Franklin Electric - Q2 2019
July 23, 2019
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Franklin Electric Report Second Quarter 2019 Sales and Earnings Conference Call. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. Should anyone require assistance at any time during the conference, please press star and zero on your touchtone telephone. 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.
John Haines (CFO)
Thank you, Dylan, 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 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. With that, I'll turn the call over to our Chairman and CEO, Gregg Sengstack.
Gregg Sengstack (Chairman and CEO)
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 EMEA, 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 $1 million of orders into the second half of 2019. Backlog remains 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 to our Distribution segment.
With much of the back-office integration complete, we are focusing on reducing intersegment 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 EMEA 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 carry the headlines.
One bright spot is 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 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, a "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 continue to be below expectations, principally due to uncertainty around Brexit, impacting underground tank sales and credit issues in Africa, delaying build programs to 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 have normalized in Q2. 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 the Midwest and West, the record precipitation resulted in sales of FE 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 more normal weather conditions we are now seeing will lead to a recovery in our Distribution business. July has started well. We believe our groundwater manufacturing business will also recover. Our sense is that inventory in the 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, where 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, and we are encouraged by the positive feedback we have 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, Southeast Asia and in China, where we've introduced a new booster system that is 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 plan 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, increase over the second half of 2018. I'll now turn the call over to John to discuss the numbers in more detail. John?
John Haines (CFO)
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 of 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 Systems 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 of 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 System sales. The gross 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 were $73 million, a decrease of about 3% from the second quarter of 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 to the prior year, certain 2018 net sales and operating income reclassifications were made. These reclassifications resulted in lowering second quarter of 2018 results of Fueling Systems and increasing second quarter of 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's 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 this standard to be material to the consolidated results of operations 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 August 15th to shareholders of record on August 1st. This concludes our prepared remarks, and we would now like to turn the call over for questions.
Operator (participant)
Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press star and one. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Edward Marshall from Sidoti & Company. Please go ahead.
Edward Marshall (Senior Equity Research Analyst)
Hi, Gregg. Hi, John. How are you today? Good morning.
John Haines (CFO)
Good morning.
Gregg Sengstack (Chairman and CEO)
Good morning, Ed.
Edward Marshall (Senior Equity Research Analyst)
So, I understand your comments regarding the Distribution and the inventory being at 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?
John Haines (CFO)
Yeah, 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 and the sales in the back half of the year that build up. We had some build up in our U.S. manufacturing plants in the 6-in and 8-in 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.
Gregg Sengstack (Chairman and CEO)
Getting maybe to your question about pricing. We don't see this as having any impact on pricing. This is just to John's point, you know, we had a stronger forecast internally. We built that forecast, it didn't happen. So we will have some, we'll be, you know, running inventories down in the back half, comparable basis, you know, create some, some drag on the margins, but we think we've got some offsets.
Edward Marshall (Senior Equity Research Analyst)
Got it. And as I think about kind of the way you might plan your manufacturing, I mean, you're anticipating a stronger second half than, than maybe the first half. Do you, do you plan to kind of build at the same manufacturing rate? I, 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?
Gregg Sengstack (Chairman and CEO)
It again, well, we'll be running our plants at, you know, lower than planned levels. When I say 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 that will create some negative absorption in the back half, Ed.
Edward Marshall (Senior Equity Research Analyst)
Got it. 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, 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.
Gregg Sengstack (Chairman and CEO)
Water segment, actually, and maybe I didn't make it clear in my prepared remarks. We're actually, Water segment, again, we have a small business in China. It's sub-$10 million, but we're, you know, so we're seeing, we're seeing some pickup there because of the introduction of this new Inline Delta product, which is a substitute for vertical multi-stage boosting products in the low and medium rise residential buildings in China. So we're getting some traction on that, but it, we have a very small base in the water, and so I wouldn't say there's any impact related to trade or economy.
The comments I made were more directed to your point about the Fueling business, and the, you know, the capital spend rates of the public oil companies, and then in general, kind of this, 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. When I say we, China will buy locally in a way to immunizing from the trade tensions with the U.S., in general.
Edward Marshall (Senior Equity Research Analyst)
Got it. 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 seen the same decline in the rate of capital spend as you've seen with the local agencies or the local pumping ownership?
Gregg Sengstack (Chairman and CEO)
Well, 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, you know, on their capital spend rates and their plans. Not so much, I think, related to the Chinese government's decisions.
Edward Marshall (Senior Equity Research Analyst)
Got it. Thanks very much, guys.
Operator (participant)
Thank you. Our next question comes from Ryan Connors from Boenning & Scattergood. Please go ahead.
Ryan Connors (Managing Director)
Yeah, thanks for taking my questions. I actually want to stick with the China theme for a minute. This issue of buy local, Gregg, is that something. I mean, is that anecdotal, or you've heard that from some of your people there, or are there, like, specific, you know, announced programs you're aware of in terms of procurement, you know, and moving toward this buy local?
Gregg Sengstack (Chairman and CEO)
Good morning, Ryan. Yeah, 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, you know, reopening of specifications to allow more local Chinese products to be qualified. And so we've seen evidence by the government of making it, quote, "easier" for local companies to compete. Now, does their product stay in the ground? Does it 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.
Ryan Connors (Managing Director)
Got it. Okay, that's good clarification. And then just on this issue of, I mean, I apologize if the question is 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 know, you would think it'd be good for dewatering, ag, you mentioned bad. You know, just, just how do we think about Franklin Electric as a, as an entity, as a whole, and, and, and wet weather and, and, and why such a pronounced, you know, negative impact of that when you've kind of got it would seem you've got product lines that, that could play either side of that?
Gregg Sengstack (Chairman and CEO)
It's a great question, Ryan, and it's a great reminder about how our business operates. You know, we're again, we're more groundwater centric, we're water well centric than any other product line. It's the one where we have the highest margins because we're more vertically integrated. Okay, that said, when you look at our surface pumping equipment, clearly, you know, in the Midwest, you know, massive run on getting some pumps, and that's why, you know, our surface business was up because of that. You know, but those are relatively, again, you know, they're smaller pumps, lower margin than in our submersible.
The dewatering pumps from Pioneer are more event-driven when and so, you know, it'd be yeah, you'd think that if there was a hurricane or you'd think that there was some type of flooding in a specified area, where you see some of that dewatering. But that's still a relatively small part of our overall business, even within Pioneer. You know, Pioneer has been a lot of our activity from Pioneer has gone into our rental fleets. And so, you know, there's a tail. We're the tail of that dog, and so, you know, they're buying from these rental fleets, and you might see, you know, upticks at URI or Sunbelt or other rental companies higher utilization because of flooding.
But we wouldn't necessarily see that in their capital spend with us. Their capital spend's, you know, been laid out months and maybe years in advance. So what happens to us is that when we get the weather we saw in the well throughout the country in the first half of the year, people aren't running their submersible pumps or groundwater pumps as frequently or even at all. And so they're just not replacing them. You know, we have a large replacement part of the business. You anywhere, you know, 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 in demand in the Midwest, particularly with, you know, flood events, with pumps for homes. But we certainly, that did not offset the decline that we've seen. In my tenure with Franklin, you know, this has been the wettest year in history, and it's just been a tremendously soft market out there.
Ryan Connors (Managing Director)
Yeah. Okay, that's really helpful. I guess my follow-on to that is just, you mentioned that after the first quarter, things were a little soft, but, you know, you maintained the guidance, and just kind of see how the 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, you know, wet weather in the third quarter? I mean, is that - are we conservative relative to that, or, you know, are we, or is it built in that we're gonna get a sequential recovery and then potentially, in that scenario, like, a shoot a drop again?
Gregg Sengstack (Chairman and CEO)
Yeah. So I think the way we're looking at it, actually, the way we looked at it back in April, we said, "Okay, things normalize, and we should then see, you know, more normal revenue and more normal profitability." You know, back half, we're looking at, you know, kind of a 5% ± organic growth rate in Water to give you some kind of guidelines around that. So we're just expecting the second half just to now that it seems to dry out, that you know, people that did get crops in the ground will be irrigating, home use of submersibles will be increasing and so we should see a kind of a more normal run rate. But that's. So think about it in mid-single-digit organic growth terms.
Ryan Connors (Managing Director)
Got it. And then just one last one, if I could. I guess this is more to bring John in, but, you know, it seems like Forex has really, you know, exacerbated the volatility of the results, you know, the last couple, few years here. And can you just kind of refresh us on your thinking around, you know, hedging and just philosophically around whether you could or would or should ever, you know, do anything to kind of help smooth some of that out?
Gregg Sengstack (Chairman and CEO)
Yeah, Ryan, before I turn it over to John for the numbers, you'd say over—since 2014, you know, the U.S. dollar has strengthened, what? Some 25%. And so that impacts, obviously, it's math on the translation side. And then we also get a little bit more volatility because that's, you know, if you look at the stock markets, you know, the developing region certainly has been a tale of two cities relative to the U.S. market, which I think is more reflective of just kind of the weak economy. So, you know, we have a, you know, 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, that's, come back with impacting our long... you know, our, 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 all the people are. John can take you through some of the philosophy around how to immunize this.
John Haines (CFO)
Yeah, Ryan, so good morning. You, you'll recall that the, the bulk of the FX exposure that our company faces is, is translational FX exposure, where, we have operating units around the globe doing business in reais, 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 reais, and their supply chain is primarily a reais, supply chain. For the most part, that's true in Europe, that's true in South Africa and, and other places. So our real issue is the translation back of those entities' earnings.
And, you know, our view is that, you know, other than that kind of natural matching in country of those operations or in market of those operations, there's not a ton we're gonna do on the translation side, but it is significant. So in the first half of 2019, FX has cost us about 3.5% on the top line, about 5% in water, and about 2.3% in Fueling. Where we have true transactional FX exposures, in some cases, we do deploy hedging strategies. We have.
We have those in several places around the world. Not significant positions, but where 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 that is a little bit difficult in a volatile revenue environment, as you might guess, that we see as well. So that's that's the short on the FX and kind of how it impacts our company.
Ryan Connors (Managing Director)
Got it. Well, thanks for your time this morning, guys.
Gregg Sengstack (Chairman and CEO)
Thank you, Ryan.
John Haines (CFO)
Thanks, Ryan.
Operator (participant)
Thank you. Our next question comes from Edward Marshall from Sidoti & Company. Please go ahead.
Edward Marshall (Senior Equity Research Analyst)
I just wanted to jump back in and follow up on the margin, if I could. If it doesn't go unnoticed, I think two points. One, Headwater had a pretty good quarter. Wondering if you'd might comment there. I know the second quarter is generally strong, but this seems to kind of hit your targets for what you expect at Headwater. So maybe you could just make a comment about what's going on there and the success you might be having.
Gregg Sengstack (Chairman and CEO)
Sure, Ed. Yeah, again, the margin we talked about were, you know, a range of 4%-6% for on an annual run rate basis, second and third quarter being seasonally stronger. So appreciate the observation about Headwater's performance in Q2. And we would, you know, expect to see kind of similar margin activity in Q3, but, you know, Q4, it 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 and before are all on one system. The acquisition we did this year will go on that system in about 6 months.
So that's beginning to help us on the back side as well.
Edward Marshall (Senior Equity Research Analyst)
Got it. The second point, I guess, was on Fueling. I mean, it looks like it might be one of the stronger margins I've seen in that business in a while, maybe ever. You know, based on the comments, specifically around China and how big of a business that is for you, is this a high Water mark for that business? And I understand it can be lumpy and volatile. Is this a high Water mark 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 to 2020? Thanks.
John Haines (CFO)
Yeah, 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's also done a really nice job of leveraging their fixed costs, so adding fixed costs at a much lower rate than the revenue growth that's happening in the business. So as I've warned you before and others, I wouldn't get real comfortable with high-20s Fueling operating income margins. I think something 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 had a favorable mix in the United States, where growth was up, as Gregg pointed out, and that favorably impacted our operating income margins.
Edward Marshall (Senior Equity Research Analyst)
Got it. Appreciate your comments. Thank you.
John Haines (CFO)
Thank you.
Gregg Sengstack (Chairman and CEO)
Yeah. So go ahead, Dylan, I'm sorry.
Operator (participant)
Our next question comes from Matt Summerville, from D.A. Davidson. Please go ahead.
Matt Summerville (Managing Director and Senior Research Analyst)
Thanks. A 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?
Gregg Sengstack (Chairman and CEO)
Well, Matt, I guess what I can say is that it's, you know, the ag was hurt the most because of where the majority of the rain fell, and when we look at some of the pattern of some of the Headwater stores, and where we saw some dramatic falloff of revenues at stores that are at locations that typically are ag-based and had a really strong 2018. Beyond that, I don't have much detail. It's more qualitative. I don't know, John, if you've got any more quantitative data?
John Haines (CFO)
Yeah, I mean, as we said, Matt, you know, groundwater in the U.S. was down 12% in the quarter. As Greg'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, you know, 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, you know, wastewater, water transfer, some pumps, those kind of things that you might expect to be up in a very wet environment.
Gregg Sengstack (Chairman and CEO)
And Matt, again, on the pro channel side, you know, what we say is because our sales to third-party distributors, not Headwater, are up 5%, and that sales base is kind of more Midwest to East, which tends to be a little bit more resi, you'd say that the residential market was maybe less impacted than the ag market, which is more Midwest, West, and more where we have Headwater exposure. And Headwater's outdoor sales of Franklin pumps were down about 5%. Does that help?
Matt Summerville (Managing Director and Senior Research Analyst)
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, you know, 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?
John Haines (CFO)
Yeah, our achieved price in the first half of the year was, excuse me, in the second quarter, was about 3.1% in Water and about 2% in Fueling. Matt, we have seen some reduction in steel prices and other commodity prices as we have trended this. 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 we're basically assuming a neutral for the back half of the year, that our price will offset that inflation, and that may get a little bit more favorable for us as we get toward the end of the year. But right now, that's our base assumption.
Matt Summerville (Managing Director and Senior Research Analyst)
Got it. And then, I guess just sticking with pricing, I think, Gregg, last quarter you'd 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 think that that happened. But can you comment around what you're seeing kind of currently and what you saw in Q2 with respect to discounting, specifically in North America?
Gregg Sengstack (Chairman and CEO)
Yeah, Matt, to your point, I think you got it figured 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 for last quarter. I would say that I called it out that at the distribution level at Headwater, that we saw some margin compression, but margins improved, pricing improved throughout the quarter. So I think, yeah, it got really tough in April, and then we saw, you know, sequentially, May and June seeing some lift. So that's what we're seeing, and I'd say right now we're kind of in a, quote, "normal pricing environment." We all run promotions.
They all seem to be similar in size and percentage terms as we've seen in prior years.
Matt Summerville (Managing Director and Senior Research Analyst)
And then just one follow-up on the sort of the comments you made on buy local in China, and I just wanna be clear on something. This is in no way a government mandate that is saying that these oil companies have to buy local. This is not. You're not seeing this at the central government level, correct?
Gregg Sengstack (Chairman and CEO)
No, we're not seeing a mandate. You are in a command economy, and we have seen some evidence I mentioned earlier in the call where, you know, the tender specifications have been, you know, reopened to help others get. Or excuse me, 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 to buy the sale or not saying, you know, they're getting picked up by the major oils, but they are now on the list.
John Haines (CFO)
You know, Matt, I think that, I think that we see frequently in these type of regulatory mandates that we and maybe a couple 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 and are able to be certified in this product and therefore, you know, serve the market. So, I'm not, I'm not sure that this is that unlike other regulatory and opportunities we've had in the developing world before.
Gregg Sengstack (Chairman and CEO)
Yeah, Matt, as a follow-on to John's comment, you may recall back in 2008, when the mandate for vapor recovery in China came out, and Franklin, with our Healy product line, we took a commanding initial lead. And we had, I don't know, 50%, 60%, 70% of market in Beijing, and then I'd say overall had maybe a 30%, 40% share of the market. But we did see that there were more local competitors that came in later. Now, the issue is that some of this product, once it gets installed, you find out it doesn't work or it doesn't work the way it was designed. And so the opportunity on a follow-up is that that product gets taken out, and we eventually get the sale.
As John pointed out, we did see this happen with the vapor recovery initiative back in the 2008, 2010 timeframe.
Matt Summerville (Managing Director and Senior Research Analyst)
Got it. I appreciate all that color. Thank you, guys.
Operator (participant)
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.
Gregg Sengstack (Chairman and CEO)
Again, we thank you for participating in our earnings call. We look forward to speaking to you after the third quarter. Have a good day.
Operator (participant)
Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.