Federal Signal Corp (FSS) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Federal Signal Corporation fourth quarter earnings release 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 this conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to introduce your hosts for today's conference, Mr. Robert Welding, chief executive officer, and Ms. Stephanie Kushner, chief financial officer. Ms. Kushner, you may begin your conference.

Good morning and welcome. Before I begin, as usual, I will just remind you that some of our comments contain forward-looking statements about the future prospects for the company. Please refer to our most recent annual report to shareholders, our recent SEC filings and press releases and the release that we issued in conjunction with this conference call for a more detailed discussion for the risks that are involved in these forward-looking statements.

I'll start with a summary of fourth quarter financial results. We reported diluted earnings per share from continuing operations of 24 cents on sales of $316m, bringing full-year results to 79 cents on sales of $1.2b. Sales and cash flow were as predicted. We were 1 cent below the low end of our earnings guidance due to weak results in our Safety Products Group and higher corporate expenses, partly offset by lower income taxes.

New orders rose sharply to $308m due to a very strong inflow at Fire Rescue. For the corporation, this represents an 8% increase from last year and a 17% rise from last quarter. In addition to the global strength in Fire Rescue orders, we saw improvement in selected industrial markets. Municipal street sweepers and sewer cleaners were up following two down quarters, but U.S. Police Products orders continued down and actually declined further from the third quarter. And refuse trucks and large parking project orders remained week.

We ended the quarter with backlog of $362m, up slightly from last quarter and down $60m from this time last year. As you probably recall, our Fire Rescue backlog was abnormally high last year and -- due to production problems, which were limiting sales. Quarter-end backlog by group was for Environmental Products, $74m; for Fire Rescue, $246m; for Safety Products, $31m; and for Tool, $10m.

Sales of $316m exceeded the prior year by 8%, up 3% in the U.S. and up 19% outside the U.S. versus prior year. The non-U.S. increase is more than half due to currency but also reflects higher export sales from our U.S. Fire operation and a strong Canadian market. Our gross profit margin was 25.2% in the quarter, below average for the year and below prior year. The reduction reflects, in large part, the relatively smaller share of sales coming from Safety Products, which is our highest gross margin business. Also, versus last year, we experienced margin declines at Tool and Safety Products. In Tool we had higher costs in our mold tooling business, which we have not been able to recover in the market, and some increase in volumes of third-party resale product, which are at a lower gross margin.

In Safety Products the decline in margins reflects weak parking systems business, which is resulting in under-absorbed fixed costs and a lower-margin sales mix, which is particularly due to weak municipal markets.

At 19.2%, selling, general, and admin costs declined, reflecting cost-reduction activities across the business. Versus a year ago, SG&A headcount has been reduced 12%, affecting almost every single location. Our operating income was $18.9m, or 6% of sales, down from $21.3m and 7.3% of sales in 2002.

The impact of the weaker dollar was neutral for us on earnings for the quarter. The earnings translation impact from our European operations was favorable, but this was offset by the adverse impact on our operating costs of the strong Canadian dollar. As you may recall, we make a significant number of refuse truck bodies in Canada, which are then sold into the U.S. market, so with the strong Canadian dollar, our margins are reduced.

By group for the quarter, environmental products revenue was up 11% at the high end of our guidance range. Global sweeper sales rose. In Holland, deliveries of our redesigned models with anti-lock braking systems were strong, and in the U.S. sales improved versus a weak fourth quarter last year. The operating margin of 6% was as predicted and up from last year.

Fire Rescue revenues rose significantly as planned, up 17% from the prior-year period, and margins averaged 5.1%, well up from the disappointing level a year ago and consistent with our guidance.

Most of the year-over-year improvement was in North America. As you recall, our U.S. plants were experiencing the worst of their operating problems a year ago, and they have made some progress this year.

Safety Products revenue was down 6%, about as expected. The reduction is associated with the weaker Police Products business, both in the U.S. due to municipal market slowness, in general, and, more specifically, in Europe due to the absence of the very large Spanish police contract that we delivered in the fourth quarter of last year.

However, operating margins averaged 11.1% versus the 14% to 15% that we indicated in our guidance. This shortfall is almost solely due to weaker profitability in our parking systems business. They have been impacted by lower-base business and higher costs on their DFW airport contract. Additionally, in response to the weakness in this business, we have incurred some costs associated with headcount reductions.

Tool revenue was up 8% from last year due, in part, to currency translation benefits on European sales. Margins declined to 9.1%, slightly below our guidance, due to lower margins in our mold tooling business. We believe these margins should improve in 2004.

Below the group operations line, corporate expense rose to $3.8m, up from prior-year and from our estimate due to higher pension and bad-debt expense accruals. Also contributing to the higher run rate, our increased legal costs associated with the hearing loss litigation. We are stepping up our activity on these cases as we begin litigating these claims.

Interest expense declined to $4.6m, reflecting lower debt balances. Our tax rate declined to 15% in the quarter, below the 2002 level. Our large permanent differences specifically are non-taxable municipal interest revenue become relatively more significant when our operating earnings decline. So the lower operating earnings, the lower our tax rate, all else equal.

Operating cash flow in the quarter was $18m, and $75m year-to-date, in the range of our guidance. We made some progress in working capital in the quarter, reducing our day sales outstanding to 49 days, and we continue to make progress with inventory turns, which trended up to 4.8 in December and averaged 4.7 for the year versus 4.3 last year. Consistent with expectations, capital spending totaled $18m for the year.

Our balance sheet is much stronger than it was a year ago. At the end of the quarter, the ratio of manufacturing debt-to-capitalization had declined to 40%. We remain well within our debt covenants at the end of the quarter.

Our pension plan investments performed well during 2003. We achieved an average return of 20%, which was, of course, well above our 9% underlying assumption. Because of the performance and also because of the discretionary contribution we made earlier in the year, our funding position improved to 73% of the value of the liabilities versus 70% at the end of 2002. We have just recently made a further $3m discretionary contribution.

I'll now turn it back to Bob.

Good morning, everyone. This is my first conference call since joining Federal Signal on December 1st, so I'd like to begin by saying that I am absolutely delighted to have the opportunity to step into the leadership position at this great company.

I'd like to acknowledge the profound growth that took place under Joe Ross's watch during the last 17 years as CEO. Federal Signal grew from $318m in sales in 1987 as a result of strong international expansion and a number of strategic acquisitions that broadened our product portfolio. During his tenure, market capitalization increased from $160m to $841m. Joe's vision, his propensity for details and execution, his interest in developing future leadership talent, and his complete dedication to the company and its goals have set the stage for Federal Signal's next 100 years of growth. So on behalf of all of my colleagues throughout the company, I'd like to express our appreciation for his great contributions and wish him and Barbara well in their more leisurely years.

Before I talk about my vision for Federal Signal, let me take a minute to tell you what brought me here. As most of you know, the company has been on a leadership transition track for several years. In their consideration of me as a candidate for CEO, the board valued my background in product development and in operations, my leadership style, my international business experience, and, finally, how my progression at Borg Warner, a company that has performed remarkably over the last 10 years, incorporated all of these traits.

From my perspective, what I saw at Federal Signal was a great opportunity -- a company with a proud history, strong brand equity, strong product heritage, and a large portion of its sales in North America. I thought that the growth leverage inherent in this company profile were particularly suited to my skill set and experience. So I'm absolutely thrilled to be here. I still have a lot to learn about our businesses and our markets, of course, but I'm working hard to do this as quickly as possible.

It is my intention to earn the strong support of our shareholders and the board by working hard to develop the great potential of the company and our employees and to unleash the substantial shareholder value that I believe this company has.

I am delighted to have Jim Janning taking the position of chairman, which does three important things. First, of course, it strengthens our corporate governance. Second, Jim's presence will help assure continuity within our board at a time when we've had a lot of changes in the board membership. Third, and perhaps most importantly, my time is freed up to concentrate on growing the business and improving our operations. Along the way, I look forward to tapping into Jim's extensive background in business strategy and M&A as we work closely together.

Now down to business. Stephanie has already taken you through the fourth quarter and 2003 results. I'd like to focus my comments on the forward look. First of all, what do we see for 2004 from a market standpoint? When you look across our operating units from the corporate standpoint, the new business trend line remains unimpressive. But, unlike the last two quarterly conference calls, we do see a couple of signs of life.

We're beginning to see indications of the strengthening in orders on the domestic industrial side. This segment represented 31% of our business in 2003. Orders received by our Tool Group began trending up in November and are continuing to trend upward, albeit not dramatically, so far. Orders for industrial vacuum trucks and high-pressure water blasters within our environmental products group have just begun to trend upward. And we saw some stronger industrial orders in our Safety Products Group in December, following a weak November. Now, it's too early to claim that these few data points are an absolute indication that the sluggishness in this segment is finally over, but it certainly feels better than it has for over a year.

Our largest segment, of course, is the domestic municipal market at 40% last year. Here, we still lack any meaningful signs of recovery. As you know, increases in municipal spending commitments typically lag recovery in the general economy because of the delay in tax receipts and because of the mechanics of the municipal budgeting processes. So we know it's coming, but we're prudently planning that the market will be down about another 5% from 2003 before starting to recover as we approach 2005.

Having said that, in December we saw some surprising strength in new business received in our Fire Rescue Group, as Stephanie indicated. Most of these orders are from municipalities and volunteer fire departments. Traditionally, December is a strong month for new orders in this business. Fire Rescue orders tend to be our most volatile, so we don't look at this one good-news point as evidence of a general recovery in municipal spending. Grants to improve first-response capability of local fire departments continue to be released by FEMA, and although only a small portion of the grants is directed specifically to new equipment, the contribution of this additional funding into the process should continue to positively impact our business.

The other market segment we report on is non-U.S., which represents 29% of our business. This segment has been strong for most of the year, with increased exports resulting from the weak dollar. All four of our groups enjoyed new international orders during the year at a stronger level than planned, and we think that will continue.

So for the remainder of 2004 we are planning on a continuing, slow recovery in our industrial segment, continuing strong orders within non-U.S. markets, and some additional weakness on the municipal side before recovery begins late in the year or early in 2005.

At this time we would normally provide guidance for the next 12 months, but we have decided to postpone giving financial guidance until sometime in the future, most likely later this year. This was a big decision so let me explain why we made it.

As everyone is well aware, the guidance we've provided for much of the past two years has not proven to be very accurate and could not have been very useful to you, our investors. I can assure you that I understand your frustration. I am as troubled by our poor forecasting track record as you are. I understand how important it is for us to provide you with appropriate benchmarks to use in measuring our progress. We will do that as soon as we have the confidence that we can provide guidance that is both timely and accurate.

As the new head of this company, I know that I have to earn your trust, and I don't want to start off on the wrong foot by counting on a process that hasn't produced reliable results in the past. I have initiated a root-cause analysis of our past forecasting misses within each of our business groups. I will update you on our progress, going forward, and, in the meantime, we will provide you with as much qualitative information as possible about our various businesses and the respective market to ensure that you have an appropriate view of the company as a whole. Along those lines, Stephanie will give you some additional forward-looking comments in a moment.

We have identified some of the causes of our forecasting problems, but we still have a long way to go before the process is fixed to my satisfaction. Just, for example, a key issue is that our market-sensing tentacles are not as effective as they need to be. We aren't able to adequately predict market inflection points in the multitude of product lines that we have. The vast majority of our sales are through distribution channels that are outside of our direct control. Therefore, we do not have the kind of customer intimacy that one would like to see. This is particularly challenging, but we simply have to find better ways to do it.

Another major factor was the unpredictability of our Fire Rescue Group. With some of our vehicles selling for close to $1m, if we're late shipping even one or two of them, it can wreak havoc on our monthly forecast. I will provide more detail shortly on how we will turn this around but, suffice to say, for now, that a more efficiently run business is vital to improving predictability.

And now I'll turn the call back to Stephanie.

Although, as Bob said, we're not providing point earnings estimates, I'm going to try and provide some color on the market and margin trends we see for 2004. So by group, Fire Rescue should be on a positive trajectory for 2004. Their U.S. sales are largely into the municipal sector and could be affected by this market weakness. However, their strong Q4 orders do put them in good shape coming into the year with a backlog equivalent to more than seven months of sales. Their operational improvement initiatives are beginning to bear fruit, and we should see gradual improvement in margins. Pension expense is not material for this group, and increases in health care costs should be more than offset by operating improvements. The first quarter will be seasonally weak, as usual, with most strength in the second and fourth quarters.

Environmental Products results will move sideways this year, unless there is a surge in the underlying municipal demand. As you may recall, about 70% of the sales from this group are into the municipal governmental markets and about 30% into industrial and commercial customers. We expect the positive momentum on industrial to more or less offset the negative of a potential further weakening municipal market. EPG products receive a lower spending priority than fire, so we are more cautious about a recovery in municipal orders for this business. EPG continues to face challenges in a weak refuse market. On the positive side, product improvements to ensure field durability are largely behind us. We are making significant productivity improvements and recently announced the shutdown of a components plant in Canada, which will reduce manufacturing overheads. And we're making progress, building sales through our dealer channel. On the negative side, we expect volumes to waste management, our largest customer, to be down, and we're facing negative cost implications due to the strong Canadian dollar. Consequently, we expect refuse operations to continue to dilute the EPG margin in 2004 preventing them from making any real progress versus 2003.

Regarding Safety Products, this business should be on a positive trajectory in 2004, at least on the income line. Sales growth may be modest due to the completion of the DFW airport project in the first half of the year, but earnings should improve as industrial markets strengthen. Industrial sales are typically slightly higher margin than municipal for this segment. Also, Safety Products will benefit from some of the cost-reduction and material sourcing initiatives put in place during 2003, which should more than offset some of the higher pension and medical expense.

Tool should enjoy their industrial recovery and post a material year-over-year improvement. In addition, their margins should benefit from the reduction in fixed costs associated with the Jamestown plant shutdown in the middle of 2003. We've not received the full benefit of this shutdown during 2003, because in the second half we have experienced some operating inefficiencies associated with transferring that business to our Dayton facility. Tool should also continue to benefit from the weaker dollar, as they have some significant overseas businesses.

Below the group operations line, a few comments -- corporate expense will be higher due to the legal expenses associated with litigating the hearing loss cases, which I referred to. Our tax rate should return to the mid-20% range, and interest expense will trend down slightly due to lower borrowings absent, of course, some unexpected move from the Fed to raise interest rates.

In summary, then, we are assuming total revenues about flat with 2003 with the further reduction in municipal sales more or less offset by the recovery on the industrial side. And earnings should be modestly higher as cost reductions and operational improvements initiated in 2003 bear fruit, which should more than offset higher employee benefits, legal expenses, and the impact of a higher tax rate. Bob?

Continuing our look ahead, I'd like to now talk about issues and outlooks within our business groups. Obviously, I don't have a comprehensive insight after only eight weeks, but I'd like to talk about three of my priorities.

One is to fix the operational issues at Fire Rescue. Another one is to finish integrating our new refuse business, and the third one I'll talk about today is the process of evaluating each of the businesses within our portfolio to determine which ones have the best potential for future growth. I'll talk more about these each in turn.

Let me start with Fire Rescue. Those of you who have been following Federal Signal for a while are well aware that during 2003, in addition to the challenges we faced as a result of weak market conditions, we struggle with operating issues at our main Fire Rescue operation in Ocala, Florida. I have spent quite a bit of time in the past few weeks down in Ocala reviewing the operations and striving to understand the issues. To be honest, my first reaction was amazement of how complicated and diverse the vehicle product mix is in this industry.

Our problem is that the complexity of the vehicle designs has increased substantially over the past decade, while the business systems and processes that we were using were not successfully enhanced to handle the ever-increasing complexity. I can see that attempts have been made over the years to improve the systems, but the approaches used did not result in changes that were institutionalized. Therefore, when the organization was stressed, behaviors drifted back to what was comfortable, rather than stay the course and make the improvements stick.

The result is that we have a business that continue to grow but doesn't have the foundation in place to be able to handle the increased volume and complexity efficiently and therefore profitably. This is a classic example of an unstable system. An unstable system is not predictable and attempts to improve it will largely be unsuccessful. Therefore, a top priority is to stabilize it and then make the necessary improvements for the long term.

I have to say that, in spite of this, through sheer determination and incredible hours, our dedicated employees have managed to produce products that continue to have a very high quality level and robust performance in the field. Our customers continue to value the innovation and effectiveness of our products, even though we have disappointed them with some unreliable delivery commitments.

We have a management team in place that, for the most part, is new within the past two years. I'm still getting to know them, of course, but I have to say that I am impressed by the diversity of talent and experience I see there, and their energy and commitment to getting it right. I believe that the improvement plan they are implementing is spot-on for what needs to be done. The plan is focused on fixing the root causes of the problems and not continuing to react to system failures with band-aid solutions. The approach will not produce a turnaround within a quarter, as we would all like, but my impression is that what they are doing are the things that are absolutely necessary to provide appropriate structure and discipline to this mass customization type of business.

Structure and discipline are the fundamentals to any efficiently run business. The more standardized the products are that you're dealing with; the easier the structure is to visualize and put into place. However, the more complex situations rely even more on appropriate structures. The nucleus for the business improvement activity at Ocala is a product configurator tool. Very simply, this is a software-managed process that guides the customer to order a vehicle that's configured from an array of pre-engineered and pre-costed modules. It's sort of like a Lego set. You can build anything you want, but you are forced to use the modules that are provided.

While providing our business with the needed structure, standardization and predictability, the configurator will still provide fire chiefs greater freedom to configure their custom vehicles to suit their needs. It will guide them to make choices that will result in a vehicle that satisfies the requirements but will cost less, require less lead time, and can be built with higher quality.

The management team has been working very hard on this all during 2003, and we'll begin the rollout during this quarter for the models that traditionally represent about 80% of our volume. With the configurator in place, we will see steadily improving throughput with the associated improvements in productivity, working capital reduction, on-time shipments, and first-time-through build quality. I am very optimistic about this approach, because it gets to the root cause of the problems that the business has been having. I assure you, I will be following it closely, and I will be reporting on our progress throughout the year.

Let me now move on to our Environmental Products Group, and my assessment about the integration of the Leach and Wittke businesses that we acquired late in 2002. I'm sure most of you are aware of the issues we face subsequent to closing on the businesses. First of all, we learn that waste management was having some significant durability issues with the Wittke products in some of their applications. Right after closing, instead of being able to concentrate on integration, we diverted significant resources to the understanding of the field issues and making the appropriate design changes to the products. We implemented fixes on the front-loader design and have completed the task of retrofitting affected units in the field at our expense. Reports from customers indicate that they are very happy with the performance of this update product.

At the same time this was going on, the market tanked for refuse trucks in the U.S. A normal year is about 10,000 bodies per year. In 2003, the number deteriorated to about 6,500. Most commercial haulers dramatically reduce their purchases and, although we held our position as a supplier to waste management, changes in their purchasing strategy will cause a reduction in forward purchases.

Let me digress for a minute here. One of the most important traditions of the Federal Signal brand is product reliability and robustness. This has been the case throughout our history and is one of the things I liked about the company as I was considering this position. This commitment was very obvious, as I looked at how our people in the Environmental Products Group responded to the field performance issues. This kind of commitment to product integrity will strike a chord in the refuse truck business just as it has in our other product lines.

As we roll out a freshened vision and growth plan in the next several months, you can count on us honoring and reinforcing this promise of quality and reliability to our customers.

Now, getting back to the refuse business. With the design issues contained and, for the most part, resolved, we are aggressively working on getting the business right-sized and developing new product ideas to fuel growth in the future. For example, late last year we launched our new rear-loader Leach body, and we expect to have an updated automated side-loader available in the first half of 2004. We are starting out in this business as number three, but let me make it clear that no one in this company is satisfied in maintaining that position.

We are working to improve our operational effectiveness in refuse, though we still have a ways to go before we could hope to operate our profit expectations, given current volume levels. We are counting on leverage from the strong dealer network in our Environmental Products Group to increase our share of the depressed market.

We are pleased and encouraged by the positive dealer reaction to the product changes we have implemented. This is a nice indication of the leverage that we counted on is going to work. Additionally, our order book is reflecting improved penetration into some of the larger hauling companies through our direct sales force, another very positive sign.

Our market research indicates that fleet and municipal operators, both value up-time and productivity, highly in these products, and we're focusing new product development in these areas.

My third objective in the near term is to lead a thorough review of our business portfolio. In a process that I began formally last week, our leadership team is reviewing all of our product lines, technologies, and distribution channels. We will identify those that we believe, given the proper focus and resources, can provide substantial profitable growth over the next five to 10 years. We will identify the key drivers to growth in the various markets that we now serve and assess whether we possess the core competencies necessary to maintain or create a sustainable competitive advantage to achieve a leadership position, if we're not already there.

For those products that make the cut, we will invest the necessary resources to accelerate our growth significantly. There have been no decisions made, so far, so there are no more details available at this time, and I'll have more to say about this after a few more months of study.

A final but important point -- we have made great progress in our lean initiative and in our strategic sourcing initiative during 2003. Overall, productivity is up about 7%. We have seen a 9% improvement in inventory turns, and a 6% improvement in meeting customer delivery commitments. We have closed four operations, and total headcount is down about 8%. I believe we still have a significant amount of improvement potential remaining, and we will be going at this very hard in 2004.

From a purchased materials standpoint, we realized about a $5m improvement during 2003 in newly implemented initiatives that have an annualized value of more than double that. We will continue to push this aggressively as well.

So that's the end of our prepared comments. I thank you for your continued support and for your interest in our company, and Stephanie and I will take your questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the "1" key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, if you have a question, please press the "1" key. Our first question comes from James Sanders of Standard and Poor's Equity.

Yeah, hi, good morning, Bob. Good morning, Stephanie. I guess, first off, welcome aboard, Bob. And my question for you is more of a big-picture type of thing. What do you value or look at as most important for increasing shareholder value, over the long term, for Federal Signal?

That's a good question. Of course, margins are interesting, but I look at a return-on-investment type of measure as the most important for long-term shareholder growth.

Okay. And I guess the follow-up would be for the tax situation. Stephanie, what exactly -- can you explain to me what happened this quarter regarding the lower tax structure and is that likely to happen this year? Because I know last -- I think when you guided last time -- and I know you're not doing guidance from here on out -- but you had said in the 25% to 30% tax range, and I think now is, what, 16% for the quarter?

Yes, I think the biggest change, about 6 percentage points of the reduction -- I think the range I gave was 25% to 28%.

Right.

The biggest piece of the reduction, about 6 percentage points, is just taking the absolute level of our permanent difference associated with the municipal leasing over a lower pretax income. So it's -- the impact on the margin is very high profit levels. In addition to that, we had -- because one of our Japanese tool subsidiaries became profitable, we picked up a couple of hundred thousand dollars, because we were able to benefit that with taxes. We had finalization of our state returns, which don't happen until September and October. That had, I think, a little over a percentage point impact as well.

As we look forward, mid-20% is probably the right number to use. There are question marks out there on the -- in terms of legislation with respect to foreign sales corporation; also with respect to the R&D tax credit. We do tend to forecast probably more conservatively, so it's kind of depending on what happens to those, the tax rate that we face could go up to, say, 28%.

Okay, okay, thank you very much.

Thank you. Our next question comes from Walt Liptak of McDonald's.

Thank you, and I'd like to welcome you, Bob, as well.

Thank you, Walt.

Let me ask you kind of a question to start -- it might be a little bit difficult, but you mentioned the teams in place at FRG, and that you'll get a turnaround, over time. What would be a reasonable time period to expect out of FRG to get margins to kind of a sustainable level?

Well, right now, that's kind of a tough question, Walt, and, to me, margins -- if you look back in history, we've been north of 10%. So I guess that would have to be the kind of target that we would be shooting for. You know, we're down to, what, a little bit north of 5% this year, so we have a ways to go. I don't know right now how long it's going to take, but I do believe that we can get back there. It's not a matter of months, and it's not a matter of a bunch of years, either. I think that we will -- in fact, as we look at the operating results of Fire and Rescue in 2003, we're already starting to see some improvement in the operations.

So I think that's an indication that we've started to get some traction, and the things that they've been working on for much of 2003 have been directed at getting this configurator in place and, of course, that's a lot of work, and that doesn't produce any substantial direct results immediately. So this will be a thing that will continue, over time. My sense is that during 2004 we ought to see the rate of improvement kicking up, you know, in the second half of the year, and I think we'll all be very excited about that.

What I would say, Walt, is why don't you ask me that question a few more months down the road, and maybe I'll have a better sense.

Okay, great. Let me ask you about the strong orders in the fourth quarter in FRG. Could you comment at all about pricing? Maybe the kind of trucks that have been ordered? Are they on a standard chassis or a custom chassis? And the mix in terms of pumper versus other trucks?

Let me start you on this. You know, we had no change in pricing in the fourth quarter. We did get a couple of -- we got a large Houston fleet order, for example, and we did get a couple of significant export orders. One, I think, to Saudi Arabia -- I can't remember where the other one went. So we had a couple of those, which are the kinds of deals you work on steadily throughout the year, and which ultimately popped in the fourth quarter.

I can't comment on the mix. Our aerial sales were a little higher in the [electronic noise] quarter -- aerial orders, I should say, and that's pretty typical for us, as well.

Okay. Okay, thanks, I'll let someone else go.

Thank you. Once again, if you have a question, please press the "1" key. Our next question comes from Jack Kelly of Goldman Sachs.

Good morning. On the refuse side, Stephanie, in the past you've kind of given us some estimate of what the dilution might have been there. Could you update that number for '03 for us -- and if there is any color you can give us with regard to '04 in terms of their contribution or lack thereof? Secondly, on Tool, you had mentioned revenues up 8%. Can you break that down between FX and organic and also, to the extent you have foreign sales there, are you really benefiting from the weak dollar? And then, finally, on the Fire Rescue, that Houston order and Saudi Arabia -- are these -- this kind of repeats, I guess, the past question, but I guess we all might be a bit concerned if those orders are too customized, we continue to run into the previous issues that we had with manufacturing those kinds of products, you know, at a good profit.

Okay, let me start. Refuse, basically, was profitable in 2003 but not by much -- so quite a low margin relative to the rest of Environmental Products. I think the fourth quarter of last year it broke even.

Above the cost of --

All right, not above the costs. I'm sorry, I'm just looking at it on the operating basis. So it was dilutive -- it would have been dilutive when you consider the shares and also the debt.

Okay, by a couple of cents or any --

I don't have that number, Jack.

Okay.

In terms of '04, I think what I was trying to say is we don't think that net-net they're going to make much progress, because the pluses on the cost and restructuring side are being -- absent any real improvement in the market, are going to be more or less offset by the impact of the Canadian dollar and also some lower volumes from waste management.

Okay.

Let's see, the Tool -- I think I had that Tool number -- the 8% increase, it was, I think, it was -- 3% of it was associated with currency, and the rest of it was a real increase.

Okay, and anything particularly strong in Europe, given the weak dollar?

Well, Germany has been very strong. Part of it, though, has been by resale products that we import from Japan, so the profitability hasn't been great, but the top line -- sorry -- it's good compared to some of our other products but not as good as the average for Tool. And I think Japan has continued to be strong.

So organically it sounds like Germany would be better than 5 -- would have been better than 5%?

Yes. Germany was up quite considerably but, again, it's not a huge operation for us, but it is our largest overseas Tool operation.

Okay.

And the last one on Houston and Saudi Arabia -- I don't think that there was anything particularly unusual. We have, I think, put in some pretty strong controls on the engineering side with respect to qualifying these truck orders. I know the Houston one, in particular, we've been working on during the entire year of 2003. So I think the engineers have been very avidly involved in that.

Good, thank you.

Thank you. I am showing no further questions at this time.

Okay, no further questions -- thank you, Nicole, for the very fine job of managing this conference, and I'd like to thank all of our participants, again, for your interest in Federal Signal, and I am really looking forward to more discussions in the future and for our next conference call in April, and everyone have a good day.

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