Franklin Electric - Q1 2019

Transcript

Operator (participant)

Today, ladies and gentlemen, welcome to the Franklin Electric reports first quarter 2019 sales and earnings conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance, please press star and the zero key on your touch tone telephone. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, John Haines, Chief Financial Officer. Please go ahead.

John Haines (CFO)

Thank you, Chris, and welcome everyone to Franklin Electric's first quarter 2019 earnings conference call. With me today is Gregg Sengstack, our Chairman and CEO. On today's call, Gregg will review our first quarter business results, and I'll review our first 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 will now turn the call over to our Chairman and CEO, Gregg Sengstack.

Gregg Sengstack (Chairman and CEO)

Thank you, John. 2019 started slightly ahead of our expectations. However, midway through the quarter, business conditions deteriorated meaningfully, particularly in the North American groundwater market. The resulting poor sales, both in our manufacturing and distribution segments, negatively impacted mix, levered our fixed cost base, and reduced our year-over-year operating income by over 40%. In the U.S. and Canada Water Systems business, large dewatering pump sales were up over last year but below expectations due to customers pushing out about $2 million of orders into the second quarter. Surface pumping sales were up as well. While groundwater pumping sales declined 5% on the back of lower inter-segment transfers to our distribution segment, sales to third-party distributors were up over last year.

Outside the United States, we experienced somewhat of a reversal of last year's Q1, with better-than-expected growth in Brazil and the Asia-Pacific region partially offsetting weak conditions in Europe, the Middle East, and Central America. Europe is slow, and the Turkish market is working through the dramatic devaluation of the lira that began last summer. In Central America, political instability and changes are negatively impacting local market demand, in particular in Mexico. John will get into more details, but weakening currencies reduced our international water reported revenue by 11% as compared to the first quarter last year. While our reported top line for Water Systems was down 2%, the mix shift resulted in operating income down over 20% in this segment. Our Fueling Systems business delivered solid results.

Sales were up double digits in the U.S. and Canada and would have been even higher but for the inclement weather delaying planned station builds. We believe we continue to gain share. Our business in China recovered more slowly than expected after the Chinese New Year. However, as station operators continue to invest in government-mandated upgrades to double-wall underground piping systems, we remain confident that we will achieve our 2019 planned revenue in the country. In China, we continue to benefit from station operators choosing to extend their upgrades beyond piping systems to pumping and leak detection systems as well. Sales in India and EMEA were below expectations, principally due to the delays in build programs and credit issues in Africa. Sales in Asia outside of China rebounded nicely, and business in Latin America grew as well.

Fueling operating income was down year-over-year due to planned investments in sales and marketing support of the overall business. Turning to distribution, 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. Weak demand compressed margins, increasing the expected first quarter loss in this highly seasonal business by $several million. All indications are there is plenty of work for contractors, but that work is being delayed by overall wet conditions. That brings me to our outlook for the balance of the year, starting with distribution. We believe that more normal weather conditions will lead to a strong recovery in our distribution business. While still early, business in April is ahead of plan. What is less clear is when our groundwater manufacturing business will strengthen.

With a late first quarter slowdown, channel inventories may be above normal. Further, if the past is any indicator, promotional activity, meaning lower pricing, will increase in the short term. We are seeing some evidence of this already. Again, overall, the business climate in the U.S. is robust, and we are encouraged by the positive feedback we have gotten from the field. The outlook for our U.S. surface pump business is good, as is the demand for our large dewatering pumps, where we have focused considerable attention on expanding and diversifying our customer base both by end market and geography. While we expect the European water market to continue to be soft, at least for the first half, we are pleased with the traction we are getting with our expanding line of pressure-boosting systems. We believe our European water business is doing better than most.

With respect to Turkey, given the high concentration of pumps used for ag, the second quarter will provide meaningful feedback as to whether the market has worked through the currency devaluation that started last summer. Argentina continues to deal with a similar situation. On the other hand, we are encouraged by the strong start to the year in Brazil and Asia-Pacific. In our fueling business, the outlook remains encouraging. The team is positioned to carry forward the strong start in the U.S. Our China revenues are recovering back to planned levels, and outside of Europe, we generally see good demand. Therefore, at this point, we believe our consolidated organic growth will be 4%-6% for 2019. With our Q1 operating income below plan, we have elected to take cost actions to help offset the lower profit realization.

In addition, we reevaluate our price realization, our input cost inflation expectations, our ongoing cost reduction and productivity initiatives, as well as our adjusted fixed cost for the balance of the year. Based on this evaluation, we are reaffirming our 2019 earnings guidance of $2.37-$2.47 per share. I will now turn the call over to John to discuss the numbers in more detail. John.

John Haines (CFO)

Thanks, Gregg. Our fully diluted earnings per share were $0.19 for the first quarter of 2019 versus $0.45 for the first quarter of 2018. Restructuring expenses were $1.1 million and were related to branch consolidation and other asset rationalizations in the Headwater distribution segment and continued miscellaneous manufacturing realignments in the Water Systems segment and had a $0.02 impact on the earnings per share in the first quarter of 2019. First quarter EPS before the impact of restructuring expenses, therefore, was $0.21 compared to 2018 first quarter EPS before restructuring of $0.45. Specifically, related to the first quarter of 2018, the company recognized about $5 million of discrete tax benefits related to certain deferred tax positions, which lowered our effective tax rate and created a tax benefit of about 9% in that quarter.

The discrete tax benefit and lower tax rate improved earnings per share in the first quarter of 2018 by about $0.11, and without it, our first quarter 2018 earnings per share would have been $0.34. First quarter 2019 sales were $290.7 million compared to 2018 first quarter sales of $295.6 million, a decrease of 2%. Sales revenue decreased by $12.9 million, or about 4%, in the first quarter of 2019 due to foreign currency translation, and we estimate this revenue decline lowered our earnings per share in the first quarter by about $0.03 versus the first quarter of 2018. Water Systems sales were $188.4 million in the first quarter 2019 versus the first quarter 2018 sales of $192.6 million. In the first quarter of 2019, sales from businesses acquired since the first quarter of 2018 were $4.3 million.

Water Systems sales decreased about 6% in the quarter due to foreign currency translation. Water Systems organic sales increased about 2% compared to the first quarter of 2018. Water Systems operating income was $19.2 million in the first quarter 2019 compared to $25.1 million in the first quarter of 2018. Water Systems operating income was lower in the first quarter primarily due to lower sales volume, the resultant loss leverage on fixed cost, adverse product sales mix, and higher freight cost. Fueling Systems sales were $60.2 million in the first quarter 2019 compared to first quarter 2018 sales of $58.6 million and were a record for any first quarter. In the first quarter of 2019, sales from businesses acquired since the first quarter of 2018 were $1.5 million. Fueling Systems sales decreased about 2% in the quarter due to foreign currency translation.

Fueling Systems organic sales increased about 3% compared to the first quarter of 2018. Fueling Systems operating income was $12.3 million in the first quarter of 2019 compared to $13.7 million in the first quarter of 2018. Fueling Systems operating income was lower in the first quarter as growth from higher sales was offset primarily by higher fixed cost. Distribution sales were $53.3 million in the first quarter 2019 versus first quarter 2018 sales of $56.2 million. In the first quarter of 2019, sales from businesses acquired since the first quarter of 2018 were $2.8 million. The Distribution segment organic sales were down about 10% compared to the first quarter of 2018 primarily due to unfavorable weather conditions. The Distribution segment recorded an operating loss of $4.3 million in the first quarter of 2019 compared to a $0.8 million loss in the first quarter of 2018.

The loss before the impact of restructuring expenses was $3.7 million. The distribution loss was primarily due to lower sales volume from unfavorable weather, higher product costs not fully offset by sales price increases, adverse geographic and product sales mix, and loss leverage on fixed costs from lower sales. The company's consolidated gross profit was $89.5 million for the first quarter of 2019, a decrease from the first quarter of 2018 gross profit of $99 million. The gross profit decrease was primarily due to lower sales and other impacts previously mentioned. The gross profit as a % of net sales was 30.8% in the first quarter of 2019 compared to 33.5% in the first quarter of 2018. Selling, general, and administrative expenses were $76.3 million in the first quarter of 2019 and 2018.

SG&A expenses from acquired businesses were $3 million, and excluding the acquired entities, the company's SG&A expenses in the first quarter of 2019 were $73.3 million, a decrease of about 4% from the first quarter of 2018 due primarily to the effect of foreign currency translations in the first quarter of 2019 versus the prior year. It's important to note that management's operating plan earnings per share for the quarter was at least $0.10 lower than the Street's consensus. So although the first quarter results are still a significant miss to our expectations, as we have acknowledged, they are not as large a miss as that to the Street consensus. We note this to provide context for our continued belief that we can achieve our full year 2019 guidance of $2.37-$2.47.

Also, as we've noted before, weather, in extremes, can drive significant variability in our results, especially in the first quarter, which will always be seasonally lower and more highly subjected to lost fixed cost leverage when revenues decline. 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 to the prior year, certain 2018 net sales and operating income reclassifications were made. These reclassifications resulted in lowering first quarter 2018 results of Fueling Systems and increasing first quarter 2018 results of Water Systems net sales by about $0.8 million and operating income by about $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 between 18%-20%, significantly higher than the 2018 effective tax rate of about 12%. This higher tax rate is primarily due to the inclusion in 2018 of discrete tax events that effectively lowered our tax expense for the full year. We do not believe these events will occur or reoccur at the same level in 2019. The company ended the first quarter of 2019 with a cash balance of $54.4 million, which was $4.8 million lower than at the end of 2018. Through our company-wide focus on working capital reduction, our operating cash flow improved by $24 million as compared to the first quarter of last year.

The company's working capital ratio, which is inventory plus accounts receivable less accounts payable divided by the trailing 12-month sales, is 480 basis points lower than it was at the end of the first quarter of 2018. As of January 1st, 2019, the company adopted the new lease standard and has recognized additional operating liabilities of about $25 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 this standard to be material to the consolidated results of operations or to the cash flows.

The company had $96 million in borrowing on its revolving debt facilities at the end of the first quarter of 2019 and $119 million in borrowing at the end of the first quarter of 2018. The company purchased about 58,000 shares of its common stock for approximately $2.5 million in the open market during the first quarter of 2019. As of the end of the first quarter of 2019, the total remaining authorized shares that may be repurchased is about $1.3 million. On April 22nd, the company announced a quarterly cash dividend of $0.145. The dividend will be paid May 16th to shareholders of record on May 2nd. This concludes our prepared remarks, and 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 the star and the one key on your touch-tone telephone. And if your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, please place your line on mute once your question has been stated. And our first question comes from the line of Mike Halloran with Baird. Your line is now open.

Mike Halloran (Senior Equity Research Analyst)

Hey, morning, guys.

Gregg Sengstack (Chairman and CEO)

Morning, Mike.

Mike Halloran (Senior Equity Research Analyst)

So let's talk about that ramp from Q1 to Q2. Prepared remarks made it very clear you were expecting what seems to be a bigger ramp from Q1 to Q2 than normal. Other than some normalization in weather, can you help line out some of those other factors that are driving that?

Gregg Sengstack (Chairman and CEO)

Sure, Mike. Again, I think the normalization of weather, given the seasonality of the distribution business, is more pronounced than before we had distribution. Also, with the fueling business ramp from Q1 to Q2 with China and also with the North America business, again, there's been some delay in construction activity, so it gets back to your normalization. Consensus, again, as a comment in prepared remarks, when you look at Europe, I think that's going to be kind of sideways, so we're not banking on much ramp there. We are thinking that we're going to see some continued strength in Asia-Pacific and in areas of South America that I didn't specifically call out. And we're seeing the slowdown in Mexico. We think that's going to recover. Argentina a little bit more cautious on. But Brazil seems to be doing overall better.

And then also with the back to North America and the dewatering space, we had some push-out, which we expect will be delivered in Q2. So those are some of the smaller items that add up to why we see the ramp or why we're expecting a ramp in Q2.

Mike Halloran (Senior Equity Research Analyst)

So is the Q1 shortfall being essentially consumed in Q2, or is it going to take Q2, Q3, Q4 to normalize out at this point?

Gregg Sengstack (Chairman and CEO)

Yeah, I'd be careful about saying all of Q1 is going to magically come back in Q2. If we get some normalization, then there hasn't been a lot of lost time in the field. If you don't, there's going to be some days where there's going to be lost contractor days. But we expect that this is going to be picked up through Q2 and Q3.

Mike Halloran (Senior Equity Research Analyst)

Then a question on profitability, more of a longer-term thought process. Distribution side and the water side, the margins have been a little pressured lately. Could you just lay out some thoughts for both segments, how you're looking at those long-term margins at this point for distribution for fueling?

Gregg Sengstack (Chairman and CEO)

Yeah, Mike, it hasn't changed on the distribution side. We've kind of said from the beginning that we expect an operating income margin of 4%-6% in distribution. We've not achieved that. Many of the efforts that the team has underway around branch rationalizations and other kind of fixed cost rationalizations that are occurring this year and will continue to occur are all directed at the idea of operating income margins being below our expectations. Now, the business unit, as you know, from kind of the get-go has had a difficult volume environment this quarter. Didn't help that, of course. So we're not leveraging the fixed cost base in that business unit the way that we want to either. So it's a little bit about where are the SG&A opportunities and other fixed cost opportunities on the margin side.

But a lot of it is we were expecting more volume here, and that more volume would have levered the fixed cost bases there that would have provided a higher margin as well. I don't think we'll get to the 4% this year. I think we have a decent chance of getting close to the 4%. But those goals that we had established when we did these acquisitions and created this segment are intact and continue to be the same. On the water side, as we've mentioned, you've seen a prolonged mix-shift going on in water. We saw it again in this quarter, away from groundwater pumping to greater surface pumping. Some of the international units are under-levered, meaning that there's a fixed cost base there that is not generating the kind of revenue and profit that we need. I would not give up on that mid-teens operating income margin.

I think the range is probably more like 15-17. We had said for a long time 16-18, but I think 15% operating income margins in water are doable for the longer term. And then in fueling, we will have swings that will be product and geographic mix driven. But generally, we feel pretty good about that kind of low 20s to mid-20s type range on a full-year basis. And we don't really see anything right now that would meaningfully deteriorate that for the long term.

Mike Halloran (Senior Equity Research Analyst)

That's super helpful. And then last one on the cost action side that you guys referenced, just some help on what kind of actions you're actually taking as well as timing and potential benefit? Thanks, guys.

John Haines (CFO)

Yeah. So the way we approached the first quarter in our business unit reviews, Mike, was to really look at it by business unit and then focus on recovery plans. So the idea was, if you missed your operating income target by X dollars, then what are you going to do between April and December to try to recover that? So those actions are very different by business unit. Some business units, it's just smooth sailing. They're on their plan, and they're moving forward. I hesitate to give you an exact number because there are a variety of different actions: people reduction, not filling open positions, cutbacks in kind of common SG&A categories. There's a whole litany of actions, Mike, that are on the sourcing side that will be more impactful on gross profit than they will necessarily on SG&A, including tariff offset ideas, all kinds of things like that.

So part of our confidence in maintaining our full-year guidance is not only the volume recovery that Gregg mentioned - that's a critical, critical part of it - but knowing that we've got some of these cost actions and other sourcing actions through the balance of the year that we think will contribute to both a better variable contribution margin and a lower SG&A run rate.

Mike Halloran (Senior Equity Research Analyst)

Appreciate it. Thank you.

Gregg Sengstack (Chairman and CEO)

Thanks, Mike.

Operator (participant)

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

Edward Marshall (Senior Equity Research Analyst)

Hey, Gregg. Hey, John. How are you? Good morning.

John Haines (CFO)

Hey, good morning.

Edward Marshall (Senior Equity Research Analyst)

So I just want to follow up on that last question. You talked about some of the actions that you were doing. You're maintaining your sales guidance, and you're seeing additional cuts to cost. I'm curious, with simply just maintaining the guidance for the year - and you've talked about picking up all the shortfall in Q1 - I'm curious why you're maintaining just the guidance and why it's not actually going up from an EPS perspective?

Gregg Sengstack (Chairman and CEO)

Well, I guess, Ed, maybe the way I'll take a crack at answering that is I pointed out in my prepared comments, our expectation for the first quarter was always below what the Street consensus was just because we know in part that the first quarter can be highly volatile. So generally, from our perspective, we missed the first quarter by, call it, $0.10-$0.12 versus what our operating plan expectation was. So to your question, we think that the $0.10-$0.12, combining the two actions, the primary actions, the recovery of volume and some of the cost takeouts, we think that we can claw back a decent portion of that in the last three quarters of the year. I don't think we're ready yet to say that we think we can go beyond that.

Now, I think the thing that might drive us beyond that, Ed, would be better volume recovery than what we're kind of assuming, which is, of course, possible when you look at our first quarter results. But I would say we're not really confident in committing to that right now. And our commitment is the $2.37-$2.47. And even though we had a really bad first quarter, our general thinking is that we can get back to that.

Edward Marshall (Senior Equity Research Analyst)

Got it. And I guess since you opened the door and you commented on the internal expectations versus consensus for Q1, can you talk about, I mean, the consensus is sitting at about $0.74 for Q2. Can you kind of comment on Q2 and maybe your internal expectations so we're not sitting at this situation again in Q2?

Gregg Sengstack (Chairman and CEO)

Yeah. I will just say, Ed, that it's hard for us to give quarterly guidance. I think the first quarter was a poster child for why we don't want to give quarterly guidance. Relative to the street expectation right now, we would say that that's a reasonable expectation, and we expect to do slightly better than that for the second quarter.

Edward Marshall (Senior Equity Research Analyst)

Got it. Got it. Okay. So when you talked about weather impact on the sales for water, I think you mentioned a $2 million push-out, but I can't imagine that was all of it. Can you kind of talk about or maybe quantify the weather impact that would have affected the groundwater pumping systems in Q1?

Gregg Sengstack (Chairman and CEO)

Sure, Ed. Okay. Two different pieces of information. The $2 million push-out related to large dewatering pumps, which is really unrelated to weather, more related to the capital cycles of the rental companies that we sell to. We've seen those get a little less lumpy and a little bit more smooth through the year, which is helpful for them, helpful for us certainly from a production point of view. So that was the push-out I was referring to there. The early data that we have on the market is that unit sales in the groundwater channel were down somewhere between 12%-15% in Q1. That would be shipments for manufacturing. That's the best data we have. So you can figure the dollar sales, because there's been some price increase, would maybe be down 10% and probably doubled that in March.

So I mean, that's why what we saw was really a great start in January. We felt things were going well, and then it just deteriorated very quickly in the back half of the quarter. And that, again, gets back to the guidance thing because last year, you may recall, first quarter, we were up 23% in operating income, and we raised our guidance. "Hey, we're in full year. It's going to be up." And we ended up taking it back basically to the midpoint of where we started the year. So lessons learned on Q1 is it's a tough. There's a lot of volatility in Q1. And middle of the year, we'll have more information and greater clarity. So we just don't want to get too far ahead of ourselves or behind on Q1 results.

Edward Marshall (Senior Equity Research Analyst)

Got it. And you referenced some competitive pressures in water. And I kind of want to look at it in context of two things. One, maybe you talk about price. It looks like you're getting that 2%-5% that you would normally get based on some of the comments you just made. But secondly, I think I wanted to talk about the third-party distributors up. And I know I'm kind of cross-referencing between distribution and water, but maybe if we could talk about that for a second. Because of your acquisition in distribution, are you able to manage your own supply chain a little bit better, which I guess is the right answer is yes. But third-party distributors up, does that give you some pause? Because it doesn't seem like that's what you did with your internal distribution.

So just kind of clear that up for me if you could. Thanks.

Gregg Sengstack (Chairman and CEO)

Sure. Let me take you through kind of what I think are three parts to the question. So the reason we want to give indication of third-party is exactly your point, is that one of the opportunities we have by having this distribution segment is the supply chain aspect of it. That's really a very interesting part of the value-add in this equation. And now Headwater's on one ERP system nationally, we're on a different ERP system because Headwater's isn't designed for distribution, and ours is designed for manufacturing. But at least now we have one system in both instances, and they can communicate with each other, and we see real opportunity there in supply chain. So you're correct.

That's why there's really no incentive for Headwater to "buy ahead." As a matter of fact, there's more incentive for them to reduce their capital structure to improve returns on capital. So we use third-party, just the sales to third-party distributors, is more of a barometer of how Franklin's business is in the channel. And as you commented, our sales to third-party distributors in the channel were up in the Q1. And given the backdrop that it gave you for that channel, we feel pretty good about that. That said, is that these distributors buy, and they're not maybe in regions that were impacted by weather as the Headwater, which is more of an upper Midwest and West, which is where we really got clobbered by heavy rains and then snowpack and snow in California.

California got a lot of water, which is good news for the long term, but for the short term, it was tough. So we looked at our sales to third-party distributors, and they were up. So we feel good. We feel like that means we're managing the channels well. We're managing the relationship with Headwater, our relationship to the rest of our Franklin distributors or people that distribute Franklin product in a good way. So that's why we give that data point. Now, reference to the competitive nature, certainly in distribution, pricing was tough, and there wasn't a lot of pump sales in the first quarter, which impacted margins. But more broadly, what I expect is that because manufacturers had a slow start in Q1 and they got inventory in Q2, we're going to probably see some more promotional activities from manufacturers to distributors.

As I said, we've seen some evidence of that already, principally in small pump systems, not so much in large pumps yet, but that remains to be seen. So I just want to caution people that this can get one of those situations where you get some price cutting, and people try to go for share, and then they find out they're not going to get share, and things go back to normal. But everyone has numbers to hit. And so that's why we're expecting it may be a little tougher for our manufacturing segment in Q2 or in that channel.

Edward Marshall (Senior Equity Research Analyst)

Got it. Thanks for your comments. I appreciate it.

Gregg Sengstack (Chairman and CEO)

You're welcome, Ed. Thank you for following us.

Operator (participant)

Thank you. Our last question comes from the line of Matt Summerville with D.A. Davidson. Your line is now open.

Matt Summerville (Equity Research Analyst)

Thank you. Several questions. First, can you just provide a little bit of end-market color per your water-facing businesses in North America in the first quarter and what you're seeing in April thus far between kind of the residential versus ag irrigation? And to the extent it makes sense, Gregg, of course, if you want to work in some regional comments specific to the U.S., that would be helpful as well.

Gregg Sengstack (Chairman and CEO)

Sure, Matt. As a follow-on to Ed's question there, what we're seeing is residential was down. Ag was down more in Q1. We're seeing out-the-door sales through our distribution segment moving ahead of our plan in the first three weeks of April. The first three weeks, as we know, doesn't make a quarter, but that's encouraging. And I think your question about regional I mentioned earlier, California, which is a large pump market, it's also a pump market that has a large line shaft. These are the motors are on the surface, and they're driving a long shaft down to a pump down in the aquifer. Franklin Electric does not manufacture line shaft turbine equipment, but our Headwater business sources line shaft turbine equipment from other pump manufacturers.

So we expect the California market, given reservoirs are above normal, 150% snowpack, basically no drought on the map, will have a very slow start for the pumping business because there's so much surface water available. I mean, surface pumps will be available, but for submersibles, not so much. Outside of California, if you looked at the U.S. drought map, if you looked at the beginning of the year, there was still significant drought in the Southwest. That's basically all gone. So as we're going into the growing seasons or the planting seasons, excuse me, it looks like surface moisture is in pretty good shape. So I would think that would speak well to farmers, assuming things dry out enough that they can get into the fields. Is that what you're looking for, Matt? Excuse me.

Matt Summerville (Equity Research Analyst)

Yeah. Yeah. And I guess just more specifically on ag, I mean, it's been pretty well documented, the magnitude of flooding that we've had in the Midwest, upper Midwest, which I would think, statistically speaking, are pretty important overall ag markets. And to your comments on, I guess, the pacing of April, are you actually seeing that piece of the business start to recover, or is it too early to tell just given the things have been, again, relatively wet, relatively cold? I guess I'm trying to handicap back to John's comment around being in the neighborhood of $0.74 in the fourth quarter. I'm looking at it maybe in the other direction in terms of how much risk there is potentially to that outlook.

Gregg Sengstack (Chairman and CEO)

Sure, Matt. You've covered Franklin for a number of years, and I think you've captured an uncertainty pretty well. Keeping in the broader perspective of Franklin as a global business, half of our manufacturing revenue is outside the United States or sales from manufacturing product. But within this pro-channel, which is important, it's where we're most vertically integrated to have a profitable business. Sure, there's a continued push-out because people just can't get in and repair systems anytime soon. And there's some level of "missing the season" in the upper Midwest. That would be a negative impact, no question about it. And then you have to juxtapose that with, "Is it going to be drier in the South or the Southwest?" And it's just too early to tell.

Matt Summerville (Equity Research Analyst)

Then I guess, Gregg, and if you already said this, I apologize, but what is your overall assessment of channel or inventories in the channel, both as it pertains to res and ag, if there's any sort of read on that? I guess maybe are you able to talk about the type of price competition you're already maybe beginning to see? I would sort of think it's a little maybe even early on in the quarter to already be starting to see some of that.

Gregg Sengstack (Chairman and CEO)

Yeah. I'd say that yeah, Matt earlier mentioned that we expect that in units volumes, from the data we have, which is somewhat limited, as we'd say that residential-type product units down maybe 12% range, ag maybe down around the 15% range in units, so a little less down in dollars because there's been price increases year-over-year. So call it 10%-12%. And that's what we saw in Q1. I'd say that it was down much more in March. As to competition, we've just seen some flyers come off the street on some promotions for the smaller pumps. Don't know how far that's going to go, how broad it's going to be. Just it was, to your point, a little early in the quarter, but we saw some of that, and so we saw evidence of that.

So having been through this before, what happens you'll see is if there's a slow start for the manufacturers, then you see some pretty heavy promotion. You can see some pretty heavy promotion in Q2. Maybe not. I mean, but I just caution people that we've seen it in the past, and so we may see it again this year.

Matt Summerville (Equity Research Analyst)

And then maybe just one other quick one on Brazil and then one on fueling. With respect to Brazil, this is the first time that I can remember in a number of quarters you guys actually speaking positively about that business. Albeit perhaps coming off of a lower-depressed base, are you convinced at this juncture, Gregg, that that business has turned the corner? With respect to fueling, can you maybe review your revenue performance in China, particularly as it related to the environmental standard and whether or not that standard is expected to drive incremental growth in China, or is China sort of flattening out for Franklin for the time being there?

Gregg Sengstack (Chairman and CEO)

Sure. I'll take your first question first, Matt. Brazil, we were powering along for years, as you know, in Brazil with the double-digit local currency organic growth. Then I guess it was about 22.5 years ago, John, that we started. I mean, Brazil really kind of just deteriorated. Yes, we had a good start to the year. Am I confident? I'm certainly more confident than I was three months ago, but we'll see how the year unfolds. We're just seeing a good base in Brazil. And as you point out, off a lower base. So we're encouraged by that. With respect to China, yeah, this is a. John will share the numbers to the degree that we share them on what we think is going to be base versus incremental on the mandate, John.

John Haines (CFO)

Yeah. I mean, Matt, in China, we had kind of said $50-$60 million opportunity for Franklin in 2019. We had thought that that opportunity would be in the same range in 2020 as well. The team is relooking at some of the longer-term forecasts for China. But the 2019 estimate is slightly incremental to 2018. It's not gigantically larger than 2018, but we think we can be more in the mid- to upper-50s there and perhaps beyond that. Unfortunately, as Gregg pointed out, it didn't start real well in China. There was a bigger pause on the New Year than what we have seen in the past or kind of recovery from the New Year, if you will. But we still think that $50-$60 is the right number, and we think it'll be slightly incremental to what 2018 levels were.

Matt Summerville (Equity Research Analyst)

Got it. Thank you, guys.

Gregg Sengstack (Chairman and CEO)

Thank you, Matt.

Operator (participant)

Thank you. We do have an additional question from the line of Walter Liptak with Seaport Global. Your line is now open.

Walter Liptak (Equity Research Analyst)

Hi. Thanks. Good morning, guys.

John Haines (CFO)

Good morning, Walt.

Walter Liptak (Equity Research Analyst)

Just to follow on to Matt's question, talking about China, if you could just talk about the quarter and how things progressed during the quarter and then the timing of the recovery in China Fueling Systems.

Gregg Sengstack (Chairman and CEO)

Yeah. So the quarter started fairly well in China for us. So Walt, as you know, in China, when the New Year's begins, the whole country pretty much goes offline. And the question was then how quickly we'll come back, if you will. And what surprised us a little bit in the quarter was that kind of comeback post we're all back from holiday now, time to go back to this business. And that didn't materialize between the end of the holiday and the end of the quarter the way we thought it would. So we're prepared. We don't believe we're losing any market share. We have very strong customer relationships there. And the work is still there. So there's nothing that is saying that we're missing the count of station conversions or anything like that.

So we believe it's all still there and all available for us to win in the last three quarters of the year. So that's our view right now. The only thing that's really changed in our view, other than kind of the less-than-expected first quarter, is we have been kind of talking this $50 million-$60 million range for this year, next year, and then maybe even beyond. And I think we're a bit more cautious about the beyond at this point in time. Just we need to see how many stations actually get converted, what the competitive environment looks like, what the commitment's going to be from some of the major oils.

If the conversions will start moving west in the country, which means they're going to start moving more rural, that's going to create a whole bunch of different issues for us and other manufacturers, not least of which is the whole compliance. As you move more rural and west, are you committed to the same quality spec for this equipment as you would be in the major cities? We have experience in China with other conversions where we have seen, well, the further from Beijing and Shanghai you move, the less adhered to are all the technical specs and requirements. Those are all factors that are in our thinking for fueling in China.

Walter Liptak (Equity Research Analyst)

Okay. And just to be clear, the China part of the business, we're starting to see that recover in the second quarter, or are we still waiting?

Gregg Sengstack (Chairman and CEO)

Yeah. No, we are starting to see that recover. Yeah. Seasonally, a better time. Yes.

Walter Liptak (Equity Research Analyst)

Okay. All right. Great. And in the Turkey and Argentina markets, I know these are meaningful. I wonder if you could size those for us in maybe percentage or millions of dollars? If you want me to proceed with that.

Gregg Sengstack (Chairman and CEO)

Yeah. I mean, at today's exchange rates, the business in Turkey is about a $30 million top-line business. The business in Argentina will be in the $18 million-$20 million kind of top-line business. The Argentine economy is kind of struggling through their currency devaluation. There's an election coming up, so there's political uncertainty now that's crept into Argentina. All those things generally are a bit of a pause for the business and economic climate.

Walter Liptak (Equity Research Analyst)

Okay. Got it. All right. Thank you, guys.

Gregg Sengstack (Chairman and CEO)

Thank you.

John Haines (CFO)

Thank you.

Operator (participant)

Thank you. We do have a follow-up with the line of Edward Marshall with Sidoti & Company. Your line is now open.

Edward Marshall (Senior Equity Research Analyst)

I wanted to ask this earlier, but on fueling, and you mentioned you had some comments about the conversions moving west and so forth. As I look at your 3% sales growth, I look at another U.S. major competitor, Pierre 20%. I'm trying to get a sense as to on their fueling business, I'm trying to get a sense of what the difference is there. And I know they make additional equipment that you don't make. Has that conversion started to move west, and that's kind of displacing you, or are you seeing additional issues with tariffs that you're working around? I'm just trying to get a sense of the disparity between the two results.

Gregg Sengstack (Chairman and CEO)

Can't really comment. I haven't seen the releases from or they're out yet for over a quarter. I guess one of them's out. Their businesses are substantially larger than ours. They're above ground with the dispensing piece of their businesses. They may be seeing some benefit from the EMV deadline. I really can't comment too much to theirs. But in our business, we feel very comfortable with our plan, and we feel very comfortable with the success of our team in gaining wins in the marketplace.

Edward Marshall (Senior Equity Research Analyst)

This is less about competition and more about just timing, like you said. Okay.

Gregg Sengstack (Chairman and CEO)

Again, it's difficult for me to respond. I haven't seen the context of their comments. I would just say that if it's specific to China, again, I don't know if they're comparing apples and oranges here because they're looking at above-ground equipment as well as below ground. We're strictly in the below-ground equipment in that upgrade but for the Fuel Management System. So it's difficult for me to draw a comparison.

John Haines (CFO)

And then just.

Edward Marshall (Senior Equity Research Analyst)

Yeah.

John Haines (CFO)

You don't want to imply that it's not competitive. It's clearly very competitive. But to date, we don't have any information that would say, "Wow, we're losing share to this competitor or that competitor," or, "As we go into some of the Western provinces, we're not, we're losing share there." We feel good about our customer relationships, both at the Big Oil and distributor level. And really, there's not a lot that's changed in that. So we would expect to compete fiercely and win our fair share.

Gregg Sengstack (Chairman and CEO)

One other thought is that we had a really strong start last year, and others may not have had as strong a start as ours, so they may have a better comp. That could be another explanation. Again, not giving details is difficult.

Edward Marshall (Senior Equity Research Analyst)

Yeah. That makes sense. By the way, that number was a global number, so it didn't really give the context maybe in China that maybe we were alluding to here on this call. Just to be fair, I wanted to clear that up. All right. I appreciate it, guys. Thanks very much. Thank you.

Gregg Sengstack (Chairman and CEO)

Thank you, Ed.

Operator (participant)

Thank you. That does conclude today's questions and answers session. I would now like to turn the call back to Gregg Sengstack for any further remarks.

Gregg Sengstack (Chairman and CEO)

Thank you for listening to our first quarter earnings call. We look forward to speaking to you in July after our second quarter results are announced.

Operator (participant)

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.