Federal Signal Corp (FSS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Federal Signal earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS).

As a reminder this conference is being recorded for replay purposes. I would now like to turn our presentation over to our host, Mr. Dave Janek, Vice President and Treasurer. Please proceed.

Thank you, Eric, and good morning, everyone. Joining me today are Bob Welding, our Chief Executive Officer and Stephanie Kushner, our Chief Financial Officer.

Before we begin, please be advised that some of our comments may contain forward-looking statements about the future prospects of Federal Signal. As such please refer to our latest 10-K filed with the SEC and the news release issued in conjunction with this conference call today for more detailed disclosure of the risks associated with our forward-looking statements. These documents are available on our web site, federalsignal.com.

With that, I will turn the call over to Bob Welding.

Thanks Dave. Good morning, everyone, and welcome to our fourth quarter and 2006 full year conference call.

I'm pleased to report that we had a very strong fourth quarter in all respects, capping off a year of significant progress as we continue to restore the Company's performance to one of sustained growth and solid profitability.

For the quarter, revenue was up 14% with three of the four business groups reporting double-digit increases. Operating income was higher by 23% compared to Q4 last year. Orders increased 11% and we ended the year with a quality backlog, up 4% from a year ago.

For the full year, orders were up 12% while revenue increased 8%. EPS from continuing operations reached $0.72 compared to $0.91 last year. Since these results include a number of onetime events it is useful to review our performance on more of an apples to apples basis for gauging the improvement we have made in operations during the course of the year.

First of all, I remind you that we reported the divested cutting tool businesses as Discontinued Operations at the end of 2006. This would have added $0.08 to our reported results so had we included this input, we would have achieved earnings of $0.80 per share which exceeds the First Call consensus estimate. Cutting tools has been removed from 2005 results so this transaction does not factor into the year-over-year comparison.

Stripping out the $0.13 per share gain from the Industrial Lighting product divestiture and $0.21 per share from the completion of the tax audit and the tax benefit of repatriating offshore cash from the reported EPS for 2005, EPS on a comparable basis would have been $0.58. Therefore, a meaningful comparison would be $0.72 in 2006 versus $0.58 in 2005.

In addition, during 2006, we have absorbed increased spending of approximately $0.11 per share on strategic initiatives and expensed stock option based compensation to the tune of $0.03 per share. So I'm very pleased with our progress in 2006 and happy to report that we are on track to chart significant further improvements in 2007.

For 2007, we anticipate revenue to be up 8 to 10% and earnings to be up about 30%. We expect to increase EV by roughly $20 million compared to 2006, which would elevate us comfortably above the breakeven point. Of course these projections assume stable economies around the world and exclude the potential impact or the impact of potential acquisitions or divestitures.

Over the past few weeks, Federal Signal has made a couple of significant announcements that provide good visibility into where we are headed as we continue to transform the Company into a world leader in municipal and workplace security and well-being solutions. First we announced the sale of our cutting tools businesses to Kennametal. I am pleased with how this transaction transpired.

The Kennametal team was a great partner and they ended up with some high-quality businesses that complement their core strength. Meanwhile, the proceeds we realized from the sale represented a good deal for our shareholders. I would like to thank our employees of Clapp Dico, Manchester Tool and On Time Machine, Inc. for their dedication and efforts over the past year and wish them well as part of a corporation exclusively focused on the global cutting tools business.

Another important announcement was in regard to our acquisition of Codespear LLC which notably is the first acquisition we have made during my tenure and the first for the Company since 2002. Codespear is a startup that began in 2003 when the company developed a software solution specifically for a large Detroit-based multinational. The technology allowed this corporation to instantaneously send alert messages to company leadership all around the world on a variety of communications platforms -- such as landline phones, cellphones, PDAs, pagers, e-mail and so on.

Once implemented, it became clear that the solution could be applied at other large companies and to municipalities for the purpose of alerting their citizens to safety and security issues. It was this functionality that first attracted us to the technology. Particularly since we had envisioned supplementing our outdoor warning sirens with personal notification systems.

In 2005, Codespear launched a simple-to-deploy, low-cost solution to address the interoperability problems faced by First Responders during large-scale emergencies. This product instantly connects two-way radios, telephones, computers and mobile devices over any network medium. The Codespear solution is the only one of its kind that offers interoperable communications and urgent notification on the same platform, allowing incident managers to instantly notify First Responders and private citizens of evacuation procedures, Amber alerts, HAZMAT warnings and other urgent notifications, regardless of device or frequency.

Codespear's early growth is a very compelling story. After the initial applications, which addressed individual alerting for two large Detroit area corporations, the company sold the first government application to Wayne County, Michigan, to provide for First Responder interoperability. As word of the benefit circulated, the application spread rapidly across the state.

From Wayne County it expanded to include the city of Detroit Emergency Responders, then to adjacent municipalities, then to adjacent counties, then to the Michigan District 1 Regional Medical Coalition, and finally the Michigan State Police implemented the solution. The most recent order received just in the past few weeks came from the Michigan State Senate who purchased the Codespear Smart Message product to enable instantaneous alerting for senators and key staff.

Recently, another application was developed from the same platform -- a software-based collaboration tool that allows emergency personnel to participate in chalkboard discussions regardless of where they are located and what type of device they're using. These three applications were being marketed by Codespear but their success was constrained by the company's small salesforce with few relationships outside of the state of Michigan.

This is where a clear synergy exists with Federal Signal as we enjoy one of the best profiled in the state and arguably the most comprehensive access to municipal emergency response managers and agencies across the country. The benefits from the Codespear acquisition are numerous. Their current application fits squarely into our strategic space so we can sell the technology through our existing channel. But the most compelling opportunity is what we can do about integrating the interoperability communication software into our existing product.

The result is a greatly expanded functionality into more comprehensive solutions. This is the case for many of our offerings across the organization. In our Safety and Security Systems group for example this applies to outdoor warning systems, our integrated Industrial Communication and Emergency Warning systems, our Emergency Vehicle Warning systems, and even our Parking Revenue Management systems. The software platform is architected in a modular fashion, which means we can develop other applications that simply hang on to the core easily and quickly.

Next, I would like to move to another exciting development that we expect to be able to announce in the next few weeks. A county adjacent to a Midwestern city recently selected Federal Signal to provide a $5 million countywide, state-of-the-art, outdoor warning system enabled by a networked public safety broadband wireless system.

If you recall this was one of the integrated solution concepts we discussed at our investor day a year ago. This is a case where we are building on one of our traditional core strengths. Namely, Outdoor Warning Siren systems. However by integrating new technologies -- in this case, a secured broadband wireless network -- and adding control software, we are able to provide customers with the solution that has broader capability to enhance regional security and well-being.

In addition to providing control of the siren systems the wireless radios that are integrated into our control boxes are networked together to provide a robust and low-cost wireless broadband backhaul solution that authorities will use to make real-time video and data available to emergency response agencies all over the county.

This application is a perfect example of how Federal Signal is participating in the enabling of community and regionwide broadband wireless networks for public safety. We expect to have more announcements like this in the coming months.

Additionally all of our core business units are actively developing applications and new product concepts to take advantage of the public safety broadband wireless networks that will be pervasive in the future. These networks will be a key part of the solution for multiple agency interoperability problems and are absolutely necessary to provide the communication backbone for all of the video cameras, meteorological, chemical, biological and radioactivity sensors that will be increasingly deployed across the world to improve natural disaster and terrorism preparedness. In that vein, our Safety and Security Systems Group or SSG was recently renamed to reflect the group's new focus on integrated solutions.

In 2006 under Dave McConnaughey, SSG orders increased 18% from the year earlier period. During the year, 28% of the group's orders related to comprehensive solutions as opposed to box products. Comprehensive securities solution sales growth remains strong and will be further energized with the addition of Codespear.

Separately, the worldwide market for non-military security products is expanding at the rate of about 8% per year. Being focused in this area, we anticipate that SSG will lead the Company in achieving our overall target for sustained growth in the high single digits, while maintaining 14 to 15% margin.

Let's move on to our other 2006 star performer -- the newly renamed Environmental Solutions group or ESG headed by Mark Weber. Similar to SSG, the modified name reflects the group's new direction as they are focusing more on end user fundamental needs and issues in order to drive development of comprehensive solutions.

For example, in the past we would sell a sweeper with the notion that the customer's intent was simply to clean the streets. However as we increasingly take in the big picture and imagine holistic solutions we realize that a primary driver for cleaning dirt and debris off of road services is to prevent storm water runoff from contaminating lakes and streams. As a result we are asking ourselves, what more can we do to help communities comply with environmental regulations, increase productivity and enhance well-being.

As this transition to a broader focus is underway and ESG continues to hit the cover off the ball with orders for its core products. As you have seen in our press release, orders during the quarter and the year were very strong in all of the groups' product lines.

Additionally margins continue to improve despite significant investment in growth initiatives. In the past three or four weeks, ESG unveiled three major new products at trade shows. These new products include a complete redesign of their market-leading Pelican sweeper, a smaller lower-cost truck-mounted vacuum excavator machine that gives us access to a new market segment, and a new more efficient configuration for an industrial high-pressure water blaster.

Additionally they have two other significant new product introductions slated for later this year. This stream of new products results from our recommitment to product leadership and increased investment in new product development to support that.

Now I would like to take a few minutes to discuss our Fire Rescue group which turned in a respectable quarter after some struggles earlier in the year. Revenue grew 15% year-over-year while operating margin remained flat compared to the prior year period. New orders were up slightly during the quarter with both E-ONE and Bronto showing improvement.

For the full year FRG orders were up 3% with the Q2 and Q3 weakness in our U.S. operations offset by strength at our Bronto unit in Finland. New orders at Bronto continued at a highly robust level and finished the year [up] 53% over a very strong 2005.

If you recall I commented during the previous two conference calls that, within FRG, our North American orders had been adversely impacted by the comprehensive overhaul of E-ONE's business model and dealer policies. As a result of these changes, including management's conscious decision to transition away from a wholesale-focused approach we forfeited some market share during 2006. A material portion of the share loss was attributed to fewer dealer stock and retail orders as E-ONE and their dealers worked hard to sell off orphaned and slow-moving trucks that were lingering on dealers lots but floor planned by Federal Signal.

This reduction in dealer inventory was $12 million alone in 2006 and $20 million since the end of 2003. This eliminates some difficult trucks that had been clogging our channel but the cost us some new factory orders during the year.

But this is another example of what -- where we are doing the things that are necessary to fix old problems throughout the value chain to return this business to an acceptable and sustainable level of profitability.

Marc Gustafson and his people have done some heavy lifting to address a wide variety of issues and problems in the U.S. operations that had resulted in a steady margin deterioration since 1991. The margin decline bottomed in 2004 and the recovery began in 2005 and continued through last year. We plan to make more progress during 2006 but lost some momentum due to the disruptions related to our channel restructuring efforts.

There are a number of initiatives underway in E-ONE that are gaining traction and will help recover some of the lost market share in 2007, without sacrificing our profitability recovery. To name a few, our sales configurator is now fully operational. We are the only OEM to provide our dealers and customers a web enabled apparatus spec'ing and parts order entry capability. Recently, all sales personnel received additional extensive training on the Easy One tool. In the last six months we have added more sales representatives to call on national accounts and assist dealers.

To promote the unique benefits of our products, we stepped up marketing efforts considerably. Our build quality levels have improved substantially over the past two years and our lead times had been reduced significantly as a result of the product structure we have achieved with a new sales configurator platform.

And of vital importance, E-ONE will be showing four innovative new products at FDIC, the industry's largest trade show in April. One is a technology showcase concept vehicle that will be an industry first. The other three are fully defined, fully tested, commercial-ready products. This is a testament to our commitment to regain product leadership in this industry.

A few weeks ago, I attended FRG's annual dealer meeting and I'm happy to say that our dealers and salespeople are enthusiastic and excited about 2007. They have gone through some tough times as we have implemented a series of changes over the past two years. But we are better for it; and the experience has made all of us stronger and more determined. We are ready and committed to generating meaningful progress in 2007.

Finally, on to the Tool group. With the divestment of the cutting tools businesses, [Alan Schaefer] and his team are fully concentrating on growing the value in the two remaining sectors -- metalforming die punches and plastic injection molding tooling components. Sales of die and mold tooling products in North America were weak for much of last year due to the well-known problems in the domestic, auto, and home construction industry.

However improvements in market coverage and on-time delivery have helped offset some of the weakness in those two areas through gains in other sectors.

I talked about the productivity issues at our Dayton, Ohio plant in Q1 and Q2 which related to a J.D. Edwards ERP of system implementation [error]. As planned the plant fully recovered in Q3 and margins at Dayton returned to last year's levels in Q4.

However overall margins for the group in Q4 were impacted by startup costs associated with the China plant. Employee training is now underway there and first production shipments begin late in the present quarter. Domestic tool orders so far this year continue to be weak as the auto makers reduced schedules in the first half and home construction remains depressed.

We expect some recovery in both of these markets later in the year and anticipate the European and Japanese markets to show selected strength compared to last year.

Now I would like to pass the conference over to Stephanie who will go through more of the market and financial detail.

Thank you, Bob, and good morning.

I'm going to start by commenting on the conditions in our broad market then I'm going to cover the results from our four business groups and I will conclude by discussing our consolidated financials.

From a new business standpoint we received record orders totaling $325 million in the fourth quarter with strength realized across all economic sectors. U.S. municipal orders totaled $128 million, up 25% from the third quarter although 6% below the fourth quarter of 2005. Orders for sewer cleaners, light bars and sirens were up significantly versus the prior year. However municipal orders for fire apparatus were down from a year ago reflecting weaker performance from our U.S. dealer channel.

For the full year, U.S. municipal orders were up 3% -- again a combination of relatively higher orders for most products, largely offset by lower fire apparatus orders. We believe the softness in fire trucks is situational; and we see broad strength in the U.S. municipal markets in 2007.

Moving onto the U.S. industrial and commercial sector, orders rose 12% compared to the prior year quarter totaling $84 million. We saw big increases in orders for our Environmental Solutions products including sweepers, vacuum trucks and water blasters which were all significantly higher.

For the full year Environmental Solutions' industrial orders were up more than 30%. We are seeing growth in demand by rental fleets and regaining some market share as well.

Finally, Q4 non-U.S. orders were uniformly higher totaling $112 million against $79 million a year ago. Included in the quarter was $18 million -- I'm sorry, included in the total was $18 million associated with the initial stage of a multiyear order for fire apparatus from the city of Montreal that we announced in December.

For the year non-U.S. orders totaled $430 million surging 23% from $350 million in 2005, and represented 35% of our total orders. We are very pleased with the progress we are making toward our ten-year target of generating half our revenues from outside the U.S.

Next, I will cover results from our four business segments. Safety and Security Systems had a strong quarter with sales increasing 16% and operating income of $12.6 million, up 7% in the prior your. Our operating margin averaged 15.2% in the quarter, down 120 basis points from the prior year. The reduction was due to a less rich mix of electrical product sales, a squeeze in margins on our mining products due to escalating raw material prices that were not wholly passed onto the customer, and higher R&D expense. For the full year safety and security revenues exceeded $300 million for the first time with an operating margin of 13.5%.

Looking in 2007 SSG's markets are strong and its customers are responding to our enhanced systems offerings. The business should deliver double-digit sales growth with operating margins in the 14 to 15% range.

Moving onto Fire Rescue, the group booked sales of $124 million in the fourth quarter, up 15% from the prior year with double-digit growth coming in both the U.S. and foreign operations. Margins averaged 3.5% about flat year over year but up from prior quarters. The impacts of improved sales volume and prices were largely offset by higher material costs and lower overhead absorption.

For the full year, this segment delivered sales that were 4% higher than the previous year and a 120 basis point margin expansion to 1.8% of sales. The improvement marked progress but, as Bob noted, fell short of our expectations due to the disruptions in the U.S. dealer channel and a $1.6 million higher loss in Canada where we curtailed operations and sold the plant during 2006.

Entering 2007, this segment should deliver revenue growth approaching 10% and we expect it to see another 2 percentage point expansion in margins. Positive factors influencing margins are the benefits of better truck flow as units designed with the sales configurator flow through production; overhead savings associated with closing the Canadian plant; and higher production volumes of aerial apparatus in Finland.

Margin risk factors include higher expenses associated with additions to the sales organization and increased product development outlay.

Next, our Environmental Solutions group delivered another very strong quarter. Orders totaled $119 million up 27% from the prior year with double-digit growth in all product lines and notable strength in sewer cleaners and water blasters. The sales increase was more modest, up 15% to $102 million. All product lines enjoyed double-digit sales growth. The operating margin expanded 170 basis points to 9.5% due to improved gross margins in all businesses. This group has used a portion of its profit expansion to increase investment in new system, opened a dedicated spare parts operation, make additions to the engineering staff and fund startup costs of a joint venture in China.

For the full year Environmental Solutions had just under $400 million in revenue and an operating margin of 9.3%, up 100 basis points from the prior year. We are beginning 2007 with a very strong backlog and expect this group to experience sales growth exceeding 10% with margins holding north of 9%.

Finally results for our tool business remain static with sales flat at $30 million and margins down slightly at 8.7%. Although the operational problems at our Dayton plant are behind us the business continues to experience softness in volumes in the U.S.

As 2007 unfolds, it is clear that the tool group will continue to experience volume and price pressure in the two-thirds of the business that is tied to the domestic U.S. market and, particularly, the portion associated with the automotive production and housing market.

Offsetting this weakness are efforts to expand the customer base in the U.S. as well as overseas plus the impact from new product rollouts. In addition as Bob noted, the operational problems we've experienced in our Dayton U.S. plant are now behind us and the productivity is high.

For 2007 we are projecting low single digit growth in sales and operating margin is recovering slightly into the 8 to 9% range.

Before I talk about consolidated performance, I wanted to point out that we have reclassified some of our staff expenses from SEG&A to plant overhead costs. This was done as part of a comprehensive conversion of all of our operating units onto the same detailed chart of accounts. We did this in preparation for future plans to consolidate our transactional accounting activities.

In commonizing our charts we identified some inconsistencies in the segmentation of expenses from business to business, which we wanted to harmonize in order to better compare business units against each other and with other companies and to facilitate a single set of account codes. As a result we have broadly shifted about 2.5 percentage points of expense from SEG&A into cost of sales. So there is a corresponding and parallel reduction of gross profit margin, and a reduction of our stated SEG&A expenses. Prior year figures have been reclassified as well for consistency and the classification did not impact our operating margin.

With that in mind, I would like to continue with a review of our consolidated financials. Our consolidated gross margin reflecting that reclassification averaged 23.5% in the quarter, essentially unchanged from 23.6% in the prior year. For the full year, gross margin was up 1 percentage point from 22.5% to 23.5% on a comparable basis.

Full year margins improved for all groups except Tool. The consolidated 1% improvement met our stated target for the year. Most of the margin expansion was realized due to lower fixed plant overhead costs as we benefited from the streamlining and closures in Company operations as well as higher volumes. Our fixed plant costs were down both in absolute terms and as a percent of sales.

We're continuing our efforts to reduce our material costs which still count for about half of our sales dollars. Our procurement organization is heavily engaged in building up purchasing capacity in emerging economies and in changing the way it does business with suppliers. We expect it to realize savings in 2007 and beyond.

We remain focused on adding another 1 percentage point per year to our gross margin in 2007 and 2008.

During the fourth quarter, SEG&A declined to 17.1% from 17.7% last year. For the full year, however, our SEG&A expense increased 30 basis points from 2005 excluding the $6.7 million prior year gain from the sale of product lines. Although the increase can be more than fully accounted for, due to the impact of expensing stock options we had planned to absorb that increase and still show a modest expense reduction.

We are increasing our focus in this important area. Our medium-term goal is to reduce SEG&A to 15 to 16% of sales. The combination of gross margins at 25 to 26% and SEG&A at 15 to 16% should result in meeting our target of 10% operating margins over the medium term.

A few comments on income taxes. At 4.2% our tax rate on Continuing Operations was very low in the fourth quarter, bringing our full year rate to 19.4%. Without the cutting tool divestiture, the rate would have been higher at 21%. Although this rate represents a significant increase from 2005 we do not regard it as a sustainable rate since it reflects resolution of some outstanding tax issues during the quarter.

Among the benefits we recognized in the quarter was accumulative adjustment associated with Congress's extension of the R&D tax credit and the settlement of an audit regarding a tax loss carryforward in the UK. So moving into 2007 we believe our tax rate will be in the range of 26 to 30%.

For the year, operating cash flow totaled $30 million, down from last year due to increasing working capital used to support the higher sales level and some expansion and our supply chain and two of our plants, Bronto and Vactor, that are operating at full capacity and outsourcing more of their component builds.

In addition we had higher chassis inventory on hand at year end, due to the impending model changeover. For the year, our working capital averaged 20% of sales unchanged from the prior year. As you may recall however our objective is to reduce that usage level to 15%. Our management team is increasing its focus on lean manufacturing initiatives and we expect it to make some meaningful progress, a reduction of 1 to 2 percentage points in 2007.

Regarding other cash uses we contributed $11.3 million to our pension funds in 2006 which are now about 90% funded. We expect to make a further contribution in 2007 between $5 and $10 million. Our capital spending totaled $18.2 million in 2006 and should increase modestly to about $21 to $23 million in 2007 as we progress to some significant IT initiatives.

This completes my prepared remarks; and I will turn the call back to Bob.

Thanks Stephanie. In summary, we are encouraged by the progress achieved in our transformation. We executed on our plan to divest noncore businesses including the Leach Refuse Vehicle production business and in January 2007 the industrial cutting tools businesses.

A portion of the proceeds from these sales were allocated to grow higher potential product lines, including the acquisition of Codespear. Results from our strategy are already emerging -- including stronger organic growth, improved international orders, and higher gross margins.

Federal Signal is continuing to make steady progress toward our long-term goal and vision of positioning the Company to more fully address the highly fragmented $60 billion global security market. As existing and potential customers seek new ways to meet the emerging demands of government, homeland, municipal, airport and industrial security, we are well situated to leverage our core competencies to provide market-driven integrated solutions.

As we enter 2007, we are confident that we will continue to make meaningful progress this year and 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. I will remind you that our goal is to position Federal Signal to sustain review growth rates at high single digit levels or better, attain an operating margin of 10%, and generate a return on vested capital of 15% or better.

With that, I would like to open the call to your questions. Eric.

(OPERATOR INSTRUCTIONS) Charles Brady with BMO Capital Markets.

Can you give us the margin impact on the China plant startup in the quarter?

The loss, I don't know that we disclosed -- it's shown in other income and the loss was less than $1 million in the quarter.

Just switching gears over to the Fire segment. You talked about revenues going up 10% in '07. Just how much on the visibility of that 10% do you have? And where is your comfort level on that, given kind of where your order intake was in the quarter and some of the problems that had been going on in that segment for a while?

We have our build slots the well buildout through about July I guess, August and some of those now are what we call pipeline units that don't have customers names on yet. But we feel pretty confident that we can reach that number.

In Bronto our build slots are pretty much filled out for the year.

And just on the margin in that business segment just to clarify, your 2% expansion in margin. That would be the '06 full year results, correct? Not fourth quarter?

That's correct.

That's it. Thanks.

Walt Liptak with Barrington.

My first question is on the guidance and the 30% increase that's expected. What base is that off of? Is it off the $0.72?

Yes. It is off of the $0.72.

So the guidance is $0.94 for the year? Roughly.

Yes. I mean if he do the math, absolutely.

And I wonder if on Codespear, Bob, if you can talk -- you talked a lot about the market opportunity what's going on there with new orders and how it fits into your strategy. But I wonder if you've quantified at all the market opportunity in millions of dollars, what could this market end up becoming over the next few years?

We don't have a crisp number on that. But if you look at, first of all, they have products that can currently be sold now. This interoperability software and individual alerting and this collaboration software. So those are three packages now that can be sold.

And if you look at where they have gotten their sales so far. most of them have been within the state of Michigan and there's still lot of opportunity within the state of Michigan and there are 49 more states and other regions of the world. So we don't have a handle on what the total opportunity for those pieces are that came with the Company.

But as I indicated in my comments, we are more excited about the opportunity for us to sell more of these systems that I referred to, this $5 million countywide warning system. Now that discussion was going on pre-Codespear so that doesn't even include a Codespear solution that's layered in there.

But as we would look at those kinds of things down the road, we can get our heads around maybe a $5 million project like that with the addition of some Codespear capability and other things. That could be up in the $7 to $8 million for the same kind of thing.

So that's where we expect much of the leverage to come from is that we can take things that we've been doing all along. And the system I'm referring to now if we would have done just the sirens without all of the wireless and so on, that would have been perhaps a $3 million type of thing. I don't know. I haven't looked at that. But that is an example. We would have installed it and we would been done for another maybe 10 or 15 years.

So with these new systems now, where more applications can be hung onto this kind of structure once you get it in place, we think that we can continue selling applications that help flesh out the systems that are in place and provide more capabilities. So we are still trying to get our heads around all of the things that we can do with this. We have a lot more ideas about capability extensions, enhancements than what we can work on all at one time.

But we think that this has the potential of being a very significant part of our Company down the road.

Yes. It looks interesting. Thank you for that.

If I could switch gears and talk about the Fire Rescue group. With the Bronto orders up 53%, is there a trend change that is happening in fire trucks more towards an aerial work platform?

No question about it. If you look -- and the U.S. is really lagging behind the rest of the world in this regard. If you look at the world I think, is it 50% on a worldwide basis, Stephanie? Okay. And the U.S. is something like 5%.

So the rest of the world is substantially, the penetration of these articulated aerial devices is substantially higher than 50% in many regions of the world and Europe is a good example of that, where over the last several years this transformation continues to happen. We believe that the U.S. is on the -- in the early stages of the same kind of transformation.

Have you seen other competitors in the fire truck business coming out with Bronto type trucks?

There are a couple of other offerings but they really haven't and they're not nearly as capable as ours. So there's nothing out there right now that can stand up next to ours. It's not to say that there are people that are working on some devices that are better than what's out there now.

And if I might ask just one more question, there were some news articles about the Ocala plant and perhaps a new facility at some point. Can you update us on what is going on there and the guidance of the 2% operating profit improvement, does that include any kind of CapEx program?

Yes, it's unfortunate that this is getting so much publicity. This started out to be the recognition by our folks at E-ONE that -- after we made all these improvements with the sales configurator, for example, and the product structure that that introduces to the Company and the ability now for us to do more to build wealth fixtures and things like that, to improve the speed of our trucks going to the plant -- we are facing a constraint here with a footprint that we have in Ocala where we are operating out of four individual buildings.

So it started by us realizing that on a longer term basis, in order for us to continue the kinds of improvements that we would like to make, we need to rectify that.

As we explore alternatives within Ocala, the way the political process works, I suppose, we were forced to go out and solicit proposals from other states. As a result of that we received some very interesting proposals and in fact as other states found out that we were in play we had a number of very compelling proposals.

So when we started talking with the Ocala City fathers and made them aware of the opportunities that we had before us, Ocala and Marion County in the state of Florida have been working very hard to try to put together some kind of a package that can offset some of the investment. I would have to say we have solid compelling offers from a number of states. It has been kind of frustrating that the state of Florida in Ocala and Marion County have been taking quite a long time in order to get a solid proposal before us.

It has been our hope all along that we just moved to a new facility in Ocala and we will wait to see how that plays out. And we want to do this out of the public limelight and out of the press to the degree possible.

But it sounds like this is a CapEx project that happens in '07.

No. It's really in '08. Whatever we decide to do, and we hope to be able to reach that decision by the end of the quarter, there's a lot of planning, a lot of design and so on. And we wouldn't expect any CapEx in 2008 or 2007.

Ned Borland with Next Generation Equity.

Just a couple of quick ones on fire here. What was the cost in Red Deer in '06 to you guys?

It was $1.6 million. It was a loss of $1.6 million.

Also on the commentary on the dealers, Bob you commented that you had this meeting with them and everyone is enthusiastic. Are we through the turmoil that you are seeing with the dealer network (MULTIPLE SPEAKERS)?

Yes. We think so. There's still a couple of issues that we are working with but for the most part we would expect that the transitioning is behind us. We have, I think three different locations where we haven't announced a new dealer yet but we -- the negotiation or discussions are going on. They are pending. If those land then I think we only end up with one area that we still don't have coverage for. So, for the most part it is behind us.

So these are three locations where you don't have a dealer in place right now, right?

Let me think.

Where we've had one in the past. There are some areas that have been open for some time -- don't have a lot of promise.

Can I correct? I wanted to correct something. You asked about Canada. The loss in Canada was $1.6 million higher in '06. That is the absolute level of the loss, was a little over $2 million because we had a small loss in '05 as well.

So it's 2 million total in '06 for a loss.

Then, also switching over to raw material discussion here. I guess with the rollout of the configurator and your shortening the lead times shouldn't raw materials be less of an issue going forward?

Yes. Anything we can do to shorten the lead times is all goodness because it reduces our exposure and it gives us a better opportunity to do the proper amount of hedging and those kinds of things. Right now from a material standpoint over the last six months or so, most of the commodities have been going down. There has been a huge reduction in copper. Aluminum is still relatively volatile. So we watch that very carefully but outside of what might happen to aluminum I don't see any material risk right now for '07.

And we do hedge the aluminum. We do buy that forward. Let me make one other comment on that. The other thing that the configurator allows us to do is to look in at the bid activity and be aware of how many units are being bid that contain a certain type of pump for example. So it gives us a visibility to look back into a structured way which is also helpful for planning and tracking our exposure.

(OPERATOR INSTRUCTIONS). Steve Barger. KeyBank Capital Markets.

Circling back to Codespear for a minute. Is this a bridge technology for legacy systems or could it be a foundational technology for municipalities in the future?

We look at it as it provides a lot of what we need for a platform for a municipality. For managing all of the data from sensors and video cameras and so on that they are going to be getting in the future. As we talked about it our investor day a year ago we wanted to address this emerging need. We recognize that the Emergency Response is going from where it was pre-9/11 to where it was a call center that was taking in 9-1-1 calls and dispatching emergency equipment to one where now they are -- emergency managers have to do a lot more to anticipate and prevent potential terrorist attacks.

Not only that but to monitor more closely those kinds of things that are natural disasters or unintended disasters like tsunamis and hurricanes and dam breaks -- breakages. So there is a wide variety of issues that the emergency managers need to be focusing on. So we are looking at what their task is. What they are faced with. The technologies that are out there that can help make their job easier.

So we see Codespear as a very significant part of a product that we intend to build out that forms the foundation for emergency management in the future.

So again form of foundation. Is there a disruptive element to this technology that could help you displace a legacy communications provider like Motorola or L3 or somebody?

Right now it adds on to what is out there. What we are trying to imagine and today, you still have the 9-1-1 centers with the legacy types of products. You now have an emergency operations center that is employing new technologies and at some point in time we see those two converging and we are trying to imagine what kind -- the best way to approach that on a convergence. We don't think the best way is to add-on new stuff with all of the legacy stuff. We think there's a better way.

I understand. Switching gears a little bit to environmental. Very solid revenue in order performance. Can you talk about where you are relative to your capacity and maybe any quality issues that as you see these increased volumes and what your lead times look like?

Our Vactor plant where we make the Vactor sewer cleaning machines and Guzzler Industrial Vacuum Machines has -- they have really grown in the last couple of years. They've added capacity and I think they are up something like 30% although I don't recalled that number right offhand over a couple of years ago and they've done that with no bricks and mortar and they have outsourced components and so on.

Right now we have an active project going, where we are trying to evaluate where the market is going to be long term and if we conclude that these kinds of volumes that we are seeing are going to be sustained then there's a better economic solution than what we are doing right now. So we have a study team looking at that and determining what we should do.

At our sweeper plants we are not volume-constrained now. At our jet stream plant, we still can add capacity there. One of the nice things about our business is that we are largely an assembly company without a tremendous amount of fixed cost in place for fundamental fabrication.

So we can add capacity relatively easily by outsourcing as we've done both at Vactor and at E-ONE and at Bronto; and it gives us some options -- that we can add capacity temporarily through outsourcing and if we want to, increase our capacity internally. We can do that for not a whole lot of investment.

And for fire. You had a slight increase in fire orders in the fourth quarter. How do you think you've performed relative to the North American market and how does quoting activity look in 1Q '07 so far? Either on an absolute basis or on a relative basis to the market?

I think in Q4, of course, we won't see the industry data for probably another few months. We think that we're probably back close to where our kind of traditional marketshare would've been. Now part of that is because of the big order from Montreal, but that's kind of the way this business is. That's why we don't get too concerned by looking at marketshare on a quarter-by-quarter basis because all it takes is one big order and you can swing that pretty readily.

So we -- right now, the bid activity is still strong. We don't see anything certainly slowing down anywhere so we are encouraged by what we see. Our participation and optimistic that we will be able to recover some of that in '07.

Charles Brady with BMO Capital Market.

Verification on your guidance for the revenues. Does that include Codespear?

Yes, it does.

It appears we have no more questions at this time. I would like to turn the call over to management for closing remarks.

Thanks, Eric. And thanks, everyone, for joining our conference call today. We deeply appreciate your continuing support and interest in the Company. We are happy with the progress we have made in '06 and we look forward to bringing you up-to-date throughout the year as we continue to make progress. So have a great day, everyone, and talk to you down the road.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a good day, everyone.