Franklin Electric - Q1 2015
April 28, 2015
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Franklin Electric Company, Inc 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. If anyone should require operator assistance, please press star and then zero on your touch-tone telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Jeff Frappier, Treasurer. Sir, you may begin.
Jeff Frappier (Treasurer)
Thank you, Amanda, and welcome everyone to Franklin Electric's first quarter 2015 earnings conference call. With me today are Gregg Sengstack, our CEO, and John Haines, our CFO. On today's call, Gregg will review our first quarter business results, and then John will review our first quarter financial results. When John is through, we will have some time for questions and answers. Before we begin, let me remind you that as we conduct this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which could cause actual results to differ materially from such forward-looking statements. A discussion of these factors may be found in the company's annual report on Form 10-K and in today's earnings release.
All forward-looking statements made during this call are based on information currently available, and except as required by law, the company assumes no obligation to update any forward-looking statements. During this call, we will also discuss certain non-GAAP financial measures, which the company believes help investors understand underlying trends in the company's business more easily. A full reconciliation of non-GAAP to GAAP financial measures is included in today's earnings release, which you can find on the Franklin Electric's website. With that, I will now turn the call over to our CEO, Gregg Sengstack.
Gregg Sengstack (CEO)
Thank you, Jeff, and good morning, everyone. The first quarter started strong but slowed measurably in the back half. While our GAAP earnings per share were 17% higher than last year, our operating earnings were well below our expectations and guidance for the same two reasons cited by most global companies: the material strengthening of the U.S. dollar and dramatically lower oil prices. These two factors accounted for the majority of the $9.5 million decline in our adjusted operating income. The impact of these two factors was greater than we originally forecasted and overshadowed our continued positive organic growth across many markets. Specifically, the strengthening of the U.S. dollar reduced our reported sales 7% and adjusted operating income by about 10% as compared to the first quarter of last year due to translation effects.
In addition, our Pioneer Pump unit, which derives a vast majority of its domestic revenue either directly or indirectly from the upstream oil and gas market, saw sales decline by 50% in the U.S. as compared to last year. Even with the continued growth in offshore sales, total Pioneer brand pump sales declined by over 30% during the quarter. Most of the balance of the decline in our adjusted operating income is the result of two additional factors. First, raw material costs at several of our overseas units increased since these units purchase some raw materials that are priced globally in U.S. dollars. We have implemented price increases in those units to offset the cost increases. We should start to see the impact of these price increases during the second quarter.
And second, with the challenge of weak demand due to multiple factors in the U.S. market, we incurred higher promotional costs in the quarter. So while we continue to be impacted by currency and the soft oil and gas market, we are taking steps to move our profitability back to historical levels. Turning to our Water Systems business, in the United States and Canada, which represented 35% of consolidated sales in the quarter, the silver lining of the Pioneer branded dewatering pump sales decline was the variable margin on Pioneer products that was back at historical levels and in line with the balance of our surface pump product lines. The sale of other surface water pumps increased during the quarter, where we continue to get traction with new products. In groundwater pump channel sales declined by 6%. As I mentioned last quarter, groundwater demand continues to be uneven.
In general, groundwater distributors are cautious to take inventory, even with promotions. There are still relatively high levels of inventory of groundwater pumps in key irrigation markets like West Texas and many other parts of the lower Midwest and Central Plains states, where it has been wet and the growing season started later than normal. In Latin America, excluding acquisitions and before foreign translation, our sales grew 16% with record results in Mexico and in Brazil. However, this entire increase was wiped out when translated back to U.S. dollars. In Brazil, the integration of the Bombas Leal business, which we acquired last June, continues on plan. Overall, margins were impacted in Brazil due to higher input costs, both from domestic sources and products imported in dollars. We have taken pricing action to offset those costs.
Moving to Africa, our team in Southern Africa turned in a solid quarter, with revenue up 20% in local currency over a relatively easy comparison to last year. We are not expecting that kind of growth in Q2, as we expect the seasonal slowdown in the second quarter to be exacerbated by a weak corn crop and depressed crop prices. However, our new distribution center in Zambia is operational and should help offset the weaker market in South Africa. Moving to the Middle East and North Africa, there are a lot of moving parts in the business. Our business in Turkey, which principally sells Impo branded products and buys and sells in three currencies, the Turkish lira, euros, and U.S. dollars, had record sales in local currencies, but again saw margin compression due to input costs. Here again, the local team is continuing to take actions to address this issue.
Overall, when we include export sales into the region from our European operations, sales declined in the region before translation by about 5% due to lower sales in Saudi Arabia and continued political unrest in the region. In Asia-Pacific, we saw a similar sales decline before translation by 5%. We view this decline to be more from customers delaying orders as we sell products in several markets in U.S. dollars than for other reasons, although business in China, albeit small, was not robust in the quarter. Revenue at our Pluga joint venture business in India is behind plan. We have taken steps to address this situation. Europe, like Latin America and Southern Africa, had strong organic sales, up 15% before translation. But after considering a 26% negative impact of foreign currency translation, reported sales actually declined 11%, with earnings taking an even bigger hit.
Some of this is attributable to the previously discussed move of production from Germany to the Czech Republic. With strong demand, we have had to incur additional costs to maintain deliveries. We expect these costs to abate by mid-year. A few comments on our Fueling Systems business. After double-digit sales growth last year, our Fueling Systemss business slowed down this quarter. However, with organic growth before translation of 5%, our fueling team posted record operating income in the first quarter. In the U.S. and Canada, Fueling Systems sales were up 5% before translation, with fuel management systems and service station hardware posting double-digit gains due, in part, to new product introductions. Internationally, fueling sales before translation grew approximately 5% as well, across all regions and most product lines, again led by fuel management systems, fuel pumping systems, and service station hardware.
There were three pockets of weaknesses internationally, each contributing about 1% headwind to consolidated Fueling Systems sales. First, storage tanks in the U.K. to support oil field activity in the North Sea have declined with the decline in oil prices. Pumping system sales in Russia have declined due to the contraction of the Russian economy and dispensing system sales in China, which we believe is due to the publicized investigation of corruption within the Chinese state-owned oil companies. As we look forward to Q2, we see most of the factors that contributed to our weak performance in Q1, namely the impact of the strong dollar and weak oil prices continuing. Further, in the U.S., unfavorable early season weather and higher-than-normal inventories will be a drag on our groundwater sales.
Offsetting these headwinds are strong organic growth in Europe and developing regions, pricing actions, and fixed cost controls that we have in place. Because of these factors, we estimate that our second quarter 2015 Water Systems net sales will be flat to the second quarter of last year, and our Water Systems adjusted operating income to decline by 6%-8% as compared to the 33% decline in the first quarter. We expect our Fueling Systemss segment, where we have seen a general slowdown in quote and order activity from two principal markets, India and China, net sales and adjusted operating income to be flat to grow 3% as compared to last year's second quarter results. Overall, we expect our second quarter earnings to be within a range of $0.54-$0.58. I would now like to turn the call over to John Haines, our CFO.
John Haines (CFO)
Thank you, Gregg.
Our fully diluted earnings per share as reported were $0.41 for the first quarter 2015 versus $0.35 for the first quarter of 2014. As we note in the table from the earnings release, the company adjusts the as-reported GAAP operating income and earnings per share for items we consider not operational in nature. We believe presenting these matters in this way gives our investors a more accurate picture of the actual operational performance of the company. When current transactions are related to previous period transactions that were called non-GAAP, the current period impact is also called non-GAAP to be consistent. Non-GAAP expenses for the first quarter 2015 were $0.8 million and included $0.5 million in restructuring costs, primarily for the continuing European manufacturing realignment started by the company last year, and $0.3 million of other non-GAAP expenses related to retired executive pension costs.
The company acquired the minority shareholdings of Pioneer during the first quarter. This transaction created several significant financial benefits for the company. The first was the reversal of a deferred tax liability created in 2012 when the company acquired a controlling interest in the Pioneer subsidiary and realized a gain on the then-equity investment in Pioneer. This first quarter tax benefit of about $4.8 million was treated as a non-GAAP adjustment to the company's earnings because the transaction in 2012 that gave rise to the gain and the tax liability was treated as a non-GAAP adjustment as well. The first quarter 2015 non-GAAP adjustments had a net EPS impact that reduced earnings by $0.09. There were no adjustments to EPS for non-GAAP items in the first quarter of 2014.
So after considering these non-GAAP items, first quarter 2015 Adjusted EPS is $0.32, which is down 9% to the $0.35 Adjusted EPS the company reported in the first quarter of 2014. It is worth noting that the company estimates in the first quarter 2015 adjusted earnings per share was negatively impacted by $0.04 due to the translation impacts alone 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 real, the South African rand, and the Turkish lira during the quarter. This strengthening causes the earnings of these units to be translated back to fewer U.S. dollars. Consolidated net sales in the first quarter of 2015 were $225.7 million, a decrease of $5.7 million or about 2% compared to the first quarter of 2014 sales of $231.4 million.
The incremental impact of sales from acquired businesses was $8.9 million or about 4%. Sales revenue decreased by $16.5 million or about 7% in the first quarter of 2015 due to foreign currency translation. And as I said, this translation effect reduced our adjusted earnings per share by about $0.04 in the first quarter. The sales change in the first quarter of 2015, excluding acquisitions in foreign currency translation, was an increase of $1.9 million or about 1%. Water Systems sales were $179.2 million in the first quarter of 2015, a decrease of $5.4 million or about 3% versus the first quarter of 2014 sales of $184.6 million. Sales from businesses acquired since the first quarter of 2014 were $8.8 million or about 5%. Water Systems sales were reduced by $13.8 million or about 7% in the quarter due to foreign currency translation.
Water Systems sales, excluding acquisitions and foreign currency translation, were flat to the first quarter of 2014. Water Systems operating income after non-GAAP adjustments was $19.7 million in the first quarter 2015, down $9.6 million versus the first quarter 2014. The first quarter operating income margin after non-GAAP adjustments was 11%, down 490 basis points from 15.9% in the first quarter of 2014. Operating income after non-GAAP adjustments decreased in Water Systems, primarily due to foreign currency translation and reduced sales of Pioneer branded equipment for the oil and gas industry. The strengthening U.S. dollar, as Gregg said, also lowered margins in foreign business units due to the increased cost of U.S. dollar source product in advance of offsetting price increases. Additionally, higher promotional activity in the U.S. contributed to the decline in operating income and operating income margins.
Fueling Systems sales represented 21% of consolidated sales and were $46.5 million in the first quarter of 2015, a decrease of $0.3 million or about 1% versus the first quarter of 2014 sales of $46.8 million. Fueling Systems sales decreased by $2.7 million or about 6% in the quarter due to foreign currency translation. Sales from acquired businesses were $0.1 million. Excluding acquisitions and the impact of foreign currency Fueling Systems sales increased about 5% compared to the first quarter of 2014. Fueling Systems sales growth was primarily from fuel management systems and pressure pumping systems, partially offset by a decline in sales of dispensing systems and storage tanks. Fueling Systemss operating income after Non-GAAP adjustments was a record $9.8 million in the first quarter of 2015 compared to $9.2 million after Non-GAAP adjustments in the first quarter of 2014, an increase of about 7%.
The first quarter operating income margin after Non-GAAP adjustments was 21.1%, an increase of 140 basis points from the 19.7% of net sales in the first quarter of 2014. The increase was driven by a positive product sales mix. The company's consolidated gross profit was $71.5 million for the first quarter of 2015, a decrease of $6.6 million or about 8% from the first quarter of 2014 gross profit of $78.1 million. The gross profit as a percent of net sales was 31.7% in the first quarter of 2015 and declined about 210 basis points versus 33.8% during the first quarter 2014. The gross profit margin decrease was due in large part to the same factors that impacted the Water Systems operating income after Non-GAAP adjustments.
Selling, general and administrative expenses were $55.2 million in the first quarter of 2015 compared to $52 million in the first quarter of prior year, an increase of $3.2 million or about 6%. The increase in SG&A expenses from acquired businesses was $2 million. Excluding the acquisitions, the company's overall SG&A expenses in the first quarter of 2015 increased by $1.2 million or about 2% to the prior year first quarter. As we said, the company acquired the remaining minority shares representing about 30% of Pioneer Pump during the first quarter for about $20 million. This transaction created significant benefits below the operating income line that are accretive to the earnings per share of the company.
The first was the reversal of a deferred tax liability I already mentioned that was created in 2012 when the company acquired the controlling interest in the Pioneer subsidiary and realized a gain on the then-equity investment in Pioneer. This first quarter tax benefit of about $4.8 million was treated as a non-GAAP adjustment. Because in 2012 we treated the gain as a non-GAAP adjustment, we are now consistently treating the reversal of the tax liability related to that gain as a non-GAAP adjustment and reducing our reported earnings per share in the first quarter by $0.10, as indicated in the table on Page two of the earnings release. The company also realized a gain on the redeemable non-controlling interest liability in the first quarter of this year of about $2.7 million, which is included in other income.
This purchase transaction also resulted in other tax benefits of about $2.5 million, which were expensed through the company's earnings in prior years, as well as a current period benefit of about $1 million related to the 2015 gain. Because these benefits were not called out as non-GAAP adjustments and burdened the then-reported earnings of the company when reported, we are not now calling out their reversal as non-GAAP adjustments to ensure their treatment and disclosure is consistent. Due primarily to the tax items just mentioned above related to Pioneer, the first quarter of 2015 had a net tax credit. Removing these discrete items, the tax rate for the first quarter of 2015 was 27%, and in the first quarter of 2014 was about 25%. The full year 2015 rate is estimated to be about 27% before discrete events.
The company ended the first quarter of 2015 with a cash balance of $69.6 million, which was $10.5 million higher than at the end of 2014. The cash balance increase is primarily due to borrowing on the revolver to fund the Pioneer purchase and working capital needs. The company had about $70 million of borrowing on its revolving debt facilities at the end of the first quarter of 2015 and had about $15 million in borrowings at the end of the first quarter of 2014. The company purchased about 51,000 shares of its common stock for approximately $1.7 million in the open market during the first quarter of 2015. The total remaining authorized shares that may have been purchased is about 820,000. This concludes our prepared remarks. We'd now like to turn the call over for questions.
Operator (participant)
Thank you. Ladies and gentlemen, if you have a question at this time, please press star one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, if you would like to ask a question, please press star then one. Our first question comes from Mike Halloran with Robert Baird.
Mike Halloran (Senior Research Analyst and Associate Director of Research)
So could you talk about some of the pricing initiatives and the cost initiatives you guys are doing out there? What about the product categories or the environment enables you to take some of these pricing initiatives and have them be successful as the first question, and secondarily just kind of go through some of the fixed cost changes you guys are making?
Gregg Sengstack (CEO)
Sure. Mike, I'll speak to the pricing first. If you take an economy like Brazil where inflation is not 1%-2% but is more in the high single digits, and where the economy they're accustomed to seeing when their input costs increase, seeing pricing actions, it's pretty straightforward. We'll follow WEG, for example, when they're changing their motor pricing along with our pump pricing, and we can also do that on imported product. Similarly, in Southern Africa where we are in a competitive market where the vast majority of the product is coming in from Europe or the United States or other areas of the world, again, there's an expectation that you're going to respond with market-based pricing based on the cost of the imported goods. And it kind of goes on throughout the developing regions of the world.
There are these expectations, and you can move on pricing. With respect to fixed costs, certainly, we are continuing to integrate in Brazil. As I mentioned, Leal, it's been a nice acquisition. It's moving on schedule. We've talked earlier about the fixed cost takeout we're doing in Europe with the consolidation of facilities there. We are balancing in North America the balance of fixed costs with also increasing promotional activity, which you can look at as being variable but is part of our SG&A expense. And so we're balancing that to maintain demand and maintain sales in the marketplace. But those would be kind of some general buckets. John, do you have anything else you want to add to that?
John Haines (CFO)
No, I would just say, Mike, on the fixed cost side is that there's a couple of specific projects in the U.S. relative to facilities that we're working through right now. Those will have some benefit in 2015. As Gregg said, it's the balance of trying to drive the organic growth with taking out fixed costs where it makes sense. I think we'll stay very attentive to that and make sure that these efforts to structurally lower some of the fixed costs that we have continue to progress.
Mike Halloran (Senior Research Analyst and Associate Director of Research)
Thanks for that. And then could you just provide an update on how the distribution channel changes are going in North America?
Gregg Sengstack (CEO)
Sure. As you may recall, we announced changes early last year in 2014 that impacted the business principally east of the Mississippi River and west of the Rockies. We're continuing to see good traction in those areas. We announced a change at the end of last year for the central region, and that is underway, and it's unrolling. We're getting positive feedback in the field, but we have admittedly a tough situation with respect to weather, with respect to ag, and so that's going to be a little slower. Mississippi and west of the Rockies.
Mike Halloran (Senior Research Analyst and Associate Director of Research)
Well, so good. In line with expectations, less the weather, which leads to my last question here. Guys, thanks to the channel? Is it a month or two of inventory that you guys need to work through, maybe not even remotely that high, and kind of what the core underlying demand looks like if you can kind of strip out the weather somehow?
Gregg Sengstack (CEO)
Okay. We don't have that level of visibility. It's all anecdotal, but I'll make the following observation specific to agricultural activities. Yeah, if you follow the irrigation companies, for example, their sales have been reported to be off, I guess, in the mid-20s percent. And that's mostly, I would think, new activity, and let's say new activity for them is about half their business. Well, new activity for us would be maybe 20% of our business because 80% of our sales are principally replacement. So you'd say the math would work out to maybe be a 10% impact on the irrigation piece of our business. We saw that our sales decline was in the mid-single digits.
Your sense is there's just a level of inventory, and again, I think there's just a level of conservatism because it's been a couple of growing seasons like this where people are just very cautious about taking additional product. I can't give you a specific number beyond that.
Mike Halloran (Senior Research Analyst and Associate Director of Research)
No, but that's certainly helpful in triangulating. So appreciate the time, guys.
Gregg Sengstack (CEO)
Sure.
Operator (participant)
Thank you. Our next question comes from David Rose with Wedbush Securities. Your line is now open.
David Rose (SVP and Senior Equity Research Analyst)
Good morning, gentlemen. Thanks for taking my call.
John Haines (CFO)
Morning, David.
Gregg Sengstack (CEO)
Morning, David.
David Rose (SVP and Senior Equity Research Analyst)
If I can just bang in a couple of these, and I'll get back in the queue with some additional ones. Maybe a little bit more on the distributor change in the central region. Have you started it? How far along are you? Because I got the impression you were underway at the last call. Can you give us a little bit more color in terms of how much longer you have to do and where you are in the process?
Gregg Sengstack (CEO)
Sure. I mean, we're underway. I mean, we have all of our new distributors appointed, and it's just a question, I think, of distributors that we used to do business with, working off inventories, and distributors that we have added to start selling our product in addition to the products they were already selling. And we mentioned the last call. We think that kind of works through the first half of the year in that region. Certainly, this weather hasn't been our friend, but I'm not going to pound on it either as being a reason. It just takes a little time for people to work through this. Again, we saw in our move in the coasts that we're getting the traction we expected this year.
David Rose (SVP and Senior Equity Research Analyst)
How are you measuring? I mean, what are the metrics that you've seen in the coasts that provide you comfort? Is it sales per distributor? Is it profitability? Is it a combination of the two?
Gregg Sengstack (CEO)
Yeah, it's the growth of sales with our new distribution partners or distribution partners we did business with in the past that have rejoined us, as seeing their growth and as seeing the growth relative to prior years.
John Haines (CFO)
We have this groundwater market share measure, Dave, that we've discussed in the past that is an independent compilation of at least specific products, and that's something we watch. So far, we have been kind of neutral or flat in the first quarter year over year. So that's another indication of kind of what our share is doing versus what else is happening out there, I think. As Gregg said, all of it is clouded by this backdrop of not-so-ideal weather conditions, and we have to deal with that, and everybody else does as well. But it's difficult to parse through or specifically say, "This is because of weather," or, "This is because of new distribution," or, "This is because of another factor." But generally, it's going the way we thought it would.
David Rose (SVP and Senior Equity Research Analyst)
Okay. And then maybe we can switch gears a little bit on the impact from Pioneer going forward. You have a larger piece of it, so I'm assuming that it's going to be given where pump sales are down 50%, it's going to be a negative on the margin front in the second quarter versus the first quarter. Is that fair?
Gregg Sengstack (CEO)
Well, again, they're down 50% in the U.S., down 30% globally. The Pioneer margins in the back half of last year variable margins were low because we were adding a lot of cost by outsourcing. We no longer have to do that. So the Pioneer margins on a variable basis are consistent with our surface pumping margin. But overall, we're going to get delevered on the Pioneer fixed cost. And we've taken steps to reduce fixed costs there as well. But when you have a 50% decline in one market and a 30% decline overall, you're just not going to respond that fast on your fixed cost base because we want to maintain a base to continue to grow that business as we have successfully done outside the U.S.
David Rose (SVP and Senior Equity Research Analyst)
Okay. That's helpful. And then the last one, and I'll get back in the queue, is can you give us a little bit more color on the big spike in the debt? I'm assuming some of it was for the debt from the Pioneer piece, but what was the remainder of that?
Gregg Sengstack (CEO)
Yeah. So the borrowings that you saw, David, three things coming at us: the minority Pioneer purchase that we discussed. Then we have our first installment on the Prudential term debt. So there's a $30 million installment coming up on that in this month. And then just seasonally, when you look at our company, this is seasonally when we have the highest investments in working capital. So that higher debt was mainly in anticipation of those three things.
David Rose (SVP and Senior Equity Research Analyst)
Okay. Great. Thank you. I'll get back in the queue.
Operator (participant)
Again, ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. Our next question comes from Edward Marshall with Sidoti & Company. Your line is now open.
Edward Marshall (Equity Research Analyst)
Morning.
John Haines (CFO)
Morning.
Gregg Sengstack (CEO)
Morning, Ed.
Edward Marshall (Equity Research Analyst)
You mentioned the actions to control fixed costs, and I just wanted to kind of maybe circle back to that if I could. I don't know that you've quantified the benefits that you anticipate, or maybe even better, the timing of those cost actions that you plan to take. Do you have any kind of understanding maybe to put some numbers around those targets for me?
Gregg Sengstack (CEO)
Well, we haven't issued specific benefits. Ed, when you look at our SG&A, generally, you'll see 4%-5% growth in SG&A. The benefits from the European restructuring that's underway, we talk about that a little bit. Some of the other stuff, we're just not at the point of disclosing specific benefits. But as I said, there are actions, some of them related to facilities here in the U.S. that we have started to take action on that will have some incremental benefit to our fixed costs. Not measured in tens of millions but measured in millions that we'll start to see the benefit from.
Edward Marshall (Equity Research Analyst)
Anything on the timing of that, or is it just too early to tell?
Gregg Sengstack (CEO)
No, I think you'll start to see some of that in the back half of the year. We'll certainly start to see some of the benefits from the European restructuring in the back half of the year as we get through most of the moves and the disruption of that. Some of the other stuff that's going on, you'll start to see benefit from in the back half of the year.
Edward Marshall (Equity Research Analyst)
Okay. And when you talked about taxes, I note the $4.8 million gain. I think you gave some others in there as well. I know you said there was a $2.5 million gain in other, and then there was another $1 million gain on that in the tax line. Can you kind of walk me through kind of how you got back to the 27% effective again? Because I missed a lot of that.
Gregg Sengstack (CEO)
Yeah. What we're saying is that when these gains run through the tax line, Ed, they're discrete items. So the 27% is what our company would view as the effective tax rate before the discrete items. If you consider the discrete items, then we would call that a blended tax rate, and the 27% for all of 2015 might be more in the 24%-25% range. But what we're talking about relative to this Pioneer transaction was there was a deferred tax liability that was reversed that was the $4.8 million. That related all the way back to the transaction in 2012, and that's what we called out as the dime reduction because when we did it in 2012, we called it non-GAAP, so now the reversal or the benefit of it, we're going to call non-GAAP in 2015. The second piece, there's actually two pieces.
It's $3.5 million of discrete tax items in total. $2.5 million of that was taken in previous periods and burdened the previous period's earnings, and then $1 million of it was taken in the first quarter. So what we're saying is that because that tax item burdened the previous quarter's earnings, when we reverse it now, we're not going to call that out as non-GAAP. And that is related to the gain on the final minority purchase. So we paid basically $20 million for that minority position in Pioneer, but we had a liability of about $23 million established. So 2 pieces that are flowing through there. One is the gain, the absolute gain of $2.7 million, which is in other income, and then the $3.5 million of deferred tax liability or reversal of deferred tax liability that's in the tax line.
Edward Marshall (Equity Research Analyst)
Okay. Gotcha. So there's about $4.8 million of additional I'm sorry, $8.3 million of unusual, what I'd characterize as unusual tax items in Q1?
Gregg Sengstack (CEO)
The 27 and the 35.
Edward Marshall (Equity Research Analyst)
Got it. Okay. Mobile pumps, I think you said was down 50% in 1Q. Is that, first of all, all Pioneer? And secondly, I guess, did that trend continue in 2Q?
Gregg Sengstack (CEO)
The 50% decline was in the North American market. Overall decline was 30%. We expect sequentially the second quarter to have higher revenue than the first quarter, but we also expect that there will be a decline year-over-year in the second quarter from the second quarter of 2014.
Edward Marshall (Equity Research Analyst)
Okay. Now, based on the timing of the remaining acquisition of that 30% of Pioneer, first, was that consolidated previously and then reported back as a minority interest, or were you only receiving 70% of Pioneer? And secondly, I mean.
Gregg Sengstack (CEO)
Yeah. We consolidated all of it, Ed, and then reported a portion of our earnings, deducted a portion of our earnings out for the minority interest.
Edward Marshall (Equity Research Analyst)
Got it. So essentially, the revenue line will be a like comparison on the top line going forward.
Gregg Sengstack (CEO)
Say that again, Ed. Sorry.
Edward Marshall (Equity Research Analyst)
So essentially, it wouldn't be. I wouldn't look at an additional 30% coming on from Pioneer in that business. Essentially, you've been consolidating 100% of that, so.
Gregg Sengstack (CEO)
Yes. Yes. That's correct.
Edward Marshall (Equity Research Analyst)
Great. Great. Okay. Okay. And then finally, when I look at the fueling guidance, does that include the impact of FX like you included on the water business?
Gregg Sengstack (CEO)
Yeah. It includes our current view of FX, Ed. Yes.
Edward Marshall (Equity Research Analyst)
Okay. And so when I look at maybe the largest zones that might be of interest to you, I guess India and China are probably smaller, and I know you called those as negatives for the fueling division. But I mean, when I look at the two biggest impacts, would it be Brazil and Europe would be the two places that I think would have the biggest impact overall on the company? And maybe not necessarily the fueling business, but the company as a whole. And is it also right to think that maybe that has less of an impact in the fueling business and more on the water side?
Gregg Sengstack (CEO)
Okay. Let me answer maybe a different approach this a little differently. The fueling business, like the water business well, actually, the water business is about 45%, what we'll call U.S., Canada, and then 55% of the rest of the globe. Fueling business is similarly weighted, maybe just almost 50/50. The fueling business has pretty big positions in India and China, larger in China than India, actually. The fueling business is not particularly strong in Brazil, although we do have a decent business in Latin America outside of Brazil. So as you think about the fueling business, the slowdowns we were seeing were, as we pointed out, we have a business in fueling that makes large underground tanks that are also used above ground and out in the oil fields in the North Sea. That piece has been impacted. We see a slowdown in Russia because of the Russian economy.
We're seeing a slowdown in China, which we believe is related to some of the political issues within the Chinese oil companies. And in India, the business is lumpy. It comes in tender business over a period of time, and we had a strong tender year last year. We're not seeing that just yet this year, but the Indian New Year started April 1, so we'll see how that unfolds. We wanted to point that out to people. Generally, the fueling business has maybe been a little soft in Europe, but most of that has been the Russian business. That's kind of the view of fueling. Now, if you look at water, we've had, again, this great growth throughout Latin America where we have a very strong position, and we're expecting continued growth. We have a solid business in Southern Africa.
We had a lot of disruptions last year. They've settled down now. We got a nice, solid business there. We have a very solid business in the Middle East, North Africa. Again, we deal with political challenges there, but we have a very solid base, and you just have to kind of deal with the fact that Libya is offline this year. You have unrest in Yemen and so on, but then Algeria is doing very well. We see that. We've made it a conscious effort to invest in our business, in our water business, in Europe. We're increasing our pump distribution in Europe, and so we're very pleased to see the organic growth in Europe and, again, in local currency. A lot of this doesn't come back to U.S. dollars, unfortunately.
Then we look at our APAC business, and again, we saw it check up in the Q1, but some of our APAC business is in dollars. We realize that these customers are going to pull back, maybe let their inventories go down, but eventually, they got to buy, and we expect Q2 to be a good quarter in Asia-Pacific. Then you can look at our news release, and you get the general feel for it, the percentage of our business in each of those regions, and you can put that into your thinking.
Edward Marshall (Equity Research Analyst)
Okay. Great. Thanks, guys.
Operator (participant)
Thank you. Our next question comes from Kevin Bennett with Sterne Agee. Your line is now open.
Kevin Bennett (Equity Research Analyst)
Hey, guys. Good morning.
Gregg Sengstack (CEO)
Morning, Kevin.
John Haines (CFO)
Good morning, Kevin.
Kevin Bennett (Equity Research Analyst)
First off, in water, can you remind us about the timing of the ramp in surface from the Pioneer Pump acquisition? I'm just wondering kind of when the comps are going to get a little bit easier in that piece of the business.
Gregg Sengstack (CEO)
Yeah. The URI acquisition, I don't know the exact date, but I believe it was completed just about a year ago, and the ramp really came in the back half of the year. So the comps will be easier in the back half of the year, and the margin comps will be better as well.
Kevin Bennett (Equity Research Analyst)
So the top-line comps will be tougher in the back half, but the margins will be easier?
Gregg Sengstack (CEO)
I'm sorry. Yeah. The top-line will be tougher, but the margins will be better.
Kevin Bennett (Equity Research Analyst)
Got it. Perfect. Thanks, Gregg. And then on the promotions in North America, is that primarily related to the weak ag markets as well as the distributor reset, or are you seeing weakness in the residential piece as well?
Gregg Sengstack (CEO)
Well, we commented that our residential business was off a few percent, so it wasn't naturally robust. I'd just say it would be general activity. Certainly, again, the ag market is a big part of that because it is the central region. It's where we are focused our attention right now. I'd say it's a little bit of both, but I wouldn't say that the residential market's way off. It's just slow.
Kevin Bennett (Equity Research Analyst)
Okay. And then lastly, Gregg, your organic growth rate total company has been kind of in the high single digits in recent years. I'm wondering if you think any of the headwinds affecting your business right now will affect that longer term, or are all of these things temporary?
Gregg Sengstack (CEO)
That's a big question from the standpoint of breadth. You look back and you say, "Okay. What's been Franklin's strategy over the years?" Okay? And our strategy has been to grow through geographic expansion and product line extensions serving the markets globally. We're very fortunate to have almost 40% of our revenue coming from developing regions in our water business, not quite that much yet in fueling, but fueling's growing rapidly in those regions as well. And that's where 80% of the people are. As people move into the middle class, they're going to consume typically more water. They're going to consume more fuel. And that all, I think, bodes well for continued strong organic growth. We've seen in the North American market where we are repositioning our distribution, we expect then to see good organic growth there.
Keep in mind, we continue to have a robust product pipeline of introductions as well, so that's the product line extensions I mentioned. We think that is also a good piece of our organic growth. But when you have currencies move tens of percent relative to the dollar, they just don't come back to dollars. But the underlying growth demand, we don't see abating. As a matter of fact, an argument could be seen as the world economy stabilizes and we get to hit on more cylinders. Could actually accelerate.
Kevin Bennett (Equity Research Analyst)
Sure. That's helpful. And then last question, kind of what you mentioned, do you have any update on the artificial lift that you guys are working on given what oil and gas has done? Are you slowing down on that, or?
Gregg Sengstack (CEO)
We continue to invest at a level consistent with prior years in artificial lift. With the gas price in North America, I believe south of $3, there's not a lot of demand here. Gas prices outside North America are higher. We have better connections, again, in China with the oil companies, in India, in Turkey. These are markets that have higher prices and have more immediate demand. So we are continuing to put test systems in these markets. We haven't had a major pop yet, but we continue to focus, and we have these connections closer to the field. And so we remain optimistic, and we continue to invest in the business.
Kevin Bennett (Equity Research Analyst)
That's great. Thank you, guys.
Operator (participant)
Thank you. I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.