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Good day, ladies and gentlemen, and welcome to the Franklin Electric Reports Fourth Quarter 2018 Sales and Earnings. 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, Skylar, and welcome everyone to Franklin Electric's fourth quarter and fiscal year 2018 earnings conference call. With me today is Gregg Sengstack, our Chairman and CEO. On today's call, Gregg will review our fourth quarter and full year business results, and I'll review our fourth quarter and full year financial results. When I’m through, we will have some time for questions and answers.
Before we begin, let me remind you that as we conduct this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which could cause actual results to differ materially from such forward-looking statements. A discussion of these factors may be found in the Company's Annual Report on Form 10-K and in today's earnings release.
All forward-looking statements made during this call are based on information currently available, and 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. I am pleased to report that our strong organic growth drove, record sales and earnings for the fourth quarter of 2018. Our Water Systems unit in the U.S. and Canada grew organically by 23%. Fueling systems organic revenue growth was 10% and distribution revenue somewhat muted by unfavorable weather, was flat in the quarter. With consolidated organic growth of 9% and tight expense control, our fourth quarter operating income after restructuring increased 17% compared to last year and was a record for any fourth quarter in our history.
In the U.S. and Canada Water Systems business Pioneer-branded dewatering pump revenue doubled from last year's, even the growing diversification of the Pioneer pump revenue customer base and growing international reputation we expect the Pioneer product one revenue will increase for the full year 2019 as well. Other service pumping equipment revenue accelerated nicely up 9% in the quarter.
Groundwater pumping systems sales of third parties from both our manufacturing and distribution segments was essentially flat in the quarter. Outside the U.S. and Canada, our Water Systems business saw mid-to-upper single digits organic growth in Europe, Middle East, Africa and Asia Pacific.
Unfortunately, this was mostly offset by a 10% organic sales decline in Latin America, primarily Brazil. Across the globe, our Water Systems teams continue to focus on delivering system solutions, pumping systems and packages that are integrated and energy efficient. As an example, with our expanding line of pumps with current submersible motors, we’re documenting up to 30% energy savings.
Our Fueling System team delivered another record quarter, revenue in the U.S. and Canada market was up 14% as the team continued to extend success with major marketers in North America. International and Fueling Systems team achieved about 60% revenue growth in China, as I previously mentioned, we expect the China underground piping upgrade to add significant revenue and income to our fueling business over the next several years and some provinces are choosing to extend our upgrade beyond pipeline system to pumping and leak detection systems as well.
Outside of China and India, International Fueling Systems revenue declined over 10%, while significant decline, we see it more related to timing and large orders than market for market share issues. Fueling Systems continue to lead in market with new products and services. During the year, the team launched FFS PRO Verify, a installation assurance program, new containment sub-line to address U.S. and China regulations and proving mitigation system to name a few.
Turning to our distribution segment, Headwater. Fourth quarter revenue was flat organically. Integration or restructuring activities are proceeding well, all Headwater businesses except oil and supply which we purchased this year are on one ERP system and the plan of branch consolidation in the West is on schedule. However, our operating results are behind the plan.
Higher product and employee benefit costs contributed to the distribution segment earnings decline in fourth quarter. We expect a meaningful improvement in segment performance in 2019 and the team focuses on selling an extended range of clean water pumping systems, wastewater pumping system and turf irrigation products. As we close the books in 2018, I want to take a moment to thank all my colleagues for delivering record revenue, operating income, earnings and cash flow, a job well done.
Looking to this year, we believe the momentum we have in our North America and Europe Water Systems end markets and global Fueling Systems business to continue, we remain cautious about our water system business in developing regions. Overall, we believe our organic growth will be in mid single digits. Variable contribution margins will be steady and we will continue to tight expense control, operating income before restructuring will grow double digits. However, currency headwinds and higher tax rate will reduce earnings per share growth around 7%. Accordingly, we expect 2019 earnings before restructuring to be between $2.37 and $2.47 per share.
I will now turn the call over to John to discuss the numbers in more detail. John.
Thanks, Greg. Our fully diluted earnings per share were $0.51 for the fourth quarter of 2018 versus $0.17 for the fourth quarter of 2017. Restructuring expenses were 0.7 million and were primarily related to branch consolidations and other asset rationalizations in the headwater distribution segment and had a $0.01 impact on the earnings per share in the fourth quarter of 2018.
Four quarter EPS before the impact of restructuring expenses were $0.52, compared to 2017 fourth quarter EPS before restructuring of $0.21. There earnings per share results were record high for any fourth quarter in the Company's history. The Company incurred a tax expense of $0.21 per share in the fourth quarter of 2017 related to the U.S. Tax Cuts and Jobs Act of 2017. Before restructuring and the tax expense, the Company's fourth quarter 2017 earnings per share was $0.42.
So after considering the restructuring expenses and the 2017 impact of the new tax law, our earnings per share of $0.52 in the fourth quarter of 2018 grew by 24%. Fourth quarter 2018 sales were 316.7 million compared to 2017 fourth quarter sales of 288.2 million, an increase of 10%. The sales increase was from acquired entities as well as organic sales of about 9%. Sales revenue decreased by 10.8 million or about 4% in the fourth quarter of 2018 due to foreign currency translation.
Water Systems sales were 196 million in the fourth quarter of 2018, an increase of 14.5 million or about 8% versus the fourth quarter 2017 sales of 181.5 million. In the fourth quarter of 2018, sales from businesses acquired since the fourth quarter of 2017 were 4.4 million. Water systems sales were reduced by 9.5 million or about 5% in the quarter due foreign currency translation. Water Systems organic sales were up about 11% compared to the fourth quarter 2017.
Water Systems operating income was $27 million in the fourth quarter 2018, compared to 19.5 million in the fourth quarter of 2017. Strong operating income growth in U.S. and Canada was partially offset by declines in international regions in part due to weakening foreign currencies versus the U.S. dollar. Operating income margin before restructuring expenses in water systems was 13.8% and was 250 basis points higher than the fourth quarter 2017.
Fueling System sales were 75.9 million in the fourth quarter 2018, an increase of 8 million or about 12% versus fourth quarter 2017 sales of 67.9 million. In the fourth quarter of 2018, sale from business acquired since the fourth quarter 2017 were 2.2 million. Fueling Systems sales decreased by 1.3 million or about 2% in the quarter due to foreign currency translation.
Fueling Systems organic sales increased about 10% compared to the fourth quarter of 2017. Fueling Systems operating income was $17 million in the fourth quarter of 2018 and 2017, respectively. Fueling Systems operating income was flat in fourth quarter. Growth from higher sales was offset primarily by negative geographic and product sales mix and higher fixed cost. Distribution sales were 56 million in the fourth quarter of 2018 versus fourth quarter of 2017 sales of 49.5.
In the fourth quarter of 2018, sales from businesses acquired since the fourth quarter 2017 were 6.4 million. The distribution segment organic sales were flat compared to the fourth quarter of 2017. The distribution segment recorded an operating loss of 2.9 million in the fourth quarter of 2018, compared to $2 million loss in the fourth quarter 2017. Higher product cost not completely offset by price and higher employee benefits costs contributed to the distribution segment earned.
The Company’s consolidated gross profit was $104.3 million for the fourth quarter of 2018, an increase from the fourth quarter 2017 gross profit of 94.6 million. The gross profit increase was primarily due to higher sales. The gross profit as a percentage of net sales was 33% in the fourth quarter of 2018 compared to 32.8% in the fourth quarter of 2017. Above the fourth quarter and full year 2018, the Company believes it will offset the impact of raw material inflation with achieved price.
Selling, general and administrative expenses were $75 million in the fourth quarter of 2018, compared to 69.4 million in the fourth quarter of the prior year. The increase in SG&A expenses from acquired business was 3.3 million. Excluding the acquired earnings, the Company's SG&A expenses in the fourth quarter of 2018 were 71.7 million, an increase of about 3% from the fourth quarter 2017 and was due primarily to higher variable compensation expenses in the fourth quarter of 2018 versus the prior year.
The fourth quarter 2018 effective tax rate net of the discrete events was 14% and consistent with our previous guidance, in the fourth quarter of 2017, the effective tax rate was about 63% and included a net tax expense of 10.2 million due to the U.S. Tax Cuts and Jobs Act of 2017. As this net tax expense from the new law not been incurred, the fourth quarter 2017 effective tax rate, net of discrete events would have been above 14% or the same as the tax rate in the fourth quarter 2018.
In 2019, we believe our effective tax rate net of the discrete events will be between 18% and 20% significantly higher than the 2018 effective tax rate of about 12%. This higher tax rate is primarily due to the inclusion in 2018 of discrete tax events that effectively lowered our tax expense for the full year. We do not believe these events will reoccur at nearly the same level in 2019.
Specifically related to the first quarter, in the first quarter of 2018, the Company recognized $5 million of discrete tax benefits from certain deferred tax positions which lowered our effective tax rate in that quarter to about 9%. Discrete tax benefit and lower tax rate improved earnings per share in the first quarter of 2018 by about $0.11, and without it, our first quarter 2018 earnings per share would have been $0.34. This benefit will not reoccur in the first quarter of 2019.
As a reminder to our investors, the inclusion of U.S. distribution segment in our consolidated earnings has made our quarterly earnings more seasonal. As a result, we estimate two third of our earnings will be in the second and third quarters of the year. The Company ended 2018 with a cash balance of 59.2 million, which was $8 million lower than at the end of 2017, significantly higher net cash flows from operating activities were offset by higher repayment of debt and repurchases of the Company's common stock in 2018.
The Company had $76 million in borrowings on its revolving debt facilities at the end of the fourth quarter of 2018 and 67 million in borrowing at the end of 2017. The Company purchased about 512,000 shares of its common stock for approximately $21.7 million in the open market during the fourth quarter 2018. As of the end of the fourth quarter 2018, the total remaining authorized shares that maybe repurchased is about 1.4 million.
On January 22nd, the Company announced a quarterly cash dividend of $0.145 per share, an increase of 21% from the previous quarterly dividend amount. The dividend was paid February 15th to shareholders of record on February 1st.
This concludes our prepared remarks and we would now like to turn the call over for questions.
[Operator Instructions] Our first question comes from Edward Marshall with Sidoti. Your line is now open.
I wanted to talk about the pricing actions that you put in place this year. I think as we were leaving the second quarter, you've talked about 250 to 300 basis points of price which was ahead of the normal price increases that you normally get. I’m curious how much of that did you achieve and will that continue into 2019?
Ed, as we've discussed in the past, the pricing actions vary by business, by region, sometimes even specifically by product line. In the fourth quarter, we calculated and achieved price realization of about $8.5 million in total. As we said, we believe that offset what we can discretely identify as raw material inflation including the impact of tariffs in the United States. So, we feel pretty good about the momentum -- price momentum that we have going into 2019.
As you know some of price action that we took was more back end loaded, third, fourth quarter 2018, and we will be more fully effective in 2019. We will continue to monitor this as to something look at obviously on a monthly basis. Some of our business units have incremental price increases coming yet in 2019 and that’s all based as a balance here between what inflection I have seen, what’s the competitive market environment look like, and that’s how our price decisions will continue to be made.
I guess in the press release and in the comments today, you talk about the distribution business and the profitability and kind of trending below your expectations. I’m curious, you quantify -- you mentioned meaningful profit growth in the business improvement and the distribution business for 2019. I’m curious, can you quantify or maybe can you take us through some of the steps that you guys are thinking about to improve the performance out of Headwater?
Sure, Ed. We've been -- if you think about 2017 was a year of getting business stabilized, we had couple of major suppliers elect to no longer supply on the West Coast particularly and that put some windows of sales. 2018 was all about integration, getting our platform. You have, I mean, yes, we can quantify some of those costs we reported with restructuring, but you just have natural friction that occurs there.
So, 2019, we have a business all one platform with the exception of small acquisition made at the beginning of the year. And I think long-term, John as going out with our view is 4% to 6% range, we think that for 2019, we should see at least doubling as bottom line of the business for last year and that gets us close to the 4% as bottom of range.
So, it's more about just the businesses kind of one year post kind of some of the disruptions that might have happen in the business and more operating as it should. Did you see signs of that in the fourth quarter that recovery and kind of the maybe to go through the past behind you or talk about maybe what you saw in the fourth quarter?
Yes. I would say fourth quarter -- at the beginning of the quarters when we put everybody on extended platform, ERP platform, we had of course that always causes some disruption [audio gap]. We announced the changes and consolidation and create expanding certain sites in California. So I wouldn’t say the fourth quarter was indicative and that’s why we pointed out and we just saw some higher cost and higher operating expenses. We expect that now as behind us for entering the year, the business in a good place and we expect to see much better performance in 2019.
Yes, the fourth quarter is always going to be a though seasonal quarter as well at a lot of areas where the fourth and the first quarter -- a lot of areas where Headwater has real market strength. Those are just markets that are effectively turned off in the first and fourth quarter due to weather and just the season rate.
And knowing that the first quarters feel some of those same effect, are we kind thinking more June and September quarters to kind really see the improvement within Headwater that where it will start to show up in our models?
Yes, that’s where John pointed out. As a reminder of that we are having a northern hemisphere distribution business, U.S. centric, it's going to shape earnings more in Q2 and Q3 because of seasonality.
And I noted in the press release that you talked about maybe not getting the price increases within the distribution that you thought you might, but it sound like you got them in the water business. So, I’m curious that some of the margin compression that you're seeing there is related to kind of what’s happening with the price and maybe not being able to pass that through?
Yes, for sure, the distribution segment has got price in the fourth quarter. So, I don’t want to leave the impression that we didn't get price. We had some higher cost in the fourth quarters and the point we made was, the price totally offset some of that higher cost. Generally, as we talked, there is a growth profit ratio in this business and then there is an operating expense ratio. And I would say, generally, we’re pretty comfortable with the gross profit ratios.
We’re having in terms of net sales less our cost of sales. I think more of the opportunity that will have to capitalize on to expand our earnings as Greg mentioned, is probably going to be more on that OpEx ratio line and just drive a lower fixed cost base SG&A base in the Company. And we got ideas and plans for how to execute some of that in 2019.
Just to be clear that doesn’t have anything to do with sales commissions or anything like that.
No, I think the sales commissions will be fairly consistent year-over-year. I mean, obviously, we will put growth targets in those sales commissions. So, we expect our sales people to achieve a higher growth rate to get there commission, but generally, there is not any major change in those assumptions going into 2019.
And I’m sorry, if I could squeeze one more in. Did you see -- can you talk about maybe the turnover in that business? Has there been turnover within your distribution business from operator or sales reps?
No, we've seen quite the opposite nice level stability. And yes, there has been some involuntary change, but the voluntary turnover is nominal.
Our next question comes from Ryan Connors with Boenning & Scattergood. Your line is now open.
I wanted to switch gears and talk about some of the top line drivers and some specifics behind that on a few fronts. One of them was, you mentioned good -- continuing to see good strength in China in fueling business, obviously that's a hot topic these days. So, if you talk about the order cadence there, the backlog, anything you can do to give us some visibility going forward in that China pays for fueling?
Sure, Ryan, I will have a foot on those documents and foot over the -- visibility is always though, but we saw 2018 unfold pretty much as we expected to maybe slightly stronger than we expected in Chine. The upgrade is going on. It's extending westward. Our team's view right now is that, 19 and 20 will have similar revenue profile as '18. So, we see this is being continuing on through '19 and 2020.
More, specifically even now, we saw -- we have Chinese New Year, and we saw the slowdown that we did last year, we're talking now into 19, but we saw a slow down as we do in New Year, New Year is now over and we’re seeing a pick up. So, there is no indication to this point that our team's view of having similar results or revenue results of '19 and '20 to '18 is still solid.
And the other one was, Pioneer, where do we stand there from a comp perspective? Obviously, we will start lapping some of these big growth numbers here next few quarters. So, what should we expect there in terms of that soft landing there in terms of growth rates or any color there?
Yes, that's why I call that out for 19 because there is the business where we have seen and you recall a big slight of that when the oil prices collapse in 15. This year while we’re seeing so far the indication that Pioneer is going to maintain and actually improve the revenue that we saw in 2018. We’re still seeing some solid backlog, solid interest in North America and the rest of the world for the line. And so, our management team there is confident that '19 revenue will exceed '18 revenue, certainly now by the 60 plus 2018. It's going to be more modest in the single digits, but that’s similar to what we call out for entire water business for the year.
And then, one last one I want to ask on was, interestingly, you called wastewater as an area of strength. Any added flavor there types of products? Is that new project versus repair place geographies, anything you can give us there?
The wastewater business that we’re referring to is specific to the U.S. and we put more focus on the business on that product line generally in last year. And I think we’re seeing the fruits of that. I don't think the market's growing appreciably any faster. As they go faster, the freshwater, I mean, the freshwater business in the U.S. is mature but wastewater does have growth. And we just -- we've been focused more attention on those products in those channels.
And our next question comes from Matt Summerville with D. A. Davidson. Your line is now open.
Couple of questions, first, just with respect to the water business. I think, Gregg, in your prepared remarks, you've talked about remaining fairly cautious on the emerging markets there. I was wondering, if you could maybe just spend a moment speaking to each of your sort of major emerging markets including Brazil, Thailand and others? And how -- what the right way to sort of frame up 2019 would for us?
I guess after a couple of years as saying, it will be cautiously optimistic having again seeing weakness for -- we’re now more cautious in our comment, but Latin America particularly Brazil, we do see that the business is improving, but I would say it's improving really, really, slowly. So, I wouldn't get too far ahead. So, we see the improvement and it's their season right now. So, although, we go into winter months, but we do see some stability I would say now and Brazil. We require business in Argentina, we’re newly acquiring business going into a top market, but we just saw really great opportunity to integrate forward Argentina by acquiring customers we've known for decades. So that’s going to be -- there is going to be comp until we lap into the summer, but that comment suspected that Argentina will be in the good place for us.
We’re seeing some strength in Southern Africa. We have some level of optimism. You read the press and you read about the challenges around like availability of electricity and continued problems with Eskom, but I'd just say that generally we feel little bit more positive about asset. We have a nice business in Turkey. It had a real tough time in last six months because of the currency evaluation. So, we're going to have to wait to see the season which is probably going to be April timeframe, May timeframe. But farmers are still there, they need product, they need pumps, we’re well-positioned there, but I think that's kind of second quarter pickup.
We’re going to see some cost pressure in Q1 in Turkey because the product, it was purchased in the later part of the last year now has to go through the income statement. In Asia specifically in Thailand, again, I think the team seeing that the curve began to bend back up. It's still yet to be seen whether we will see that in Q1, I think again it's kind of more back half loaded, but we’re encouraged in South East Asia as well. So a little bit more positive probably my unprepared comments and my prepared comments, but we've been burned a little bit on this in last couple of years, so that’s why I had cautioned in my prepared remarks.
Speaking with the sort of emerging market discussion, if you look at your fixed cost infrastructure throughout these countries, throughout these regions, does the current performance you see in the business, the overall outlook give you reason to contemplate taking additional cost actions in the near-term?
We've been pretty steady and judicious about taking fixed cost actions. Generally, I mean we do work to size the cost structure to the business. That said, we're -- I think going we've been delivered in these markets, but there is such important end markets for us that we want to have the infrastructure in place to continue to support the long-term demand in these markets. It's where all the people live. I mean, the vast majority of the population in the world lives in developing regions, and we just see it's really important to be there. So, certainly, our leadership is conscious about fixed cost and managing those fixed costs, but we’re in a good place right now from a standpoint of capturing upside when it comes.
Then just lastly with respect to ag, maybe talk globally, but certainly, please comment on, what your thought is for the U.S. while I recognized we’re out of season just with all the noise around farm income and trade and tariffs? What’s your overall outlook for ag for Franklin in 2019?
Here again, there hasn't been a real catalyst to drive tremendous ag growth. That said, given the multi-year decline in farm income, generally, as we've talked before, the views is, we’re mostly down our replacement by both the products. So any type of movement around farm income, upward, any type of movement related to drive our weather conditions, it would be good for us. But I would say that we’re kind of in a -- we've been in a multi-year decline in farm income, and at this point, we have a stable business in ag in U.S. Certainly, probably similar story in Brazil, which should be in ag big market for us. I've spoke to you about Turkey. I think that in Turkey it's only the question of timing for farmer to start buying again after having this currency stock. Those would be the principal ag markets that come to mind that I could comment to.
At this time, I’m showing no further questions. I would like to turn the call back over to Mr. Gregg Sengstack for any closing remarks.
We thank you for joining us on this conference call. Look forward to speaking to you after the first quarter end. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.