John Haines - CFO Gregg Sengstack - Chairman and CEO Robert Stone - SVP and President, International Water Systems.

Mike Halloran - Robert W. Baird Edward Marshall - Sidoti & Company Ryan Connors - Boenning & Scattergood Matt Summerville - D. A. Davidson Walter Liptak - Seaport Global.

Good day, ladies and gentlemen, and welcome to the Franklin Electric Reports Second Quarter 2018 Sales and Earnings Conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this call will be recorded.

I would now like to introduce your host for today's conference, Mr. John Haines, Chief Financial Officer. You may begin..

Thank you, Catharine, and welcome everyone to Franklin Electric's second quarter 2018 earnings conference call. With me today are Gregg Sengstack, our Chairman and Chief Executive Officer; and Robert Stone, our Senior Vice President and President of our International Water Systems Unit.

On today's call, Gregg will review our second quarter business results, and I'll review our second quarter financial results. When we're 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 as except as required by law, the company assumes no obligation to update any forward-looking statements.

With that, I will now turn the call over to our Chairman and CEO, Gregg Sengstack..

Thank you, John. Overall, our second quarter results were strong. Our Water Systems units in the U.S. and Canada grew organically by about 12%, and our Fueling Systems organic revenue growth was 18%. In Distribution, we continue to see revenue growth momentum, and overall results met our expectations for the quarter.

Our operating increase grew by almost 20% and our earnings per share before restructuring expenses and the non-operational gain we realized in the second quarter last year grew by 12%.

But second quarter results were however held back by considerable weakness in two key international Water Systems end markets, Asia-Pacific and Brazil, whose combined revenue declined over 20% versus the second quarter last year.

We estimate that this decline resulted in our second quarter earnings per share being about $0.07 lower than we had expected. Despite the international water market weakness, with the strength of our other businesses, we're maintaining our full-year earnings per share guidance. In the U.S.

and Canada Water Systems business, Pioneer-branded dewatering pump revenue was up over 70% from last year, now in pace with the first quarter of 2018. Groundwater Pumping Systems grew about 11% with strong sales gains through our Headwater distribution company and steady sales through the balance of our distribution network.

Other Surface Pumping Equipment revenue was flat. Outside the U.S., we again saw strong growth in Europe, the Middle East, and Africa, which similar to Q1, grew organically at about 7%. But this growth was not enough to offset continued weak demand in Asia-Pacific and Brazil.

In Asia-Pacific, our sales in Korea declined due to an overall slowdown in the economic environment and strong first quarter sales. And in Thailand, sales were adversely impacted by declines in government funding for water-related projects and by weather.

In Brazil, the impact of a prolonged trucking strike in the second quarter significantly hurt our ability to deliver product to our customers. Our Fueling Systems team delivered another record quarter. Revenue in the U.S. and Canada market was up 7% as the team continues to gain traction with major marketers in the North American market.

Internationally revenues were up over 40%. China continues to be the key growth engine of the country's mandated multi-year upgrade to the underground piping systems in retail gas stations is well underway.

As I mentioned in the last quarter, we expect this upgrade to add significant revenue and income to our fueling business over the next several years. Further, 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 10%. Turning to our Distribution segment, Headwater, second quarter revenue grew organically by 6%. The Headwater leadership team has nearly recovered all the lost revenue related to products purchased from former groundwater pump suppliers.

Through the first six months of 2018, Headwater performance is on plan. During the first week of July, we announced two acquisitions. The first acquisition was a product line of battery testing and monitoring equipment used in a variety of industries including telecom, datacenter, and electric utilities.

This product line will be added to our grid solutions business expanding our remote monitoring technology and capabilities. This product line has about $8 million in annual sales. The second acquisition, Industrias Rotor Pump, positions Franklin as a leading pump company in Argentina.

Franklin has been a supplier to Rotor Pump for more than three decades, and while Argentina has a volatile economy, it has a stable and growing pump industry supporting a large agricultural market. Industrias Rotor Pump has about $21 million of annual sales.

And if you look forward to the back-half of 2018, we remain encouraged by the momentum we have in our North American Water Systems end markets and in the global performance of Fueling Systems.

We expect our 2018 results for both business segments to be above our original expectations, and offset the low results in the water end markets of Asia-Pacific and Brazil. And we believe announced pricing actions will offset estimated inflation and tariffs in the second-half of 2018.

Therefore, our earnings per share guidance range is unchanged at $2.27 to $2.37 per share for this year. I will now turn the call over to John to discuss the numbers in more detail.

John?.

Thanks, Gregg. Our fully diluted earnings per share were $0.64 for the second quarter of 2018, versus $0.64 for the second quarter of 2017. Restructuring expenses were $0.6 million, and have a $0.01 impact on the earnings per share in the second quarter of 2018.

Second quarter 2018 sales were $344 million, compared to 2017 second quarter sales of $305.3 million, an increase of 13%. The sales increase was from acquired distribution entities as well as organic sales of about 9%. Foreign currency translations did not have a material impact on consolidated sales in the second quarter.

Water Systems sales were $210.4 million in the second quarter of 2018 versus the second quarter of 2017 sales of $198.3 million. Water Systems sales decreased about 1% in the quarter due to foreign currency translation. Water Systems organic sales increased about 7% compared to the second quarter of 2017.

Water Systems operating income was 32.3 million in the second quarter of 2018 compared to 32.8 million in the second quarter of 2017. The decline in operating income is due to lower revenue in Asia-Pacific and Brazil, higher raw material cost, and product sales mix shifts.

Fueling Systems sales were 74.1 million in the second quarter of 2018 versus the second quarter of 2017 sales of 61 million. Fueling Systems increased by about 3% due to foreign currency translation. Fueling Systems organic sales were up about 18% compared to the second quarter of 2017.

Fueling Systems operating income was 18.8 million in the second quarter of 2018 compared to 14.9 million in the second quarter of 2017. The increase in operating income is primarily related to higher sales. Distribution sales were 79.5 million in the second quarter of 2018 versus the second quarter of 2017 sales of 59.1 million.

Sales from businesses acquired since the second quarter of 2017 were 16.6 million. The Distribution segment organic sales increased about 6% compared with the second quarter of 2017. The Distribution segment operating income was 4 million in the second quarter of 2018 compared to 3.7 million in the second of 2017.

The increase in operating income was primarily related to the inclusion of more acquired entities, higher sales partially offset by higher operating expenses. The company's consolidated gross profit was 116.1 million for the second quarter of 2018, an increase from the second quarter of 2017 gross profit of 102.8 million.

The gross profit as a percent of net sales was 33.7% in both the second quarters of 2018 and 2017. The gross profit increase was primarily due to higher sales. In the second quarter, we believe achieved price actually -- basically offset inflation.

In the back-half of the year, we expect there to be about 250 to 300 basis points of achieved price in part due to announced pricing action, and that this achieved price will offset assumed inflation including tariffs.

Selling, general, and administrative expenses were $75 million in the second quarter of 2018 compared to the 68.2 million in the second quarter of the prior year. The increase in SG&A expenses from acquired businesses was 3.3 million.

Excluding the acquired entities, the company's SG&A expenses in the second quarter of 2018 were 71.7 million, an increase of about 5% from the second quarter of 2017, driven in part by a research and development spending.

As a reminder, the company's second quarter 2017 earnings include gain on the previously held equity investments in the three distribution entities acquired in the second quarter of 2017.

This gain included in other income in the company's income statement represented about $4.8 million of pretax earnings or about $0.06 cents of earnings per share last year. Consistent with our previous guidance, the company believes that full-year 2018 effective tax rate will about 15% on pretax earnings.

In the second quarter, the effective tax rate about 19% primarily due to the lower tax rate in the U.S. The second quarter of 2017 tax rate was also about 19% primarily due to discrete tax benefits released in that quarter.

The company ended the second quarter of 2018 with a cash balance of 70 million, which was about $3 million higher than at the end of 2017. The cash balance increase was attributable to higher borrowing and cash generated from operations of about $5 million.

An improvement of $70 million compared to the first-half of the prior year when cash used in operations was about $12 million. The company had $134 million in borrowing on its revolving debt facilities at the end of the second quarter of 2018, and $67 million in borrowing at year end 2017.

These borrowings were primarily to fund acquisitions and working capital needs. The company purchased about 46,000 share of its common stock for approximately $2 million in the open market during the second quarter of 2018. As of the end of the second quarter of 2018, the total remaining authorized shares that may be repurchased is about 1.9 million.

Yesterday the company announced a quarterly cash dividend of $0.12 consistent with the previously dividend amount. The dividend will be payable August 16th, to shareholders of record in August 2nd. This concludes our prepared remarks. And we'd now like to turn the call over for questions..

Thank you. [Operator Instructions] And our first question comes from Mike Halloran with Baird. Your line is open..

Hey, good morning guys..

Good morning..

Hi, Mike..

So, let's just start on the guidance and just make sure I understand the puts and takes here.

On the Brazil and China weakness, is the expectation that the run rate you saw in the second quarter, would that continues into the second-half of the year at this point?.

No, Mike. First of all, it's Brazil and specific markets within Asia-Pacific [indiscernible] which is China. Yes, it's Thailand and -- yes, Thailand and Korea. So no, our expectation is that we will not fully recover the miss in the second quarter. Having said that, we do think that there will be some recovery sequentially over the levels we saw.

So for example, in Korea, part of the issue in Korea is that our customers there are very sensitive to the overall economic environment to the strength of the U.S. dollar. We had a very strong first quarter in Korea. So, as you tend to see in that market, some ebb and flow up and down a bit.

We expect that we'll get some recovery in the back-half in Korea. In Brazil, as you've read about and we mentioned here this morning, this trucker strike was very impactful in the quarter. There certainly will be some recovery from that trucking strike.

We're not sure it will fully recover what we lost in the second quarter, but we kind of compare it a bit, Mike, to a major snowstorm when things kind of shutdown for a while, and then there's a period of recovery. The issue is we just didn't see that recovery in the second quarter.

Now the other thing that's on our mind in Brazil of course is there's a presidential election coming there. There's still a highly unsettled political environment and economic environment there. And those are part of our caution for the second half of the year..

That makes sense. And on the positive side, the strength you're seeing in the other pieces. On the Waterside North America it certainly feels like broad-based strength through the portfolio there.

Any change in the underlying trajectory there? Anything in the second quarter that you don't look at as sustainable, it doesn't feel that way, but just want to understand the trend going into the third quarter, particularly relative to any pricing actions if you're seeing any impact from that?.

Yes, Mike, we agree with your observation. We see the dewatering business continuing to be strong on the back of just the strong economy, strong oil prices, although we are systemically moving away from the oil, we're seeing broad-based demand for dewatering pumps, which we think will continue through the end of 2018 and beyond.

The groundwater business I'd say is steady. The weather conditions have been kind of mixed. We've had wet in the Southeast, it's been moderate in other parts of the country. You've seen recent articles about crop prices actually going down a little bit because the favorable weather conditions getting bigger crop yields.

And we see, kind of again in the mid-south and Texas has been dry, well-documented, we're seeing some good demand for our larger pumps there. But then you go the California and the Valley, business is kind of okay. We're not as big in the Valley because it's more line-shaft driven.

We're growing that business with Headwater, but the California market has been maybe a little down. So, the overall market in groundwater has been kind of flattish, but we don't see any reason that that's going to deteriorate; it may actually see a little bit of acceleration in the back-half.

And I'd say the rest of our pumping business, as you pointed out, has been pretty steady in North America. I'd also point out that in Europe, and Middle East, and Africa we again posted 7%. Robert's team there is continuing to do well. And it's a bit of pretty steady business.

And that's actually been an environment, Robert, where it's been not the world's best kind of weather or climate backdrop..

Correct..

Makes sense, and then last one from my side, just could you comment on the price cost side inflation capture with pricing actions and how you're thinking about that according to the back-half?.

Yes, so we have taken pricing action across the North America business units, the Fueling unit. And John can give you some more detail about our approach and where we see that falling out.

John?.

Yes, Mike, in the second quarter we think we were basically break even on price inflation all in the neighborhood of 200 basis points. So we had some nice price achievement, a sequential improvement in both Fueling and in Water Systems. But we're also starting to feel higher inflationary pressure.

So in total in the quarter we think that we basically achieved price to offset inflation. As we look at the back-half of the year we have even higher sequential inflation expectations. We also now have this new factor of tariffs on certain goods that we're bringing in from other countries.

So those are bad items, of course, from an inflation perspective. But as Gregg points out, we have announced price in our Water Systems business. We have price in Pioneer, we have price in Fueling, all of which are going to be back-half impactful. So our view right now is that we'll see price inflation somewhere in the 250 to 300 basis point range.

There's the possibility we could achieve more price than inflation. But how much of these sticks, the mix of business, individual customer impacts, there's a thousand variables that will come into play here, but that's our view of it right now..

Makes sense, great color. Thanks for the help guys..

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

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

Hey, Ed..

So I just wanted to follow up on that pricing discussion. Technically you get 200-300 basis points a year if I'm not mistaken.

Are you saying there's an additional 250 or 300 basis points of pricing that you're going to get in the second half in addition to your typical pricing increases?.

Well, no, what we're saying is that when we analyze inflation and inflation factors, Ed, and we analyzed our announced or already-in-affect price actions and those that will come into effect in the second half, and we boil all that down.

What we're saying is that in the back-half of the year we think inflation will be in the 250 to 300 basis point range over the prior year period. And we think that pricing will be in that same range. So our expectation is we're basically going to be neutral on price inflation in the second half like we were in the first half..

Got it..

Yes, so what -- just to the first part of your question, we have not seen, if you look over the last couple of years or eight quarters or so, necessarily reached -- getting to that full 200 basis points. We try to get price every year for sure, but that's obviously impacted by the competitive environment that we're selling our products in.

So 200 is not a bad outcome from our perspective for the second quarter, but given the inflation, the tariffs that are coming in have to be better than that in the second half. And we think that the actions that we have taken and or planned will get us that..

Got it. And looking at Headwater, looks to have had a pretty good quarter. You had pointed out the acquired sales in the quarter. I'm wondering if you could talk about maybe the profit contribution from Valley Farms.

If you're not willing to give a direct number could you talk about maybe was it at the average, below the average, or above the average?.

Yes, we prefer not to talk about those individual entities' profitability, Ed. But we can tell you that Valley Farms is above the average. But Valley Farms is a strong market player in the markets that they compete in. They have large branches. So Valley Farms is generally above the average..

Got it. And I can't help but notice the acquisitions that you've most recently made, the two that was announced Fueling and one in Water, weren't Distribution. I just want to kind of check in with you, make sure that that's not a change in your strategy.

That you anticipate continuing to build out the Headwater segment that you put in place, and any comments you'd like to put around that as well?.

Sure. These two acquisitions were absolutely consistent with Franklin's global strategy of geographic expansion and product line extensions. In the geographic expansion, us getting a further position in Argentina we saw as key. We've been talking to the owners of this company -- well, I joined Franklin 30 years ago; we were doing business with them.

At one point they're going to have events and family events. It was not through succession. We see this as just a natural extension of both distribution reach and then the ability also to enter the market as a manufacturer, which so Industrias Rotor Pump does both.

So we see that as just a natural extension to our Latin American strategy and our global strategy around geographic expansion. With respect to the Midtronics product line acquisition, in fact almost now 20 years ago, we acquired a company called Incon [ph] in the state Maine.

That was the platform for our EVO fuel management system, the people that started Incon actually started in the electric utility space with a product that monitored the transformer load tap changer and also circuit breakers. We took that technology -- they took that technology into the fueling space, we've added to that. We've developed that platform.

We're used that platform, the electronic platform back in the utility space with circuit breaker monitoring. And so we see this kind of back and forth in these highly regulated spaces the ability to have monitoring equipment. And we're learning from this. And we think that there'll be some natural extensions in our water space as well.

So they both clearly fit our overall company strategy. We're not abandoning by any means our [technical difficulty] of increasing our distribution footprint in the U.S. groundwater market where we have a significant position and we have a significant commitment to the overall industry..

Perfect. I appreciate the thoughts, guys. Thanks very much..

Thank you. Our next question comes from Ryan Connors with Boenning & Scattergood. Your line is open..

Great, thank you. Thanks for taking my question.

Guys, I want to just, since you're on the topic of distribution, stick on that for a second as it relates to where -- can you just update us on where we are with the core business, the initial acquired entities in terms of obviously we had some profitability pressures earlier or later part of last year that pressured the stock.

And where are we in terms of that stabilization process with the line cards and the personnel. Are we kind of where we need to be? Everything is steady as she goes now or there's still -- are we still kind of in a mode of getting things where they need to be..

Sure, Ryan. I'll answer that as a series of follow-ons to your question. So, to start off, let's go back a year ago; we announced the acquisition of these three entities, and we're beginning to integrate them as a Headwater company. There is an election by three large home suppliers, groundwater pump suppliers to no longer support Headwater.

That all started to impact principally third quarter, and then more dramatically, as you pointed out, fourth quarter revenues as we needed to replace that line card as you pointed out. We have nine additional pump companies that have been added to the line card to replace the product lines.

That those companies that left us had, and including Franklin is one of those, to the line card. So Franklin is really just a piece of it. There were other pump suppliers that stepped up to support Headwater.

We then came into the first part of this year and got our season releases [ph] and began to drive sales growth, as we mentioned in this quarter we had organic growth. Some of those have been consciously by increasing the sale of complimentary products. You may recall that pumps are about 30% of what these distributors sell.

They sell a number of other items, accessories, drop pipe wire, drill bits and so on. So there's been a conscious effort to increase the sale of these other product lines as well. We have slowed down the integration. We're moving on to the one ERP solution. That ERP solution we initially thought was going to occur in the back-half of last year.

And we realized that we are more on the bleeding edge than leading edge on this new cloud solution from a well-established software company. We have worked with them, and now we have worked out almost all the kinks, we believe all the kinks. And so we're expecting to do that further integration of back-half of this year.

That's going to allow us to get better scale and visibility and operate the company more efficiently, particularly in the supply chain area. So we see that as a net positive as well.

So we're actually now looking at some challenges of space constraints, some of our branches just physically aren't large enough to support what we see as being a growing business. And so we'll be looking at opportunities to expend our footprint on a go-forward base, particularly in the West -- West of the Rocky.

So where we want to be on running the business, the back office is about six months -- actually maybe 12 months late on getting everything on one platform. And from a standpoint of growth we posted some pretty good numbers in Q2..

Okay. So it sounds like, if I could just summarize, that there were some predictable kind of headaches in integration and getting this thing on the ground. But it sounds like now you feel like you're where you want to be, and now we're into kind of a growth mode going forward.

Is that kind of the right way to think about it?.

That's a nice summary..

Okay. And then, yes, so the one -- you covered this APAC thing pretty well. But there was one comment you made in your prepared remarks and in your press release that I didn't hear you expand on. And it was that you're citing this strong 1Q sales, so implying some kind of a pull-forward in 1Q that it negatively impacted 2Q.

Can you expand on that? I mean is that some kind of channel thing or is that a pricing buy-ahead, or what's going on with that?.

This is specific to the Korea markets -- the Korean end market which has some nuances. And I'll let Robert Stone give you some more background..

Hi, Ryan. Yes, so as John mentioned earlier as well, the Korean market, Koreans are very sensitive to U.S. dollar currency moves. And they will bet a little bit in terms of where the currency is going. And we had some strong demand in Q1.

That was partly driven by a new product we offered there, which was a small, a highly reliable variable frequency drive for constant pressures systems. We had lost some share there. That product took off really well for us. In fact, we actually sold out there. And that's how we drove some of our Q1 success.

In Q2, again we get to sort of an accordion affect with inventory there, fairly long supply chain to deliver to Korea. And they have held off on some purchases. They've told us, and we know too that we weren't able to get some shipments outright at the end of the quarter, so that's going to come back in Q3..

Got it, okay. Okay, that's helpful. And my last one, more of a housekeeping, I guess, since John is the only one we haven't talked to, just on the tax rate, it seemed like it came in a little higher than at least we had been expecting, John.

Well, can you give us an update on how we should be -- what kind of numbers should we be thinking about there in terms of the tax rate going forward?.

Yes, Ryan, we had in the first quarter, you'll recall, some very significant discreet items in our tax rate that drove it actually favorable in the first quarter. So what we're saying is on a full-year basis it'll be 15%.

But what of course that means is in the back-half of the year it's going to be more in the high-teens low 20s kind of range, which is where it was in the second quarter.

So, the exchange that we are seeing here is of that although we have a favorable rate in the United States because of the new tax law, we're losing on discrete tax benefits not because of that law just because there are fewer discrete tax benefits to take globally. So you see a tendency and offset with that.

That's why in the second quarter, we had kind of a 19% tax rate in both years. But the way we got to that was very different. This year it was about the new tax law in the United States and the statutory rates being lower.

Last year it was about some discrete tax benefits that we realized in the second quarter that drove that rate down, so 15 for the full-year. And what you'll see is something closer to 20 for the back half of the year..

Got it. Okay, that's really helpful. Thanks, guys..

Thank you. And our next question comes from Matt Summerville with D. A. Davidson. Your line is now open..

Thanks, good morning; couple of questions..

Hi, Matt..

Maybe, Gregg, what's your assessment in terms of channel inventories in the groundwater business in North America? I believe coming out of Q1, you had indicated your own inventories were running a bit high.

If you just look at the balance sheet, it looks like you maybe have been able to reduce some excess, maybe talk about what the game plan is for inventories for the remainder of the year?.

Sure, Matt. Two separate points here. One is that within the channel, we would say inventory levels are normal. We don't have any reason to believe that they are exceptionally high or low.

I don't think that the tariffs which would increase -- which the specific product tariff which would impact the consumer channel have really had a meaningful impact on buy ahead in Q2 to our knowledge. So I would say inventory generally in the channel looks to be normal. And that would include the groundwater channel.

We have some visibility with our distribution company.

With our own business, the manufacturing business, we are moving forward with some intentional thoughtful management of our supply chain to squeeze out inventory within the supply chain now that things have been settling down particularly in the North America market with respect to having full integrated distribution.

So I think you are going to see more systemic decreased inventory without impact to service levels within Franklin..

With respect to agriculture, and this is primarily obviously in North America in common, with recognizing -– I recognize that a big piece of this is non-discretionary in nature in terms of purchases.

But those that are discretionary, is there any concern on your part the trade and tariff is used, i.e., perhaps may be a lot less soybeans and other crops being exported, crop prices falling all that stuff.

Are you worried that the discretionary side of ag really gets hit here in the back half of the year?.

Well, Matt, to your point, we have a much bigger non-discretionary piece of our business replacement and say maybe the guys I used as an example would be the Pacific guys. It's one thing to refer to expand irrigation. It's another to stop irrigating that what you already have.

We don't -- we have not had made discussion internally about the impact of trade tariffs at the present prices and then having farmers to let not to replant for next year. And for this year, again, weather patterns have been kind of normal or neutral and have certainly been wet Southeast kind of the favorable parts of the country.

It's been dry and again in the Texas Panhandle area that's been good for us, but other parts of the country from the residential side of it, we see has had really relatively flattish demand. So the short answer to your question is we are not seeing it that way. But we think weather probably has much reward with influence than the tariffs would have..

I mean the tariffs would probably be more longer term. I don't know that you necessarily, Matt, would see tariff impact on a short-term basis. It can take a while to for markets to react and supply chains to react and it might be a little bit longer term..

That makes sense. And then with respect to the fueling business in North America, I don't have in front of me how many quarters you have been posting well above kind of mid single digit or better organic sales growth. But it's been sustained for quite a while here.

Can you talk about how much of that is being driven by I am going to call it a cycle in North America versus how much is being driven by market share and/or pricing?.

Okay. Well, in the fueling channel there is really no kind of market share data readily available. It's we have to build it through anecdotal. I would say this, you back in the late 1990s, there was a massive upgrade of all the underground tanks in the U.S. market. That is now 20 years old.

Those stations are now effectively 20 years that they have been refreshed. So maybe they have done some refresh in between. But what I think we are generally seeing a secular upgrade of equipment. You are seeing consolidation.

Major marketers are buying up more; the single store operators or the single operator stores and upgrading as they are expanding footprints generally in these mini market bases, adding a lot of features that are drawing people into the stores, and are looking to upgrade their fore course. So that's generally good for us.

There are new regulations on the books that station owners have to do more tightness around their -- the containment sums and more inspection. And we suspect those inspections are going to identify more leaks which are going to be have to be repaired. And that's going to be a kind of a multi-year initiative.

EMV which has been pushed out has probably actually delayed some construction. And so that would also delay some of our upgrades as well. Getting back market share, I mean we have state-of-the-art fuel management system. There is -- we are not the market leader in size. But we are working hard to become the market leader.

And so there we are clearly seeing some share wins with some significant marketers and has been pretty steady over the last several years. That's why I think you are seeing the strong growth as well. And with that, we can pull along other product line. So we see I think kind of secular trend. We see some additional regulatory trend.

And we see that we are doing well with our new technology getting some market share as well..

And then, one last one that and just maybe for Robert.

Just in terms of Brazil, if we just remove the noise from the trucker's strikes to the extent that's possible, what is your feeling around how the underlying business is performing not only just from an end market demand standpoint, but your own market share? And I guess politically, economically, when does that business in your mind start to turn the corner meaningfully? Is that 2019–2020 sort of thing, or do we see some of that in the back half of '18?.

Back half of '18 is really going to depend on what happens with the election. And I think given the timing of the election in October, there is not going to be a lot of impact in 2018. So we would be really looking at 2019. We've -- over the past several years, we've been gaining share in the markets.

What we see now is just a depression in the overall demand. It's partly driven by -- mainly driven by political uncertainty in Brazil at this time. The weather hasn't really been a factor or the seasonably slow period in the southern hemisphere that just start to turn around next quarter.

Yes, and we've been expanding for products and our reach as well in Brazil. So the underlying business we have been growing. We are just been hammered by horrible economic condition. You would expect that the Brazilian economy generally would also start to pick up with an increase in commodity prices.

But that hasn't really translated to any additional spending in the economy..

Got it. Thank you, guys..

Thank you. And our next question comes from Walter Liptak with Seaport Global. Your line is open..

Okay. Thanks, good morning guys..

Good morning..

Good morning, Walt..

I wanted to follow-up on the last one about Fueling Systems North America, and my understanding is this is a project based business. So wonder if you can just address the visibility that you are seeing on north -- I guess U.S. project, especially with the regulations coming up this fall.

And is this high single digit revenue growth? It sounds like you are saying that that's sustainable.

But I wonder if it's -- if it could accelerate from here, if the projects are building?.

Yes, Walter, it's fair question. We have some visibility because as we talk to major marketers they will share with us to some level of detail their build schedules. And that's why we remain bullish on the business -- the fueling business globally.

And in China and North America more specifically is that we do see good build schedules by major marketers who use our products. The regulation you are talking about impacting this fall, I think that as you have seen -- similar to what we have seen in the past that there actually tends to be a carryover.

And so we think this is going to be kind of a more of a several year situation where people continue to test products on a more regular basis, spill buckets and tank and like -- and have different solutions for monitoring and that generally will be good for us on a longer-term basis.

But it is difficult for us to get into specific numbers about is it going to accelerate from here, accelerate, as I said EMV is a factor, the fact that was pushed out may have actually slowed things down. So that would be a potential positive for us as well, but right now the potential is very good about the North America and particularly the U.S.

market..

Okay. All right, great.

And with Fueling Systems in China, I wanted to ask about the channel there and maybe if you could help us understand how these systems are put in place, the inventory that goes in and then what goes into a project? Or is it something where it's project-based, so you've got visibility going out? And I guess the concern here is that somehow tariffs might impact the demand or maybe there was a kind of a pull forward in front of tariffs?.

Sure, Walter. It's a fair question or fair series of question. So what's going on is that in China is that based on the national mandate and regulations that are on the books, the individual provinces are beginning to put in these upgraded systems. For Franklin Electric most of our production for these systems is in China.

So it's not based or relied on our U.S. production. And therefore we are not -- quid pro quo or a tit for tat type tariff activity. That should not impact materially the business in China. The other production we are using to spot China is coming out of Europe. So we feel pretty good of at that front.

The speed at which these conversions occur are really driven by the provinces of the state owned oil companies as well as the private sector oil companies. And again, we have visibility to some extent, but my experience in China has been things turn on pretty quickly and you get -- you don't get a whole lot of warning.

And we also see where it tends to be back half calendar year loaded. And so we saw this acceleration in the Q4 2017 which gave us confidence about the 2018 numbers. But they have continued to come in a little stronger than our plan.

And see that turning into '19 and beyond because there are literally tens of thousands of gas stations that need to be upgraded across the entire country..

Okay. All right, sounds good. And then last one. I didn't see a foreign currency impact overall on top line. And with the strengthening dollar, I wonder if the benefit that you have been getting starts to turn negative.

And how does that impact profitability?.

Yes, on the Water Systems and Fueling Systems on a consolidated basis, Walter, it was basically negative. It was less than 1% in the quarter. However when you look at it on a segment basis, in Water Systems, foreign currency was negative in the quarter about 1% and in Fueling Systems it was positive, i.e., additive to the top line in the quarter.

So if we look out, we can't predict these obviously, but the ones that are proving to be very volatile are the reais, the Turkish lira has lost a significant amount of value versus the dollar. But the euro is kind of hanging in there and maybe strengthening a bit.

So those are the key currencies that we look at, but on a year-to-date basis, it hasn't really been a factor, and we will see what happens in the second-half..

Walter, what I would like to add to that is that when you look at couple of these high currencies that have moved significantly, for example, in Turkey, our Turkish business there also exports -- they pretty much -- when they export they're priced in dollars, and we didn't -- in Turkey, they manage their pricing very effectively because much of the input cost is in euros and dollars, so able to manage their margin by adjusting pricing rather rapidly.

Similar situation, for example, in Mexico and Argentina, which is considered to be a hyperinflation country, essentially the products are not priced in dollars at the time, and we have to be either clicking in cash or being very aggressive on the receivable side, so that we don't see a deterioration in the margin because of the depreciation of the currency.

So in these currencies that we are seeing some significant weakness, we generally are able to take some pricing actions to again manage the margins overall and the business overall..

Okay, great. All right, thank you..

Thank you. I'm showing no further questions at this time. I would like to turn the call back over to Mr. Gregg Sengstack for any closing remarks..

Again we thank you for listening to us, and answering your questions on this conference call. We look forward to speaking to you after the quarter three end..

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day..