Franklin Electric - Q3 2018

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the Franklin Electric Reports Third Quarter 2018 Sales and Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a Q&A session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone. As a reminder, this conference is being recorded. I will now turn the call over to Mr. John Haines, our Chief Financial Officer. Please go ahead.

John Haines (CFO)

Thank you, Charlie, and welcome everyone to Franklin Electric's Third Quarter 2018 Earnings Conference Call. With me today are Greggg Sengstack, our Chairman and Chief Executive Officer, and Robert Stone, Senior Vice President and President of our International Water Systems Unit. On today's call, Greggg will review our third quarter business results, and I will review our third quarter financial results. When we're 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, Greggg Sengstack.

Gregg Sengstack (Chairman and CEO)

Thank you, John. I am pleased to report that strong organic growth drove record sales and earnings for the third quarter of 2018. Our water systems units in the U.S. and Canada grew organically by about 10%, Fueling Systems organic revenue growth was 22%, and distribution revenue, somewhat muted by unfavorable weather, grew 2% organically in the quarter. With consolidated organic growth of 8%, operating leverage, and tight expense control, our operating results were up over 20% compared to the third quarter of last year, and a record for any third quarter in our history. Our financial results were negatively impacted by translation declines and transactional losses due to the mid-quarter strengthening of the U.S. dollar against many currencies. We estimate this decline resulted in our third quarter earnings per share being about $0.05 lower than we had forecasted.

Based on current exchange rates and the continued political uncertainty in Latin America and the Middle East, we believe the fourth quarter will be negatively impacted as well. Accordingly, we are taking the midpoint of our 2018 earnings guidance down $0.08. In the U.S. and Canada water systems business, Pioneer-branded dewatering pumps revenue was up 70% from last year. With the sustained sales growth, particularly outside of the oil and gas end market, and increased backlog, we're expanding capacity in this important product line. Other surface pumping equipment revenue accelerated and was up 6% in the quarter. Groundwater pumping system sales declined about 5% in the quarter due to a decline in intercompany sales to our distribution segment.

You may recall that in the third quarter of last year, to replace products no longer supplied by other pump companies, our manufacturing unit sales to our distribution business increased dramatically. This year, our manufacturing and distribution business units were able to focus more attention on supply chain optimization and reducing inventory, which negatively impacts water segment reported sales. We believe the more relevant measure of our performance in this channel is our water segment sales to third parties, which were up 6% in the quarter, and Headwater sales of Franklin product to third parties, which was up 6% as well. Outside the U.S., the 5% growth achieved in Europe, the Middle East, and Africa was not enough to offset continued weak demand in Asia-Pacific and Brazil. However, we are somewhat encouraged that the year-over-year revenue decline in these end markets was half the revenue decline in Q2.

In Thailand, sales were adversely impacted by continued declines in government funding for water-related projects and by weather. In Brazil, economic and political uncertainty continued to negatively impact our business. Our Fueling Systems team delivered another record quarter. Revenue in the U.S. and Canada market was up 9% as a team extends its success with major marketers in North America. Internationally, revenue was up again over 40%. Revenue in China accelerated and was more than doubled last year's third quarter as the country's mandated multi-year upgrade to the underground piping systems in retail gas stations continues. As I previously mentioned, we expect this upgrade to add significant revenue and income to our fueling business over the next several years, and some provinces are choosing to extend their upgrades beyond piping systems to pumping and leak detection systems as well.

Outside of China, international revenue growth of our Fueling Systems business exceeded 20% with growth across all regions. Turning to our distribution segment, Headwater, third quarter revenue grew organically by 2%, and earnings improved as well. Growth was hampered a bit by Hurricane Florence, but more importantly by the constraints of our footprint. These constraints are being addressed over the next several quarters by consolidating smaller or duplicative branches in the west into new, larger branches that can support additional growth and reduce operating expenses.

Finally, integration of the 2 acquisitions we completed in July, one in the U.S. and one in Argentina, is on track, and initial financial results are on plan. As we look forward to the end of this year, we expect the momentum we have in our North America and Europe water systems end markets and in the global Fueling Systems business to continue. We continue to be cautious about our water business in Brazil, Asia-Pacific, and the Middle East. We believe announced pricing actions will continue to offset estimated inflation and tariffs. Accordingly, as mentioned above, we expect our 2018 earnings before restructuring to be between $2.22-$2.26 per share. I will 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 $0.63 for the third quarter of 2018 versus $0.52 for the third quarter of 2017. Restructuring expenses were $0.3 million and relate to branch consolidations and other asset rationalizations in the Headwater distribution segment. In total, these efforts will result in total restructuring charges of about $2 million by the end of 2019 and had a $0.01 impact on the earnings per share in the third quarter of 2018. Third quarter earnings per share before the impact of restructuring expenses was $0.64 compared to 2017 third quarter earnings per share before restructuring of $0.53. These earnings per share results were a record high for any third quarter in the company's history. Third quarter 2018 sales were $341.9 million compared to 2017 third quarter sales of $311.1 million, an increase of 10%.

The sales increase was from acquired entities as well as organic sales of about 8%. Sales revenue decreased by $11.2 million, or about 4%, in the third quarter of 2018 due to foreign currency translation. Water Systems sales were $198.3 million in the third quarter of 2018, an increase of $2.3 million, or about 1%, versus the third quarter 2017 sales of $196 million. In the third quarter of 2018, sales from businesses acquired since the third quarter of 2017 were $3.9 million. Water Systems sales were reduced by $10.6 million, or about 5%, in the quarter due to foreign currency translation. Water Systems organic sales were up about 5% compared to the third quarter 2017. Water Systems operating income was $28.4 million in the third quarter of 2018, flat compared to $28.3 million in the third quarter of 2017. Operating income growth in the U.S.

and Canada was offset by declines in international regions, in part due to weakening foreign currencies versus the U.S. dollar. Fueling Systems sales were $78.8 million in the third quarter of 2018, an increase of $14.7 million, or about 23% versus the third quarter 2017 sales of $64.1 million. In the third quarter of 2018, sales from businesses acquired since the third quarter of 2017 were $1.3 million. Fueling Systems sales decreased by $0.6 million, or about 1%, in the quarter due to foreign currency translation. Fueling Systems organic sales increased about 22% compared to the third quarter of 2017. Fueling Systems operating income was $20.9 million and was a new record for any quarter in the segment's history in the third quarter of 2018 compared to $17.1 million in the third quarter of 2017. The increase in operating income is primarily related to higher sales.

Distribution sales were $78 million in the third quarter of 2018 versus third quarter 2017 sales of $68.1 million. In the third quarter of 2018, sales from businesses acquired since the third quarter of 2017 were $8.2 million. The distribution segment organic sales increased about 2% compared to the third quarter of 2017. The distribution segment operating income was $3.1 million in the third quarter of 2018 compared to $2 million in the third quarter of 2017. The company's consolidated gross profit was $113 million for the third quarter of 2018, an increase in third quarter 2017 gross profit of $103.8 million. The gross profit as a % of net sales was 33% in the third quarter of 2018 compared to 33.4% in the third quarter of 2017.

As we expected, the water and Fueling Systems segments experienced considerable raw material inflation in the third quarter. We estimate that inflation in the quarter slightly exceeded achieved sales price increases, but that on a year-to-date basis through September, we have offset the actual raw material inflation with price, and we expect the same during the fourth quarter. Selling, general, and administrative expenses were $72.5 million in the third quarter of 2018 compared to $70.9 million in the third quarter of the prior year. The increase in SG&A expenses from acquired businesses was $2.9 million. Excluding the acquired entities, the company's SG&A expenses in the third quarter of 2018 were $69.6 million, a decrease of about 2% from last year. This decline is primarily due to the effect of foreign currency translations in the third quarter of 2018 versus the prior year.

Consistent with our previous guidance, the company believes the full-year 2018 effective tax rate will be about 15% on pre-tax earnings. The effective tax rate for the third quarter of 2018 was about 16%, and before the impact of discrete events was about 20%. The effective tax rate for the third quarter 2017 was about 19%. However, before the impact of discrete events, the tax rate was about 23%. Regarding our guidance that Greggg referred to, we are providing a new range for 2018 full-year earnings per share. Before restructuring charges of $2.22-$2.26, or about $2.24 at the midpoint. As we said, in the third quarter, we estimate FX hurt our earnings per share by about $0.05, which we don't believe we will recover. We expect continued weakness in our international market, international water developing region markets during the fourth quarter.

We also expect additional translational FX losses like those we experienced in the third quarter as the Brazilian real, Turkish lira, and South African rand all remain weaker than the estimates our current guidance was based on. These impacts, combined with the third quarter actual impact of $0.05, is how we arrive at a lower center point of our guidance by about $0.08 from $2.32 to $2.24, which implies our fourth quarter earnings per share estimate is about $0.50. Cash generated from operations was about $60 million, an improvement of $20 million compared to the first nine months of 2017. The company had $89 million in borrowing on its revolving debt facilities at the end of the third quarter of 2018 and $67 million in borrowing at the end of 2017. These borrowings were primarily to fund acquisitions and working capital needs.

The company purchased about 10,000 shares of its common stock for approximately $0.4 million in the open market during the third quarter of 2018. As of the end of the third quarter of 2018, the total remaining authorized shares that may be repurchased is about $1.9 million. On October 22nd, the company announced a quarterly cash dividend of $0.12 consistent with the previous quarterly dividend amount. The dividend will be payable November 15th to shareholders of record on November 1st. This concludes our prepared remarks, and we would now like to turn the call over for questions.

Operator (participant)

Ladies and gentlemen, if you have a question at this time, please press star, then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, press the pound key. Our first question comes from the line of Edward Marshall from Stifel. Your line is open.

Edward Marshall (VP)

Hey guys. Good morning. Good morning.

Gregg Sengstack (Chairman and CEO)

Good morning.

John Haines (CFO)

Hi, Ed.

Edward Marshall (VP)

So I just wanted to touch on the water segment. As I look back through the first nine months of the last three years, sales have grown, but they've grown with about a 50% margin headwind each year as you step down. I'm just trying to get a sense as to what might be happening there. I mean, it was 15.4 and 14.9 and 14.4 on a year-by-year basis. I'm just trying to get a sense as to why the margin in water. I mean, is there more competition? Is there something to do with the distribution units? Anything you can help?

Gregg Sengstack (Chairman and CEO)

Yeah. I think there's several things. Ed, I'll offer some thoughts, and Greggg will do the same. I think overall what you see in our water systems segment is a mix-shift that's gone on over that time. As we've talked in the past, we know that as our product sales move from groundwater and motor-based products to more pumping products and surface pumping products like Pioneer is, Pioneer is all-surface pumping product, that mix-shift in and of itself will cause some margin deterioration because, as you know, our surface pumping products are not as vertically integrated as our groundwater pumping products are as well. Another factor that we see happening is that because of some of our international water units' underlying market condition, we're losing leverage in certain of those businesses. Asia-Pacific and Brazil are good examples of that.

So there's a fixed cost base there to support a certain revenue level, and as that revenue varies or declines in certain periods, then you're going to see a lost fixed cost leverage impact margins. The final point that I'll say, and we feel good about this, although in the third quarter we were basically kind of break-even or slightly below, is the raw material inflation versus achieved price. No question, Ed, to your point, that our individual water markets are highly competitive, and no question that's extremely true in many of the international or especially true in many of the international markets that we compete in.

So we see raw material inflation. There's no question that that's happening. And a constant thing that we're focused on and paying attention to is this ability to get price to offset that, and we feel pretty good about that on a consolidated and a global basis. But in certain markets, that's more difficult because of the competition of that particular market or those underlying competitors in that market. Those would be probably the big things I would point to. Greggg might have other thoughts.

John Haines (CFO)

Yeah. Ed, I think you mentioned the word distribution. Again, you're looking at the water manufacturing segment. That's where we're reporting. So our foreign distribution, that wouldn't impact those numbers other than driving top-line growth because of the share gains we're seeing. And then I'd say to echo on John's point, in the last couple of years until this year, commodity prices, input costs have been fairly benign, and so the price realization has been net greater positive, say, in 2016, 2017, and 2018. And yes, we've been able to maintain parity with input costs this year, whereas the last couple of years before that, there was probably some tailwind.

So that's a combination of factors. But it's really in our developing regions. It's where all the people are. It's part of our overall strategy, but there has certainly been economic malaise, actually a recession even more in Brazil. We've certainly seen in Asia-Pacific, particularly Thailand, which is a large market for us, has fallen off. And so that's where we've been delevered, where we're getting operating leverage. It's been our North American business, our fueling business, and we're seeing that now in distribution as well.

Edward Marshall (VP)

Got it. I think when I was referring to the acquisitions of Headwater, I was referring to the recognition of kind of intra-company revenue, maybe the impact on the margin from that perspective, and maybe it was more optics than structural. But I think what you've explained is it's more structural in nature. Could you kind of talk about maybe the mix in surface versus ground over the past couple of years? Where was it? Where has it gone? And is that by design? I assume Pioneer really linked to oil and gas, so with the resurgence in that market, maybe that helped the mix-shift to surface. But have you also seen increased competition within ground?

John Haines (CFO)

So.

Edward Marshall (VP)

I'll just.

John Haines (CFO)

Sorry. Yeah. We'll try to take them one by one. So Ed, I think first on the distribution end, the water segment sells to the Headwater business just like a third party. That's how it's reported in our results. So for example, that was the point I wanted to make about how our revenue and our operating income in the water segments would have been actually higher in the quarter if the transfers from the water segment to distribution segment had been on parity the last year. Okay. So the intersegment relationship is as if it was a third party. So just to be clear on that. Moving to your other questions, certainly, Pioneer has been lifted by the resurgence in oil and gas prices. At the same time, it's been a conscious decision to diversify the customer base for Pioneer, and that's happening.

Yes, that has been a contributor to the diversification also away from the groundwater space. In the groundwater business, we are doing very well in our traditional markets, but in the emerging markets, what we're just seeing is that there's just been an overall lessening in demand in these markets. It's just the markets have been soft. We've come from a multi-year—you go back five years ago in the United States when you had crop prices. Corn was at $7 a bushel. Today it's at $3.5.

You've seen that in the irrigation companies are reporting lower sales over that time period, so that would indicate there's been less investment generally in groundwater over a multi-year horizon. Those things will change over time, and certainly, it's been tougher in the international markets. And so our surface business, which we've been consciously growing, is a bigger aspect of a bigger portion of our mix. And then as John pointed out, the price competition in developing regions has been tougher because of that and because of the inflation, the input costs we're seeing.

Edward Marshall (VP)

Okay. And finally, as we look into 2019, and not to get on your guidance quite yet, but would you anticipate kind of the trends that we've seen within the water margins kind of continue as we move into 2019? I know it's difficult with mix, but to predict mix, and I know your plan's not in place, but just kind of getting a sense as to the overall kind of high-level view of the business.

Gregg Sengstack (Chairman and CEO)

No. We would not, Ed. We would expect in 2019 and going forward that water operating income margins will be in the 15%-18% range. So part of some of the factors that we mentioned here will continue, but some we expect to lessen, one of which is our business units in Asia-Pacific and Brazil having some recovery in revenue and therefore this loss leverage coming back to be a positive in those end markets as an example. We also expect to get more price than we have seen inflation overall for 2018, so that'll give us a bit of a tailwind going into 2019 as well. So no, we do not expect continued water systems operating income margin deterioration.

Edward Marshall (VP)

Got it. Just to be clear, do you anticipate inflation will start to plateau or that your pricing will accelerate?

Gregg Sengstack (Chairman and CEO)

More of the latter, I would say, is the indication that we have right now. When we look at our raw material inflation, Ed, on an input basis, what we're buying period to period, that is still inflating pretty significantly versus last year's average price paid. So in terms of indication of what inflation is doing in the current period, our indications are that we're still seeing raw material input inflation. So as you've heard others say, the price actions we know about, we think we'll offset that. But if they don't, then we are prepared to go back out into the markets and try to get additional price in those markets to offset that inflation.

Edward Marshall (VP)

Got it. And you mentioned Asia-Pacific and Brazil. Coming off a quarter where was it 9% down in the particular quarter? I mean, some of that was currency, but are there any signs that you see that give you confidence that Asia-Pacific and/or Brazil will begin to turn around? I mean, are the tea leaves there that are sprinkled there that give you the confidence?

Robert Stone (SVP and President)

Well, Ed, we're hopeful that once the election is done this Sunday in Brazil, there'll be some more stability there, and customer confidence, consumer confidence all along the route will be improved and we'll start to spend a bit more money. I mean, one of the other things that happens when you have situations like that is that everybody's budgets are cut, and they tend to go for lower-end products, oftentimes our lower-end products, but that also puts a little bit of a squeeze on some of those margins. Not necessarily that there's share loss, but the markets decrease, and they tend to go toward lower-margin products. In Asia, there are some promising signs, particularly in Thailand with weather, but we have yet to see that actually materialize. But usually, when that situation occurs, the government releases funds, and they'll start to buy more pumps of our products.

Edward Marshall (VP)

Got it. I appreciate your comments this morning, guys. Thanks very much.

John Haines (CFO)

Thank you, Ed.

Operator (participant)

Our next question comes from the line of Walter Liptak from Seaport Global. Your line, Liptak.

Walter Liptak (Industrial Analyst)

Hi. Thanks. Good morning, John and Greggg.

John Haines (CFO)

Good morning. Morning, Walt.

Walter Liptak (Industrial Analyst)

Just on a follow-on to the discussion about Latin America, with the inflation having sort of ticked up in the last quarter or so, and specifically around Brazil, is there anything you can do to hedge, or what are you doing to hedge? Can you go to pricing in U.S. dollars? I guess how do you plan on mitigating that currency headwind?

Gregg Sengstack (Chairman and CEO)

Yeah. The translational headwinds, Walt, as we've talked about, are pretty difficult to hedge. Where we saw that very significantly in the quarter was in Turkey, which had some very significant movements in the lira versus the dollar. We saw it in Brazil. We saw it in Southern Africa in the rand as well. In Turkey, as an example, we do what is effectively spot price to our customers. So we will have a price list that will be in Turkish lira, but then when we quote an offer to our customers to buy a product, we'll convert that at today's spot price for either the euro or the dollar, depending on the product that we're selling. So that type of an action does tend to offset, in part, some of the translational impacts that we see.

The $0.05 that we called out, just to make the point, was both a combination of translational FX impact but also of transactional. And the sudden movements and quite severe movements that we saw during the course of the third quarter also hurt us below the line, that $1.6 million that you see on our income statement, below the operating income line. And that's where you have current liability, account payable positions that just basically get caught in a revaluation. And when you have currencies dropping in a single period by 30% and 35%, that's what drove that loss. So that type of a loss, the transactional type of FX loss, we can potentially do some hedging and do some other strategies around to try to mitigate.

But as you know, that has not historically been a significant amount for Franklin. So sometimes you've got gains in receivables. You've got losses in payables, and they tend to offset one another. Well, in this case, in this quarter, those losses prevailed in a pretty meaningful way. So we look at those opportunities, but basically, the transactional is the only place where we think an effective hedging strategy could be deployed.

Walter Liptak (Industrial Analyst)

Okay. All right. Thank you. And switching over to the Fueling Systems, the growth rates accelerated nicely. I think you guys have talked you've been pretty vocal about the U.S. underground business being sustainable. I wonder if that's the case going into next quarter and how you feel about 2019. But then also international, I think you mentioned that there was 20% growth international as well. And I'd just like to see if we can get a little bit more detail about why international is growing so fast. Is that a sustainable rate? Are there market share gains? Just some details around international too.

Gregg Sengstack (Chairman and CEO)

Sure, Walter. As you point out, we see continued strength in the U.S. market, U.S./Canada. Team's done a nice job. We're getting wins from major marketers on fuel management. That puts more of our product on the truck, and so we also get then discretionary business out of that. I think the U.S. has been in a steady investment environment in the fueling arena for a number of years, and we really expect that to continue. We don't see that letting up at all in 2019. Internationally, to your point, yeah, we've seen really nice recovery kind of Latin American fueling business where it has been soft and pressed. We don't have a big position in Brazil in our fueling business, but the position we have is growing. But we have fuel business throughout Latin America, and that's recovered nicely and grown nicely in the quarter of the year.

Certainly, China's driven that, but that's outside the 20%. That's what drove the 40% overall growth. The other part is we had continued good business in India, and we've had continued good business throughout Europe and the Middle East. And when I say Europe, I also include Russia as well, which is a market for us. So it's really been broad-based, and we just see that Franklin Fueling Systems continues to be innovative.

They've announced a couple of new products and product ideas here at the most recent show, and so it's broad-based both across the U.S. and Canada and the rest of the world. As for China, as we pointed out, we think this is a multi-year initiative. It'll carry out through 2019, 2020. We'll see after that. We do see, again, that there's probably some growing interest in India to start putting in more systems of Western standards that will mitigate the risk of leaks into the environment.

Walter Liptak (Industrial Analyst)

Okay. All right. Sounds great. Thank you.

Operator (participant)

Our next question comes from the line of Matt Somerville from DA Davidson. Your line is open.

Matt Summerville (Managing Director)

Thanks. Good morning.

John Haines (CFO)

Hey, Matt.

Matt Summerville (Managing Director)

Hey, Matt. A couple of questions, and I apologize that these have already been answered. But John, how much price do you anticipate realizing in 2018, and what is your early thought in terms of what you believe you need to realize in 2019 if you're going to be covered from both tariff and inflation, or if we just want to call it inflation, from that sort of perspective?

Gregg Sengstack (Chairman and CEO)

Yeah. Well, year to date through nine periods or through September, Matt, our pricing has been about 200 basis points. We expect that's going to go up before the end of the year or by the end of the year. So I guess I would say something in the 2.25 range for pricing. And as I said, we expect that will be more than the raw material inflation that we're experiencing. As we go into 2019, I think it's going to have to be at that level or higher, to be candid. And that's because of the point that I mentioned earlier, which is when you look at and these measures are all on kind of a P&L basis, on an output basis, Matt.

When you look at the measures on an input basis of, "Okay, what are we paying for raw materials around the globe versus what we paid on average last year," those inflation indicators are still pretty significant, pretty severe. So we don't have an exact number that I would tell you, but I think that the chief price in 2019 is going to have to probably be closer to 230-250 basis points than kind of where we are so far in 2018. And that's entirely on the premise that raw material input inflation is continuing.

Matt Summerville (Managing Director)

And then, based on your other comments, do we need to assume if you're let's just use 250. If you need to get 250, do you have to see some stabilization and/or actual out-the-door volume improvement in end demand? I guess is really the question, in both Brazil and in Asia for you to be upwards in that 250 range? Is that fair?

Gregg Sengstack (Chairman and CEO)

No. They're largely decoupled, I think, Matt. We expect volume rebounds in both Asia-Pacific and Brazil, and some of that will be driven by price because they're seeing the inflation akin to what we're seeing around the globe. But the 230-250 is what I think we can achieve regardless of their end volume situation, the end 2019 volume for Asia-Pacific or Brazil.

Matt Summerville (Managing Director)

Yeah. Back to an earlier question. Strengthening in those markets would lift our operating margins into the range that John mentioned earlier. That's where we'll get the operating leverage, but we've been generally able to get the pricing necessarily to offset the inflation in those markets. Yeah. Got it. Okay. That makes sense. So then just a follow-up just on groundwater specifically here in North America. You mentioned the business being down, I believe, in Q3. Can you talk about what you're seeing in terms of channel inventories? I had thought you'd been trying to right-size your own inventories a bit, and then if you're able to loosely quantify what sort of hurricane disruptions you may have felt in either your manufacturing and/or distribution businesses.

Gregg Sengstack (Chairman and CEO)

Sure, Matt. Again, while our top line in the water segment, we would say that groundwater was down 5% in the quarter. The sales to third parties other than Headwater were up 6%. And then Headwater sales of Franklin products were up 6%. So the 5% negative is a result of the fact that the scorekeeping for an inner segment sale was we consciously have taken down inventory in the Headwater segments because we've now kind of reached stability. There's an opportunity for greater coordination between the manufacturing segment and the Headwater distribution segment. So we're able to take those inventories down. So what that does, though, is an optics point of view, is for the water segment - and John can get the numbers - is it reduces the reporting of the water segment results in the quarter. So we feel very confident about the end markets.

We'd say that I mean, the market's been pretty much kind of flattest through the year from what we see. It was a pretty long, cool, wet, and generally, I mean, there were pockets of dryness that drove some sales in the areas of the country, but it was a pretty modest year from a requirements point of view. So we see that we're encouraged by the increase and continued increase in sales of Franklin product, both with third parties and then through the Headwater distribution segment. As to your question about Hurricane Florence, we shut down 4 branches with Florence for up to 2 weeks.

We didn't have power. Certainly, that's going to have some impact. We've got over 50 branches, but that's going to have some modest impact. Typically, you'll see some recovery in the next quarter because people are going to be repairing systems and so on. So that was it. I don't want to overplay. It was an event in the quarter. We're glad that nobody was hurt. We didn't have any damage to our business, but we just couldn't get to them and get them operating because of lack of electric power to the sites for a period of time.

John Haines (CFO)

Yeah, Matt. Just a couple of numbers to what Gregg just said. The sales from water systems in North America to Headwater in the third quarter were down over 30%. So recall that last year in the third quarter, Headwater was out in this full-on effort to replace other pump OEMs' products with Franklin products. So that demand for Franklin product because of that replacement phenomena was happening in a large way in last year's third quarter. In this year's third quarter, as Gregg's saying, that has stabilized, right? The replacement that it's going to happen has effectively happened.

Now Headwater is able to step back and say, "Okay, how do we manage this supply chain?" Headwater and Franklin are able to step back and say, "How do we manage this supply chain more effectively?" It does no good to transfer inventory to Headwater from Water Systems and then have that inventory set at Headwater. It only does good when it's sold on through to the end market. The other point, as we mentioned, is the organic growth in Headwater in the quarter was 2%. So yeah, we'd like it to be higher. We think it can be higher. But in light of the storms and the hurricanes and in light of the third quarter last year, we think that that's a respectable achievement, and there's a win in that in and of itself.

Matt Summerville (Managing Director)

That color is very helpful. Thanks, guys.

John Haines (CFO)

Thank you, Matt.

Operator (participant)

We have no further questions at this time. I will now turn the call back to Mr. Greggg Sengstack for his closing remarks.

Gregg Sengstack (Chairman and CEO)

We thank you for participating in our third-quarter conference call. We look forward to speaking to you after the end of the year on our fourth quarter and full-year 2018 results. Have a great weekend.

Operator (participant)

Ladies and gentlemen, this concludes today's conference. Thank you for participation. Have a wonderful day. You may.