Federal Signal Corp (FSS) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen welcome to your Quarter Two 2005 Federal Signal Earnings Conference Call. [OPERATOR INSTRUCTIONS] At this time I will turn over a call over to your host Ms. Stephanie Kushner, Vice President and Chief Financial Officer. Please go ahead ma'am.

Good morning and welcome. Joining me and Bob today is Karen Latham, our Treasurer. She'll be taking on additional responsibilities for Investor Relations for the Company. Karen has been with us or about three years and has formed a great knowledge base on the Company so I'll let her kick off the call.

Good morning I'm pleased to join you today. As usual some of our comments contain forward-looking statements about the future prospects of Federal Signal. Please refer to our latest annual report to shareholders, our recent SEC filings and the press release issued in conjunction with this call for a more detailed discussion of risks involved in our forward-looking statements. The press release is available on our website, federalsignal.com. Our CEO, Bob Welding, will begin.

Thanks Karen. We appreciate all of you joining us this morning. I would like to begin my comments by expressing how pleased I am with the progress made by our individual business units and the positive impact their work is having on our Company's overall performance. After reaching an inflection point last quarter, we continue to execute on those steps critical to the restructuring program during the second quarter and are building momentum. As a result, our under-achieving business segments are reporting improved results and revealing the capability to return to sustainable profitability. The successful execution of our restructuring strategy has improved the company's near term outlook and positioned Federal Signal for an even more promising future.

As you will note from our earnings release we reported total quarterly sales of $316 million, up 13% sequentially, and 9% year-over-year. Second quarter EPS was $0.23 including two favorable tax adjustments totaling $0.16. The cost for restructuring were $0.01 per share this quarter compared to $0.18 in the same quarter last year. We still have a long way to go until we hit peak operational performance of course, but we've made good progress in improving profitability. Looking ahead, we believe our operational performance will improve sequentially and we will exceed prior year's comparative results.

Now I'd like to walk you through some high-level take aways for the quarter. Market conditions continue to improve. The Municipal sector recovery remains underway with new business strength across nearly all of our product lines. Export orders and new business at non-U.S. entities continue to be robust. Additionally the U.S. industrial sector remains strong, and continues to build on it's recent momentum.

Fire Rescue had it's first profitable quarter since we reported a meager profit last year in Q2. The Ocala operations have made steady improvement in each of the first six months of the year. Safety, quality, delivery and productivity have all improved and most importantly we're seeing fewer surprises. This encouraging news gives us confidence that we've mad substantial progress in stabilizing the business. Furthermore with addition of two important new dealers, which I'll talk about later, we have a improved on the position to achieve long-term profitable growth.

Our Refuse plant consolidation experienced a hiccup during the second quarter as we excelerated the evacuation of our Oshkosh plant. We encountered some additional costs and delays but have worked through most of those issues. Outside of Refuse, margins for environmental products were very good. Additionally we signed an important joint venture agreement in China, which I will discuss later.

In July we completed a sale of the Victor Lighting and Transtar product lines. This transaction is a -- an example of our ongoing pruning selling non-core businesses in order to allow management to focus on stronger performing businesses. In this case we are focusing on our leading position in the expanding mining business. We received $12 million net cash proceeds, which we used to pay down debt and fund $4 million in restructuring costs.

Lastly our Tool business has made meaningful progress in reducing it's fixed costs in U.S. and Europe. Shifting production to lower-costs regions and increasing sales in growth markets.

With that I'd like to walk through market conditions in greater detail. Orders in the U.S. municipal market were up 11% in the first half of 2005 compared to the year earlier period with good momentum going forward. Across the Company all product lines were stronger with the exception Outdoor Warning Systems which was down slightly. There are no fundamental -- fundamental weaknesses with Outdoor Warning just the customary lumpiness associated with the delay of larger projects. The most important highlight for the market is the exception of the continued strength in Municipal budgets over the coming months driven in large measure by the growing economy.

Now let's turn to the Industrial market. Overall our Industrial market orders were down 1% in the first half of the year with -- with the mixed bag of improvements and declines. Guzzler vacuum trucks, Parking and our Amber Warning Lights Business continue to be very strong performers. On the other hand orders for Refuse Trucks from commercial haulers, High Pressure Water Blast Machines and Industrial Fire Truck orders experienced weaknesses compared to the year earlier first half.

Continuing in the Industrial sector. Orders in our Electrical Products Business and our Tool Group were flat year-over-year for the first half. Based on recen -- recent economic reports we expect our Non-Tool Group industrial market orders to continue to expand at a modest rate through the second half and we anticipate Tool to remain essential flat compared to last year.

Next I would like to briefly discuss the International side of the market where export orders continue to be strong. The single exception is Fire Apparatus where we are down year-over-year. A very large order in the first half of last year is the key factors eschewing this comparison. Additionally we expected to land two large orders in the second quarter this year that were hung up in funding issues. We still expect to get them but the timing it difficult to predict. Orders at our units outside of the U.S. were higher across all businesses with the exception of Tool Group which was off 10%. Excluding Tool, orders at the others were collectively up about 8%.

I will now provide details for our four operating groups, this time I'll begin with the Tool Group. For new business Tool was relatively flat, relative -- or compared to last year despite realized price increasing of about 2%. The volume decline was mostly due to lower sales in the U.S. auto industry, which directly and indirectly accounts for about 40% of our business. Another detractor was Japan, which was down compared to very strong period early last year. Our price increases in Tool essentially offset material costs increases which we experienced during the quarter.

Material costs for some Tool steel grades continues to increase as a rapid rate and we're implementing additional pricing actions to stay ahead of game. We have entered into four contracts to purchase steel in advance which is helping to delay the impact on our business. We are also working to develop products that substitute lower cost steel grades already commonly used in other regions of the world. Revenue wise the Tool Group was down about 1% including price increases indicating that the volume was down approximately 3%. Much of the decline was related to the metal forming punch business where we typically enjoy very nice gross margins. So as a result volume decline hit us a particularly hard.

The group is continuing to work on reducing their fixed costs in the spending to adjust for structurally lower volumes in the U.S., while working hard to increase sales in the growing regions of the world. Gains are already been made with sales in eastern Europe nearly doubling compared to the same period last year in the sales in China up about 50%. However given the relatively small revenue base in these regions the gains were not enough to offset the declines that we experienced in the U.S.

We're continuing efforts to shift products to lower-cost regions. Examples of the shift include the transitioning of production from France location to Portugal last year and moving equipment into our brand-new plant in China which will begin late in a quarter. No question we're behind in reacting to the changes that have been underway in the global manufacturing footprint but we're moving to catch-up.

Transitioning now to our Safety Products Group where we are continuing to see improvement in this group with new business up from most product lines year-to-date. The exceptions were the large projects associated with Outdoor Warning that we detailed earlier and U.S. Industrial Signaling, which has been relatively flat in the first half of the year.

Emergency Vehicle Signaling -- Signaling continues to be very strong both in the U.S. and Europe and Parking projects continue to strengthen. As I mentioned earlier we made the decision to sell off the Victor Lighting and Transtar product lines of the Safety Products Group. With we know longer view this segment of business as strategic, however we will continue to manufacture and market, U.S. code, marine and oil and gas and hazardous area lighting under the Pauluhn and NRL brands. The outlook for this market is positive as demand remains strong in these segments and we also have a leading market share.

Second quarter revenues for safety products were up 18% from the year earlier period, but roughly half of the increase is due to the parking project at the Port of Authority of New York and New Jersey and shipments in the base business at Parking. The 30% increase income was mainly due to the improved performance in Parking compared to last year.

Next let's discuss the Environmental Products Group. Excluding the Refuse segment, EPG Business has continued to perform well and reported stronger new orders, higher revenues and robust margins. Municipal new business remains at a nice level overall even though customary lumpiness remains within the product lines. For example Sweepers were somewhat flat but we saw nice gains from Refuse Trucks and Sewer Cleaners during the quarter. On the Industrial side, Refuse Trucks were up for the quarter but down for the first half due to a difficult comparison resulting from a very strong first half of 2004. Sweepers are up nicely in Industrial. Although weak Water Blaster results brought down the group's quarterly numbers we don't foresee anything ominous on the horizon in this regard. Environmental Product export orders were very strong primarily prompted by a large order from the Middle East. Another contributor was our European Sweeper Company, which reported brisk new business.

Earlier I mentioned a recently signed JV agreement to produce Refuse Truck bodies in China which will begin to impact our non-U.S. sales in 2006. The Shanghai Manufacturing Facility and a established distribution network combined to give us a great access to the economically fastest growing regions within China and a manufacturing base upon which to expand in the future with the introduction of other products.

Let me comment on our Refuse restructuring progress. As you know we are in the final stages of the major plant consolidation and the second quarter was a crunch time for us. Unfortunately we fell behind in our ramp up of Rear Loaders and the associated costs were higher. The reasons for the cost overruns were two fold. First we experienced some inventory confusion specifically related to component parts during the course of transfer and second we had a more difficult time onboarding and training new employees than we anticipated. The latter, to some degree, is due to the booming oil patch in Alberta which has been siphoning off skilled labor with extraordinarily high wages.

But much of the inventory confusion and trained labor short age resulted from our decision to excelerate the evacuation of our Oshkosh Building by several months in order to take advantage of an unexpected offer for the facility which we received from a buyer with an urgent need. When we made the decision to pull the trigger early, we anticipated it would result in some turbulence but it proved to be worst than we expected. We received a nice gain on the building sale but regrettably -- regrettably gave it away again because of problems that resulted. Some of these problems will also impact us in the current quarter, but our target, to be at break even run rate by the end of year and profitable by next year, has not changed. Essentially all of our labor positions have been filled and for the most part, we've gotten our arms around the inventory issues. I have to complement our people who have been working diligently for long hours on this project and as a result of their hard work we expect performance to improved sequentially from here.

As these problems caused us to fall behind in our deliveries we also lost out on some orders due to unex -- extended lead times. But generally, our market share numbers have been been trending up over time both for Rear Loaders and Front Loaders excluding Waste Management. The Refuse Truck product line was highly impacted by steel price increases during 2004. We implemented three different pricing actions between May and October resulting in an average of about 24% price increase. In Q1 this year, we raised prices another 3%. We expected to the have the last of the lower price units shipped out by the end of the second quarter but because of our throughput problems we still are a few of them flowing through in the third quarter. As we look at our backlog and current component cost we can see we will be recovering all of the steel costs impact with the higher priced units.

Moving onto fire rescue. I'm delighted to report that our people have made great progress in getting this business stabilized and profitable. The employees at our Ocala Operations have made steady improvements in each of the first six months of the year. Starting with Safety, recordables are down 21% in the first half. Quality as measured by at number of issues reported at customer inspection improved 26%. Throughput as calculated by truck completions per week is up 10%. When weighted on a complexity basis, completions are up about 16%. Lead times, for two of our most popular lines, Aerials and Tradition Pumpers have been reduced to about 20%, productivity is up about 10%. From a capital efficiency stand point, inventory accuracy improved by 12%, [aged] receivables are down 59%, customer prepayments are up 24%. And most satisfying is the fact that management has taken ownership of the operational issues and has consistently meeting targets.

Our 4% price increase from last June, June of 2004 that is, was realized with most trucks produced in Q2. However we were still experiencing component costs increases during the first half of year in Fire Rescue. As we saw component costs continue to increase we implemented another 4% price increase in April, but we won't begin seeing that in our revenue stream until late this year. In the still dynamic commodity cost environment for the long lead time trucks we are reviewing pricing on a quarterly basis and will continue to implement price increases aggressively to try to keep from getting trapped it a squeeze again like we found ourselves in last year. To this end an additional 2% increase was implemented this July.

As we expected, Fire Rescue was profitable during the second quarter and margins should increase sequentially during the remainder of the year. The improvement in the coming quarters is predicated primarily on the continuing progress in the increasing throughput at the Ocala Facility and component price level stabilizing. At the beginning of the quarter, Marc Gustafson who is head of the Fire Rescue Division and his team implemented a incentive bonus system to more directly engage the Ocala work force in the transformation and increase the energy around our improvement initiatives. The program was a success as they reached their Q2 goals. Targets will be progressively higher in Q3 and Q4 and we hope they reach their goals again.

Another exciting FRG development is the phase one rollout of our improved configurator sales tools in July. 1/3 of the dealer sales force has been trained on the new web-based sales tool and the reaction has been very positive. We remain on track to realize our year end goal to have 80% of vehicles covered by what we think will be the best tool in the business.

On the distribution front we've made two significant dealer announcements over the last few months. We are excited to report the appointment of a new dealer in the Texas market. Dooley Tackaberry has been in the Fire Equipment business 80 years and has developed outstanding relationships with the fire departments throughout Texas. Despite only having the opportunity to sell for the past three months of the year, they have already reached 10th position in terms of volume year-to-date.

Additionally a few weeks ago we announced a new dealer in California, Valley Fire Service, which is a unit of Valley Power Systems. The parent company has been in business for 50 years as a heavy duty diesel engine and transmission dealer. Valley Power Systems is well capitalized and has outlets in seven locations throughout the state complete with service facilities and mobile service trucks. They are recruiting a number of experienced fire apparatus sales people and we have high expectations for this organization in the coming years. This is a sig -- a significant growth opportunity for [everyone]. Despite the fact that California constitutes nearly 10% of the apparatus market, we've been very weak there for decades. In fact historically the region has accounted for less than 1% of our business.

We're still working on two other major market regions and hope to have those in place in the next few months. We will then have the U.S. and Canada pretty well blanketed. However we -- we will remain quite engaged in the strengthening of the effective -- effectiveness of our dealer channel. This is something that our new leadership -- our new leadership team at FRG is keenly focused on. As we understand it, it's absolutely vital to our success.

Market share information for the Fire Apparatus Industry is available through Q1 of this year. Meaningful quarter-to-quarter comparisons difficult because of inherent lumpiness in the industry and because of all the changes we've implemented over the past year. Our results are down to a degree greater than what can be explained by the Company's earlier exit of the exotic end of the stainless steel market but we are near surprised nor concerned by this.

As we work to turn around this business, we are addressing a broad spectrum of issues from product offerings to dealer relationships. We are committed to creating a business that is profitable and creates economic value on a sustainable basis and we're not focused on market share. Now is the time to get everything in order and we're confronting all of issues we find. Essentially all of our production slots are filled for the remainder of the year and our backlog is strong. As a result the share decline we have seen will not affect our turn around plan in the near future. And longer term, as these changes are institutionalized, we are extremely confident that we will re-establish positive momentum in market share.

Now I'll turn the call back over to Stephanie for a review of the financials.

Thank you Bob. Second quarter sales totaled $316 million, up 13% sequentially which follows our normal seasonal pal -- pattern. These results represent a 9% increase from the same period of 2004. About 40% of the increase is due to higher prices and the balance is mainly volume and mix, although currency did have about a $2 million impact. We're predicting approximately the same level of sales in the third quarter and are expecting our typical fourth quarter uptick. Full year sales should be between 1.2 and $1.3 billion. Before jumping into details, let me first provide some perspective on the second quarter's earnings, because their are a lot of moving pieces when try to compare net income to the results reported for 2004 . As you may recall 2004 included some significant restructuring activities and of course, 2005 results include large tax gains.

For 2004 Federal Signal reported a $0.07 loss per share from continuing operations. The loss included $0.18 in charges from a combination of restructuring activities and the loss on the sale of the minority interest investment. So although we can't report it this way, per se, you can think of that as a $0.11 per share from a strictly operational net income perspective. This year's quarter shows EPS of $0.23 but that includes two favorable tax items totaling $0.16 along with a $0.01 charge from restructuring costs. So you can think of that as $0.08 per share from a strictly operational net income perspective. So you can see while our profits are improving sequentially we are still behind this time last year from a strictly operational net income viewpoint. Given the improving outlook for our Vehicle Segment, and the easy comparison we expect the next quarter to be the crossover point for earnings.

Relative to last year our cash flow is much stronger and our debt levels are lower. At quarter end, our net manufacturing debt stood at $211 million and our operational working capital was $252 million, about 22% of six-months annual -- annualized sales. For though the Company's bank lines are un-drawn and we are in compliance with all debt covenants. [Conversely] at this time last year our operational working capital was $283 million or almost 25% of annualized sales.

On the order front, total orders for the quarter were $307 million, up 4% from Q1 and 2% from the prior year quarter. Orders were slightly below sales and backlong -- backlog declined slightly but remained very strong at $428 million. Quarter and backlogs by group are as follows: for Environment Products, $102 million; Fire Rescue, $246 million; Safety Products, $72 million; Tool, $8.7 million. Our gross margin averaged 22.2% in the quarter, down 80 basis points from last year's Q2, and also down sequentially from 23.4% in the first quarter. The year-to-year decline was mainly in our Tool and Safety Products Businesses.

In Tools, margins are being squeezed in our Die Punch Business due to escalating raw materials. Although we're passing through, for the most part the raw material costs -- the impact on the margin is negative, the percent margin.

In Safety Products the decline mainly reflects a higher mix of lower margin sales on large airport parking equipment projects because of large pass-through items. Of the sequentially decline of 120 basis points 2/3 or 80 basis points is solely due to relative content of Chassis in one quarter versus next. We had a higher level of pass-through Chassis sales in the second quarter. Excluding this impact I'm pleased that our Vehicle Business margins improved about 100 basis points sequentially. The balance of the decline was mainly in Safety Products due to sales mix. We believe the next two quarters will show improved gross margins as we get more pricing and see improvement in Refuse operations.

Now I'm turn to expenses. Our selling general and administrative expenses, as percent of sales, declined as predicted to 19.2%, down from 21.9% this time last year and down sequentially from 21.5% in the first quarter. We expect SGA expenses to remain below 20% for the rest of the year. Corporate experience, which is part of SGA totaled $5.5 million, up from $4.6 million last year. The year-to-year increase mainly reflects higher fees to support the hearing loss litigation and for strategic planning activity. Our full outlook is unchanged at 21 to $22 million and will depend on the spending for legal costs associated with the hearing loss litigation and incentive compensation. Interest expense remained at $6.1 million this quarter reflecting higher short term rates versus last year. For the rest of the year we expect interest expense to remain in the range of $6 million per quarter, depending on trade off between debt pay down versus the on going short-term interest rate increases.

Our effective tax rate was negative in -- in the quarter due to the impact of the close-out of a five year tax audit, and due to the impact of a reconciliation of deferred tax balances. The $6 million income pickup from the tax return might make it appear that our tax accounting is overly conservative, but please keep in mind that a five year audit encompasses a very broad range of issues. Excluding these one-time items, our rate was just under 20%, lower than the mid 20% we have otherwise forecast for the year, but this reflects the relatively low level of earnings. As I've committed in previous calls, on a low earnings base, the permanent tax benefits associated with our Municipal Leasing Business and export and other credits have a disproportionally favorable impact on the average. Looking forward, the picture is somewhat uncertain because of the yet unknown potential tax charge, should we decide to repatriate foreign cash in the fourth quarter. We're still evaluating the timing and the extent of -- of repatriation.

Now some comments on balance sheet and cash position. Our balance sheet is continuing to strengthen. Operating cash flow totaled $13 million, reflecting payoffs of financing leases. Our working capital was flat, despite the $36 million sequential increase in sales. For the quarter receivables rose with the higher sales but the Company made some more progress with increasing customer deposits and we reached another new low of 40 net days sales outstanding at the end of the quarter. At this time last year we were at 50 DSO.

Inventories declined, turns are averaging 4.5 year-to-date versus 4.2 a year ago. Each .1 improvement frees up about $7 million of working capital so we're very focused on this. Manufacturing debt net of cash rose slightly to 35% in the quarter but well below the 43% level we reported a year ago. During the quarter we repaid $17 million trounce of our private placements as they came due, and we repurchased a small amount of company stock to offset delusion from options. We ended the quarter with $39 million in cash on the balance sheet, which does not include the $12 million of proceeds received from the sale of the Victor Product Line after the end of the quarter.

Since quarter end we have a made a discretionary $5 million contribution to our U.S. pension fund and we are considering cash repatriation strategies for possible implementation in the fourth quarter. As I said, that could result in a tax charge which we're still evaluating.

This concludes my comments, I'm turn it back to Bob for a brief summary and to moderate questions.

Thanks Stephanie. As I said earlier I'm pleased and encouraged with the progress we've made on multiple fronts this quarter and I'm as determined as ever to press on. After reaching an inflection point in our turnaround last quarters, management has continued to execute the Company's restructuring program, which has improved the Company's performance and maintained our positive momentum. Although we are still a long way from peak operational performance, the changes we have implemented to help our under-achieving seg -- segments are beginning to demonstrate steady progress and improving profitability.

Looking ahead, we believe next quarter results will show improvement over prior year from an operational standpoint. The attention of the top leadership team has transitioned from singular focus on fixing the problems facing the Company to spending more time imaging what Federal Si -- Signal will look in the future. Our work to craft a contemporary vision in strategic direction for the Company is well underway and we intend to announce our intentions in early November. All of us are looking forward to the next exciting chapters of Federal Signal. That concludes our prepared remarks and now we'd like to open up to questions.

[OPERATOR INSTRUCTIONS] Walt Liptak, KeyBanc Capital Markets/McDonald Investments, Inc

Hi. Thank you. Good morning Stephanie and Bob.

Good morning Walt.

The first question is on the orders up 2%. Presumably that's in -- including price increase for steel pass-through; is that correct?

Yes.

What would, on volume basis that equate to?

Let's see our -- our price is having an impact -- let me think about that one for a minute Walter, because our price is having an impact of about $11 million on our sales. It's probably a little bit higher on our orders. We don't do that -- that detailed analysis at the orders level.

Okay that's fine. That's enough to you know provide a ballpark. In the -- in the Garbage Truck Business, I don't know how to ask this one, but can you talk about either, what the incremental costs were or perhaps the amount of the gain on sale of the Oshkosh leased plant?

The gain it's shown in other income is a million dollars. What was the first question?

Okay, I see. So the -- the incremental costs on the restructuring were also about million dollars; is that right?

Yes, probably a little bit higher than that Walter.

Okay and are you looking at other divestitures besides -- are we fine now with the assets of Federal Signal? Are there other divestitures that could happen? Are we at -- this is Federal Signal now, the businesses that you have?

Well I think that the -- the restructuring plan that we laid out last year, about this time, in that we looked at the businesses that were -- were just nuisances or problems or clearly didn't fit. What this product line that we just sold represents is as we look at our portfolio now going forward, this is a business where we have -- we had a very low market share. It -- it has -- hasn't performed well for the total amount of time that we have owned that business unit, and it fits very well with somebody else who is willing to pay a price for it that we thought was -- was pretty good. That kind of thing we will continue to do going forward.

We'll continue to look at all of our businesses and make sure we are spending our time and resources on the ones we can get a lot of mileage out of. Also at this time, too, we're -- we're involved if a strategic planning process where we are more methodically and rigorously reviewing what Federal Signal will look like in the future. And as we finish that, you know, there may be some other ones that we determine to be not strategic.

Okay. And -- okay thank you for that. And if I can go back to -- to costs. In the Garbage Truck Business you know, you're competitors are talking about having margin problems from steel costs. [Katherine], in your comment I think you mentioned that -- that you would be recovering all of the steel costs, but I wanted to -- to know when that may occur?

Well as I indicated, we have a few lower priced trucks that are still flowing through in the third quarter. Probably about -- I don't remember. It's what? 10 or 15% it seems like, of the units that we will be producing. So it's pretty much flushed out, Walter. And as we look at backlog then of the trucks that have the higher price levels, we will be offsetting all of the material cost increases.

Okay fine I'll get back in queue, thanks.

Jack Kelly, Goldman Sachs

Good morning. Can we just maybe start out on Fire Rescue Bob? Just you had indicated you expect sequentially improvement on production and a consequent impact on margins. As you exit the year, can you give us some sense of where you think the margin would be in Fire Rescue? You've kind of done it for -- for Refuse. And then what percent increase in production between now and then or second quarter, the fourth you would need to achieve that margin objective?

Well I'll refer back to the -- to the year guidance that we gave in December and talked about it at the end of last quarter, Jack. In regard to Fire Rescue, our target that we had outlined would have the business running between 3% and 4% for the year. So if you look at how we've done so far in the first half of year where -- where we lost money in the first quarter and marginally made a profit for the second quarter, to reach 3% or 4% for the year, obviously we have a lot of -- a lot of improvement in that. As far as the throughput goes, you know on a -- as I've indicated on a complexity based basis, because our mix has been richer recently, we were up 16% over the previous year in the second quarter. And those are the kinds of improvements that we need to get sequentially in that order of magnitude.

So to -- to average your three to four we're going to have be in high single digits obviously in the third and fourth, is that a fairway to look at it?

Mid to high.

Okay and then just, Bob, maybe if you just characterize the end market in -- in terms of Fire Rescue. What's -- you know, what are the trends with -- you mentioned municipal -- municipal spending is up, but you know, specifically as it relates to Fire Rescue Vehicles, what are you -- what are you saying?

Well if you look over the last three, four to five years, Jack, the -- the number of sales of units has been -- has been increasing gradually, I guess I'll put it that way. It was prompted up during the economic downturn because of federal money that was made available. And as we saw the last industry data was reported, for the first quarter, we saw that the volume is continuing to trend up. We would expect that to -- to continue. You know there are some things that could even provide a -- a more -- a discontinuous improvement in that in this -- what is it? Chapter D or whatever they call it?

NXD.

NXD. Those kinds of things. But we're not -- we're not banking on that. We would expect that number to continue to increase.

And then or on Refuge you mentioned, because of some production issues, you may be loss in orders because of del -- when you could deliver the trucks. As we sit here now, when -- you know, if you were to get an order, you know, a sizeable order, when could you deliver? Are you back on track? Or does that -- as we enter the third quarter is that going to prevent you from getting orders, or do you feel that you can promise customers close enough to deliver that you can capture orders?

Well we're pro -- we're not back on track yet, Jack. But, you know, we'll make -- make a lot of progress in the third quarter and by the end of the fourth quarter we'll be back only track. We didn't lose that many orders but -- until we have your delivery times down so that they're competitive with the industry this is something that -- that we could -- it could hit us to some degree still in the third quarter and perhaps a little bit in the fourth quarter.

And just finally, Stephanie, on the tax rate, putting aside the repatriation which skews every -- every company's tax rate up, what would the tax rate be?

20, mid-20s, 25 to 27. Sorry, going forward. I mean that's the problem we have. I think what we're saying in our -- in our 10Q is that the whole average composite rate we expect for the year to be under 10% which it reflects the benefits we had in the second quarter but that, that doesn't include the impact of repatriation.

So 25% in the second half of the year?

Right.

And you don't -- in terms of excluding the tax benefits, it sounds like it maybe comes in at 20? Have you calculated that number?

You know I haven't, I haven't. Because we have, between the tax repatriation -- actually the gain on the Victor Product Line sale has very low tax rate. I don't -- I don't have a number.

Okay thank you.

[Mike Pierce], Black Diamond Research.

Good morning Bob, Stephanie, Karen. Bob, I read an article in the local [Ocala] paper suggesting that you guys were looking to hire I don't know roughly 50 employees. I guess, one, is that true? And if so, is -- is it such there that the production levels have gotten to the point where you need another shift or just what are you planning on doing with those people?

50, I wasn't -- if that's what the article says that's probably pretty close I wasn't aware of number. But, yes, we are looking to hire people. The unemployment rate in Ocala is around 2%. And so we've had some turnover.There's not a whole lot of manufacturing going on in that area but there's a lot of service industry demand. So -- so we have a full court press on increasing the number of candidates that we get in, so that we can do a good job of sorting through the candidates and get some -- some very good people. We do need a few more people than what we had in the past because our volume is up in Ocala. Recall that we closed down the [inaudible] plant that volume is down in Ocala. But the 50 would represent mostly replacements of turnover.

Okay so it's not that you're at point where you need an additional shift or anything like that?

No, not yet.

Okay, and also you mentioned the joint venture in China but I thought I read somewhere, where you were doing a local joint venture, maybe Classic Fire or something like that. Could you just ,I guess maybe provide a little bit more color on what drove that joint venture and what are the [guys] bring to the table and where will that flow through the income statement things like that?

Yes. The announcement was that we're in discussions, which could lead to form a joint venture and that hasn't been completed yet. What -- what Mark and his people are doing is looking at our product line complexity, trying to determine what an optimum product offering, if you will. There a couple of -- there's one product line in particular that we weren't very competitive in and we've been losing share over the last several years and Classic offered some interesting designs. And they offered some production capacity, and so it looked to us like it would be a good fit. And we're still working on -- on you know, defining what that business model would be and exactly what kind of products that they would help us produce.

Okay and just remind me, Bob, these guys have a, sort of legacy here with [E-One], right?

Yes the -- the founders of the company were former E-One employees. There's still a lot of emotional attachment, I guess. So this is something, if we could find the right business model, will be a pretty exciting new development for us.

Okay thanks, I'll get back in queue.

[OPERATOR INSTRUCTIONS] Walt Liptak, KeyBanc Capital Markets

All right thanks. In that -- when you answered Jack's question about the margin, you said that in the second half you need a lot of improvement. Would you mind putting kind of the confidence level about getting to full year target for Fire Rescue Group?

I'm pretty confident, Walt, there is a lot of improvement that's embedded in that obviously. So if you -- if you look backwards to our performance over the years, this is -- this requires some substantial improvement in our -- in our operations. Based on what we've been able to accomplish in the first half of year, the improvements, we have our entire work force with some skin in the game now because of this bonus system that -- that the guys have set up. There's a lot of enthusiasm, of course about accomplishing this both from management standpoint and our employee standpoint. Not only economically just -- but just from a pride stand position. It's not -- it's not like falling off a log, Walt, but I'm confident we can do it and so are our guys down there.

Okay that's -- that's fine. So -- clearly it's tied to your workforce in Ocala, Florida and -- and how well they can operate and the bonus comp. Can you talk a little bit about the -- the metrics for the targets that management in Ocala has put in place for -- you know, to achieve the bonus?

Well there are a lot of improvements that are going on, Walt. As you know over since October of last year we brought in a number of new people. I think a third of our top 45 people are -- are new. We brought in some great talent. And these people are focussed on all of the areas of the business including inventory accuracy, to building material accuracy, to quality improvement on the plant floor. So these kinds of metrics that I offered to you showing the improvements that we made, we intend to continue to improve in each one of areas. There -- there really a couple of key things Walter, throughput is -- is biggest one because we have the orders. And in order to improve throughput the inventory has to be there, the building materials have to be right, and so improvements in all of those areas are what will enable the improvement in throughput. And as throughput improves, productivity goes up, quality goes up.

The specific metric that folks are being paid on is based on the improvement, the sequentially improvement in the spread between fixed costs and contribution on vehicles. So driving down costs and improving throughput both contribute.

Okay. Okay, thanks for the color on that.

[OPERATOR INSTRUCTIONS] I see no questions at this time I'll turn the call back over to presenters for closing remarks.

Okay, thanks, Jean for doing a fine job again. And thanks everyone for attending our conference we deeply appreciate your continuing interest in Federal Signal. We are pleased with the progress that we're making. We have a long ways to go. We're up to the challenge. We're in invigorated, excited and we're going to make it happen. And have a nice weekend everyone. [ Operator Instructions ].