Federal Signal Corp (FSS) 2004 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter earnings release call for Federal Signal Corporation. 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 from the conference please press * then 0 on your touchtone telephone.

As a reminder this conference call is being recorded. It is now my pleasure to introduce your host for today’s conference Mr. Robert Welding, President and CEO and Miss Stephanie Kushner, Vice President and CFO. Mr. Welding you may begin your conference sir.

Thank you Sean and good morning everyone. I will begin by making a few general comments about the broad markets we serve and then go into some details within each of our four business groups.

Recall that our largest market, about 40% of our business, consists domestic municipalities and other government agencies. Beginning in 2002 lower priority segments of this market began to weaken then in the latter half of 2003 demand declined significantly.

Q1 continued weak and to this point we’ve seen only scant indications of recovery. In the January conference call we said that we didn’t expect to see any recovery in the municipal segment until late this year or early 2005. While this essentially remains our view, very recently we’ve seen some increased quoting activity in some of the product lines that would be a higher priority item in terms of municipal budgeting.

Strengthening in the domestic industrial segment, constituting some 30% of our sales began in Q4 last year and we’ve seen a nice steady improvement throughout Q1 positively affecting three of our four business units.

In 2003, sales to our third major segment non US market set a new record as they grew to 29% of total even with the addition of a full year of domestic refuse truck sales diluting the measurement.

In the quarter just completed, non-US orders continued to build in all four of our groups up 32% from the year ago. About a third is due to a weak dollar, but much of the increase is due to initiatives we put in place to strengthen our distribution and marketing in the segment. We think international business should continue to grow over time as we focus more in that area.

When you look at our operating results summarized in the press release it’s obvious that safety products group and our tool group are doing very well. These two groups are more leveraged to the industrial markets so they are benefiting nicely by the recovery underway and they’ve done a good job converting the additional sales into income.

Restructuring measures taken during 2003 and our continuing lean initiatives have reduced the cost structure in these groups while they are still able to flex up quickly and efficiently to meet the increasing demands.

On the other side of the coin you can see that we continue to struggle in our fire rescue group and even though margins increased in our environmental products group, we’re far from where we need to be because the group consolidated results continued to be diluted by the refuse truck business. The issues in both of these areas are well known and I will update you on progress to get our arms around them.

Now going into details by group, we’ll look first into environmental products. From a new business standpoint, we had a stronger first quarter than expected across all product lines. Orders for our Dozer (ph) vacuum trucks were very strong from contractors reflecting increased demands from their industrial customers for manufacturing plant maintenance projects. The orders placed for our Elgin Sweeper vehicles surged primarily due to road maintenance contractor customers rebuilding the fleet.

International orders for sweepers, vacuum trucks and water blasters were all very strong. Non-US orders reached 19% of the group’s total up from 11% last year. This group added some resources to develop non-US business last year and now it looks like it’s paying off.

And finally, new business for refuse trucks exceeded our expectations. Orders for our Leach brand rear ordered trucks were higher by about 61% over Q1 last year with the improvement coming primarily from regional commercial haulers. Much of the higher order activity for Leach truck happened during the month of March and likely some of that was to get ahead of the scheduled price increase, but the higher order rate is continuing so far into April.

Orders for Whitkey front loaders are down from last year due to waste management contractual reductions, however front loaders to customers other than waste management are up 42% compared to last year first quarter.

We’re very, very encouraged by this new business activity in refuse. This is an indication that the strategic rational for the acquisitions was sound.

Last weekend I attended the annual meeting of our EPG dealer group and was very happy to hear their enthusiasm for refuse truck business going forward.

Although the new business is very strong for industrial commercial and international customers across EPG, we haven’t seen any significant business pickup from the municipal side so far. We had assumed this market would be down in 04 relative to 03. In EPG we’re down a little less than expected in Q1, but our municipal business is still off about 3% from last year.

In regard to sales, for the first quarter EPG was up 8% over last year and slightly ahead of plans. All lines were higher except for refuse. Despite the higher orders which were back end loaded in the quarter, refuse sales were down from Q1 last year because we entered this year with a light backlog. But now with the increased level of new business we find ourselves planning an uplift in our daily build rates at both of our plants.

In EPG from an income standpoint, we finished Q1 well ahead of last years weak first quarter, but did not rebound as much as we should have because of issues within the refuse business, some due to lower volume of course but other issues as well.

Discount levels for refuse are well above last year as we and our competitors battle for a smaller share of the pie, or for a share of the smaller pie I should say.

We launched an improved new buy at Leach last year and still haven’t gotten our through put to where it needs to be so we’re not yet at our cost target. We’re getting hit hardest by steel price increases at refuse where recovery from our customers via a surcharge pass through, lags our cost increases by several months.

Add on some additional pension and health care costs and we end up in an unacceptable financial position in this business. Obviously the measures required to address these issues and to consummate the integration are both significant and urgent. We’re in the process of retaining outside assistance so that we can accelerate our work and finalize necessary improvement plans. I intend to be able to inform you of our plan by the end Q2.

Now lets move on to fire and rescue. New business overall is up 4% from Q1 last year but all of the good news is from non-U.S markets. We estimate that the U.S municipal market for fire and rescue apparatus was down more than 8% in 03 compared to 02 and we saw this weakness continuing into the first quarter.

Our booked orders from U.S customers were down significantly in this quarter compared to a year ago. However, things seem to be picking up a bit now in April.

While FRG’s 2003 U.S municipal orders were up 5% in the down market we believe that the surprisingly large amount of new business we received in the 4th quarter last year included some pull ahead ordering to leverage municipal budget timing opportunities. Some of our first quarter falloff is likely due to that.

There’s no question that municipal budgets are still under tremendous strain and the 2003 Sima (ph) grant money is essentially out. We believe things will strengthen in Q3 and Q4 as the beginning of the 2004 funds start to show up.

Industry sales data compiled by FAMA still hasn’t been updated since the second quarter of 03 so we don’t know for sure, but we believe we are picking up market share in this weak market. One reason is because we’re doing well in regions of the country where we historically haven’t been very strong in the past.

In FRG International new business is up 36% compared to the prior year. Canada’s very strong, as are orders for our Bronto All-Rounder in European countries.

From a sales revenue standpoint you’ve seen that we’re down hard in fire compared to Q1 last year. About 1/3 of this amount was planned because we had such a strong Q1 last year, but the bulk of the shortfall was due to the same operational issues that have been plaguing us for some time. Unplanned disruptions of our production schedules due to missing components build interferences and incomplete specifications. In short we just didn’t get the trucks out the door.

As I discussed in January, most of our operational issues result from the fact that the bulk of our trucks are highly customized very complex vehicles and our systems to manage this complexity are inadequate. Compounding this in Q1 was our attempt to pull ahead some orders to try to smooth out production flow in the first half of the year. New business for our Ocala plant booked inQ3 of last year was very light resulted in some open production slots in this quarter and particularly in March. We tried to pull-up some trucks forward into March but we were not very successful because of missing components. This will give us a boost in Q2 because many of them were pretty far along. This attempted pull-ahead runs contrary to one of the changes that we are trying to make. We want to focus more on smoothing production for cost purposes and focus less on compromising efficiency in order to try to make month end cut-offs.

Keep in mind everything we’re building now, was configured under the old order generation process. The first vehicle orders generated with our new Configurator will be built be later in the current quarter. Orders for a bout 25% of the trucks planned for production in Q2 were processed with the new Configurators. We’ll have some early results to talk about at our conference call in July. However, be cautioned that we’re starting with the simplest models. So this first step still leaves us a long way from getting us where we need to be.

As we rolled our the Configurator over the past couple of months, after the first model we received some push back from our dealers because of the amount of time and detailed knowledge that was required for the sales persons to configure the vehicles with this tool. We also received some good suggestions from them for ways of making the process easier and faster. Even though we need the structure of the Configurator urgently, we stopped and went back to the drawing board to add enhancements to the Configuator for some subsequent models. With one model out there now, the second is being rolled out this month, both of them without the enhancements but additional models, those with increasing complexity will be released to our dealers in the June, July time frame when the tool will have been augmented with the additional logic we are now developing.

By year-end we’ll have about 15 models rolled out which will cover about 45 % of our total volume. We had previously expected to have about 80% of our volume covered by year-end. We have recently retained a different consulting company to help us with this implementation because we veered a little off-course in our early goings. We’re now focusing on adding intelligence earlier than we’d planned even though this will extend the date of completing the full integration, their full implementation rather.

At the same time we have extensive resources dedicated to implementing the Configurator tool. We have been at work on several other important initiatives within FRG. Through Kaison workshops, our people have implemented a broad array of operational improvements that are unfortunately still being veiled by our problems. For example, productivity at the Ocala plant is up 4% Q1 versus last quarter. Overhead variances have declined 12% over last quarter. The measurement that we introduced to gage our progress in making our production flow more predictable and smooth at time from order to cash has been improved each of the last two months since we began tracking in January. We’ve reduced the weighted average lead time by 13% in those two months. Of course we won’t be happy until we have something on the bottom line to show for it but our leading indicators are showing steady improvements.

Another indication of progress in reshaping our business model is that we were to eliminate a layer of management at Ocala and reduce 45 salaried positions as we announced on April 5th. We’ve had to compensate for ineffective possessing systems with manual intervention. But we’re far enough along that we were able to scale back somewhat. Additionally we freed up enough floor space at the Ocala site that we were able to vacate a 45,000 square foot satellite plant that we’ve been leasing there since 1995. This was completed in March.

Continuing on FRG, on the product front as we discussed we’ve been working on implementing the Configurator as the tool to help us better manage the complexity of our highly customized product offering. At the same time we’re looking for opportunities to reduce complexity by restricting option content. We’re working to rationalize our model offering and reduce the number that we will continue to offer. We are discontinuing those models that are out on the fringes of the distribution curve. On others, mainly the more complex of our vehicles we have adjusted pricing to more accurately reflex the cost of designing and producing these highly customized, one-off types of vehicles. We will no pull vehicles if we view them to be unnecessarily complicated configurations that will likely have no other applications.

Returning FRG to acceptable profitability remains my highest priority. Having spent a lot of time engaged in the FRG issues, I’m absolutely confident that we’re on the right path. We’ve accelerated the pace of the activities that were underway, we’ve made a couple of steering corrections and we’ve added new focus on product and production rationalization. I’ll reiterate that this is not a short term turn around. It will still be some months before we will be able to see solid, sustainable improvements in stabilizing our production and thereby giving us the confidence to provide guidance again.

Until then, I’ll update you on what I think is the best leading indicator of progress, our order time to cash cycle. As I said, in March we were 13% better that on that than we were in January.

I’ll now move on to our safety products group. You can see that they’re doing quite well as a result of some solid market recovery in most of the businesses within the group and, they’re enjoying the advantages of cost reduction measures taken during 2003. 45% of the group’s revenues come from domestic, industrial and commercial markets and new orders have been picking up in all of the businesses that service these markets.

We’ve even seen some recovery in our police warning light business as of late which has been very encouraging. Our only disappointment in the group is that orders for our parking business despite being 5% above last year are not picking up as we expected. Large airport projects are of course very lumpy but we didn’t have any new awards in our forecast for the first quarter. However market conditions remain soft for base equipment and have not solidified to the extent that we’d like.

We think we’re still on the expansion part of the cycle in our industrial and we believe we start some up tick in higher priority municipal and government projects as the year progresses, for example, we’re expecting increased orders for outdoor warning systems in the coming months.

In the past two years the U. S. military has upgraded security systems on military bases in foreign countries, with that pretty much accomplished they’re now focusing on upgrades for domestic bases, so this should extend for two or so years. And there is increased productivity on the municipal side of outdoor warning as well, we think cities are giving up waiting for federal money to come through and have to get on with critically important upgrades that have been stalled. Replacement of aging police car fleets has increased in Q1, we hope this will continue as one of the higher priority needs in the still weak municipal budget.

And finally for our safety products, the quoting activity for major airport parking systems has picked up, which is encouraging. Many of these have been delayed several times already so we’re not ordering raw material just yet, but we think a few of these bids will finally be awarded in 2004.

Going on to our tool group, we enjoyed mostly positive trends in this group in Q1, new orders began to pick up in October and its been a nice ride since then, in particular for metal forming and plastic moldings segment. The exception is Europe, Germany carried a big load for us in 2003 as the U. S. was weak, but they and France are off significantly in Q1 this year, mostly due to delayed automotive projects. We think some of these projects will come back on later in the year, but we think our European business overall will likely be weak for the balance for the year.

The metal cutting segment was a little slower coming back, but that’s finally turned in January. During the second half of last year our Daton (ph) plants experienced some inefficiency as they integrated the product line from another plant that had been closed, but by the end of Q1 they’re back to where they were before the move and once again on the improvement trend. We think we’ll see the growth rate in tool leveling off in the coming months so we should stay strong for the remainder of the year.

Now, before going on to Stephanie for come additional caller commentary around the number, I would like to address a couple of other general topics. You saw our recent announcement about the addition of Kimberley Dickens as vice president of Human Resources. Next Monday we’ll have an announcement regarding the appointment of a Chief Information Officer whom we’ve successfully recruited. I’m excited about these additions to my team. They’re both very experienced in the kind of initiatives we’re embarking as important enablers to achieving high performance.

Among those initiatives we will be implementing a performance measurement system and a compensation system based on economic value added principles, and we will putting in place an enterprise-wide IT platform to facilitate shared services for some our back room operations.

Now some comments regarding raw material price increases. Like everyone else, we’ve been hit with significant increases in particular on carbon steel, which is up about 30%. We were able to stall the effective dates to some extent because of the relationships we have with strategic alliance partners.

With all of our affected products, we have implemented price increases to pass the additional cost onto customers, so far pricing actions look like they’re sticking. At this point we believe we will be able to recover all of the increase, although on some of our products the price increases lag the effective date of the cost increases.

At the end of Q1 we have been impacted to the tune of about $½ million in cost increases so far with no recovery. We project we’ll be about $2.3 million in arrears at the end of the year from a cost increase base of about $8 million. We expect to recover the shortfall early next year.

And a comment regarding guidance, as I stated in the press release, at this point we’re not yet providing guidance. Although performance in three of our four units came in pretty close to what we expected, we’ve experienced again the volatility still inherent in our Fire Rescue operations in regard to predicting the completion dates of specific trucks relative to month end cut-offs. Our people are working very hard on this and we are improving, but we still have months to go before we will have reached the different levels. In addition, we’re in the planning stages of a number of restructuring moves that will entail one-time charges, we don’t yet know the extent of the charges, nor are we in a position to accurately estimate the on-going impact. We will outline these plans later in this quarter.

Now over to Stephanie.

Thank you Bob. Before beginning let me just remind you that the release and the comments that we’re providing during the conference call, are provided with reference to our disclosures regarding forward statements in our press release, so please refer to the press releases with regards to those forward looking statements.

First off, just to provide you with a few more financial details, our quarter end back log by group for environmental products, was $87.5million, which is up 18% for the year end, for Fire Rescue $260 million up 6%, for safety products $33.5million up 7%, and for tool $11 million, which is up 8%.

A comment on the impact of foreign exchange in the quarter, the year-over-year impact of a weaker dollar increased our reported revenues by about $7 million of 2.4%, the currency impact on our earnings, however, was modestly negative, we enjoyed a favorable impact on the translated earnings of our foreign businesses of about $½ million, but we were adversely impacted in our refuse business by $1.4 million because we incurred higher Canadian cost for refuse truck bodies that are built and which are sold predominantly into the U. S. market. The net impact on earnings was about 1% negative.

Our gross profit margin was 24.4%, down from 25.5% first quarter of last year, and that reduction was essentially all at Fire Rescue due to low overhead and fixed cost absorption in that quarter.

Our selling, general and administrative expenses as a percent of sales declined to 21.2% versus 21.6% in the same quarter last year.

Our current head count for SG&A is12% below the prior year level, although some of that benefit is being masked by increased legal and other expenses.

The corporate expense portion of SG&A was $4.4 million up from $3.5 million a year ago, much of the increase was associated with legal fees to defend a hearing loss litigation. We expect to incur a total of $3 – 4 million from legal defense cost on this matter. The $1 million charge shown as other expense, mainly the settlement in the quarter of three different of three different dealer and distributor relationships or disagreements that have been in dispute for some time.

Our effective tax rate was 26.1% which is more typical for the company as against a very low reported tax rate year that was linked to the one-time benefit of a shutdown of a UP operation.

Now two comments on the balance sheet. Our operating cash flow was unusually low in the quarter, $2m due to a $17m build up in inventory mainly in fire rescue. Reflecting this sharp increase our inventory trends averaged 4.6 for the quarter which is a slight decline from 4.7 last year.

Regarding our net receivables, the trend is more positive, our first quarter net DSO, unit Day Sales Outstanding, averaged50 days down from an average of 52 last year and our over 90 day amounts declined by about 6%.

Our reported operating cash flow is net of $4m in discretionary pension contributions that were made in the quarter. With these contributions our funding position on our U.S. plants will have improved to about 78%, we don’t have any plans for further funding this year.

Capital spending in the quarter was $4.3m and we still expect that run rate to ramp up as the year progresses.

At quarter end the ratio of manufacturing debt to capitalization rose to 41% and a $3m increase in debt to $268m. We were in full compliance with all of our debt covenants and had $68m drawn on our $250m bank line but those bank lines are committed through November of 2006.

During 2004 we have two trances of private placement debt coming up---coming due totaling $25m which we expect to refinance with our operating cash flow or through the use of our bank line.

Taking into consideration our debt and our associated swaps about 42% of our debt is currently fixed versus floating. A 25 basis point increase in the interest rate would raise our interest expense by about $200,000 per quarter. And now I’ll turn it back to Bob.

Thanks Stephanie. In closing the prepared remarks portion of the call I’d like to say that I’m very happy with the performance of our company in the first quarter except of course with the disappointing results that our fire rescue group turned in. After spending a lot of time with the leadership team there I’m very confident what they’re doing and in the new initiative they’re getting on the way to bring structure and discipline in the business and I guess get our over head cost in shape.

In regard to refuse, we have significant work to do and some key members of a new management team to get in place. We’ve successful recruited a new operations manger for our Meadason Hep (ph) plant that brings with him some great experience in refuse truck manufacturing operation. But we’re still looking for the right people for two key positions, one is the president/general manager of the business and the other is vice president sales and marketing.

I’m very optimistic about the future of Federal Signal and of the capabilities and the determination of our employees, our leadership teams and our dealership partners to do what it takes to get the company back on tract to create superior returns.

To underscore my confidence I plan to make a sizable investment of personal funds in Federal Signal stock in the coming weeks. We will now take your questions. Sean?

Thank you Mr. Welding. At this time if you have a question please press the one 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 at this time please press the one key on your touch tone telephone. Our first question comes from Jack Kelly of Goldman Sachs.

Good morning Bob.

Good morning Jack, how are you?

Good. You had mentioned acceptable margins in respect to fire rescue and I know you don’t want to put a date on what acceptable margins might be – reach, but maybe you could share with us what you think acceptable margins are. And if I could expand it to also to refuse, but I think you just made the reference to the fire rescue. And then secondly, with regard to refuse, things picked up as you mentioned in March. Dozer also reported – (inaudible) had indicated that Hile (ph) saw some big gains, I guess the issue is do you think you lost share? It sounds like you might have lost share on the waste management contract cause you’d indicated revenues were down or orders were down from them. So just kind of where you think you are on the share side in refuse, the second question.

Okay, first in regard to (inaudible) you know there is still a lot about this business I’m learning but I still believe that we should be able to hit 10%. And I’m hanging on to that as our goal and if I someday think that that’s not possible I’ll let you know, but right now that’s our target.

In regard to refuse – that’s a more competitive business. We’re still kind of getting our feet wet in it and we’re still learning a lot. I don’t have a target yet for refuse but you know, our environmental products group we have products there that have enjoyed nice margins for many years because we’ve established a clear product leadership advantage that is our objective in refuse as well. So I guess I’ll--- as oppose to target I’ll say this is a hope that we can get those margins for 10% someday too but at this point that’s just a wish.

In regard to the refuse business we’re up very, very strong Jack. The last data that we got from Waste Tec [ph] only covered up to the end of Q4 last year. And in Q4 we had picked up share at that point. So having no idea what the total market size is in Q1 so far I have no way of knowing whether we picked up share or not. However, as we look at where these orders are coming from and through our dealer channel and particularly in regard to Witkey [ph] who didn’t really have a dealer channel out there before I can’t help but think that in the overall refuse market taking waste management out of it that we are picking up share.

So by definition you’re probably loosing some share at waste management?

Probably at waste management for sure, we planned on that, we expected that our front loaders business at waste management would be down some 50% just on the front loaders.

Just one last question on refuse you’d referred to tough pricing, you know pricing is pretty tough probably across the board and everything but what’s the dynamics in refuse the markets’ picking up lets say X waste management, why should the pricing get worse as the market recovers if that’s the right characterization?

Well I suspect that the price pressures will ease up a little bit now, this new business rate is really relatively late in the first quarter. The business that is being placed today some of these business started several months ago, when we were still in pretty weak market condition. So my sense is that---that will be easing up.

Okay good thank you.

Our next question comes from Walter Liptak of McDonalds Investment.

I thank you, good morning. Good morning Walter.

The question I have is on the increase in inventory, you mentioned $17m largely due to the fire rescue group. How much is the fire rescue group inventory up and how much of that is pretty close to finished goods that are going to ship in the second quarter?

Walter it was really all fire rescue increase, the others’ net we’re neutral.

Okay does that $17m ship in the second quarter?

Most of it will ship in the second quarter, about half of that number is value that was in fairly advanced stages, so I think you would use the number of more like $9m.

Okay and then on the backlog is up in FRG but you mentioned that the orders are down significantly, are the orders down significantly across the industry or because of the shipment problems that you had in the quarter, you lost market share is that the issue of why orders were down?

Well the orders have been a little lumpy lately the Q3 last year was very low and that’s what causing some of our problems now. Q4 was very high in fact the highest it’s ever been I believe, Q1 was low again. Now the first couple of weeks of April---April looks like it’s going to be pretty strong. So we suspect because Q4 last year was so strong that some of those were pulled forward for whatever reason, some of them because of budgetary the way the budget is working used penalties and you have to get the money committed before the end of the year. Some of it probably anticipating a price increase.

But there’s nothing we think that we’re picking up share. There’s no data to indicate that the latest industry data as I said was goes back to Q2 of last year, but what we’re going by is that on the bids that are left we’re really not losing very many. And we’re stronger in those areas the currently we haven’t been strong. So just that kind of anecdotal evidence or indications would suggest that we’re doing better.

Okay so you mentioned the market being down 8% last year it sounds like there should be an expectation that the market is at least stable to maybe up a little bit for fire trucks?

We weren’t expecting it to be up much in ’04 frankly. I mean there’s nothing going on that is different than it has been in the past. There’s still new Sima grant money that should be available in the middle of the year, but we were just expecting kind of an inflationary type of market improvement for the year.

Okay just so I understand the sub-assemblies, the part shortages what parts were missing so you couldn’t ship these trucks, was it because of your assembly problems or was it just a supplier issue?

Well a little of both of that we had been in some cases some suppliers, we had a supplier that went bankrupt in January that caused the disruption, that was a supplier that we were ready to change over to a new ally alliance partner any how. So that causes some problems some significant problems for about a week and then as that kind of rolled through the system the next few weeks we recovered.

We had some electrical wiring harness problems where they weren’t built right by outside supplier but --- and those have been significant but we’re still working hard to smooth our production flow and to improve the number of trucks that we can get to the plant.

We’re doing this through the Kaizen (ph) Events. So we’re attacking the bottle neck, getting it fixed and of course the bottle neck moves on to something else.

In the first quarter of the year we’ve been working in a specific area for the entire quarter for the next bottle neck that popped up, it was the one that we expected so it didn’t catch us by surprise. But the issues are just taking us awhile to get through. So I really Walt --it’s some of both -- some was supply, some was ours I can’t say whether it’s 50/50 or what.

Okay and going into the refuse here, you mentioned that prices went up it sounds like in April, I wondered how much the price increase is for?

Well I’d rather not say that on the conference phone right now, what we’ve done though is we’ve in the case of refuse we went with the sir charge. And we believe that was the most appropriate for that market at this time given the competitive landscape and given what we thought that our competitors would do. And the Sir charge is designed to do a little more than offset our cost increases.

We were anticipating some additional increases at the time we put the Sir charges in we captured those as well. So we think we are in pretty good shape going forward.

Okay, thanks very much.

Once again if you have a question at this time please press the one key on your touch tone telephone. Our next question comes from Michael Harris of Black Diamond Research.

Morning Bob and Stephanie.

Morning Michael.

Morning.

A quick question for you Bob you know when you have to go in and sort of re-vamp an operation like what you’re doing in the fire rescue business, my experience has been sometimes if you’re not careful when you think you’re putting in an improvement you’re actually creating another bottle neck, I guess we can call it, some where down that you know operation.

How do you know that that’s not what’s going on in Ocala right now? What’s in place that would give you confidence that you know when you think you’re making an improvement it is actually an improvement that’s not creating a problem somewhere else in the process?

Well I think Michael part of your comment is right on, you know when you improve one area you end up with a problem in another area. But that problem is there any how it’s just that you can’t see it because the bottle neck is some where else.

As we go through these bottle necks and work on them we do them with the Kaisen (ph) work shops where we have a team of people which are from different areas of the plant that have a nickel in the game to make sure that we don’t screw up some thing else in the process.

But there is no question you know as you make one area of the plant work better what that does almost instantaneously is expose the next area. So for example if you’re limited to do 2 a day of some thing and you fix that to do 3 a day and now that you find that one of the supplier operations in the plant can only do 2.5. So that’s what we run into, but that’s the normal kinds of things. You know you – the bottle necks are very obvious. What’s not so obvious all the time is what the next bottle neck is, although you know you have a pretty good sense of where.

Right I guess the -- I don’t know if I can say concern -- is when do you see the light at the end of the tunnel? How do you know your approaching the end of the tunnel that -- if all these unexpected bottle neck have the potential to just pop up on you.

Well this is like any other manufacturing operation in that regard Michael, you know there is going to be a bottle neck some where at all times. What you try to do is determine what your build rate needs to be and any thing that’s keeping you from getting there you fix. And -- but you’ll always chase it some place else and that’s why you’re never done.

It’s a continuous journey right?

Absolutely it’s a continuous journey and you know you set your goals on a task time or a through put number of vehicles based on you know what the market requires. You get your production systems fixed so that you can do that. And if you have nice problems that come up you need to increase your through put and you start all over again.

Okay.

So that’s why I’ve said a number of times to many of you when I talk with you this stuff isn’t rocket science, this is manufacturing 101. We weren’t in very good shape, we will be in very good shape and we’re making progress.

Okay and just for clarification did I understand your comments earlier that 25% of the fire rescue production this quarter via the new configurator?

Yes I did say that.

Okay and I mean when we have worked through the, I guess product that are being build via the old system early second quarter, are they done now? When are we 100% on the new configurator?

Well keep in mind there Michael that we have about 37 or so different truck models. The only ones that we’re building in Q2 are one of those 37. And it happens to be one of the simplest, one that wouldn’t normally have caused us too many problems anyhow. Now as – we’re rolling these other ones out as I said we’ve stopped so that we can add this intelligence, we’d expected to that next year, but it looked like that was necessary to do now. So by the – still at the end of the year we’re still going to be producing a lot of trucks that were configured under the old system.

Okay.

Now the things that we’re doing to improve our operation as a result of the work that is going along with the implementation of the configurator, I mean these are things that are going to help us a little bit with the old way of doing things as well. But before this thing gets really good traction and we’re proud of the progress that we’re making, you know we’re still going to be well in ’05.

Okay alright I’ll get back in queue.

Mr. Welding I’m showing no further question from the phone lines at this time.

Okay well thanks Sean for the fine job of managing the conference and I’d like to thank every one out there for your interest in our company and I look forward to our next call in July. And we’ll probably have some things to say before our conference call in July as well. So have a good day every one.

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