Franklin Electric Co., Inc. (FELE) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Franklin Electric Reports Second Quarter 2019 Sales and Earnings Conference Call. [Operator Instructions] Also as a reminder, this conference call is being recorded.At this time, I'd like to turn the call over to your host to John Haines, Chief Financial Officer. Please go ahead.

Thank you, DeLome, and welcome everyone to Franklin Electric's second quarter 2019 earnings conference call. With me today is Gregg Sengstack, our Chairman and Chief Executive Officer. On today's call, Gregg will review our second quarter business results and I'll review our second quarter financial results. When I'm through, we'll 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.With that, I'll turn the call over to our Chairman and CEO, Gregg Sengstack.

Thank you, John.Second quarter 2019 results were below our plan and expectations. Continued record precipitation in the U.S., political uncertainty and social unrest in EMENA, economic weakness in other developing regions, and a slowdown in China all contributed. That said, second quarter revenue, operating income, net income, and earnings per share were records for any quarter in our Company's history.In the U.S. and Canada Water Systems business, large dewatering pump sales were up over last year but below expectations, again due to customers pushing out a couple of million dollars of orders into the second half of 2019.Backlog remained steady. Sales of other categories of surface pumps were up as well in the quarter. U.S., Canada groundwater pumping systems sales declined 12% on the back of lower sales through our Distribution segment. With much of the back office integration complete, we are focusing on reducing inter-segment inventory. Sales of groundwater pumps to third-party distributors were up 5% over last year.Moving outside the U.S., our Water Systems business in EMENA declined organically mid-single digits. As we supply components to other European pump companies, we view this slowdown as industry-wide. The Middle East is an important export market for European companies, and a political uncertainty and social unrest are impacting the pump business in this region.In addition, business in Turkey is slow, particularly in the Ag market. Farmers have not recovered from the dramatic devaluation of the lira that began last summer.Our Water Systems business in Latin America, outside Brazil declined organically as well. Throughout Latin America, political instability and fragile economies still trade the headlines. One bright spot in Asia Pacific, where like quarter one, our Water Systems business was up meaningfully. John will get into more details, but weakening currencies reduced our International Water reported revenue by 8% as compared to the second quarter of last year.Our Fueling Systems business delivered another record quarter with operating income up double digits. Sales were again up double digits in the U.S. and Canada. Business in China is back on track. But, we see growing evidence that the economic environment in China is impacting our business in two ways.First, state-owned oil companies are scaling back their capital plans; and second, “buy local” initiative is growing. At this point, we believe we will achieve our 2019 planned revenue of approximately $50 million in the country. However, we now believe that 2020 revenue will be between $40 million and $50 million.Sales in EMEA continued to be below expectations principally due to uncertainty around Brexit impacting underground tank sales and credit issues in Africa delaying build programs in the back half of 2019. Sales in Asia were down after a strong Q1. Sales in India recovered nicely and are back on plan. Our fueling business in Latin America continues to grow.Turning to distribution, like Q1 this end-customer facing business was the one most dramatically impacted by the extreme weather and high levels of precipitation experienced in many regions of the U.S. We had expected, hoped maybe that precipitation would normalize in Q2, and that didn't happen. However, the team did a great job of selling more non-water well products and delivered 1% organic growth in the second quarter.As expected, the overall weak demand in the water well market compressed margins, although they improved sequentially through the quarter. With many Headwater branches located in Midwest and West, the record precipitation resulted in sales of F.E. brand products through Headwater being 5% lower in Q2 of last year.That brings me to our outlook for the balance of the year. I will start with Distribution. End demand is there. We believe that the more normal weather conditions we are now seeing will lead to recovery in our Distribution business, July has started well. We believe our groundwater manufacturing business will also recover. Our sense is that inventory channel is about average for this time of the year.The outlook for our U.S. surface pump business is good as is the demand for our large dewatering pumps, we continue to focus considerable attention on expanding and diversifying our customer base, both by end market and geography.Overall, the business climate in the U.S. is robust. We are encouraged by the positive feedback we've gotten from the field. Even with the turmoil in EMENA, we are somewhat optimistic about the second half of 2019. We’re getting more traction with our expanding line of pressure boosting systems, we are seeing an increase in tender activity for North Africa, and believe we will see some improvement in the Middle East, albeit from a low base.We believe our European Water business is doing as well or better than most. Given our second quarter results, we expect Turkey to continue to be weak. We see Argentina stabilizing, and Brazil getting a little bit better as well. We are encouraged by our results in Australia, South East Asia, and in China, where we've introduced a new booster system that's gaining some traction.In our Fueling business, the outlook remains positive. The team is positioned to carry forward the strong start in the U.S. and our China revenues are recovering back to planned levels.Despite these positives, looking forward, our first half results did not meet our expectations, and we do not believe we will be able to achieve our original earnings per share guidance. We now believe our full year 2019 earnings per share before restructuring charges will be between $2.15 and $2.25, which at its midpoint would result in a second half 2019 earnings per share before restructuring charges of $1.29 [technical difficulty] percent increase over the second half of 2018.I will now turn the call over to John to discuss the numbers in more detail. John?

Thank you, Gregg.Our fully diluted earnings per share were $0.70 for the second quarter of 2019 versus $0.64 for the second quarter of 2018. Second quarter EPS before the impact of restructuring expenses was also $0.70 compared to 2018 second quarter EPS before restructuring of $0.65.Restructuring expenses in the second quarter of 2019 were $0.2 million and were related to branch consolidations and other asset rationalizations in the Headwater Distribution segment. Restructuring expenses in the second quarter of 2018 were $0.6 million related to various manufacturing realignment activities and resulted in a $0.01 impact on earnings per share in the second quarter of 2018.Second quarter 2019 sales were $355.3 million compared to 2018 second quarter sales of $344 million, an increase of 3%. Sales revenue decreased by $10.3 million or about 3% in the second quarter of 2019 due to foreign currency translation, and we estimate this revenue decline lowered our earnings per share in the second quarter by about $0.03 versus the second quarter of 2018.Water Systems sales were $205 million in the second quarter of 2019 versus the second quarter 2018 sales of $211.4 million. In the second quarter of 2019, sales from businesses acquired since the second quarter of 2018 were $3.3 million. Water Systems sales decreased about 4% in the quarter due to foreign currency translation. Water Systems organic sales were flat compared to the second quarter of 2018.Water Systems operating income was $30.9 million in the second quarter of 2019, compared to $32.2 million in the second quarter of 2018. Water Systems operating income was lower in the second quarter, primarily due to lower sales volume, the result of lost leverage on fixed costs and adverse product sales mix.Fueling System sales were $78 million in the second quarter of 2019 compared to second quarter of 2018 sales of $73.1 million, and were a record for any second quarter. In the second quarter of 2019, sales from businesses acquired since the second quarter of 2018 were $1.7 million. Fueling System sales decreased about 2% in the quarter due to foreign currency translation. Fueling Systems organic sales increased about 7% compared to the second quarter of 2018.Fueling Systems operating income was $21.7 million in the second quarter of 2019, compared to $19 million in the second quarter of 2018. Fueling Systems operating income was higher in the second quarter due to favorable mix and operating leverage.Distribution sales were $87.1 million in the second quarter of 2019 versus second quarter 2018 sales of $79.5 million. In the second quarter of 2019, sales from businesses acquired since the second quarter of 2018 were $7 million. The Distribution segment sales grew about 1% organically compared to the second quarter of 2018.The Distribution segment operating income was $4.5 million in the second quarter of 2019, compared to $4 million in the second quarter of 2018. Operating income before the impact of restructuring expenses was $4.7 million. Distribution's operating income was higher due to acquisitions.The Company's consolidated gross profit was $119.7 million for the second quarter of 2019, an increase from the second quarter of 2018 gross profit of $116.1 million. The gross profit increase was primarily due to higher Fueling Systems sales. The growth profit as a percent of net sales was 33.7% in the second quarter of 2019 and 2018.Selling, general, and administrative expenses were $75.8 million in the second quarter of 2019, compared to $75 million in the second quarter of 2018. SG&A expenses from acquired businesses was $2.8 million and excluding the acquired entities, the Company's SG&A expenses in the second quarter of 2019 was $73 million, a decrease of about 3% from the second quarter 2018, partially due to the effect of foreign currency translation in the second quarter of 2019 versus the prior year.During the first quarter of 2019, the company changed the management reporting for certain transfers of manufactured products between the Water and Fueling segments. This change was made to better align the production of certain products by reportable segment and sales to third party customers. To consistently compare 2019 results of the prior year, certain 2018, net sales and operating income reclassifications were made.These reclassifications resulted in lowering second quarter 2018 results of Fueling System and increasing second quarter 2018 results of Water Systems net sales by about $1 million and operating income by $0.1 million, versus what was reported in this period last year. There is no impact on the Company's previously reported consolidated financial statements.In 2019, we believe our effective tax rate net of discrete events will be about 20%, significantly higher than the 2018 effective tax rate of about 12%. This higher tax rate is primarily due to the inclusion of 2018 of discrete tax events that effectively lowered our tax expense for the full year. We do not believe these events will reoccur at the same level in 2019.The Company ended the second quarter of 2019 with a cash balance of $41 million, which was $18.2 million lower than at the end of 2018. Cash decreased primarily due to acquisitions and debt repayments. The company had $123.3 million in borrowings on its revolving debt facilities, at the end of the second quarter of 2019, and $133.8 million in borrowing at the end of the second quarter of 2018.As of January 1, 2019, the company adopted the new lease standard and has recognized additional operating liabilities of about $26 million for its outstanding operating leases with corresponding right of use assets of the same amount. The impact of this new accounting standard is non-cash in nature and does not affect the Company's cash position.The Company does not consider the impact of the standard to be material to the consolidated results of operation, or to the cash flows. The Company purchased about 93,000 shares of its common stock for approximately $4.1 million in the open market during the second quarter. As of the end of the second quarter of 2019, the total remaining authorized shares that may be repurchased is about $1.3 million.On July 22nd, the Company announced a quarterly cash dividend of $0.145. The dividend will be paid on August 15 to shareholders of record on August 1.This concludes our prepared remarks and we would now like to turn the call over for questions.

[Operator Instructions] Our first question comes from Edward Marshall from Sidoti & Company. Please go ahead.

So, I understand your comments regarding the distribution and the inventory being what you thought was or what you think is average. For this time of the year, I guess I have a question on that. If I look at your own inventory, it seems a little bit higher than normal for this period in the second quarter. Can you talk about maybe what your own inventory looks like maybe outside of the distribution and what that might mean for pricing as we move forward?

Yes our inventory levels, Ed for sure ended the quarter higher than we had expected. That's in most part because of inventory buildup in anticipation of sales that did not take place in the quarter on the manufacturing side. When you look maybe just one level below that, we had some inventory in Pioneer anticipating the backlog in the sales in the back half of the year.The build-up, we had some build-up in our U.S. manufacturing plants in the 6-inch and 8-inch product that is often used for agricultural purposes, which as you know because of the weather were depressed in the second quarter. So, those were two of the primary reasons why we had the inventory build-up in the manufacturing entities. Our inventory in total was up about $17 million from the same period last year that's about 7%, when you're excluding distribution.

And Ed, getting maybe your question about pricing, we don't see this as having any impact on pricing. This is just to John's point, we had a stronger forecast internally. We’ve built that forecast, it didn't happen. So, we will have some running inventories down in the back half comparable basis, creates some drag on the margins, but we think we've got some offsets.

And as I think about kind of the way you might plan your manufacturing. I mean you're anticipating a stronger second half than maybe the first half. Do you plan to kind of build at the same manufacturing rate? I know last quarter you talked about some restructuring? Was there another round of restructuring announced in 2Q as we kind of look to the back half of the year?

Yes, again, we will be running our plants at lower than planned levels, as we planned levels planned at the beginning of the year to bring down our inventories to be more in line since we do have this strong position here, and now we’ll create some negative absorption in the back half.

And then you mentioned that you saw some slowdown in China. Is that more driven by the economics or is that maybe trade war tensions or both, or any comments that you can kind of relate to that, I'm specifically talking on the Water segment, I understand the fueling is quite a different scenario? Thanks.

Water segment actually, maybe I didn't make it clear in my prepared remarks. Actually water segment, again we have a small business in China, it’s sub $10 million. But we're sort of seeing and we're seeing some pick up there because of the introduction of this new inline delta product, which is a substitute for vertical multistage boosting products in the lower medium rise residential buildings in China. So, we're getting some traction on that, but - we have a very small base in the water.And so, I wouldn't say that there is any impact related to trade or economy. The comments - I made were more directed to your point about the fueling business, and the capital spend rates of the public oil companies. And then in general kind of, which may be related to trade tensions didn’t put that in my comments, but this idea of, well we'll buy locally as a way of immunizing, while I say we, China will buy locally a way to immunizing from the trade tensions with the U.S. in general.

Have you seen the weakness? Have you seen the capital investments from some of the other larger kind of global players outside of Chinese-owned pumping stations? Have you've seen the same decline in the rate of capital spend as you’ve seen with the local agencies, by the local pumping owners?

Yes, in China, the bulk of the gas stations are owned by the national oil companies. The number of gas stations owned by major oils is a smaller subset. And I would expect that their programs are pretty much their programs. They do this and they do their upgrades on their capital spend rates and their plans, not so much I think related to the Chinese government’s decisions.

Our next question comes from Ryan Connors from Boenning & Scattergood. Please go ahead.

Actually I want to stick with the China theme for a minute. This issue of buy local Gregg, is that something, I mean is that anecdotally you've heard that from some of your people there, or are there like specific announced programs you're aware of in terms of procurement and moving toward this buy local?

Yes, what I'm hearing is from our leadership team, our fueling leadership team on the ground in China and through the senior leadership of fueling is that, we saw some reopening of specifications to allow more local Chinese players to be qualified. And so, we've seen evidence by the government of making it easier for local companies to compete because their products stay in the ground - their work as well as Western product, we'll let the market decide that. But that's the evidence we're seeing and that's what I'm hearing from our teams.

And then just on this issue I mean, I apologize if the question somewhat elementary. But I mean, can you just kind of refresh us on how the wet weather - the puts and takes in your business. Because on the one hand, you would think it would be good for dewatering, Ag you mentioned bad. Just how do we think about Franklin Electric as an entity, as a whole and wet weather and why such a pronounced, negative impact of that when you've kind of got - it would seem you've got product lines that could play either side of that?

It's a great question, Ryan and it's a great reminder about how our business operates. Yeah, we're - again we're more groundwater centric, we're water well centric than any other product line is the one where we have the highest margins because we're more vertically integrated. That said, when you look at our surface pumping equipment, clearly in the Midwest, massive run on getting some pumps that's why our surface business is up because of that. But those are relatively as the smaller pumps, lower margins and in our submersible.The dewatering pumps from Pioneer are more event driven and so we - you think that if there is hurricane or you think that there was some type of flooding in a specified area, where you see some of that dewatering. But that's still relatively small part of our overall business, even within Pioneer. Pioneer has been a big, a lot of our activity from Pioneer has gone into our rental fleets. And so there is a tail, we're at the tail of that target and so the other buying these rental fleets and you might see upticks at U&I or Sunbelt [ph] or other rental companies, higher utilization because of flooding.But we wouldn't necessarily see that and their capital spend with us. Their capital spend have been laid out, months and maybe years in advance. So what happens to us is that, when we get - the weather we saw and growing throughout the country in the first half of the year. As people are running their submersible pumps, their groundwater pumps as frequently or even at all, and so they're just not replacing them. We have a large replacement part of the business anywhere, we estimate it's around 80%.And so, if you're not turning the pumps on to run them, you're not replacing them, and so that's where we saw the weakness. So yes, we did see some uplift and demand in the Midwest, particularly with flood events, with pumps for homes, but we certainly - that did not offset the decline that we've seen in my tenure with Franklin yeah this has been what is your history [ph] it has been a tremendously soft market out there.

I guess my follow-on to that is just, you mentioned that after the first quarter things were a little soft, but you maintain the guidance and it's kind of see how second quarter played out. So now you've trimmed it, but what's baked in there in terms of the second half. I mean what if we do continue to get wet weather in the third quarter I mean is that - are we conservative relative to that or are we, or is it built in that we're going to get a sequential recovery, and then potentially in that scenario, like a shoe to drop again?

Yes, so I think the way we're looking at - actually the way we looked at back in April, we said okay things normalize. And we should then see more normal revenue and more normal profitability. Back half we're looking at kind of a 5% plus or minus organic growth rate in water to give you some kind of guidelines around that.So we’re just expecting the second half, just - now it has seen to dry out, but people that do get crops around the year getting home - use of submersibles will be increasing. And so, we should see kind of a more normal run rate, but that’s - so think about mid-single digit organic growth terms.

And then just one last one if I could. I guess, just to more bring John in, but it seems like ForEx is really exacerbated the volatility of the results, the last couple of few years here. And can you just kind of refresh us on your thinking around hedging and just philosophically around whether you could, or water should ever do anything to kind of help smooth some of that out?

Yes Ryan, before I turnover to John, the number you say over since 2014 the U.S. dollar strengthened what some 25%. And so that impacts I guess is math on the translation side. And then we also get a little bit more volatility because if you look at the stock markets the developing regions, certainly has been a tail to cities relative to the U.S. market, which I think is more reflective of just kind of a weak economy. So we have a meaningful strategic exposure to developing regions.And developing regions have been weak economically, which is also why the currencies have been weak. And so that's come back with impact in our short-term results. Long-term, we think it's where we need to be from a performance point of view, because that's where are people are. John can take you through some of the philosophy around how do you immunize this.

Yes Ryan, so good morning, you'll recall that the bulk of the FX exposure that our company faces is translational FX exposure. Where we have operating units around the globe doing business in real doing business in Turkish lira in euro, South African rand other currencies. And then we're translating those results back. We think the best immunization for that is to match revenues with supply chains, which we do in most part around the globe.So for example, our business in Brazil primarily sells in real, and their supply chain is primarily a real supply chain. For the most part that's true in Europe. And that's true in South Africa and other places.So our real issue is the translation back of those entities earnings and our view is that other than that kind of natural matching in country of those operations or in market of those operations. It's not a ton we're going to do on the translation side, but it is significant. So in the first half of 2019, FX has costs us about 3.5% on the topline, about 5% of Water, about 2.3% in Fueling.Where we have improved trend actional FX exposures, in some cases, we do deploy hedging strategies, we have those in several places around the world, not significant positions, but we're, we can predict a balance sheet position and then hedge that successfully. Trying to get predictions around cash flows and predictions around AR balances and other things like adding it’s a little bit difficult in a volatile revenue environment, as you might guess, that we see as well, so that’s the short on the FX and kind of how it impacts our company.

Our next question comes from Edward Marshall from Sidoti & Company. Please go ahead.

I just wanted to jump back in and follow-up on the margin, if I could. It doesn't go unnoticed, I think two points, one Headwater had a pretty good quarter. I wondering if you'd may comment there, I know the second quarter is generally strong, but this seems to kind of hit your targets for what you expected Headwater. So maybe you could just make a comment about what's going on there and the success you might be having?

Sure. Again, the margin we talked about were range of 4% to 6% on our annual run rate basis. The second and third quarter being a seasonally stronger. So I appreciate the observation about Headwater's performance in Q2 and we expect to see kind of similar margin activity in Q3, but Q4 will slow down.And so we're still not where we think it should be, but we are continuing to now work more on the supply chain, the cost side as we have a more integrated platform. All the Headwater branches that were acquired last year before all on one system, the acquisition we did this year will go on system about six months. So that's been going to help us on the backside as well.

And the second point I guess was on Fueling, I mean it looks like it might be the one of the stronger margins, I've seen in that business in a while maybe ever. Based on the comments and specifically around China and how big of the department business that is for you. Is this, and I understand it can be lumpy and volatile. Is this a high watermark for that business, I mean, do you expect that kind of moderate as we move through the remainder of the year or do you expect to see that kind of repeat into the end of the year and maybe even into 2020?

Yes, one of the key drivers, Ed of the Fueling margins is in fact the U.S. business and the product mix that we have there. This team has also done a really nice job of leveraging our fixed costs, so adding fixed cost at a much lower rate than the revenue growth that's happening in the business.So as I warned you before and others, I wouldn't get real comfortable with high-20s fueling operating income margins. I think it's not these in the mid-20s is doable as you point out. It can be influenced quite dramatically by product, mix shifts and geography mix shifts and this quarter we just had the, we had a very favorable mix in the United States where growth was up as Gregg pointed out and that favorably impacted our operating income margins.

Our next question comes from Matt Summerville with D.A. Davidson. Please go ahead.

Couple of questions. First, just to talk about the North America groundwater business, can you parse out a bit how you think your business did in the second quarter on the Ag side versus the resi side year-over-year?

Matt, I guess the way I can say is that the Ag was hurt the most because of - where the majority of the rain fell, and when we look at some of the patterns in terms of the Headwater stores and where we saw some dramatic falloff of revenues at stores that --at locations typically are Ag based had a really strong 2018. Beyond that, I don't have much detail was more qualitative, I don't know, John have you got anymore quantitative?

Yes, I mean as we said Matt, groundwater in the U.S. was down 12% in the quarter as Gregg's pointing out. More severe in Ag than in residential. The surface pumps that are not the dewatering pumps that Ryan was asking a little bit about, those were up 8%, dewatering was up about 12%.So when you look at that surface non-groundwater other category, we saw some lift there, a big percentage of that is residential. So if you're thinking residential, non-groundwater, that was impacted by the surface increase which is wastewater water transfer, some pumps those kind of things that you might expect to be up in a very wet environment.

And Matt again on the pro-channel side, what we say is because our sales to third-party distributors, not had water up 5% and that sales basis is kind of more Mid-West to East, which tends to be a little bit more resi, we've said the residential market was maybe was due less impacted again the Ag market, which is more Midwest West and more where we have Headwater exposure and Headwaters outdoor sales of Franklin pumps were down about 5%, does that help?

Yes, that's very helpful. I appreciate that. Thank you. And then on the pricing environment, what was realized price for Franklin in Water and Fueling in Q2 and with steel costs rolling over copper prices coming down a bit. I guess what's your outlook in price versus cost in the back half of the year?

Yes, our achieved price in the first half of the year was, I mean, excuse me, in the second quarter was about 3.1% and Water and about 2% in Fueling, Matt. We have seen some reduction in steel prices and other commodity prices as we have trend of those.But I would also say that on an input basis, both our raw materials, our commodity materials and all other raw materials that we're buying are still higher than last year's average price paid. So, we right now for the most part are not anticipating new price actions in the back half of the year, but we are still seeing inflation flowing through our raw material inflation flowing through our cost of goods sold.So right now, I would say that were basically assuming a neutral for the back half of the year and then our price will offset, that inflation that may get a little bit more favorable for us as we get towards the end of the year. But right now, that's our base assumption.

And then I guess just sticking with pricing, I think, Gregg. Last quarter you had indicated some concern that you were going to experience, given the demand environment increased price pressure in Q2. Given the realization John just cited in water, I guess, it's hard for me to maybe things that that happen, but can you comment around what you're seeing kind of currently and what you saw in Q2 with respect to been counting specifically in North America?

Yes. Matt at to your point, I think you got to figure it out. We did not see as much pricing pressure in Q2 at the manufacturing level that I maybe been cautious about in my prepared remarks last quarter. I would say that, and called out that at the distribution water level at Headwater, that we saw some margin compression. But margins improved pricing improved throughout the quarter.So I think, we got really tough in April and then we saw sequentially May and June seen some lift. So, that's what we're seeing. And I'd say right now, we're kind of in a sort of normal pricing environment. We all run promotions. They all seem to be similar in size, in percentage terms as we've seen in prior years.

And then just one follow-up on the sort of the comments you made on by local in China, and I just wanted to be clear on something. This is in no way a government mandate that is saying that these oil companies have to buy local. This was not - you're not seen at those central government level, correct?

So we're not seeing a mandate, you are in command economy and we have seen some evidence, I mentioned earlier on the call, where the tender specifications have been your reopened to help others get hurt too. They've been reopened, and as a result of them being reopened, we've seen more local suppliers being qualified, not saying that they get bought the sale or opportunities they are getting picked up by the major oils, but they are now on the list.

Matt, I think that I think we see frequently in these type of regulatory mandates that we and maybe a couple of other of our U.S. multinational competitors take early leads from a market share perspective and then it becomes more common that local competitors start to catch up on that.I think that's what's happening here as well that there's just more local companies now that have caught up in and are able to be certified in this product and therefore serve the sort of the market. So I'm not sure this is that this like other regulatory in opportunities, we've had in the developing world before us.

Yes, Matt, as a follow on to John's comment, you may recall back in 2008 when the mandate for April recovery in China came out and Franklin with easy product line, we took a commanding initial lead. And we had - I don't know 50%, 60%, 70% of market in Beijing, and then as the overall have maybe 30%, 40% share of the market, but we did see that there are more local competitors that came in later.Now, the issue is that some of this product once it gets the stall, if I know doesn't work, it doesn't work the way we designed, and so the opportunity on a follow-up is that that product is taken out and we eventually get the sale. So as John pointed out, we did see this happen with the April recovery initial initiative back in the 2008, 2010 timeframe.

Thank you. This concludes our Q&A session. I would now like to turn the call over to Gregg Sengstack, Chairman and CEO for closing remarks.

We thank you participating on our earnings call. We look forward to speaking to you after the third quarter. Have a good day.

Thank you, ladies and gentlemen for attending today's conference. This concludes the program. You may all disconnect. Good day.