Federal Signal Corp (FSS) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Federal Signal second quarter 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. If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Joseph Ross and Ms. Stephanie Kushner.

Good morning and welcome. In conference, remember than some of the comments we'll make contain forward-looking statements about the future prospects for Federal Signal. Please refer to our 2002 annual report to shareholders, our recent SEC filings and the press release that we have issued in conjunction with this conference call for a more detailed discussion of the risks that are involved in our forward-looking statements.

I'll start with a brief summary of the second quarter. We reported diluted earnings per share from continuing operations of 21 cents on sales of $311m. Sales operating margin and earnings per share were all within the range of guidance that we provided three months ago. Our cash flow was strong and we reduced our debt ahead of our schedule. Our new orders totaled $288m. That's up slightly from last quarter and still relatively strong versus a strong quarter last year. This represents a 2 percent decline. That's second quarter this year versus second quarter last year.

We ended the quarter with a backlog of $393m, which is down about 5 percent from our last quarter end. I'll just provide the backlog numbers by group. For Environmental Products our June 30th backlog balance was $88m, which is down about 7 percent from the end of the first quarter. Fire Rescue was $251m, which is down about 6 percent from Q1. Safety and Tool were both flat from last quarter. Safety Products at $44m and Tool at $11m.

Our sales of $311m were at forecast and 21 percent above last year. They were up in three out of four of the segments, that is excluding Tool. The $53m increase included a $10m impact of the weaker dollar. It also included the impact of the Refuse acquisitions and improved PRUPA [ph] in our Fire Rescue U.S. operations.

Our gross profit margin was 26.7 percent in the quarter, down from 29 percent last year, but improved from our first quarter level, which was 25.5 percent. Versus 2002, the difference was mainly due to the impact of lower volumes on our refuse margins and then some other changes in sales mix.

Our selling, general and admin costs as a percent of sales declined to 20.6 percent from 21.1 percent in last year's second quarter. This reflects the focus we've had on cost reductions. Excluding the restructuring charges, many of which went through SG&A, the SG&A in the quarter would have averaged 20 percent, which would be a greater reduction from last year. With these restructuring impacts behind us we would expect further improvement in this ratio as we go forward.

Our operating income was $19.1m, or 6.1 percent of sales, down from $20.4m, or 7.9 percent of sales a year ago. Excluding restructuring and other one-time costs in the quarter, operating income would have been $21.6m, or 6.9 percent of sales.

As expected in the quarter, the translation impact of the stronger European currencies benefited earnings per share by 1.2 cents.

By group for the quarter, Environmental Products revenue was up 25 percent, due, mainly to the addition of Refuse sales and this was at the high-end of our guidance range. At 6 percent, their operating margin was also at the high-end of our guidance range. Versus last year, the lower margin mainly reflects the impact of the Refuse acquisitions, which generated only a modest profit in the quarter.

Fire Rescue revenue rose to $113m, again, at the high-end of the guidance range we provided, with an operating margin of 4.8 percent, above the high-end of the range we had estimated.

Safety Products revenue rose 10 percent, as predicted, and margins averaged 11.1 percent, a little below the 12 to 13 percent range we had forecast. That was almost solely because the shutdown costs associated with the UK facilities came in a little higher than we had estimated. That plant is now closed. We have transferred production of some of these product lines to an existing U.S. plant and we expect to realize economies of scale. In the quarter, absent those restructuring costs the margin for Safety Products would have been three percentage points higher and in line with last year.

Tool sales were down 3 percent from last as expected. At 10.8 percent the margins fell short of the 12 percent range we had expected. That was a mix of product sales. The restructuring impact for Tool was .8 percent on the margin, about $300,000 in the quarter.

Below the operating line, corporate expense was $3.7m, up from last year, as we had expected. Part of the increase was also associated with the provision that we took against a bad debt from a cancelled Oren dealer. We also incurred some higher recruiting expenses. We expect the run rate to be slightly lower for the rest of the year and corporate expense to be in the range of $13.5m to $14m for the full year. Interest expense was $5.1m, up about $100,000 from last year. During the quarter, we successfully replaced our revolving bank credit facility, a portion of which expired in June. We put in a new $250m three year bank line. In addition, we took advantage of the strong environment for multi-year floating rate private placement debt and borrowed $50m for terms ranging from five to ten years. We face no material debt raising requirements for the foreseeable future.

The effective tax rate was 29 percent in the quarter, up slightly from last year, and we are still projecting a full-year rate of about 27 percent. That includes a one-time benefit from the tax deduction on closure of our UK business that we took in the first quarter.

Operating cash flow in the quarter was $29m, bringing year-to-date operating cash flow to $47m. You may recall that our days sales outstanding had increased during the first quarter to 52 days and we were expecting a reduction. In fact, DSO returned to 47 days in June, which released some cash. We benefited from higher customer advanced payments and we also benefited from the early closeout of some interest rate swaps.

Inventory turns reached 4.8 by the end of the quarter and that's an improvement from 4.2 a year ago.

Capital spending continued modest, although it's up 5 percent year-to-date from last year, it is accumulatively less than $9m. In view of the slower spending rate, we're now expecting our full year capital outlays to be closer to $20m than the $22m to $24m we had been forecasting earlier.

During the quarter, we completed the sale of our discontinued Sign business and recorded a small loss, $369,000. That was as we were establishing provisions for some of the estimated retained liabilities. The transaction was an asset sale.

At the end of June our ratio of manufacturing debt to capitalization had declined to 42 percent.

I'll talk briefly about our outlook for Q3. We're projecting revenue about consistent with this quarter, in the range of $305m to $315m, and a sequential improvement in the operating margin as a result of the restructuring actions we've taken. The operating margin should approximate last year's level of 8 to 8.5 percent. In total, our earnings per share should be in the range of 29 to 33 cents, which will give us a positive comparison versus last year, which was 28 cents.

By group, Environmental Products group's revenues will be 25 to 35 percent above last year, again, mainly due to Refuse acquisitions. We're forecasting an operating margin in the mid 6 percent range, up sequentially from the second quarter. Fire Rescue revenues will continue up from last year, about 20 to 25 percent higher, as we continue to build out the very high backlog we started the year with. Operating margins should improve again and be in the 5.5 to 6.5 percent range. Safety Products group revenue will increase 10 to 12 percent from the prior year and, with restructuring costs behind them, margins should be slightly above last year's 15.2 percent. Tools expecting revenue to be slightly below last year and an operating margin in the 11.5 to 12 percent range. Corporate expense should be about $3.5m and interest expense should be about $5m, just slightly above last year's level. The effective tax range should continue in the 28 to 29 percent range.

That completes my comments.

Thank you, Stephanie. Good morning. As usual, I will start out with some general comments and will then have a few specific comments on each of our four groups. From an overall market perspective, very little has changed since our conference call three months ago. Our commercial industrial markets, which are about 40 percent of our total business, remains slow. As we indicated in the press release, we are not seeing any significant indication of a sustained improvement in the U.S. economy. However, on the plus side, the only negative we have seen since our call of three months ago is a somewhat weakened demand for our tooling products by U.S. auto manufacturers.

On the governmental side of our business, about 60 percent of global revenues, we continue to see deferred buying in the U.S., but at the same time, we're experiencing fairly good demand from our governmental customers outside of the U.S., mainly in Canada and Europe.

We continue to see positive results from our lien initiative. As Stephanie noted, our inventory turns at the end of the quarter were 4.8, up from 4.2 a year ago. Also, our overall productivity has improved during the quarter as sales per employee were up over 10 percent compared to the first quarter of this year. A lot of this improvement is being driven by our Fire Rescue group.

As most of you know, we are in the process of seeking a replacement for Andy Graves, our President who left earlier this year. By way of update, we are in the middle of this process with an outside search firm and we are still hopeful of identifying a replacement during the third quarter.

Now, I'd like to make a few comments about each of our groups. Within our Tool group, as I mentioned earlier, we had very slow demand from our U.S. automotive customers. The quarter was actually slower than we had anticipated and we don't see that changing in the near future. Outside of U.S. auto, our domestic markets remain slow, but stable, while our non-U.S. markets, mainly Canada and Europe, remain solid with most of the European benefit resulting from continued market share gains rather than growth in the markets themselves. Within Tool, apart from the effects of currency, for example, our Tool sales in Europe were up 10 percent during the quarter.

Within our metal stamping segment, and I might mention that when I talked about slowed demand from U.S. auto customers, it's mostly impacting our cutting tool segment, separate from our metal stamping segment. In our metal stamping segment, we are in the final stages of establishing a distribution and licensing arrangement in Mainland China. This is our initial entry into tool distribution in China. As we gain more knowledge of the application for our particular tools in China, and this, again, is mainly in the metal stamping area, we'll be in a better position to consider, perhaps, small scale manufacture at some point in time, similar to what we currently do in a few of the European countries.

Within the Safety Products group, new orders were up over last year's second quarter as all of our business units saw some increase in orders. Absent translation effects, orders were up 7 percent. The cost we incurred in the first and second quarter to shut down a facility in the UK are now behind us and, while those costs negatively impacted margins in the second quarter, we expect to see the positive impact beginning in the third quarter, as Stephanie mentioned.

Within our Environmental Products group, our overall municipal demand remains slow and we continue to face an extremely slow market for Refuse bodies. On the other hand, we are pleased with our progress in developing our dealer sales channel for Refuse bodies and the back half of this year should see the beginning of results through that channel. While we expect our Refuse acquisitions to be positive contributor to operating earnings for the full year, they will have a modestly negative impact on earnings per share after the cost of acquisition. As we have mentioned before, since we are doing quite a bit of consolidation and rationalization in manufacturing, as well as in SG&A, we will not be providing separate profitability results for our Refuse acquisitions.

Within our Fire Rescue group, Stephanie noted that orders for the quarter were down last year. Our marketplace remains stressed due to budget shortfalls. While our North American municipal orders have been just slightly below last year, through the first six months of this year we remain concerned about the possibility of further slowing in the second half of this year. During the first half of this year, our activity with the U.S. Federal Government agencies has been very flow due to delays in their spending authorizations, but we believe that most of this is buying that will occur in the back half of this year. At this point, we understand that just $63m of the $750m authorized has been released under the 2003 Assistance to Fire Fighters Grant Program. We do not know how much of that $63m is specifically for apparatus, but we should have better information at our next conference call update. In any event, there is still quite a bit of money to be released under that program over the next few months and, surely, that will have some impact on our marketplace in the U.S. for the balance of the year. It's just difficult to gauge that impact at this point in time.

On the Operations side, our operating margins have improved in the second quarter as a result of both additional volume as well as further positive results of our lien initiatives. Labor productivity in our Ocala, Florida operations, our largest manufacturing facility, again, improved in the quarter. As we have suggested previously, and as you can see from Stephanie's third quarter guidance, we still anticipate improving margins in both the third and fourth quarter of this year. In addition to benefits in labor productivity and inventory turns, we are seeing other improvements from these lien initiatives in Ocala. We currently have four facilities in town producing apparatus. As a result of the floor space we have released in three of those facilities, we plan to close the fourth, a leased facility, early next year and consolidate that manufacturer in the remaining three facilities. This is a continuation of certain of the consolidations we have experienced over the last year in our other groups as a result of opening up floor space, again, resulting from the lien initiatives we are taking on.

For the total company, we continue to anticipate increasing margins in the second half of this year based on our projected improvements in our Fire Rescue group as well as benefiting from our one-time cost we incurred in our Safety Products group and Tool group in the first half of this year. As you noted from our press release, we have moved our range of guidance from a previous range of $1.05 to $1.15 to a new range of $1.05 to $1.10. We had previously indicated that the high-end of the range would only be achievable if we had reasonable improvement in the U.S. manufacturing economy in the back half of this year. At this point, we are not seeing such an improvement and, accordingly, are adjusting the top end of our range. We have held the low-end of our range of guidance, but it is important to note that much of our commercial industrial business is very short lead time and can be negatively impacted, as well as positively impacted, but if there's further softness in that marketplace it could have a negative impact.

Now, I'll turn it over to Adam for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press the star key on your touch-tone phone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. If you are using a speaker phone, please lift the handset before asking your question. Our first question comes from Walter Liptak of McDonald Investment.

Good morning, Joe and Stephanie. The outlook for FRG margin in the third quarter, the range, 5.5 to 6.5, what does that depend on? You're at the high-end this time. What will it take for you to be at the high-end in the third quarter?

It's really going to be keyed on successful deliveries of what we have scheduled going through that facility, as well as realizing the labor productivity that we have been experiencing throughout the first and second quarter and expect to continue experiencing some increased productivity in the third quarter. So those are the two key issues. The backlog is in place. It is not dependent on new orders. It's dependent on execution.

OK. And the backlog, if I recall, some of the pricing in the backlog from the second half of last year was not what it should have been. Is that all out of the backlog now? Are you working with better priced product?

Most of it is. I want to do one clarification as I answer the question. It wasn't the pricing in the backlog, but it ended up to be the margins. What we priced was not necessarily what we built. It wasn't an issue where we had slashed prices, for example, and ended up with low margin backlog. That's the clarification. But to answer your question, the vast majority of that is gone. We have talked about that, I think, in our last conference call. We still believe that and that's of part of why we see increasing margins in the third and fourth quarter at Fire Rescue.

OK. I think, Stephanie, you mentioned that the backlog had $251m for FRG?

That's right.

Is that sufficient to be at a run rate in the fourth quarter of this kind of $110m to $112m?

Yes.

OK. In the acquisitions you mentioned, could you quantify - - I think we can back into the number, but just what the acquisition revenue was and what the FRG through put revenue was? You mentioned foreign currency had a $10m right to revenue.

We don't break out Refuse revenue separately.

OK.

Remember, we have taken and we feel for a lot of reasons and, mainly, competitive reasons, since we're consolidating that in the group, we don't separately report our Refuse sales and earnings.

OK. Right. Thanks, Joe and Stephanie.

Our next question comes from Jack Kelly of Goldman Sachs.

Good morning. Joe, I was just wondering if you have seen any benefit from the weaker dollar from a competitive standpoint? You mentioned the benefit, obviously, the translation benefit, that was kind of the first question, the benefit of the weaker dollar.

Secondly, just coming back to Fire Rescue margins. The part of the backlog where you weren't realizing good margins on is, basically, gone. Why wouldn't we have a more dramatic pickup in margins in the third quarter from the second quarter? In other words, 4.8 percent and, let's say we hit 6.5, which is the high-end of the third quarter range, it would seen that given the volume gains that you've been getting, or will get in the third quarter, which, I think, Stephanie said was going to be up 20 to 25 percent, it would seem that it would be very quickly jumping to something near double digits because that was always kind of the objective? Maybe you are getting it. Maybe a time line on how to get to double digits based on what you see now.

Third, in terms of your finance company, could you just give us an update on what's happening there? I'm just kind of looking at the receivables, they're kind of flat, and in terms of profitability of the finance company because, typically, we don't get that in the press release?

Could you repeat the question, Jack? No. We got them all down. Starting with the issue of how the weaker dollar has helped us in the marketplace. I think there are two micro areas I would suggest. In the Tool world, in our European Tool sales, the weaker dollar has helped us competitively since we still do a fair amount of that manufacturing in the U.S. and ship it over to our European facilities to finish the work op. We've gotten some benefit there that we've been able to use in the marketplace from a pricing viewpoint. Another area, but it's, perhaps, longer term, we haven't seen any short term effects, is in our vehicle area, mainly, fire, but also some of our environmental products. When we're competing in the Mid-East and certain South American areas, we're competing with European manufacturers. Actually, this has occurred in a couple of places in Continental Europe, too, though we don't do a lot of business there exporting from the U.S. In those cases, we've found that we're able to get some benefit from that weaker dollar in competitive pricing for larger deals, for example. That's where it has been short term Tool and longer term, if this dollar stays this way, and if we get these bids in and lock those prices in, it's given us some advantage in that competitive marketplace.

With respect to the FRG margin issue, Q3 over Q2, part of what's still going on here is that we're still making a lot of investments in improving our operations to get us to that double digit margin. Those investments are going on across the group. I'd say that most of them, right now, are occurring in Ocala. Second largest, if I had to rank them, is probably in our New York facility. By investments, I'm talking about that we're doing a great deal of investment of time of our own people, as well as consultants expense, in implementing quite a few Kyzon [ph] events in pursuit of our lien initiatives. For example, for the first six months of this year, I believe we've had 15 week long events in Ocala. That takes quite a few people. Rough cut, it averages 10 persons, including outside consultants. That's going to continue in the third quarter and, to a lesser degree, continue in the fourth quarter.

As you also recall, we talked about one of the reasons we feel better about the margins coming in the front end as we've done some system changes. Originally, we did it more manual and now we're bringing on an electronic system so it will be all computerized. That's had a great deal of engineering time, significant amounts of engineering time, that are occurring and that will continue to occur in the third quarter. We have a lot of expenses in getting to that 10 percent. They are not going to stay there forever, but they're not going to be gone this year, which is why we will have more of a gradual improvement. What's really driving that improvement in Q3 is the better margins in the backlog that we referred to plus some productivity improvements. We expect that the results of those Kyzons, for example, are going to give us, perhaps, a point or two of productivity in Q3. Those are the combinations and we still have those other expenses.

Moving over to the credit corp, Stephanie.

Our assets in our portfolio at the end of June was $229m, just about $10m below where it was a year ago. Basically, what's happening there is that the, roughly, 15 percent of that portfolio that was taxable leases is being run off. That is declining over time and we're getting a little bit of growth on the non-taxable side.

Can you give us some kind of income numbers to that? Also, Joe, just following up on Fire Rescue, do you think you'd be, by first quarter of next year, at a double digit rate in terms of margins?

I wouldn't anticipate the first quarter. Keep in mind, first quarter, traditionally, is our weakest quarter in Fire for a lot of different reasons, budget things, deliveries in Q4. I think it's coming next year. We should have some double digit quarters. Can I suggest that the full year will be double digits? At this time, no. We'll know a lot better when we get into our planning near the end of the year.

We don't actually break out the profitability on the leasing portfolio. I can tell you that the spreads are positive. They declined slightly with our increase in our cost of borrowing this year, but it's still profitable and it's a good return portfolio.

Thank you.

Our next question comes from Larry Baker of Legg Mason.

Good morning. Just to go back to Fire Rescue, Joe, would the improvement that you see in third quarter margins, could you outline at this point to what you might think the fourth quarter would look like in terms of improvement over third quarter levels?

I think it will help you because you can back into it from our full year guidance. Our current estimate is what range, Stephanie? I'd say that I'd use a range of 8.5 to 10.

OK. What cost do you think you'd have on that plant closing of the fourth Ocala facility, I guess, that would be in the first quarter of next year?

It'll be first or second. It will be minimal. It's a leased facility. The lease is expiring. We've timed this move so that we don't have any exit costs for the un-expired lease and the employees will move to the other facility. We're going to have minimal cost to move equipment.

OK. It looks to me like orders in the quarter for Fire Rescue came in in the $95m to $100m range. Is that in keeping with what you were expecting or is that sort of below what you thought might happen in the quarter?

I think it's roughly our expectation. It was fairly much in line with what we anticipated.

OK. Then, your comment on the second half change for further pressure on the municipal side, do you think you can sustain something in the $90m to $100m or do you think you're going to drop below that?

I think that's a sustainable range. Keep in mind our comment; it's very difficult to gauge what's going on in this marketplace. The best input we get is by talking to our dealers and listening to our customers. There are some plus sides to that and there's some minus. We're trying to be cautious and prepare for what goes on with this deferred spending. How much of this $750m goes to apparatus is a key piece of this also. Notwithstanding all of that, yes, we do believe that they are sustainable on the numbers you've talked about.

OK. Then to shift over to Safety, can you talk a little bit about the status of the Dallas Airport installation, parking system installation, and had there been other significant orders like those that have come up?

For those of you who didn't hear, Larry is referring to a large contract we got to renovate the parking system at Dallas Airport. The total value is somewhere in the range of $23m. Most of that will bill out this year. There was a little bit last year and there's some future maintenance on it in future years. We're on track this year. We're in the middle of working with the airport. I can pick a number, we're 40 percent through the project, but it will go a little bit into next year, but we're on track for that. As far as additional airports, we have had a couple of additional airports this year. They have not been of the size of Dallas-Ft. Worth. A couple of those are out there, but it doesn't look like they'll go this year. We've had medium size, low multi-million dollar ones. I think Kansas City Airport, we picked up, perhaps, two months ago, a month ago, something like that. We still see the future activity in the airport marketplace to be a positive for us.

Are margins on Dallas about what you expected?

So far they are.

Finally, on Environmental Products, when do you think you'll hear from the Waste Management contract renewal process? Is that supposed to be this month?

Our best understanding now is that it will be in August that Waste will make their final decisions and enter contracts, etc. or Memoranda of Understanding.

Has anybody been eliminated or has there been any refinement in the bid process there?

We know we're not eliminated. I really can't tell you. We don't know if anyone else has been.

OK. Thank you, Joe.

Our next question comes from Greg Halter.

Stephanie, a quick question for you regarding the guidance. Does that include or exclude the three cents in the amounts in the first and second quarters, $1.05 to $1.10?

The $1.05 to $1.10 has been reduced by the charges we've had for restructuring.

OK. But that's in there, then?

It's in there.

OK. Great. Can you comment on the pension costs that you're seeing, any increase or decrease or leveling off?

Our year-over-year expectation was that the incremental costs of pension would affect us by about four cents in terms of earnings per share. In terms of what we're seeing, obviously, the markets have been a little bit better in the first half, but we don't have any better outlook than that at this point.

OK. Joe, regarding the move into China, can you expand on that a little bit since there seems to be a lot of interest in what's going on?

There are two things there. We believe that manufacturing in the U.S. will not return to what it looked like in 1999 and early 2000. At this point, we don't have any quantification, but we believe that a lot of this work that has gone away has not just been lower U.S. demand but it's also permanently moved offshore. In our Tool business, especially, close to the customer is a key issue. One-day delivery times a key issue. What we're doing is putting our toe in the water, and we've been in China with our other businesses for many years, but in the Tool area, we're just getting into the marketplace there for a couple of reasons. We're doing it though distribution and a little bit of licensing.

We need to learn more about that marketplace for our types of tools. Recalling that our tool focus is differentiated, high-end, high quality, not the cheapest tool around, so, historically, that's been why the manufacture in China didn't particularly consume our tools. That world is changing. There are a lot of high qualities. There are a lot of autos. In fact, what we'll probably start with is the auto world over there, our tooling for autos, and then make it broader from there. That's our plan down the road. Again, we have no specific plan for manufacture, but I wouldn't be surprised if we did something over there. Not just export it back to the U.S., that's not the purpose of this, but, rather, to service the manufacturers who are located in the Far East and in China in particular, not to service U.S. manufacturers, which will continue to be done, mainly out of our U.S. facilities.

OK. Looking at the balance sheet, the receivables and, I believe, the inventories were up as well on a year-over-year basis, and the receivables were sequentially. Can you comment on those? Obviously, there's some Refuse in there, but besides that?

If you look from the end of December, our receivables are up, but our sales run rate has gone up as well. You have to keep that in mind. We tend to look at our net receivables in terms of days sales outstanding. We ended 2002 at 47 and, after climbing earlier this year, we're back at 47 today. Talking about inventories year-over-year, if you look at year-end 2002 to where we are today, we're down about $10m and it's a little bit better than that if you take out the currency impact.

Finally, regarding the dividend this week, or last week, you just declared the 20 cent quarterly dividend.

Correct.

I just wanted to get your feeling on the prospects there, going forward. Obviously, with the $1.05 to $1.10, there's less pressure in terms of the payout ratio, but I want to get your feeling on where you want to see the payout ratio over the next couple of years, I guess?

Nothing has changed. I realize with the high payout ratio we'll be addressing this every conference call. While our cash is very strong and supports the dividend, that's why we declared the dividend, we still have a target payout ratio. We need to get our payout ratio back in line and we need to do that by increasing our earnings. We need to increase earnings sufficiently so that we can get to or approach that payout ratio. As should be expected, our Board looks at this every time we meet before we declare the dividend and review our cash position, as well as our earnings prospect position. That's what it's dependent on, too. In order to forecast the dividend, I guess I have to forecast the earnings at this point. It's difficult to do going out. Obviously, we're a dividend payer and we have been one and we have strong cash. Can we make any promises? No, we can't do that. Do we intend to keep paying a dividend? Yes, we do. I don't know if I can give you any more color than that except to say that, at the end of the day, it is dependent. We need to get our earnings up in order to get to our payout ratio.

OK. That is very helpful. Thank you.

Our next question comes from David Gruoff of Kero Price.

Just a couple of questions. I know you don't want to discuss your guidance for 2004, but can you just conceptually talk about the Fire market, it's got a lot of moving pieces there, but if you can look at a worst case scenario? Is the market that you're serving there going to be down 10 percent? Maybe, a best-case scenario, maybe, flat? Just conceptually, how are you thinking about the markets you're looking at in Fire in 2004?

Let me start with a little bit of 2003, and then move into 2004. We have seen competitive estimates that the U.S. market could be down 10 percent in Fire for this year and that's between slightly down and 10. I think is probably a fairly good estimate of where that 2003 marketplace is. From that point in 2004, this is going way out, but given what we've seen in budgets and demand and what needs to be done and product replacement, etc., etc., and how long deferred buying can go, it would be surprising if that market could go down another 10 percent in 2004. That would be very surprising if that could happen, to answer your question about 2004. If you noted, even, for example, in the Assistance to Fire Fighters Program, notwithstanding all these deficits, the firefighters are still claiming and screaming that they need more money from the Federal Government than they're getting, notwithstanding a $750m this year. I believe they had approximately $2b in requests. There's still a lot of focus and a lot of activity, lobbying, whatever it might be, in the fire service to get more of that, what's becoming to get to be, scarce Federal money. That will be an impact on the marketplace. It has to compliment what's going on with the local governments with respect to demand.

I think the other piece to keep in mind, from a sales viewpoint in 2004, is that the first quarter for sure, the second quarter very much so, are impacted by 2003's market activity, rather than 2004's market activity. 2004's market activity really starts impacting us in the second half of 2004.

It sounds like the market you're serving where all of this is going on, it could be flat next year on a full 2004 ordering basis. Could that be a possible outcome?

I think it's a very possible that the market would be flat next year. Also, I would say with respect to this year and to next year, we have plans in place, and we're talking North American municipal now, we're looking at product offerings that we are hopeful will give us some share increase within that marketplace.

Good. Good. Just one other housekeeping item, and I apologize, I stepped on the call a little bit late. Stephanie, the three cents of restructuring, could you give us the EBIT by segment that that was in? Also, if you could comment on it, will there be any other additional restructuring in the second half of the year? If you've already been over this, I apologize?

I'll start with the second half while she's checking those numbers. It is substantially behind us in Q1 and Q2. I'd say there's just trickles in the back half. That's part of the reason why you'll see from our guidance that we have a substantial improvement affect. From Q2 to Q3, about 6 cents of that improvement in earnings is a result of one not having the costs we incurred in Q2. The second piece is getting the benefits of the removals of the cost in Q3. There are trickle things there from some small accounting requirements, but nothing substantial.

The impact on Safety Products was about $2.1m in the quarter. Tool was about $450,000.

One other question, I think you dealt with this on the last call. Anything on the acquisition front, acquisition pipeline, or is this just right now not a focus?

I'd say, right now, it's not a focus in a couple of our groups. For example, and we will confirm what we've said before, Environmental Products, we're focused on consumption and really integrating, which is why we don't separate out Refuse. When we do an acquisition, especially one like this, it's a complete integration process. We're heavily into that integration. Until that's integrated, we won't be looking outside. Fire Rescue, we're going to improve our performance before we're going to acquire. Safety is looking at a few things, probably closer to what you'd call "product lines". In Tool right now, given the marketplace and where it is, we haven't seen anything that looks attractive to us.

Thank you. Congratulations on a nice quarter.

Our next question comes from Marcello Chois of CLK and Associates.

My question is regarding the municipal product demands. In the release you stated that you expect municipal products to remain weak for the balance of the year. Is this softness due more to municipalities' budgets shrinking or competition taking market share away?

We are very confident that it is shrinking budgets. While we don't, in most of our small market niches, get hard data on market share and we do it soft ways, but based on what we win and lose and deals that go down. We are very comfortable that we're not losing share and we're very comfortable that in certain of our lines we are gaining market share.

OK. In terms of your new waterless sweeper products, I believe last quarter you stated that you wouldn't see any impact in Q2 and Q3 from the sales. But in terms of orders for this quarter, have the orders been in line or have they been above or below expectations?

They're at expectations, which were very, very low. We have two products in the waterless area. The first product has three demos out there working as we speak. The second product will be introduced next month at a large sweeping show. The order activity really won't, apart from sales, the orders really won't get going until the tail end of the third or the beginning of the fourth quarter.

OK. In terms of the overall demand for sweepers, last quarter you said that you had a nice increase in sweeper orders. I think you mainly said it was because of deferred buying from Q4 and, I guess, expectations for spring-cleaning. How have the orders been in Q2 compared to last quarter and compared to Q2 prior year?

The sweeper orders have been good. They've been holding up, notwithstanding the overall weakness in municipal demand.

OK. Thank you very much.

Our next question is a follow-up from Walter Liptak of McDonald Investments.

Just a couple of quick follow-ups. The orders that you are seeing in FRG, would you mind commenting on the mix, custom versus commercial chassis?

It's interesting. May happened to be very heavily into commercial chassis in the short-term. June was back more towards a more average mix. It generally runs, as you know, between, perhaps, 60/40, either way. It's been in between. I think the thing that's driving our custom right now is our aerial product line. We're doing very well this year with aerials, which falls into the custom ranks. They're also higher priced units so that that's, on a dollar basis, is going to positively impact the custom ratio.

OK. Switching over to the Refuse market, has Waste Management talked about the size of the contract? I know that Whitkey [ph] had the $150m, three-year contract previously. Is the size the same? Are the terms the same?

To the best of our knowledge, there was no size given. There was no size given in our last Memorandum of Understanding. We have been told, to the best I know, that these Memorandums of Understanding do not commit to any particular volumes. We'll find that out when Waste finalizes their vendor relationships.

OK. You'll do some kind of a press release or something?

Sure.

Then, you mentioned that you're doing the push-through on the Refuse trucks through your dealer network. Have you gotten sales out of that yet?

Yes, we've had sales. I'm just saying some sales. They're from repeat customers who still need to go to a local dealer, even if it was a new dealer, but from this training viewpoint, we expect the volumes to start increasing in Q3 and continue so for a few quarters as these dealers get up to speed. So, yes, we definitely have had sales pretty quickly out of the dealer channel.

Is it for smaller Refuse hauls - - How are you doing penetrating some of the other waste haulers out there?

I think it's a fair statement that the vast majority of the large haulers want to deal directly with the manufacturer. We do have a couple of dealers who have good relationships with reasonable sized haulers. With the dealer organization - - to answer your question - - their main target is the smaller individuals and the very small fleets. They also are certainly there to provide service support for the large directs.

OK. Thanks a lot.

Our next question comes from Jason Rogers.

Elliot Schlange at LJR Great Lakes Review. Joe, given the somewhat static outlook, or period, that we're looking at, judging from your comments, are there any new products that can energize the company in 2004 or any new strategic alternatives that you're pondering as relates to 2004 to get off this sort of dead center period? I realize your products aren't exactly that dynamic as far as change goes in technology and so on, but is there any thought going on that would bring you into a new phase and the possibility of additional divestitures, not acquisitions, in, possibly the Tool group?

Let me take that in order. With respect to new products, as you know, we do a lot of focus on new products. That's a key requirement throughout Federal Signal companies and we are doing a lot of that. For example, one that will not change the nature of all of Federal Signal, but it certainly could have a major impact on the marketplace in our emergency lighting area. We just introduced a very different and brand new light bar. The first really new platform since we introduced our V-bars some years ago. What we expect that to do, you prefaced your question with this "static marketplace" that we're in, it will get us some share of a very slow demand right now but as that comes back, let's say it might be 2004, to your point on 2004. There's an example of something where we think we're going to pick up substantial market share with this new platform light bar that was introduced there.

The other area, the aerials and what that might do to us from a market share viewpoint in Fire Rescue. We continue to put together new products through our Bronto, our branded Finland-based manufacturing operation. They came out with some new products that they're selling outside of the U.S., which, as what, when we've talked about strength in our governmental businesses outside of the U.S., that was one of the reasons our Finnish-based fire products are doing pretty good this year. If we combine that with some demand coming back, we think we have the ability to generate a growth rate in earnings now that will be based on some economic recovery in the U.S., market share, plus these operational improvements and all these "restructuring" costs that I know you've asked us about many times, which we now have done and behind us, combined with our lien. Those are the four things we think are going to come together to get us back onto a stronger profitable growth trend starting in 2004.

I can't say we're looking at strategic alternatives such as selling the Tool group. We always revisit what's core at Federal. If something changed, for example, with Sign, it was core some years ago, but because of change in marketplace, change in size, change in characteristic, it no longer became core and we did something different with it.

I guess that's what I'm asking, in Tool, whether the fundamentals of that business have dramatically changed to a point that it's not going to come back the way that it might have been anticipated a few years ago.

That's the key, when I talked about what we've been doing in the past in Portugal, what we're doing now in China, we've already had an operation in Japan and some arrangements in Thailand. We don't think it's going to look the way it did before. We believe that the advantages we had before, we can have again. We're in a certain segment of manufacturing in the Tool world. We're not real generic and we're not at the low end. As long as the quality also goes offshore, then it's something we can address. If it turns out that that doesn't make sense, then maybe we would consider strategic alternatives. We do think we have a pretty good global infrastructure, especially in our metal stamping. We are far and away the largest tool provider in that metal stamping world.

Thank you.

Our next question comes from Jack Kelly of Goldman Sachs.

Joe, just to follow-up on the Refuse side. You had indicated that the acquisitions would be dilutive this year. Could you just, without getting into sales and operating income per se, characterize that by pennies per share?

Pennies per share? It's four. That's where we're trying to get by, when we say modestly, but, now, we're just forecasting through six months to give a directional sense to the folks on the call. That's why we used the term we did. A lot of things are going on there, but that's the ballpark.

Thank you.

There appears to be no further questions at this time.

OK. Thanks again for joining us. We will talk to you again in three months. We have a lot of things going on here. We're forecasting and projecting a very good quarter and it will be, or at least, we're forecasting it to be higher than last year, which is a key turnaround for us, to start exceeding our prior year's quarters. Thanks very much and we'll talk to you in 90 days.

Ladies and gentlemen, thank you for participating in today's program. This concludes the call. You may now disconnect.