Federal Signal Corp (FSS) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2005 Federal Signal earnings conference call. [OPERATOR INSTRUCTIONS] Now, I will turn the presentation over to the host of today's call, Ms. Karen Latham, Vice President and Treasurer.

Thank you for joining us today. Before turning it over to Bob let me remind you some of our comments contain forward-looking statements about 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 conference call for more detailed discussion of risks involved in our forward-looking statements. The press release is available at our web site, www. Federal Signal.com. Our CEO, Bob Welding, will begin.

Thanks, Karen. Good morning everyone, and thanks for joining us on our call today. I want to begin by expressing my pleasure with the progress the Company made during the fourth quarter and throughout fiscal 2005. As the headlines in our press release indicate, our earnings from continuing operations are up significantly compared to the year earlier quarter. The period marks our fourth consecutive quarter of progress in returning the Company to respectable profitability. Overall, our margins improved both quarter over quarter and year-over-year with most of our business units contributing to the success.

We continue to convert working capital to cash during the period. Our primary working capital as a percentage of revenue finished the year at 19.7%, the lowest point in over a decade. The Company's net debt to capital ratio is at the lowest point since the late 1990s. Our improved earnings and reduced level of invested capital improved the Company's economic the value by $45 million, The first year of rising economic value in nearly ten years. While I am pleased with our progress we're certainly not satisfied. We have, however, established some great momentum and we are poised to build upon his success in 2006. Our optimism for the future is rooted in our belief that we can be a stronger, more profitable company by concentrating on businesses that have demonstrated significant competitive advantages and exit those that don't.

And today, we have a key development to share with you relating to this strategy. After careful evaluation the Company has decided to exit the refuse truck body business. We are currently engaged in discussions with potential buyers and expect to divest this business during 2006. Consequently, we have reclassified refuse as a discontinued operation. More on that later, but now I would like to transition the discussion to the conditions in our free market segments. U.S. municipal and government, U.S. industrial and commercial, and non-U.S.

Our U.S. muni and government orders remained strong in Q4 up 6% from the year earlier period and 23% higher sequentially. Fire trucks and sweepers were the primary growth contributors during the quarter, but I'll remind you that Q4 is typically our strongest period for the Fire apparatus. For the full year we were up 10% with all lines other than outdoor warning sirens reporting improvement. As expected we continue to see brisk activity in the U.S. municipal and government segment in the early weeks of 2006.

In our second market segment, U.S. industrial and commercial, orders were also strong in Q4, up roughly 22% over last year and 15% sequentially, with all product lines contributing to the growth except for fire trucks sold to refineries and chemical plants but they represent only a small portion of our business in this segment. We experienced noteworthy strength in our Environmental Products group which was up 66% year-over-year and 36% from Q3 with sweepers, vacuum trucks and water blasters all reporting nice gains.

For the full year, the U.S. industrial and commercial segment orders were all 6%. However, if you strip out 2004's $47 million parking award we would have reported a positive 10% year-over-year comparison. U.S. orders for our Tool group businesses were up only 1% in 2005 although we saw some slightly increased momentum late in the year as Q4 orders exceeded Q3 by 3%. In the early weeks of 2006, orders remain steady in most product lines with some encouraging incremental strength in our metal forming tools sector in recent weeks.

Next, let's move to our third market segment, non-U.S. Orders for goods to be exported from U.S. plants were higher in EPG, SPG and Tool for the year. EPG set the pace with an18% increase due largely to anice sweeper order for the Middle East. Fire truck orders were down 37% due to tough year-over-year comparisons. This shortfall can be traced to three large orders received during the second quarter of 2004 which were not duplicated in 2005. Orders for exports tend to be very lumpy so quarter-over-quarter comparisons can be misleading at times.

New orders for our businesses located outside of the U.S. finished the year down 1% compared to 2004. We were well ahead of the game through the first three quarters off the year but fell short in Q4 due to timing issues that resulted in weak orders for our Bronto Aerial units. Another factor affecting the comparison is the company's decision to divest two product lines from safety products during Q3. Tool orders were down due to softness in Japan and Canada while orders for our two business units in Europe were stronger than last year but not meaningfully enough to affect softness in the other regions. For 2006, we believe the non-U.S markets will continue to provide us with stable orders although as always we expect them to arrived in somewhat unpredictable lumps.

Let's move on to Group specific operational performance beginning with the Environmental Products. Our announcement to exit the refuse business was a difficult decision to make. As most of you know we have been providing updates on the restructuring of this business since the announcement of our turnaround plan in June of 2004. I want to reiterate previous comments that I've made on this topic and emphasize that reaching a break-even run rate before mid-year 2006 is unlikely.

However, I am pleased to report that the sector's Q4 results slightly exceeded expectations and our people have made good progress in right sizing the business's overhead structure. Material costs are beginning to fall in line with expectations and labor force turnover has subsided to more manageable levels. Throughout 2004, and 2005, we implemented five different pricing actions in refuse and all but the last which is yet to be matched by one of our major competitors have stuck. The only major risk we envision for our goal of reaching the break-even run rate in the second half relates to full market acceptance of our pricing. And at this point is too early to determine where this will end up.

As I have indicated in previous conference calls the refuse truck business is different than the others we manage in EPG because we lack sufficient distinctive advantages to offset the effects of a customer base that is becoming more concentrated. Refuse truck industry profitability would benefit from additional consolidation and we decided that the best course for us is to exit this sector and focus resources on our areas of strength. We are in discussions with potential buyers and expect to complete the divestiture before the end of 2006. I would like to thank our dedicated and determined employees in refuse who have worked so hard to get this business to at point where we can consider alternatives that will help assure viability in the future.

Now, that the losses from refuse are removed from the operating results of the EPG, you can clearly see that our other product lines are doing very well. Orders were up 16% for the quarter, and 16% for the year. Revenues are up accordingly and margins are strong. I will point out that margins were off slightly from last year but this is due to increased spending on IT, product engineering, and startup costs related to our China JV. Nevertheless our group improved EB by approximately $7 million in comparison to the prior year. In spite of the divestiture of our refuse business unit we intend to continue forward with our joint venture in China. The designs that we will introduce there are different than the models produced for the North American market and the original intention of this joint venture was to start with refuse trucks and expand into other products. We believe this strategy still makes sense.

Let's move on to Fire Rescue, where our people are continuing to make great progress. Even with the closure of our plant in Preble, New York in late 2004, and some downsizing of our Canadian plant during 2005, the combined North American operations completed 58 more trucks in 2005 compared to the prior year. Specific to Ocala, reportable injuries declined by 4.5%. Defects per unit as determined by our customers at final inspection declined by 79% and warranty costs declined by 30%. Primary working capital as a percent of revenue improved by more than nine percentage points compared to the end of 2004.

Orders in FRG were flat both in Q4 and for the year. In both cases U.S. orders were up but the improvement was offset by weaker international orders. Historically, International has been considerably more lumpy and we don't have any concerns about the strength of the market and our ability to land our share of the orders going forward. Revenue for the Fire Rescue Group although down 8% for the quarter compared to the year earlier period, was up 3% for the year. The fourth quarter comparison is affected by shipments against the large Dutch contract in late 2004, a strong quarter from Preble in 2004 as they cleared out completed units prior to closing, and lower shipments from our Bronto unit in Finland during the most recent quarter, and this is purely a timing issue. Margins in the group improved in Q4 making this the fourth consecutive sequential increase. The improvements resulted largely from progress made in Ocala, where our determined employees continue the labor-intensive manual scrubbing of orders, specifications, bills of materials and early prestaging of kits and components. All of which result in smoother, more productive flow with fewer costly disruptions.

Between improved operating results and significant capital reductions, FRG improved economic value by more than $20 million during the year. As scheduled, the group completed work on our EZ-ONE branded sales configurator tool at the end of 2005. Our dealers and salespeople received training in January and we are now utilizing EZ-ONE to generate orders for our most complex custom pumper lines. Each month until mid year we will forcibly discontinue the use of the old sales tool for one additional product line as sales people become more proficient on EZ-ONE. Our dealers are delighted with the functionality of this tool which will be a substantial productivity improvement for them. EZ-ONE covers the models that constitute more than 80% of our volume.

As these structured orders flow into and through the Company, there is a quality productivity and lead time benefit every step of the way, and we are very optimistic that this will enable steady and gradual improvement over the coming quarters. I will stress again the word gradual. As promising as this is it is not like flipping a switch. We will have some growing pains and discover some mistakes along the way. However, the big difference we will gain from this technology is that when we identify and correct a mistake it will stay corrected.

In addition to the customer facing EZ-ONE sales configurator tool we are implementing a complementary product configurator which manages the bills of material and also implementing a purchasing and material control overlay onto our ERP system and this will help us manage inventory more effectively. I will point out that although we expect our 2006 performance will improve over 2005 in Fire Rescue our Q1 results will return to loss or no better than break-even. We're working hard to smooth the year out but with municipal budget cycles as they are, and still some ingrained traditions, Q1 will be our weakest quarter as has been typical in the past years.

Continuing for a moment on our customer facing activities, as you know the Fire Rescue Group announced a number of dealerships changes in North America during 2005 and we have a few more in process that will bring us to seven major changes in a little over 12 months time. Success in this business requires high quality products and strong dealers and we are committed to leadership in both areas. Many of our dealers are well-capitalized and do an outstanding job of understanding their customers' requirements thus allowing them to create longstanding relationships. I admire the talent and the entrepreneurial spirit of our business partners and respect the mutually beneficial relationships we have built with them. In that vein, we are methodically working with our lower tier of dealers to help them improve their effectiveness but we may find some additional dealership changes are necessary in the future.

Now, let's move on to our Safety Products Group. Orders were strong throughout the year in all product lines other than large installations for outdoor warning systems. Year-over-year comparisons are negatively affected by the $47 million parking order received in 2004 and the Q3 divestiture of two industrial product lines from our Victor business unit in the UK. We also closed a small non profitable parking business in Brazil during the fourth quarter.

And recall that in 2004, we divested SPG's just right business unit which manufactured industrial storage containers. Our strategic pruning over the last two years, has focused the group's technologies and products on areas where we enjoy competitive advantages. We expect this to fuel improved growth rates in the future and generate very respectable return on sales and ROI numbers. SPG's margins improved from 13.5% last year to 16.3% in 2005, although it should be noted that much of this gain was due to a pickup in the Industrial Lighting divestiture. Overall, the group improved EB by approximately $5 million. The group's markets remain strong although I remind you that orders for large projects in our parking, outdoor warning sirens, and integrated warning sirens businesses are lumpy and timing is difficult to predict.

Finally on to our Tool Group. We were pleased with the strength of incoming orders in Q4 particularly in view of the stress in the U.S. auto industry. With lead times of days, revenues were right on pace with orders. The group's margins were respectable with second half improvements offsetting a weak first quarter and Q4 operating results mostly offsetting the expenses associated with the group's top leadership change. European markets in the group strengthened over the last year while Japan reported weaker results compared to a strong second half of 2004.

Looking forward, we don't foresee significant market improvement on the radar screen for Tool but we believe actions Alan Shaffer and his team will improve our share of the U.S. market and will benefit our operating margins. Tool is continuing to focus on operating efficiencies, North American market coverage and on growing sales in the regions of the world where a new industrial investment is the strongest such as Eastern Europe and China. The group will be completing their new plant in Quandong, China early this year and and expect to begin shipping product from this facility by mid year. In 2005, the group improved their economic value by about $1 million resulting from flat earnings on a slightly lower invested capital base. However, the leadership team has been reinvigorated with Alan's arrival and is putting into action a more aggressive growth and profit improvement plan that will add EB at a better rate in the future.

I will end my comments regarding 2005 by repeating my gratification with the Company's progress. We have clearly turned the corner, and reversed what was a ten-year trend of declining performance. Our results have energized our employees and added to their excitement about the future of the Company. I want to express my sincere appreciation to all of our employees throughout the Company for their continuing hard work and focus on satisfying our customers and implementing improvements. The progress I am proud to report on today is the result of their dedication and determination.

Looking forward to 2006, we expect revenues to grow by about 6% to 8% and earnings to be up between 10%, and 15% even with stock option expensing and a change in pension fund assumptions negatively impacting us. This excludes the impact off one time items. Of course, our forecast assumes no market disruptions and moderate but steady growth in economies of our major markets around the world. We also assume steady but gradual progress in our fire truck operations in Ocala. Although our business flow will never be entirely predictable we have made good progress in 2005 and feel increasingly confident in our projections.

Lastly, I would like to extend an invitation for investors and analysts to join us on our Analyst Day one week from today or listen via Webcast. Stephanie and I will be joined by Greg Sink, our Vice President of Strategic Business Development and our Group President to provide you with an update on the progress we have made in establishing a new strategic direction for Federal Signal. I am very proud of the work we have put in to craft this strategy, and I'm excited about our prospects for impressive value creation in coming years. We are confident that Federal Signal will regain its stature as the top performing company in the eyes of our customers, our employees, our dealer and distributor partners, and of course, our shareholders. Now, I would like to turn it over to Stephanie Kushner for some additional color on the financials.

Thanks, Bob. We made significant progress this quarter. Reported earnings of $0.28 per share from continuing operations versus breakeven in the fourth quarter of last year. Because of the restructuring expenses and restatement for discontinuing businesses, I know the comparison is a little tricky but let me help you through the unusual items and how they impacted both years. In 2004, on a continuing operations basis, we are now reporting break-even results. This however, included $0.03 in costs associated with restructuring. So, you can think of it as a $0.03 profit on a strictly operational basis. You will undoubtedly recall that we incurred a sizable loss in 2004's fourth quarter, associated with the multi-year Dutch Fire Apparatus contract which cost us $0.14 a share in and of itself. That was a big contributor to the very weak results. We were also experiencing some squeeze in raw material costs broadly across EPG.

For 2005 the $0.28 figure reported includes $2.5 million, or $0.05 per share benefit associated with repatriating offshore cash. I had indicated on last quarter's call the the gain was likely but the amount was uncertain. If you were to exclude this amount, our results on a strictly operational basis would be $0.23, so by any measure this is a sizable improvement. As Bob explained, we reclassified refuse as discontinued this quarter which means their $3.5 million after-tax operating loss below the line. This obviously boosted our fourth quarter operating earnings by $0.07 a share versus Street estimates.

I would also add that the operating loss in 2005 for revenues for the full year was $15.6 million, or $0.31 a share. In addition, we took impairment charges totaling $36 million, $34 million for refuse, and $2 million for the closure of a small parking plant in Brazil. The refuse impairment includes a $14 million writeoff of goodwill plus a $20 million charge against the rest of the net assets for a total impairment of $34 million.

I will now, turn to the income statement. Our fourth quarter sales totaled $307 million, up a net 2% from 2004. Volume and price were both higher but currency translation was adverse to the U.S. dollar which has a 1.5% negative impact. EPG and Safety products were up significantly from last year but the Fire Rescue comparison was negative due to the heavier shipments last year from Bronto and for the completion of the Dutch contract. Our GM improved to 26.1% in the quarter on a continuing operations based, up sharply from 19.7% a year ago. The 640 basis-point improvement reflects the absence of the Dutch contract loss which depressed last year 's margins by about 370 basis points, also significantly better operational results for Tool and modest improvements in our other businesses. Perhaps more significantly this also reflects a sequential improvement from Q3 of 150 basis points with improvements posted by every group.

Our selling, engineering, general, and administrative expenses as a percentage of sales rose to 19.9% in the quarter due to higher accruals for incentive compensation expense. This brings the full-year number to 19.2% against 20.7% a year ago. Bringing down this ratio and reallocating some of the spending will continue to be an area of focus for the Company. Corporate expense which is part of SEG&A totaled $7.5 million in the quarter up modestly from $7.2 million a year ago. The increase mainly reflects higher incentive compensation expense partly offset by lower outside legal costs due to a delay in the trial date for the Chicago Fire fighters hearing loss case. The trials have now been scheduled to begin in August of this year. On a positive note, earlier this month the judge denied punitive damage claims on these cases so the stakes are now considerably lower. We are continuing to fight these cases aggressively.

Interest expense was $5.4 million this quarter, down slightly from $5.5 million a year ago. The impact of lower debt balances is nearly offset by higher short-term rates. Our income tax rate on operating earnings was 7% in the quarter reflecting the $2.5 million tax benefit described earlier. Excluding that impact our effective rate would have been about 25%.

By way of further explanation on the tax gain we were able to repatriate money from a low-tax rate jurisdiction for which we had previously recorded a deferred U.S. tax liability. Since we brought the funds back under the American Jobs Creation Act and it was only subject to a 5.25% tax rate we were able to reverse the balance of the U.S. tax accrual which gave rise to the earnings gain. Good execution on the part of our Tax and Treasury folks.

As Bob mentioned, cash flow was very strong in the quarter. Operating cash flow was $34 million, up from $18 million in the same quarter a year ago. Although a year ago we also made a $5 million pension contribution whereas this year, in 2005, our pension contributions were earlier in the year. This brings our full-year operating cash flow to $73 million, up significantly from $53 million in 2004. At year end our operating working capital was down to $219 million from $250 million a year ago.

Let me comment on the improvement of our liquidity. At year end our manufacturing debt was $276 million, up from $235 million a year ago. However, this $41 million increase is more than offset by the $77 million increase in our cash balances. Therefore, our debt net of cash declined from $220 million in 2004 to $184 million at year end 2005, a significant improvement. Net manufacturing debt to capital improved to 34% from 36% a year ago.

We ended the year with high cash balances for two reasons. We repatriated $22 million of offshore cash very late in the quarter and we increased our drawings on our lease financing facility just prior to year end as we perfected a bundle of vehicle leases. We did this in anticipation of repaying private placement debt early in 2006. During this first quarter of 2006 our cash balances will drop significantly as we apply cash to the extinguishment of $40 million of private placement debt and contribute an additional $10 million to our U.S. pension fund. Also, after year end we extended and amended our revolving credit facility to increase the facility's size to $110 million and to take us out into 2009. That facility was previously scheduled to expire later this year. So, on March 31st, we'll show a very healthy low debt and low cash balance sheet.

I also want to make a couple of comments about EB. For 2004, our EB was a negative $66 million. That figure, excluding the restructuring costs we incurred, but included, for example, the large loss on the Dutch Air Force contract. We had very modest earnings and more than $700 million on average tied up in capital in our business. For 2005, EB improved significantly to negative $21 million. It is still negative. That is, we are not returning 9% on our capital employed yet. But pur performance is consistent with the projections we provided when we first rolled this measurement system out at the end of 2004. At that time, we stated the crossover point, to positive EB would probably occur in 2007. We're still on track for that.

What drove the $45 million improvement? In 2005, on average, capital employed was more than $100 million lower than the prior year, due to improvements in our working capital management and because of cash received from product line and business sales. That in and of itself boosted EB by about $10 million. Operating earnings improved $24 million, and our taxes were significantly lower. Just to clarify there is no EB benefit from the gain on the product line sale for example and the reclassification of operations as discontinued does not impact EB. Only when we actually sell a business and generate cash will EB benefit through the reduction of our capital employed. We are very enthusiastic about this new measurement system and we are confident that it will continue to drive the right management behavior.

Just before I close, a couple comments on backlog and orders. Our orders totaled $302 million in the quarter, slightly below sales due to deliveries against parking system contracts which reduced the Safety Products backlog. Backlog at year end remains strong at $390 million, down about 2% from a year ago. Our Environmental Products backlog at year end was $89 million, up about 6% from the prior quarter. Fire Rescue, $234 million, down 2% from third quarter. Safety Products, $58 million, down about 15% from a quarter ago, and then, Tool at $9 million. Now, I will turn it over to Bob to moderate questions.

Thanks, Stephanie and, Jackie, I guess we're good to go for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Jack Kelly from Goldman Sachs. You may proceed, Jack.

Okay. Hi Bob. Just one broad question and maybe a couple others on Fire Rescue. The broad question was, Bob, you talked about the 10% to 50% EPS improvement and Stephanie stepped through the operating earnings numbers in the fourth quarter. What should we be basing that 10% to 15% on? What is the base number you view 2005 earnings were? Then we can apply the 10% to 15% to that number.

Jack, I will answer that one. The 2005 results included two items that we view as one time. The $0.13 per share gain on the product line sale and the $0.21 of tax benefits that came from resolving the previous year tax returns and also from this repatriation of offshore cash. There is also $0.01 in there that goes the other way from --

The restructuring.

Yes, so you can add that back. So if you do that, you come up with a number that is like $0.65.

$0.65. Got it. Just on Fire Rescue, Bob, you had mentioned in the first quarter we won't see a sequential improvement, and you mentioned traditional practices or something like that. Can you elaborate on that a little bit?

Yes, Jack, we have a very strong fourth quarter typically and part of that is driven by the fact that the municipalities have to spend the money before the end of the year and part of it is driven by what I termed as some traditions, where it seems like the industry, including some parts of our organization are just accustomed to this kind of having, really, a gang buster fourth quarter, and then kind of falling back in the first quarter. We won't be able to correct that entirely but certainly, that part of it that we can control, the way our dealers engage with customers and the way our employees schedule trucks and try to schedule customer inspections and so on. So, we can affect a little bit of that but not all of it. And we've made a little bit of progress but we have a long ways to go.

Okay, so your objective would just be, if you could, to smooth out production? I guess that's basically --

Yes, from a production standpoint we have made remarkable strides in completions of trucks per week as we measure this, and over the course of 2005 we have made good progress in completions. What we haven't done very well is making good progress on shipments. If you look at our shipments on the last month of the quarter, for example, it is a lot higher than it is in the first two months of the quarter and then the fourth quarter is stronger than it is the previous three quarters, and that is what we're working on.

Okay, and secondly, with regard to the new ordering system, it sounded like by the middle of this year, 80% of your volume will be on EZ-ONE? Is that--

Yes. The orders will be generated on EZ-ONE. Again, Jack, by the time -- If we configure and order in June, for example, on EZ-ONE, if it is a complicated truck we'll be making that truck either very late in the fourth quarter or into the following year. But you are right, in generating orders we intend to have this fully implemented on the models that we have coverage on by mid year.

Okay. So, the margin in the fourth quarter, operating margin in Fire Rescue, was 3 - 7, we fall off in the first quarter. Two questions, number one, what do you view as the long-term objectives here, in terms of margins. And if I look out to the fourth quarter of 2006, could we be pushing something close to 10%?

You are much more optimistic than we are, Jack. I will reiterate what we said in the past about our longer-term view of this business. We still don't see any reason why we can't get 9%, or 10% over time. And this takes a full implementation of the configurator with all of the ancillary improvements on the manufacturing floor. What we have done with the configurator now is we have structured the first part of the business cycle generating the order.

Along with that, we are structuring builds and materials so we are developing a build for truck with pre-engineered modules as opposed to from scratch each time. What we still have to do is out on the plant floor now is to modify our operations to take advantage of the fact that we can much more accurately predict what we're going to build. For example, under the old system when we were making a custom truck, when we were fabricating the body of the cab, we couldn't do anything in advance until the order was completely generated and we made the drawings and so on. And now, we will be making those bodies and cabs from a number of standardized length of extrusions, standardize widths for storage compartments and so on.

So, there is a lot we can to over time now to reduce the amount of labor hours that are in the truck, to improve the quality and to improve the lead time. But we have a lot of work to do to take advantage of all of that so that is why this isn't like flipping a switch, Jack. It will take us awhile to get through all of this.

Okay. Last question, sounds like the domestic business is robust. You explained what happened internationally. Can we expect international over the course of the year, Bob, to be up or is this volatility going to remain on the downside for the balance of the year?

Well, or example, in Bronto we fell short in the fourth quarter, but one of the big orders that we thought was going to hit the fourth quarter hit in January or February. January. That was a big multi unit order for Moscow. It looks like our first quarter will be pretty good. It is really hard for us to tell you we're working on these deals, we're pretty sure we're going to get them but it is really hard to figure out what month they are going to fall into and, of course, if that month goes over a quarter then -- So, right now, we don't see any reason why our international orders, both for Bronto and for exports from the U.S., won't be strong.

In fact, since they were kind of weak in 2005 they will be even stronger in 2006.

Thanks.

Your next question comes from Walt Liptak, from KeyBanc Capital Markets. You may go ahead, Walt.

Hi. Thank you. I guess the question I have is with the guidance of the 6% to 8% revenue growth. I wonder if it could be possible to go through by segment and talk about which might be up more or less or are we talking about all of the group's 6% to 8% including Fire Rescue?

We will talk about that in more detail next Tuesday on the Web cast. At this point we are expecting all of our businesses to be up in 2006.

Okay and during the fourth quarter, did you see an impact in orders from the Fire Grant program. I guess I was surprised your orders were flat year-over-year even taking into consideration the Dutch order.

Our U.S. municipal orders were actually up materially quarter to quarter. So, the reduction was not in the U.S. It was on the international side. For the flatness, I should say.

Okay and within the EPG group and the strong order frenzy you're seeing there, I wonder if you have seen any evidence of any kind of pre buying going on before the new 2007 heavy truck engine emissions standards?

I don't attribute too much of what we're seeing to that, Walt. One of the things that has really helped us in EPG is the cleanup after the hurricanes. There is a lot of equipment, vacuum truck equipment, that is down in that region still, cleaning out industrial plants and cleaning out sewers and so on. We had strong exports. Right now, we're not seeing evidence that there's a whole lot of pre buying going on.

Okay. Okay, good, and going back to FRG and talking about the operating profit trends, for a break even because of seasonal factors that you talked about in the first quarter, can you give us an idea of the magnitude of the ramp in the second quarter and the back half of the year?

Again, we will talk about this a little bit more. I think for planning purposes for 2006, we are going to have a similar shaped curve that we had this year but it should be notched up a couple percentage points.

Okay, and the tax rate. You might have mentioned this, but should we use the 25% tax rate for 2006?

For planning purposes we are using a 30% rate but we have a number of tax planning initiatives underway that we're never sure that they will occur or not. So, I think we could end up anywhere between 25%, and 30%.

Okay. Great. Thank you.

[OPERATOR INSTRUCTIONS] At this time there are no further questions. I will turn the call back over to management for closing comments.

Okay. Thanks, Jackie. Again, I would like to express our appreciation to everyone for listening to our conference call, for your continuing interest in our company. We are delighted to have a story today that we are a lot more proud of than many we have had over the past couple years. We have made some important progress in 2005 across the Company. We have made the difficult decision to exit the refuse business which will allow us to spend a lot more time on those businesses where we can do much more to create value, and we are looking forward to the rest of 2006 and beyond. Again, I would invite everyone to listen in next Tuesday to our conference call where we are talking about the years beyond 2006. Have a great day, everyone. I will see you all soon, hopefully. Thanks, Jackie, for your fine job.

Thank you, ladies and gentlemen, for your participation in today's conference. This concludes the presentation. You may now, disconnect and have a wonderful day.