. Thanks, Gregg. Thanks, John.

Mike Halloran, Robert Baird.

Could you delineate between the smaller diameter pumps on the groundwater side, your resi-oriented stuff and how that is doing, also then on the larger-diameter industrial ag pumps, what those are looking like in the quarter, if there is any real difference in the trends there, or if the precipitation is impacting both pretty equally?

Sure, Mike. The resi, which tends to be more where people live, greater populations, which are in Northeast, east of the Mississippi, the industry in the second quarter, as information we have, was down, say, low single digits. We were down more like mid to high single digits there. So that's where we made a comment about relative share there.

The large pumps is what really got heavier in the center of the country. It's just they are operated ag systems, and it just didn't need the water. We have more water than we know what to do with, flooding, people actually dying from flooding. So it was a situation where the ag, the large-diameter pumps were -- the business was way off.

That makes sense, particularly given the ag landscape going into the quarter was more challenging than on the resi side, anyways.

And then maybe some color on the rental channel in the Pioneer side. Obviously, the end markets there are pretty challenging. You had some -- I wouldn't call it inventory build in the last year, but you certainly had some unique things going on in your portfolio with some of the customers there. So could you just talk about how the inventory is tracking with some of those rental channel partners and when you think you can get to the point where there's drop through and pull through from a core demand perspective?

To say when we are going to see a change in the pull-through demand is extremely difficult. The issue and the feel is mainly that our larger customers like United Rental were very heavily exposed to upstream oil and gas. And with those prices, that business basically just disappeared overnight. And so their utilization rates across their fleets, especially in this sector, they are down significantly. Earlier, when Gregg was talking about sell-through on March, pumps of this type, you have to keep in mind that we see a slowdown when things are going down and when they are coming back up, until the utilization rates get up high enough again. So we have to ride through the downside and a little bit of the upside before we start to see more demand from rental customers.

As our customers change their fleet mix and sell assets, trying to refocus on other segments of the industry, that will be where we start to see some more sales pick up in products not so oriented toward oil and gas but rather toward municipal, sewer bypass and other applications. And that's just going to take some time.

Great. Thanks out there. And then last one from me, just to follow up on one of Joe's questions -- I still -- I can't say I'm struggling with it, but I'm just trying to make sense of the down 8% to 9% topline trends that you saw in the first half that you are projecting in the second half. I think that certainly makes sense, given the end market dynamics.

But getting back to flat year-over-year earnings, relative to some of the decrementals and the volume deleverage you are seeing, it just seems -- I guess I just need a little bit more comfort on how you get there. And towards that end, maybe you could just give a little more context for the changes that you have made or started making on the restructuring side last year, this year, that maybe hit a bit more in the second half of the year than maybe I was thinking, maybe a little bit more help with the mix side of things as well? I know you did a good job with Joe's question of explaining everything you've done. But just maybe help me with the timing of some of the actions you have taken and then specifically where the mix is going to swing for you.

Mike, let me just add on to what I said to Joe's question. I should have said that when Joe asked it. But when we look at our back-half fixed cost, now, remember when Franklin Electric talks about fixed costs, we're talking about the totality of SG&A in our manufacturing and fixed cost basis. That's what we define as fixed cost. We think in the back half of 2015 that we have actions in place to lower that versus the back half of 2014 by, call it, 7.5% to 8%. So that's our current view. We think sequentially from the first half to second half, my first-half 2015, second-half 2015, it's about 4% lower. So that really is the result of the cost actions that we have taken to date and, if necessary, we will continue to take. We're going to see some benefit coming through in the back half in Europe to get those margins back to where we have historically seen them and the other things that I described. So that's the current thinking and the current view.

Mix is going -- we are assuming for the moment that mix will favorably impact us, that the groundwater, even though total revenue will be down, we believe that groundwater equipment will be a more favorable factor in the back half than it was in the first half.

That was the color I was looking for. Thanks a lot, John. Appreciate it, guys.

David Rose, Wedbush Securities.

Maybe just to touch a little bit more on the SG&A side, what should SG&A really look like in the back half of the year and maybe third-quarter/fourth-quarter progression? And then maybe you can break out a little bit more on how much of the SG&A in the quarter was for the support of the dealer reset and how much more we should see in the back half of this year? And I'm assuming that it wasn't as effective, given the reins. So you are still going to have to invest in the back half.

And then lastly, as we look to next year, how should we think about SG&A expansion next year?

I guess the way I would answer that is, again, when we think about fixed costs, it's a combination of SG&A, and the fixed costs is buried in our cost of goods sold, our fixed manufacturing costs.

So we believe we've taken action to lower that versus last year's second half by 7.5%, 8%, as I just stated.

Now, if your question is more, is that enough, we are paying attention to this very, very closely, of course, and we will reset the fixed costs if we need to. We have a target, which we are not going to share, of what we want our fixed cost run rate to be at the end of 2015, so we enter 2016 at that run rate. And we believe right now we're going to be able to make that and have taken actions to make that.

If we see volume declines continuing and we can attribute those volume declines to factors that are other than some of these macro factors, then it may be necessary to come back and look at our fixed cost base again. But right now, we are trying to continue -- as you know about Franklin, we are managing the Company for the long-term. We're going to continue to do that. These headwinds on revenue that we faced are, we think, almost entirely external macro kind of headwinds, and we are not going to go upset or radically disrupt the cost base of the Company until we see some of these go from temporary headwinds into permanent changes in our business, which we haven't seen yet. So that is the balance that we are trying to maintain.

John, I appreciate that. I was just the -- maybe a little bit more color in terms of expense and the dealer reset, for example. You still have to spend money in Q3, correct, or you plan to, or does that go away?

We are not going to cut back our support of our customers, David, no. As we work through the reset, we will continue to contribute the resources necessary to win our new customers and gain their commitment to Franklin.

And I think in the fourth quarter of last year, you called out roughly $5 million in expenses that was part of it, that dealer reset, if I'm not mistaken. Is that similar than in the fourth quarter? That doesn't go away is what I'm trying to get.

No, I think some of it would go away, Dave. As we are out in the marketplace winning new customers, new distributors, there's a lot of training costs. There's a lot of -- these distributors have things called open houses. They have these events where they bring contractors in. They might have a dinner. They might train. They do promotional activity like that. And when you are trying to win new customers, you are going to up the level of that, which is what we saw, in large part, in the back half of last year.

So some of that will certainly continue, and we want it to continue. Without having the actual detailed number in front of me, I would say it would be at a level below last year. But that's only because we've gotten through some of the upfront one-time effort to win these customers.

Okay. That's helpful. And then, John, maybe lastly on pricing, it seemed like you were a little bit disappointed on your ability to pass on price. What gives you the confidence that you can pass on price in probably what is a much more difficult environment?

Pricing has been something that we have historically been able to pass through again. As a Company that supplies distribution, it's generally, I would say, well received, but it's not necessarily negatively received. When we are in a situation where there's a disruption to the marketplace -- you go back in our history, back in 2006-2007, you go back in the financial crisis in 2009, that's when you get pricing aberrations as the market is going through turbulence.

Then the market settles back down again, and then you normally will see, in our business, a positive pricing environment. And that's just in the United States.

You get outside the United States, again, we are able to move pricing at or above inflation. We haven't been able to do it as quickly as we would like in, say, markets like Brazil, where unimported products we saw the dramatic increase in costs that we have to recover over a period of time. We have to be sensitive to just how fast we can move. But we typically can recover our margins and, through productivity, get some expansion of margins over a period of time.

Flipping back to your questions around SG&A costs, I think I heard you all talk about Europe. Keep in mind there that we had a rather big disruption in the fourth quarter last year for the size of the market with our factory shutting down for six weeks. We have been spending a fair amount of money importing products and getting product over there to supply the markets during the first half of the year. That has now quieted down, and we would see in the back half of the year, for example, those costs going away.

With the acquisition of Bombas Leao, the unit has been a great acquisition, a great fit, but we have duplicative costs. And we have been incurring those costs for a period of a year now, and we saw an opportunity with the slowdown in our Schneider branded products with now we are in our new factory, enjoyed a delay -- and that has all quieted down -- to take the opportunity now to accelerate taking costs out there. So these are the various cost actions that we are taking around the globe or examples of cost actions that we believe are prudent and yet are also keeping in mind an eye for the long-term of the Company.

Okay. I understand. Thank you, Gregg. I appreciate it.

Edward Marshall, Sidoti & Company.

So on the groundwater side, I kind of want to talk a little bit about the timing. My sense is that there's a seasonality that hits in the first half of the year, especially around ag, as we prepare for maybe a summer season. Have we missed that? Now that we are sitting in the second -- are we in that lull where the summer is still -- there is some activity, but the predominant initial part of the growing season has already occurred? And so are we going to wait until next year? How does that work out? Just help me out with the seasonality impact of that.

If you look at Franklin historically in what I would call more normal times, about half our revenue, half-hour earnings in the first half of the year, half-hour earnings in the back half of the year, you typically have a soft first quarter, to your point, a buildup in the second quarter. (inaudible) years of our third quarter was larger than our second quarter. So I'm talking about now over a period of years; I have been here awhile.

So we see that moving back and forth. Where there has been a growing season, yes, that season has been gone. We have heard of, anecdotally, people are trying to plan to get a second crop in or get a crop in after the flooding has subsided. There will be a watering cycle that occurs in the third quarter. How big it is we don't know. That's why we have looked collectively at the back half of the year. But at the end of the day, people need pumps. Keep in mind that part of this has also been people haven't been able to get into drill or even service pumps that are already in the field, and they are going to need to have those pumps when they turn on. They are going to need to replace those pumps when they don't work.

So it's a little unclear to us as well as to how strong the back half will be for the growing season. But we think it's reasonable to look at it and say, based on what we've seen in the first half, to estimate that if we have a similar sales decline in the back half, that we will have results that we've put out there. So that's how we are looking at the year.

And when I think about your business, predominantly aftermarket to new builds, what is the ratio there or the percentage of the two different businesses?

That's a question we often get asked, and it kind of depends. All right. So let's take the US residential market. Let's talk -- there's maybe 15 million wells in the United States, all right, as an estimate, and there are about -- that means about 15% of the households have wells, approximately. Maybe it's 12%.

And so then you look at new housing starts and people focus on new housing starts. So if you say 12% of new houses have wells, so it's, what, 80,000 new houses. And so you say that if you are selling approximately 750,000 or 1 million pumps into the United States in a year, it's a very large replacement business with relatively marginal new installs.

Now you go in and say, okay, now I have an ag pump. Now, if the water table has dropped, as we're talking about in California, and you are drilling a new well, is that a replacement, or is that a new install? It's kind of difficult to parse that data. But you'd say that the large portion of even those installations are replacements.

So we have a very large kind of replacement base. We've said around 80%, we think, is the replacement market on average. But there's really -- it's very difficult to parse the data.

Got you. Where are we in the shift in distributors? I know you had some comments in there. But I think as we talked over the last couple of quarters, we have expected some restocking, potentially, to occur. My sense is that did not occur. What would you say? Did you see any kind of restocking on the distributor level? I understand there's some inventories there. But maybe you can help me out with just your understanding of where the market is today.

Sure. You need to take that in two bites. So we made a decision to reset our distribution effective 1st of July of last year east of the Mississippi and let's call it west of the Rockies. And there, for example, east of the Mississippi, even with the weather situation, we are seeing sales up year over year, and so we are seeing the throughput. And west of the Rockies, as I mentioned in my prepared comments, we are seeing where our inventory is no longer available now with our prior distributors. That is now available and people are converting over to our new or renewed relationships with other distributors.

Now, in the center of the country, the distributor that we were working with that elected to leave us, we saw a degradation in the sales patterns for them in the back half of last year. So we made a decision in the center of the country to change our distribution, effect basically the 1st of April. And in that case, we are doing that right in the middle of the record rainfall in Texas, near record rainfalls everywhere in the center of the country and the upper Midwest. And so there we are just seeing there has just not been a lot of demand, and so there has been not a lot of throughput.

We do have information that, again, if you go back to those, there is a country where we had reset last year that actual throughput from distribution is higher than some of what they are buying from us because everyone is trying to manage -- or not everyone but several are trying to manage their inventory levels down. So that's why it's a little bit cloudy to give you, again, greater detail than what I just said.

Okay. Everything in perspective, I understand that you chose not to give the general guidance that you provide on a quarterly basis, and I understand it must be difficult right now from your seat to predict. I'm wondering what the month of July has done thus far. I know it's less than 30 days of business. Have you seen any improvements in either the dewatering or the groundwater as its related to the US business that gives you some confidence as you move into the second half of the year?

Yes. We have seen that in the dewatering space, where we have some backlog, that sequentially -- and that's why in my prepared comments I made that comment -- sequentially we should see some improvement. But keep in mind, in the back half of last year, we had really big sales of dewatering equipment. And we are seeing some decent order rates here, good order rates in July in our groundwater space. But we are just a few weeks into the period, and that's why we look to, as I said, let's look at the back half, and collectively, as we look to the back half, we thought it was a reasonable approach to give you guys some feedback and some guidance.

Great. I appreciate it. Thanks, guys.

Kevin Bennett, Sterne Agee.

Gregg, back to the fueling segment for a second, I'm wondering if you can potentially help quantify the declines in India and China?

We don't get into individual countries, but it has been a couple million bucks of business in China. And, of course, in India we had some great wins last year with the fuel pumping sides, and so those have not been replaced. This year we just haven't seen the tender equity we saw last year. This is that order of magnitude.

Kevin, the other thing on that is that, to Gregg's point, these Indian sales are lumpy. We had a pretty significant second quarter last year in India. We think we're going to have more sales in the back half of India. So it really comes back to how they time their tenders, how they place orders, award and then place orders under the tenders. So there's nothing relative to India that we are concerned about, fundamentally. We view it more as just the timing of how they are buying.

Got it. That makes sense, John. And then sticking, I guess, to China for a second, we all see the headlines. The stock market crashes every day, and auto sales are down. Are you guys worried that there's something structurally wrong with China, or do you think that the reduction in state-owned oil company procurements is more of a temporary issue?

Well, I'm sure there are many more people that have a deeper understanding of China than I on that subject. I would say this. We have a relatively small business in China. So we have seen the impact of the construction market on our Water business in China, and it certainly has not been encouraging.

With respect to the fueling, I think the slowdown in China is real. We are seeing it also in (inaudible). We don't talk a lot about (inaudible) right now because the price of gas is so low. But we are continuing to put in some wells in China. But it seems to me that the Chinese are shifting back to or are comfortable with using more diesel fuel as opposed to natural gas, which diesel is going to be higher polluting than natural gas. They have made that a fair decision or at least it seems that the market is behaving that way.

So it looks like the Chinese, from the standpoint of where we are focused, which is in paper recovery, improvement in the infrastructure in China, the foot is off the gas pedal. We would expect that to change over time, but we don't have as much visibility into China as I think some of your other people you cover.

Sure. That makes sense. And then two more for me. First, Gregg, given all the headwinds that we've talked about, is there anything in the near future to really drive some top-line growth, whether it's the new product or potential M&A? Are you guys not really focused on that right now? Something we are not thinking about?

Well, first off, new audits -- we have what we believe is a very robust pipeline of new products. We measure them. Every quarter we are looking at our new audits relative to our forecast. It is something that the Company has been focused on and deliberately increasing our R&D investment over the last many years. We are introducing new drive audits, the new connected products, new integrated system products, like our Inline 400, new high-efficiency products like our permanent magnet rewindable products. And so we are continuing to introduce new products, and that is generally systemically helping our top line and part of our organic growth story, which we see it as being in the mid to high single digits in a normal environment.

With respect to M&A, as we have talked about M&A over the years at Franklin, we have bought about a couple companies a year. But a lot of that relates to the timing of the sellers because these are family businesses, and we have one case we talked about a family for nine years before we acquired the company. In other cases, we talked to people for nine months. And so it's a little hard to gauge when acquisitions come in place.

Last year we did three deals. A couple of them were small. And we continue to look for opportunity, but timing is a little bit outside our control. We can be there. We continue to do the dialogue. And when people are ready to make a decision, we like to believe that we are a good acquirer. But beyond that, I wouldn't want to get into any details about a particular transaction.

But Kevin, just to be clear, nothing in the current environment is making us think about acquisitions strategically different right now. For the right transaction, Gregg is absolutely right. The timing of these things is difficult to predict. But we are an acquirer for the right transactions, and we will remain that. And that view of the world hasn't changed in light of these quarterly results or what we see happening in 2015.

Got it. That's helpful, John. And then last question for me: given what has happened with your stock price, I am wondering if you guys are thinking about the buyback any differently than you have before or planning on leaning more heavily on that, given where the stock is?

Kevin, as we have talked in the past and we have said publicly, our first priority for free cash flow is accretive acquisitions. We are in a CapEx environment now that has certainly settled down to below our DNA levels from the last few years where we had major projects going on. So we won't need as much money for CapEx. We think $35 million or less this year.

So as we generate cash in our Company, then we should have more opportunity for share repurchases, and that is something that is one of the tools in the toolkit, if you will. So, as I said, we have about 714,000 shares remaining on our current authorization. And as we have also discussed in the past, we have a view of what we think a forward multiple for this Company should be. And when the market price is below that, then we will act accordingly from a repurchase perspective.

So that thinking is not really any different than we have had for some time now, and the market opportunity may be greater now.

Perfect. Thanks, John.

And I am showing no further questions at this time. I would like to turn the conference back over to Mr. Gregg Sengstack for any closing remarks.

Well, again, thank you for joining us for the conference call. I look forward to speaking to you after our quarter three results. Have a good week.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a great day, everyone.