Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to find didn't electric reports first quarter 2020 sales and earnings conference call. At this time all participants are in listen only mode. After the speakers presentation they'll be a question and answer session.
A question during this session you only supposed to start into one key on you touched on telephone. Please be advised that today's conference is being recorded.
He would cooperate systems. Please press star then.
I'll now turn the conference or what your speaker today.
John Haines, Chief Financial Officer Franklin Electric. Please go ahead Sir.
Thank you Libya and welcome everyone to Franklin Electrics first quarter 2020, <unk> earnings Conference call with me today, as Gregg Sengstack, our chairman and CEO.
Today's call Greg will review, our first quarter business results in the impact our company is experiencing from the global pandemic.
I will review our first quarter financial results were not through we'll have time for questions and answers.
Before we begin I'd love to remind you that as we conduct this call will be making forward looking statements within the meaning of the private Securities Litigation Reform Act of 1990 bought these statements are subject to various risk and uncertainties. Many awards could cause actual results to differ materially from such forward looking.
Statements.
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 its itself.
That's required by law the company assumes no obligation to update any forward looking statement.
Well now turn the call over to our chairman and CEO Greg. Thanks.
Thank you John Thank you all for joining.
Good morning, I'm going to cover four topics in my prepared remarks.
I would like to address the health status from <unk>.
I will review the results for first quarter.
Third I will review the current status.
And for New York current thinking about how we see our business for the balance of the or.
So first to satisfy them please help.
We continue to monitor each of our facilities.
Used to say that we've experienced a few cobot related employee health issue today.
Our global potash supply leadership and facilities teams have done a great job running social business.
And proven industrial hiking processes, all we keep our people say.
You're following the evolving I want you must center for disease control, the C.D.C. and other global health authorities and are continuing to provide additional personal protective equipment or PT for our people where recommended.
In accordance with the U.S. cyber security infrastructure Security Agency guidelines.
As well as similar guideline I wish my other governments around the world.
That's a framework manufactures and distributes are considered critical.
Our workers essential to support our world infrastructure.
Therefore were possible frankly, what remained open.
I will now review the first quarter 2020 results.
Our first quarter results were better than our expectation.
Our manufacturing revenues were down double digits improved mix margins and reduced operating expenses produced an improvement in our operating income that was higher than our expectation.
With more normal weather our distribution revenue was ahead of expectation and results better than last year.
Overall operating income before restructuring expenses was up 11%, an 8% lower sales.
And our earnings for sure before restructuring expenses increased 14% versus the first were 29 team.
In the first quarter, our water systems revenue declined organically.
These pumps are also used in mining municipal and other industrial applications.
One of the watering pump sales was the primary factor leading to the sale decline our newest in Canada water.
This is going well.
Groundwater equipment sales in the U.S. and Canada increased in the quarter.
Outside the U.S. in Canada water systems organic sales declined modestly.
Organic growth in both Latin America and EMEA. So this was not enough to offset the sales decline in Asia Pacific for our results in Korea, Japan, and China for all at least partially impacted by the whole pent up.
Doing business revenue declined on a quarter was slightly more than we'd expected.
This continued to grow in U.S., but that growth could not offset the anticipated decline in sales in China and weak sales in the rest of Asia outside of China. We believe these declines were impart due to global and domestic.
Headwater, our U.S. groundwater distribution business delivered strong results across the country with sales up double digits over the first quarter last year.
During the quarter on a consolidated basis, we continued our focus on reduction of working capital.
Ratio working capital for the trailing 12 month, that's still true on the first quarter last year.
[laughter] now, let's talk about what's on everyone's mind, our current situation and now.
Nationally our company the strong.
Six months ago, some potential investors expressed concern Franklin was under Levered.
Six weeks ago, we were complement for having a conservative balance sheet, John will share more details on our liquidity in a few minutes.
Over the last six weeks, we've had facility shut down for various period of time.
Ranging from a couple of facilities, having been close for a couple of days to clean potentially contaminate areas.
Several weeks as was the case purpose always in South Africa and India.
These two locations account for about 3% or.
Two and three weeks respectively.
Two apartment in Brazil pose for 10 days.
Other friends with distribution facility in South America have been impacted by state mandated temporary closure.
Our personal manufacturing facilities in China, UK, Czech Republic, Mexico, Oklahoma, and Wisconsin have continued to operate throughout this time uninterrupted.
Our product supply team has done a great job keeping them thrill flow flowing through our factories and to our customers.
We are working proactively with suppliers and help them through material or labor disruption.
We have relocated or chain sources in some cases, and we'll continue to look for longer term opportunities to improve quality delivery and cost more supply there.
As we speak this morning, our manufacturing facilities, our operating and none of the temporary closure as I mentioned hasn't really impacted our ability to serve our customers.
We are continuously assessing our end market to determine changes in demand pattern and our customers behaviors or Miss assessment, we have determined that at this moment. There are four major impacts from the pandemic it will negatively impact our financial outlook for 2020 as follows.
In water systems demand for a large you watering homes sold into a variety of industrial applications will diminish.
This is a large part due to seal that's equivalent to rental company to support oil and gas production, primarily in North America.
Even with our efforts to grow where dewatering pump sales from geographic channel and end market diversification, we still have a larger lights on sales of new and replacement to pump rental companies.
As we've seen historically this is one most cyclical terrorism or walking systems business.
Also in water systems, and consistent with what we experienced in the financial crisis of 2008, 2009, we see our customers significantly reduced purchases from their suppliers to bring down their existing inventory response from the uncertainty of future demand and to preserve cash.
As has been notified men. This pandemic downturn is very different than the financial crisis downturn 10 years ago, and the reason for that customer behavior may be different but the actual pardon me to say.
Periods of uncertain are uneven demand, our distributor customers will curtailed or purchases and rely more on us to carry inventory for that.
We see this is particularly true with our large customers five surface pumping equipment for wholesale and retail distribution into a lesser extent in our groundwater channel.
The third area of end market disruption as an are fueling systems segment.
With reduced driving and the commensurate reduction of store traffic in the United States.
You're being notified by several large C store marketers that their plans for new stations old and upgrades are being deferred or canceled outright.
It's too soon to estimate the size and timing of this development and want to recovery may take place.
Additionally, although we see some signs of recovery in our Q1 revenues in China, We knew 2020 would already be addressing a transitional year between regulatory mandates. There. So we're cautious about leaving China or any other global markets offset the impact we are seeing in North America.
Finally, the strengthening of U.S. dollar versus many global currency hurt our translation of foreign denominated sales and earnings.
I will give more details on those minimal.
No. These specific end markets considerations the company may experience other negative impact to profitability from various government mandated closures that broadly affected distribution delivery and installation of the company's products last operational efficiencies and deliver you leveraging of our manufacturing fixed cost base.
And the financial stress our customers that may impact certainly yes.
Because negative impacts reducing spending across the entire company accelerating restructuring activities.
Well for we May take additional actions as we can prudently balancing the short and long term needs.
In terms of what we're currently seeing from mid March through last week. The decline in weekly sales in the last week last in the same week last year for both our water and fuel system has averaged about 20%.
Our U.S. groundwater distribution Didnt have more is our best sport indicator what is happening in an important and mark.
Since mid March through last we have water sales are down about 4% the same period last year. However.
When you exclude the states that are most significantly impacted by the stay at home or California, Michigan in Washington, The last six we still have had water were about 6% higher the same period 2019.
Our had worked hand remain bullish on the U.S. and marketing service continues report the demand for our products and well drilling services as general is high even though we're seeing some delays and the completion of those services.
In closing I want to stress two points first our people our greatest strengths are proving once again, what Frank will occur in such a great company. So despite the unprecedented and rapidly evolving environment, where and I remain confident our company's ability to serve our customers and meet whatever marketplace man face.
Second given significant uncertainties and our end markets and impacts of the goal and I like that we have outlined here. We are withdrawing our 2020 earnings guidance at this time, we will revisit the subject of guidance after the second quarter.
I'll now turn the call back over to John John Thank you Greg.
Our fully diluted earnings per share were 23 cents for the first quarter of 2020 versus 19 cents for the first quarter 2019 first quarter earnings per share before the impact of restructuring expenses was 24 cents compared to 29 team first quarter NPS before restructuring of 21.
Inside.
Restructuring expenses in the first quarter 2000, 21.9 million and were related various manufacturing branch realignment activities in all three segments and resulted in a one cents impact on earnings per share in the first quarter 2020.
Restructuring expenses in the first quarter 2019 were 1.1 million resulted in two cents impact on earnings per share in the first quarter of 29 team.
First quarter 2020 sales were 266.8 million compared to 29 team first quarter sales of 290.7, a decrease of 8% sales revenue decreased by 8.1 million or about 3% in the first quarter 2020 due to foreign currency.
Translation.
Water systems sales in the U.S. and Canada decreased by 14% overall compared to the first quarter 2019, primarily due to lower sales of dewatering equipment sales of watering equipment decrease by nearly 54% due to lower sales rental channel and substantial uncertainty in oil.
Production markets.
Sales of groundwater pumping equipment increased by 2% versus the first quarter 29 King.
Sales of surface pumping equipment decreased by 14% on lower sales, both waste water and water transfer systems of customers. In this channel began to feel the impact of the global pandemic and start to lower their inventory levels.
Water systems sales in markets outside the U.S. in Canada, the decreased by 11% overall foreign currency translation decreased sales by 9%.
Strong organic growth in Latin America in AMEA was not enough to offset declines in Asia Pacific, Most notably in Korea, Japan, and China, where customers felt the impact of global and damage.
Water systems operating income was $18.8 million into first quarter of 2020 compared to 19.4 million in the first quarter 2019, primarily driven by lower revenues.
Viewing system sales of U.S. in Canada increased by 7% compared to the first quarter 29, <unk> increase was principally in piping pumping and fuel management systems product lines outside the U.S. in Canada fueling systems revenues revenues declined by 30 per se.
Driven by lower sales in Asia Pacific, primarily China, which had a 70% decline in sales.
Viewing systems operating income was 12.1 million in the first quarter 2000.
20, compared to 12.3 million in the first quarter 20.
Distribution sales were 60.4 million in the first quarter 2020 versus first quarter 2019 sales of 3.3 million.
Distribution segment organic sales increased 13% compared to the first quarter, pointing 19 more favorable weather conditions versus the first quarter last year contributed to the revenue growth.
The distribution segment recorded an operating loss of 2.2 million in first quarter point warning compared to a loss of 4.3 million in the first quarter of 29 team primarily as a result apart revenue.
The company's consolidated gross profit was 90.3 million for the first quarter 2020, an increase from the first quarter 2019 gross profit of 89.5 [laughter].
The gross profit as a percent of that sales, 33.9% in the first quarter 2020 versus 30.8% in the first quarter of 2019.
Selling general and administrative expenses were 75.6 million in the first quarter 2020, compared to 76.3 million in the first quarter of 2019.
Asking expenses in the first quarter 2020 were lower in part due to the offsetting effect a foreign currency translation versus the prior year lower variable compensation and companywide efforts to lower spending in response to the pending impacts of the global pandemic.
[noise] in the first quarter 2020, and 29 team our effective tax rate net of discrete events was about 19%.
Oh from about 14% in the first quarter.
Excuse me.
Good morning Nike.
Due to the [laughter].
Due to the non recurrence of favorable discrete items last year.
Our 2020 effective tax rate net of discrete events should be between 18, 20% and consistent.
With the original financial.
The company ended the first quarter 2020, where the cash balance of $40 million in had total available borrowing capacity of 478 million.
Also the ended the quarter the company's primary borrowing covenant ratio of net debt to trailing 12 month pro forma EBITDA was <unk> 0.63 versus the women of 3.5.
The company's trailing 12 month pro forma EBITDA would have to fall from our current EBITDA.
167 million to 30 million to breach this covenant at existing no doubt levels.
The company believes that have enough liquidity to meet its operating and Caftwo requirements.
Some additional Bob to follow up on Greg's comments regarding the impact from the global pandemic.
Due to the economic uncertainty created by the pandemic, we are withdrawing our 2020 revenue and earnings guidance into at least you ended the second quarter as Greg outlined in his comments are simply too many moving pieces right now with two why a range of possible outcome to give us a reasonable level confidence regarding.
<unk> revenue growth and therefore our earnings.
The strengthening U.S. dollar will negatively impact the translational foreign currency denominated sales and earnings beyond our original estimate right now we think the foreign exchange impact on water systems sales will be between four and 5% and previewing systems to be.
Less than 1%.
Despite the uncertainty the pandemic creates related to our top and bottom lines. We still believe we will achieve a 2024 your cash.
Cash flow conversion of over 100% of net income.
We estimate that the capital expenditures for 2020 will now be in the 20 million dollar range versus $30 million provided in our original financial guidance.
Yesterday, the company announced a quarterly cash dividend of 50.5 cents that will be paid may 21st to shareholders of record on record on May seven.
The company have no intention of spending 2020 dividend payments after thus far.
The company purchased 322000 shares of common stock for 15.2 million in the open market during the first quarter 2020.
At the end of the first quarter 2020, the total remaining authorized shares that may be read repurchases about 934 about.
The company May continue to repurchase shares in the open market this year.
This concludes our prepared remarks, and we would now like to turn the call over for questions.
Ladies and gentlemen, just a question on the phone line, you'll need to first to start into one key on you touched on telephone to withdraw your question. Please press the pound key.
Please standby mode, the combined to Kenny roster.
Yes, Livia, we're ready to begin the question answer session. Thank you.
Our first question coming some decline of Mike Halloran from Baird. Your line is house.
Hey, good morning, gentlemen.
Right.
So so maybe just talk a little bit about the difference in trends you're seeing between had water in call your core water assets.
In the down, 4%, Im seeing and Tidewater and ins and positive actually affect the more heavily affected regions.
That's quite a difference between you know if you if we're assuming that the cold water business is plus or minus that 20% you referenced that is that spread just you think the inventory correction or do you think there's something else going on there.
Well I will answer that in two parts are first Mike I'll talk a little bit about just the global groundwater business I think.
On the incoming orders.
So yeah, there's again at a high replacement factor in groundwater the weather conditions are better this year and certainly we're seeing that that go through the end water data. We're also seeing I mean, you're pulled up reasonably wallet and EMEA generally.
South Americas, holding up Okay, I guess that slowdown a little bit here and we're seeing a recovery in the Asia Pacific region.
Relative to water space. That's a date your point the de stocking or the negative order rates there were seen particularly now a year and early to second quarter late in the first or what kind of centered more around again, the pioneer numbers are large water it as well as the is what we call the plumbing wholesale channel.
Where you can see more variation a inventory balances are saunas, yes in buying groups larger customers or not so much of the war shale jogging isn't worth analytics.
Yeah, Mike I guess the aren't the only thing I would add to that is is that as you saw headwater had a really nice growth.
In the first quarter and that business you that has a lot of momentum.
And.
You know what we're well what we're encouraged by is.
That sales growth and and some of the inroads that made in certain markets pre pandemic.
Two in the western part of the United States was strong Dxi was strong in the south eastern part of the United States.
The caution right now of course is is that with the government mandated shutdowns, it's hard to see what what that may due to their topline and as we pointed out when you take away. The three states that are affecting.
Asked most from a government mandated shutdown, California, Michigan in Washington, All important states for the headwater business.
The growth.
Trajectory from mid March to now is very different than what it is for the total headwater. So.
You know that we you know they were also good start we we thought and still think good headwaters going to have a.
Good 20 Twond.
So sort of like for like products between your water system that business and then what would sell through the head water channel what are those like for like products tracking at right now it is towards that 20% or those tracking a little bit better from pure equipment sale perspective.
Within water systems.
Mike So as I understand the question is that are we seeing that groundwater products that would go through that had water business are we seeing similar.
A full through to our other distributor customers in the groundwork handle the answer is yes, the the fall off and we're seeing a beyond the large you arent pumps, which has been is kind of go back to the a and 14 15 time it mostly in the plumbing wholesale channel which are surface pumps.
You think some pumps thing.
Aethlon pumps that that type of product, which is which goes through really principally through a separate channel for the plumbing Joe.
And then how are you thinking but decremental margins here.
Margin performance in the quarter royalty revenue levels I'm sustainability of that in any delineation fly by segment would be helpful.
Yeah, we are ready to comment on decremental margins, Mike as you point out we've got a nice margin period in the first quarter. We think a lot of that is going to carry forward into the second then.
Second quarter, and the balance of the year, namely price achievement and lower raw material input costs.
Things were looking at of course are the the operational efficiency inefficiencies that may arise from.
Lower inputs into the plants lost leverage on fixed manufacturing costs those are.
The price achievement and the momentum we had.
On the raw material input side in the first quarter, we expect will continue.
I appreciate it touching the time John Greg.
Thank you Mike.
Next question coming from the line of Edward Marshall from Sidoti and company. Your line is now open.
Hey, Greg John how are you hope you're doing well your families et cetera.
Make sense, India morning, I Oh.
Well, if I should get yeah glass or water is John.
Yes.
Throughout the whole model down.
Thank you all right.
So you touched on decremental margin briefly I guess on water.
I wanted to look at fueling and I wanted to kind of go back so nine and and I think we had some discussion about this already but as you look at that.
There was a pretty happy decremental margin and El Nio event is that something that we should be thinking about this time around as you are fueling business kind of starts to slow just any color you could provide them.
Yeah, I think there is there's several things that are different.
From that last downturn, one is solid global businesses more global than than it was and the reliance in that in that period on the California vapor recovery.
So again.
Yeah, the comment on purely margins really really aren't that different and water really nice price achievement in the first quarter.
What we can hang on to that lower raw material input costs.
We think that trend generally will continue.
We are of course concerned about what we are.
Our hearing in the U.S. market you know the U.S. has been a pretty consistent source of growth for our fueling business. So the same kind of concerns loss operational efficiencies about volume goes down last manufacturing leverage I'm on our fixed cost base, but.
You know are generally we would say that there's still more margin momentum and positive on the feeling side than there than there is negative right now.
Got it.
If I can look at the de watering portion of the business some water and maybe you can break out for me what the North America energy sales was as a percent of revenue for 19, and what I'm, what I'm, specifically looking at as maybe the cadence for through the quarter, specifically how did March look versus January and February and then maybe if you could talk about the trends.
But you're seeing so far in April.
And that dewatering business.
Yeah the.
Just to two to put some in sport numbers out there our total pioneer business in 2019 was about 108 million dollar topline.
In the first quarter.
And that business declined by about $13 million as we expected it to so pioneer was largely on our first quarter expectations and that is primarily the result of large customers who are in the rental channel notifying us that they were deferring.
Delivery of equipment that had been on order in had been produced for them.
Now we think as you go through the quarter that things got a little bit worse in terms of that outlook, especially for the through fourth quarters because of what was going on in the oil base as you'll recall we.
We think a lot of this equipment that go through rental companies ultimately ends up in some type of an oil and gas exploration type of application. So you know as we were talking about where as we were talking in January and February about what was happening to the water equipment, we were basically.
Yeah. This is kind of what we expected to happen as we got the March.
Dan It started to incrementally get worse and that uncertainty is one of the kind of the big for that Greg talked about as creating uncertainty in our financial outlook for the balance of the year.
Got it and did you say that should be up that have that decline and water how much how much do you anticipate pioneer could potentially be down.
Year to here as we move into two kids.
Well were if it will be down.
Into Q as well, but we're not we're not putting a boundaries on those estimates right right now add just because there's there's too much uncertainty what I can tell you in our original plan was is that there would be the pretty significant drop in the first quarter a more narrow drop in the second.
Order and then growth starting in the third and fourth quarter. So that's what that was our original thinking and now we now that original thinking is of course disrupted so.
I think the best we can say is that if it was kind of on our original LP in that are operating plan in the first quarter was about 108 million in total last year of the idea that are they all added that of the 20% that Greg talked about water revenues being down if you pull.
Pioneer out of that for that same period you'd be about 15%. So it's it's a meaningful driver what's going on what we currently see going on.
Got it got it okay.
You mentioned the dividends. Thanks for thanks for the support there I'm curious you mentioned also buybacks in that and that conversation I mean, when you think about cash do you think that that the buyback is something that you will continue to do throughout this year have you kind of thought about delaying that's it may be conserve cash.
For the dividend et cetera, or you think about your capital deployment things yeah, the capital deployment.
View hasn't changed dramatically.
As I mentioned, we're going to dial back the capex.
A little bit from 32 to 20 million the the thinking on repurchases.
It is kinda two parts as you've heard in the past. The first part is to try to offset the dilution of equity awards that we make that number's probably in the 300 to 350000 share range annually, which is where we were the first quarter. So we kind of done that.
The second part is related to opportunistic buying that we will do based on our viewable for multiple now that you've got.
Got it disrupted very significantly here, but the short answer is that yeah, we'll remain opportunistic around share repurchases and if we see that that makes sense.
During the course of the year, we'll we'll continue to do that but like I said, we we bought the dilution impact already in the first quarter. So that that need is it's gone.
Our primary our primary.
A use of cash we'll continue to be accretive acquisitions, we continue to look and manage our pipeline. The way we always have look at and manage our pipelines way. We've always had as I mentioned, we don't think the dividend.
We'll change we have a quite a bit of liquidity quite a bit of a debt capacity should we should we need that and then the final thing I would say is that we made tremendous progress on working capital in the first quarter now that's going to change we get that.
Inventory levels, they are levels, what happens to our customers stress on our customer all those things are of course on our mine, but theres a lot of momentum and there's lot of initiatives inside our company right now to continue to improve working capital. So we think that that should continue to be a source drive.
Source of cash from operations long winded answer, but that's that's kind of the totality of how we're thinking about.
Others follow up with what John's comment and as we have a balance sheet that we can use strategically.
Certainly buybacks is one strategy, but accretive acquisitions is the first one and as you think about companies going through this situation and dynamic.
And it's going to create opportunities and so we want to be prepared those opportunities.
And use our algae thoughtfully as we move through this pandemic issue and challenge.
Just just to be clear with what you're saying, you're you're trying to save.
Your dry powder for the opportunity that you may see is there any particular market in water fueling de watering, even headwater, what where do you think investors.
As we've discussed.
Yeah, we don't formerly allocated capital that any individual segment or or business or geography, we oh, we have a pipeline of deals we continue to a culture cultivate a opportunities and yes, because we often by the company from family businesses.
Or family businesses from individuals as timings more on their end that arent.
So we will continue to work that way.
Okay.
Appreciate it guys. Thank you.
Good.
Our next question coming from the line of Ryan Connors Ben.
Your line is open.
Great. Thanks for taking my question Hope you guys are well.
Thanks.
Good morning.
Yeah I wanted to go back to kind of the first question you've got there and appreciate the comments on headwaters and the relative resiliency there being a good forward indicator, but just to take a big picture view of that I think whats interesting about this downturn it hits so fast.
That we kind of have a bit of suspended animation and some of those later cycle project driven markets, where stuff that was funded a approved in under way has continued but the the concern is what about the next round of projects that are trying to get funded and approved now and what does that mean for demand not this year.
2021, So you do serve a lot of those later cycle project driven markets, you're cutting capex a lot. Other people are cutting capex, what's your big picture view, obviously more qualitative but you know what's your big picture view of those later cycle markets into you know as we go beyond corridors and start talking them.
Into into you know 12 months out.
Yeah, right. There are a number of letters and the out of that able to using ascribed to the current situation.
And you can pick your own letter for each each market as you said shoes, I would make the observation or water space and as that we often talk about our groundwater business, which is about half of our water revenue is a very high replacement market.
And frankly, I know with call it half of our business there as residential call it 30% AG, which has been kind of bump on the bottom for several years now.
And then you have the more industrial or commercial project type business, you'd say would as David balance of that so I think as you think through qualitatively the business.
Demand for water doesn't really go away or we have been.
Looking to grow the business in the commercial industrial segments, but more with the largely watering pot lines, a leading and of course, the the commercial lines are complimentary to that in case of mining amount and indication some industrial application, but mostly in the mining space.
And then the.
Recovery of raw materials, so, yes, I'm sure that projects delayed well it will have some impact on our business topline are going out as you pointed out, but we're seeing that impact that they can the large watering surface pumps and we are.
In the summer [noise].
Okay.
And then my other question was on on this issue inventory de stocking and distributors, who knows that increasing your own working capital needs in terms of you being forced to carry more inventory coming up you know or sort of and there's been some discussion on other calls about manufactures you know trying to.
Not become the bank that's got to become the inventory holder of default I mean, whats how is that a responsibility shifting up and down that.
The supply chain.
Yeah. So yeah, we are being the bank.
On one level or is it something I guess you want to avoid I've ever had been a bank. When you have critical supply chain relationships, both up and now supply chain is where you have competitive advantage. So we're going to.
Work hard in the latter try to avoid some of the former and that's kind of we think more the inventory swings tend to be again more in the plumbing HB Hvdc channel. There. We also had been Simon relationships with our suppliers. So we'll be taking some risks they'll be taking some risk as we as we navigate through that.
As it is reversal business, yeah, given that we're really the world leader of that product line. We are effectively are the bank and that's okay.
It's a high rate, it's a high margin products.
Just a little replacement product you need to have it on the shelf when people needed. So they are willing to invest.
Okay and.
And then in terms of just a follow on for that as it relates to headwaters I mean, it's had where is able to if that's a broader trends that.
Quid well financially position manufactures like yourself are able to to play that role is that something headwaters will benefit from that that that maybe inventory needs within the channel will dissipate a little bit.
Yeah I understand you think you look at a couple ways one is that headwater, having access to Franklin's capital base.
Has the ability to yeah finance their inventory and a good way the flip side of that is that now we have high water up on one ERP system in Franklin essentially a one ERP system, our ability to see true end to end is getting greater so our ability to optimize supply chain with their relationship with have water.
He is going to only improve with time, so that would be at an opportunity actually take inventory out of.
The relationship so we've seen a actually a modest reduction in headwaters inventory on hand, a in the first quarters compared to last year, even though with their sales that up so it's an indication that inventory management is growing and it's up in our ability to do it more effectively between Franklin and have more.
Got it very helpful. Thanks for your time guys.
Thank you Ryan Thanks Huh.
Our next question coming from July now Walter Liptak with Seaport. Your line is something.
Hi, Thanks, Good morning, guys.
Good morning wall.
I got on the call little bit late insight I just wanted to ask the April question.
Has have you quantified how much or the revenue is going down in April.
Yeah, well, what we what we said Walt was that when you look at our water systems in our fueling systems segment.
And you look at revenue compared to the same period last year.
Its down about 20% for the last six for the last six weeks right. So six weeks from mid March to the end of last week.
Viewing and watered down about 20% headed water for the same analysis for the same period is down about 4%.
But we also made the point that.
When you exclude from that analysis. The states that are most impacted by the government mandated shutdowns or stay at home orders bit, California, Michigan in Washington.
It's actually up 6% so.
For that same period of time, so that we know that that is impacting our head water business. It's it's more difficult to assess how that's impacting the other businesses, but it's clearly a factor. So yeah last six we look I think yeah.
Okay, Yeah, thanks for repeating that for me.
So the.
Additionally, you have to China into Italy to some of these countries that have started to open up for business again have you seen demand trends improve there or.
Are we just down at the bottom a there.
Yeah.
If you missed a couple a earlier remarks C.
In China, or I'd say Asia Pacific more broadly in our water space, we're seeing that returning to normal or part of the decline we had the first quarter frankly, as our own a supply chain interruption that was about $3 million a of product that we didn't get it right places right time.
The balance was the decline, we saw and principally in Japan Korea and China.
China's reopened as back near normal we are seeing are fueling business in China began a tick up well that's encouraging how much it ticks up and how big it becomes that's unknown at this point, China still pretty opaque in that respect.
The interesting thing in Europe, we had a very good quarter in first quarter and an immediate generally some weakness in the near east where begin to feel some of that in Turkey, right. Now is turkeys kind of going through a the growth in colder 19 cases.
And we've seen demand hold up in Europe, and and April so AMEA seems to be doing okay, and we mentioned earlier that.
South America is maybe not quite as strong as Europe is doing okay, as well, but maybe not an okay homes to bust.
Okay, great right I'll try to ask something that maybe he hasn't been talks about yet the restructuring was less than a million dollars.
Comments about.
You know their cost structure I think in the press release or are you, making any changes to our to mitigate the the 20% slowdown that you're saying how are you looking after the costs going into second quarter.
Yeah, So we have.
A couple of primary thing, we're cutting discretionary spending throughout the company.
Walt as you as you might expect so this would be things like travel of course or other types of spending categories outside consulting whatever.
Discretionary categories. We think makes sense, we will go caught the principal restructuring activities are going on in the company right now our consolidations of facilities in North America one.
From a little rock too.
Oklahoma City, and then one in the Portland area, Greater Portland area, where we've got a couple facilities. So we are accelerating those restructuring initiatives, making them happen. Soon they were kind of second half fourth quarter type initiatives originally were going to access.
All right.
And then we're looking at and considering a number of other cost out or cost reduction type of opportunities, but we're not ready to comment on those right now until we are fully committed to them and we've had an appropriate communication on what they are with our.
With our leadership in employee teams.
Okay. Okay. Thanks, very much guys.
Our next question coming from the line of Matt Summerville from D.A. Davidson. Your line is now open.
Thanks, Hey, guys wanted Monday that.
Yeah. Good morning. Thank you wanted to ask about maybe a little bit of color in the U.S., Canada water in the first quarter. What you saw in AG versus residential when if there's any context you can provide around those two markets as it pertains to kind of the trailing 12 week number you mentioned.
Yes, the the.
The groundwater sales were up in the U.S. about 2%.
That was more residential driven and focus then AG focused our view of AG is.
Remains not very positive.
Matt given all the things that were happening even before the pandemic, there's not a lot of differentiation in the 20% that we mentioned.
Between a product line. So you know we would say that that's a of course, that's across the board, but I'm not sure. There's a lot of distinction in that between.
Residential and.
That is distinction between groundwater and what we call surface water yeah, yeah more of a 27 is driven by the surface.
Impacts that that we've been discussing but.
In terms of groundwater not not a lot of the sanction.
Got it and then I guess with respect to.
Inventories coming down in that channel you mentioned sort of.
The plumbing wholesale side of things as it pertains to the other surface category. How far do you think we are into that inventory take down and then similarly groundwater are you seem to same type of behavior and then I'll get asked the same question how far into that process. Do you think we are at this point.
I'll take easier on the ground water one.
Under the <unk> and the groundwater space.
Our coming into the season and so.
I would say that we qualitatively.
A couple of our larger distributors were a little hesitant about taking down inventory towards the end of Q O Q1.
But ultimately that's going to pass through so I'd say that now there were a few weeks away from kind of the market breaking it it's kind of somewhere in may things really start picking up.
And as we see lifting of.
Somebody's Dan on orders and a couple of state you pointed out I would expect that to be somewhat of a have a net positive as well I yeah as to the.
You know the the served the surface business, you know kind of water transfer products. The affluent products. Some pump product. It has not been quite a large as large we never ran events, we had last year, which impacted that end demand.
And it becomes a little less clear as the replacement cycle the ability for polymer as you get access to homes all like.
Helmerich, obviously more funds all the social distance, but the ability for people to do that kind of product here again, it's such a large replacement market for sub pump was out you need to replace it.
Here's a balloon pump without any replacement so uh huh.
But it's hard for me.
John I think the speculate kind of where we are in the second I'll, let John once you got something else wash or yeah, I think the way I would add there is the point that we had some large customers not that didnt have the weather events that they expected to have in the first quarter and that probably is causing them to carry a little more inventory.
And then the second point is when you look at some history here.
We do think that these type of de stocking impacts are fairly quick and and we would expect the bulk of that to happen in the second quarter more of a V shape, yeah, but but again, Greg we're speculating here a bit so, but but they're there there was some.
Coming into the second quarter higher inventories to start with just because the weather wasn't quite what some of these folks expected it today.
Got it and then just two other quick ones how much of a hit you expect based on where exchange rates are John to E. P. S. In 2020, and then what was your average realized prices in Q1 year over year. Thank you.
Yeah, so only on the yet on the on the realized price in Q1.
Matt in the water systems segment. It was just over 200 basis points and feeling systems that was just over 350.
Basis points so.
Nice price realization.
As I mentioned in terms of FX. When we started the year that we were thinking that water would be somewhere in the point in a half range, maybe 150 basis points.
And fueling is is a lot less than that because we're doing business in U.S. dollar frequently in ER in our fueling business. So call. It maybe 50 to 70 basis points and fueling.
Right now when we looked at 2020 that water number might be between four and 500 basis points.
Just when you consider current spot rates, so that is pretty meaningful difference than the 150 that we had been assuming feeling it will be less maybe maybe 1% probably still less than than 1%. So you can.
You can kind of work that through that different through on the variable margins and in impacts, but that's kind of what we're expecting right now relative to a FX.
Got it thank you guys.
Im showing no further questions at this time I would now like to turn the call back over to Mr., Greg Thanks, Doug for closing remarks.
Thank you would add a we live in interesting times the.
Which everyone on the call to the against Asap Safe look forward to reviewing our second quarter with you all probably in late July until then take care.
Ladies and gentlemen that does conclude conference for today. Thank you for your participation you may now disconnect.
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