Franklin Electric Co., Inc. (FELE) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Franklin Electric Company 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]. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Jeff Frappier, Treasurer of Franklin Electric. Please go ahead sir.

Thank you, Candice. 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 helps 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 new release earlier this month, and our earnings release we issued an hour ago, I'm going to focus my prepared remarks on the principal reasons behind our 13% decline in revenue, and 40% decline in earnings as compared to the second quarter last year. After a weaker than expected April, in the middle of May, I traveled to West Texas see firsthand the market situation. The good news was 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 contract to 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 where we elected 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 ground water sales are up over last year. Second, on the West Coast, where our former distributor's inventory of our products is now depleted, we are seeing an increasing number of contractors 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 of 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 a recorded history in the U.S., compounded with cool temperatures, we have had the perfect storm in the U.S. top market for Franklin which accounted for a little over half of our revenue shortfall in this quarter. The other principal volume shortfall in the U.S. was weaker than forecasted sales of Pioneer branded mobile pumping equipment principally used to support oil and gas exploration. During the back half of the quarter, customers called to push our 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 own Bombas Leao, the groundwater pump company that we acquired last year, for the entire second quarter of 2014, if we had, then on a pro forma basis our overall Brazilian businesses would have had another record sales quarter, as demand for Bombas Leao groundwater pumps continues 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 Systems 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 U.S., as well as growth in other regions in 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, consolidated earnings were further depressed as we have not fully recovered the inflationary cost in markets that source products material as U.S. dollars. We did see improving margins in those business units throughout the quarter, but we are not yet back to last year's levels. Further we lost absorption and production as we strive to lower inventories, even with declining sales, and I'm pleased that during the quarter our cash flow from operations improved $33 million as compared with the second quarter of last year. With these results we have taken a number of actions to adjust our cost structure to 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 U.S., expanding our global reach in developing markets, introducing new and innovative products to the markets that we serve, and prudently managing our fixed cost. 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 your our view of the balance for the year. Looking forward, at current exchange rates, currency remained a headwind for the balance of the year, and at current oil prices demand for Pioneer branded dewatering pump should be sequentially better but will be relativity weak for the balance of the year. In the U.S., our weather conditions are slowly improving. We believe it's reasonable to assume that market demand for pumps should be no worse than the first half of the year. As I mentioned earlier, we are seeing evidence of a recovery in our market positioning. And outside of the U.S., 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 from China this year, we expect the global demand for fueling equipment to continue at 2014 levels. Given the sales forecast, which should lead to better overall margin mix, pricing actions to recover inflationary cost, and fixed cost reductions, we believe that our earnings in the back half of 2015 will equal our results to 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 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. Non-GAAP expenses for the second quarter 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 cost, primarily severance in targeted fixed cost reduction actions and retirement pension cost. The second quarter 2015 non-GAAP adjustments had a net EPS impact that 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 cost. So after considering these non-GAAP items, 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 2Q 2015 adjusted earnings per share was negatively impacted by $0.05 due to the translation impact to loan of foreign exchange. As Gregg noted, we saw a significant strengthening of the U.S. dollar versus many key currencies which we do business in, including the euro, Brazilian reals, South African rand, and Turkish lira during the quarter. This strengthening causes the earnings of these units to be translated back to fewer U.S. dollars. Water Systems sales were $191.6 million in the second quarter 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 24% decline in groundwater pumping equipment. As Gregg noted, the second quarter of 2015 had 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 precipitation 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 costs 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% in the quarter, due to foreign currency translation. Fueling Systems sales were up about 1% excluding foreign currency translation and acquisition. 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 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 of 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 2015 rate before discrete events. The company ended 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 is 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 2014, and rationalize other aspects of the existing operations in Brazil. In total, the company expects to take a pre-tax 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, costs 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 borrowing 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 2015. Currently, the total remaining authorized shares that may be repurchased is about 714,000. This concludes our prepared remarks. We would now like to turn the call over for questions.

Thank you. [Operator Instructions]. And our first question comes from Joe Ratigan of KeyBanc. Your line is now open.

First, on the water segment, in regards to margins for three quarters in a row now you've been well below what you would consider structural margins in that business. So I just -- 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 sort of that mid-teens or above structural margin range that you've talked about the past even with declining revenue or should we consider may be second quarter margins are more appropriate for the back half of the year?

Joe, 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're are currently seeing right now is that, if the volume declines 8% to 9% 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 be back in the mid-teens. I don't know if we will back in that 16% to 18% range, which we've provided as kind of the range we see the water segment operating in. But we should be back in the mid-teens 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 kind of restating what Gregg said, we have, the lost leverage is the biggest driver of the -- we dialed back production rates, which of course means lower absorption of end inventory levels with lower absorption of fixed cost. We have priced actions that continue to impact us more favorably sequentially as we move through the year. Part of those price actions are to offset U.S. dollar inflation in those business units that have experienced that and procure a product base in U.S. dollars. We have the fixed cost reductions we've made, reductions in several of our business units from just a pure headcount perspective. We're closing a facility in the U.S. in Saco, Maine, which is one of our fueling facilities. We continue to get incrementally better in 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're going to kickoff an effort to accelerate the integration of Bombas Leao in Brazil and that will take some time to get done. We'll 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 top-line does.

Okay. That's helpful. Thanks John. And then, I'm surprised that surface water products were down double-digits in the quarter. Just given the weather, I mean, I would think some of that inventory would have been work through just with excessive wet weather for some of that stuff. How big is that HVAC related business? And then is that -- I mean 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?

Hey Joe, there is 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're not going to be using those products when it's been relatively cool and many parts of the country they would use condensate products. And we also have dewatering products [indiscernible], interesting is all the rain we got in the Midwest, it only came late in those markets in the upper Midwest where we had some strengths and we began to see some movement of products late in the quarter to move along there. And the other part of our surface dewatering business is Pioneer. And that obviously is where I guess, I'm sure there is some incremental sales of Pioneer pumps to deal with some of the flooding. But they're again more principally focused for dewatering and construction. Municipal bypass, oil and gas, hurricane type of events and that is to occur this year. So yes, the surface business was down and again we think with all the rain and everything in the central part of the United States we would have seen a little 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. Can you -- if you exclude the FX and headwind that you 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 '15 versus last year?

Yes. To your point, yes that is a headwind for fueling, we do price in dollars in many markets outside the United States, but it is a dream. We're kind of saying if we look at right now as being flattish you don't see the catalyst of China coming back online. We have a very solid business there, and particularly they're for recovery, and it's 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; so is our tank business in Europe. Here we saw a small business of underground storage tanks and actually many of them go into the North Sea oil and so that's been a negative headwind as always. 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 generally say that we're looking at kind of flattish back half to, as you've point out. Fueling has been on a role for four years taking a little rest right now.

Thank you. And our next question comes from Michael Halloran of Robert Baird. Your line is now open.

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

Sure, Mike. The resi, which has to be more where people live in greater populations, which are in Northeast, Eastern 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 lots of share there. That the large pumps is what really got heavier in the center of the country, just their operating ag systems just didn't need the water, we have more water, we don't do with flooding people actually dying with flooding. So it was a situation where the ag, the large diameter pumps where our business is way off.

And that make sense particularly given the ag landscape going into the quarter was more challenging than 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 can 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 is kind of drop-through and pull-through from a core demand perspective?

Hey Mike, this is Robert. To say when we're going to see a change in the pull-through demand is extremely difficult. The issue in the field is mainly that our larger customers like United Rental are very heavily exposed to upstream oil and gas. And with those prices that business basically just disappeared overnight. And so their utilization rates on across their fleets especially in this sector they're down significantly. Earlier when Gregg was talking about sell-through on large pumps of this type you've to keep in mind that we sort of see a slowdown when things are going down and when they're coming back up until utilization rates get up high and up again. So we kind of have to ride through the downside and little bit of the upside before we start to see more demand from rental customers. As our customers changed their fleet mix and sell assets and try to refocus on other segments of the industry that would be where we start to see some more sales pickup in products not so oriented towards oil and gas or rather toward municipal sewer bypass and other applications. And that's just going to take some time.

Great. Thanks a lot there. And then last one for me, just a follow-up on one of Joe's questions, I still -- I still I can't say I've been struggling with it, but I'm just trying to make sense of the down 8% to 9% top-line trend that you saw in the first half that you're projecting 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're seeing and just seems I guess I just see a little bit more confident in how you get there. And towards that end may be if you could just give a little more context for the changes that you've made or started making on the restructuring side last year, this year, that may be hit a little bit more in the second half of the year than may be I was thinking may be 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 some actions you've 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 it when Joe asked of it. When we look at our back half fixed cost now remember when Franklin Electric talks about fixed costs, we're talking about totality of SG&A and our manufacturing 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, Mike, first half 2015 to 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'll continue to take. We're going to see some benefit coming through in the back half in Europe to get those margins kind of 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 were assuming for the moment that mix will favorably impacted 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.

Thank you. And our next question comes from David Rose of Wedbush Securities. Your line is now open.

Let me just touch a little bit more on the SG&A side. What should SG&A really look like in the back half of the year-end, may be 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 this year. And then I'm assuming that it wasn't as effective given the range but you're still going to have to invest in the back half. And then lastly as we look to next year what -- what or how should we think about SG&A expansion next year?

David, I guess the way I would answer that is again when we think about fixed cost it's a combination of SG&A and the fixed costs as carried in our cost of goods sold, our fixed manufacturing costs. So we believe we take an action to lower that versus last year second half by 7.5% to 8% as I just stated. Now, if your question is more is that enough, we are paying attention to this very closely of course and we'll reset the fixed costs if we need to do. We have a target which we're not going to share what we want our fixed cost run rate to be at the end of 2015. So we enter '16 kind of at that run rate and we believe right now, we're going to be able to make that, and taking actions to make that. If we see volume declines continuing and we can attribute those volume declines to factors that, 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're trying to continue, as you know about Franklin, we're 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 headwind and we're 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's the balance that we're trying to maintain.

Okay, John, I appreciate that. I was just may be a little bit more color in terms of expense in the deal or reset for example, you still have to spend money in Q3 correct? Or you plan to or is that go-away?

Yes. We're not going to cutback our support to our customers, Dave. No, yes, absolutely as we work through the reset we will continue to contribute the resources necessary to win our new customers then 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 at deal or reset, if I'm not mistaken, is that similar than in the fourth quarter and that doesn't go away is what I'm trying to get.

No, I think some of it would go away, Dave. As we're out in the marketplace winning new customers, new distributors, there is a lot of training costs, there is a lot of these distributors have things called "open houses" they have these events where they bring contactors in, they might have a dinner, they might train, they do promotional activity like that. And when you're trying to win new customers you're 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 us to continue, I without having the actual detailed number in front of me, I would say it would be at a level below last year, at that point because we have gotten through some of the upfront one-time effort to win these customers.

Okay. That's helpful. And then John may be lastly on pricing. It seems like you're little bit disappointed on your ability to pass on price, what gives you the confidence that you can pass on price in probably what's a much more difficult environment?

David, this is Gregg. Pricing is something that we have historically been able to pass-through again as a company that supplies distribution is generally I'd say a well received is not necessarily a negatively received. When we're in a situation where there is a disruption to the marketplace, you go back, and our history back in 2006, 2007, you go back and the financial price in 2009, that's when you get pricing aberration 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. That's just in the United States, if you get outside the United States again we're able to move pricing at or above inflation. We haven't been able to do it as quickly as we would like in same markets like Brazil where on imported product we saw a dramatic increase in cost that we have to recover over a period of time, we have to be sensitive to just how fast we could move. But we just 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 cost, I think you heard you all talk about Europe. Again keep in mind there that we had a rather big disruption in the fourth quarter of last year for the size of the market with our factory shutting down for six weeks. We've been spending a fair amount of money importing products and getting products over there, to supply the markets during the first half of the year. That's not all kind of excited down and we would see the back half of the year, for example those costs going away. Here with the acquisition of Bombas Leao it's been a great acquisition, a great set. But we had duplicative cost and we've been incurring those costs for a period of a year now. And we saw an opportunity with this kind of a slowdown in the -- our Schneider branded products with now we're in our new factory in Joinville it has all kind of glided down. We take the opportunity now to accelerate taking cost out there. So these are various cost actions that we're taking around the globe are examples of cost actions we believe are prudent and yet are also keeping in mind an eye for the long-term to come.

Thank you. And our next question comes from Edward Marshall of Sidoti & Company. Your line is now open.

So on the groundwater side, kind of talked a little bit about the timing. My sense is that there is a seasonality that hits in the first half of the year especially around that as we prepare for may be a summer season. Have we missed that? I mean now that we're sitting in the -- are we kind of in that well where the summer is still, the summer activity but the predominant initial good part of the growing season has already occurred. And so are we going to wait till next year? How does that workout just help me out with the seasonality impact of that?

As the, if you look at Franklin historically at work, what I would call more normal times, about half a revenue, half earnings in the first half of the year, half a revenue, half earnings in the back half of the year, you typically have soft first quarter to your point, a buildup in the second quarter, there are years where the third quarter is larger than the second quarter. So I'm not talking about now over a period of years depending on [indiscernible]. So we see that kind of moving back and forth. It was -- we're not in a growing season yet but that season has been gone. We've heard and told that people are trying to plant to get a second crop in or get a crop in after the flooding is decided; there will be a watering cycle that occurs in the third quarter. How big it is, we don't know. That's why we look selectively at the back half of the year. But at the end of the day, people need pumps. Now 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're going to need have those pumps when they turn on; they're going to replace those pumps when they don't work. So it's a little unclear to us well as well as to how strong the back half would be for the growing season. But we think it's reasonable to look at it and say based on what we see in the first half estimate we have a similar sales decline in the back half that we will have the results that we put out there. So that's how we're kind of looking at the year.

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

Yes. That's the question we often get asked and it's kind of -- it depends. All right. So let's take the U.S. residential market. Let's talk. There's may be 15 million wells in United States, all right as an estimate. And there are about -- and 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. When you say 12% of new houses have wells and so if it's what 80,000 new houses. And so you say that if you're selling approximately three quarters of a million or 1 million pumps into the United States in a year it's a very large replacement business with relatively marginal new installs. Now, I go into look I've an ag pump. Now, if the water table has dropped as we're talking about in California and we're drilling a new well is that a replacement or is that a new install? It's kind of difficult to parse that data. But we'd say that the large portion of even -- of those installations are replacements. So we have a very large kind of replacement base. We've got a set of around 80% we think is replacement market on average. But it's really -- it's very difficult to kind of parse the data.

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

Sure. You need to take that in kind of two bites. So we made a decision to reset our distribution effective the 1st of July of last year, Eastern Mississippi and let's so call kind of Western Rockies. And there -- for example, Eastern Mississippi even with the weather situation we're seeing sales up year-over-year and so we're seeing the throughput. And Western Rockies as I mentioned in my prepared comments, we're seeing where our inventory is no longer available now with our product distributors that is now available and people are converting over to new or renewed relationships with other distributors. Now in so many country, the distributor that we were working with that kind of likely to leave us, so we saw a degradation in the sales pattern to them in the back half of last year. So we made a decision the third country to change our distribution effective basically the 1st of April. And in that case we're doing that right in the middle of these record rate fall in Texas, new record rate fall where in the center of country in the upper Midwest. And so there we're just seeing there's just not been a lot of demand and so there's been not a lot of throughput. We do have information that again if you go back to those areas of country where we had reset last year that actual throughput from distribution is higher than some of what they're buying from us, because everyone is trying to manage -- or not everyone, but several are trying to manage through real accounts. So that's why it's a little bit cloudy to give you again greater details of 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 kind of predict. I'm wondering what the month of July is done thus far. I know it's less than 30 days of business. Have you seen any improvements in either of the dewatering or the groundwater is related to the U.S. business that gives you some confidence as you move into the second half of the year?

Yes, we've seen that the watering space where we have some backlog that sequentially and that's why in my prepared comments I made and the comments are sequentially we should see some improvement, but keep in mind the back half of last year we had really big sales of dewatering equipment. And we're seeing decent order rates, good order rates in July in our groundwater spacing. But we're just a few weeks into the period and so that's why we looked at it and said, let's look at the back half and collectively if you look at the back half, we felt what was a reasonable approach to give you guys some feedbacks and guidance.

Thank you. And our next question comes from Kevin Bennett of Sterne Agee. Your line is now open.

Gregg, first 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 if then, a couple million bucks of business in China, and of course in India yes, we had some great wins last year with fuel pumping side. And so those have not been replaced. This year we just haven't seen a tender activity we saw last year is in that order of magnitude.

Yes, so Kevin the other thing on that is that we, it is a great point if it is Indian sale are lumpy, we had a pretty significant second quarter last year in India. We think we're going to have more sales in back half in 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 is nothing relative to India that we're concerned about fundamentally. We view it more as just the timing of how they're buying.

And then sticking I guess with China for a second, we all see the headlines, and the stock market crashes everyday and order sales are down, are you guys worried I guess that there is something structurally wrong with China or do you think that I guess the reduction in state-owned oil company procurements has gotten more of a temporary issue?

Well, I'm sure there are many more people that have a deeper understanding of China than I am and as public I would say this; we have a relatively small water business in China. So we have seen the impact of the construction market on our water business with China certainly has not been encouraging. With respect to the fuelling I think a slowdown in China is real or we're seeing it also in ours. So we just don't talk a lot about markets just right now because the price of gas is so low but just the -- we're continuing to put in some wells in China but it seems to be that Chinese are shifting back to or comfortable at using more diesel fuel as opposed to natural gas which diesel is going to be higher polluting than natural gas. They've made that that fair decision or at least it seems that the market is behaving that way. So it looks like the Chinese from a standpoint of where we're focused which is vapor recovery, improvement of the infrastructure in China that puts off the gas toddle we would expect that to change over time but we don't have as much visibility as China to think some of your other people you cover.

And then two more from 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 a new product or potential M&A or you guys not really focused on that right now, something we're not thinking about.

Well, first off new products we have a very what we believe is a very robust pipeline of new products. We measure every quarter we're looking at our new products relative to our forecast it's something that the company has been focused on and deliberately increasing our R&D investment over the last many years. We're introducing new drive products, new connected products, new integrated system products like our in line 400, new high-efficiency products like permanent mandatory linable products. And so we're continuing to introduce new products and that is generally, specifically helping our top-line and part of our organic growth, where we could see we're going t be in the mid-to-high-single-digits in a normal environment. With respect to M&A, as we've talked about M&A over the years at Franklin, we've bought about a couple companies a year. But the line of that relates to the timing of sellers, because these are family businesses and we in one case we've talked to a family for 9 years before we acquired the company. In other cases we talk people from 9 months, and so it's a little hard to gauge when acquisition kind of took place. Last year we did three deals couple of them were small. And we continue to look for opportunity, but timing is a little bit outside our control. We're going to be there, we continue the dialogues and when people are ready to make decision, we like to believe that were a good acquirer. But beyond that, I wouldn't want to get any details about particular transaction.

But Kevin, just to be clear, knocking in the current environment is making us think about acquisitions strategically different right now. For the right transaction, Gregg is absolutely right. Timing of these things is difficult to predict, but we're 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 kind of what we see happening in 2015.

And then last question for me. Given what's happened with your stock price, I'm 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?

You know Kevin, as we've talked in the past and we've 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's something that is one of the 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've also discussed in the past, we have a view of what we think of forward multiple for this company should be and when the market price is below that then we will act according from a repurchase perspective. So that thinking is not really any different then. We had some time now and the market opportunity may be greater now.

Thank you. And I'm 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 in this conference call and 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.