Federal Signal Corp (FSS) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 1 2007 Federal Signal earnings conference call. My name is Kelly, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions.) I would now like to turn the presentation over to your host for today's call, Mr. David Janek, Vice President and Treasurer. Please proceed, sir.

Thank you, Kelly, and good morning, everyone. Joining me today are Bob Welding, our CEO, and Stephanie Kushner, our CFO.

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 Form 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.

Thanks, Dave. Good morning, everyone, and thanks for listening in. We appreciate your interest in Federal Signal. I'm very happy to be here this morning with Stephanie to comment on a very good first quarter. As the headlines in our press release indicated, orders for the quarter were up 8% and broke through last Q4's outstanding level to set a new record for the Company. Our revenues were up 7%, and our operating income nearly doubled, up to $15 million. EPS was $0.13, up from $0.03 last year.

The improved financial performance is indicative of progress we are making to transform the Company. We expect to make further progress in the coming quarters, as indications are that our market segments will remain strong.

I'll begin my business segment comments today with our Environmental Solutions group, who improved upon their great performance on the back of continuing strong orders. Our JV in China began shipping compact refuse trucks during Q1, and they are working on the introduction of two street sweeper models into the local market later this year. We are very optimistic about the potential for our high-quality sweepers in this market, as improved quality of life expectations accompany the increasing GNP per capita, and China prepares to take center stage for two major international events in the next several years.

In addition to the new sweepers in China, as I commented on last time, ESG introduced three dynamite new products in North America early in the first quarter, and we expect to experience additional lift from those during the remainder of 2007. ESG recently reorganized their previously combined sales and marketing group to create a dedicated marketing team focused on advanced market intelligence to more effectively guide our technology and product development processes, and they've recruited an outstanding marketing professional to staff the position.

Next, I'll move on to our Fire Rescue Group. The orders for FRG increased 13% over Q1 last year. Bronto, improving even further on their exceptionally strong performance in 2006, was up sharply, as their articulated aerial solution continues to gain market share in the firefighting and industrial markets around the world. Orders in North American municipal market were softer compared to last year, as we continue to be impacted by the effects of transition in our dealer channel, and we believe some order delays as customers awaited the launch of several new products.

In regards to our sales and distribution initiative, during the quarter there was one new dealer appointment, while E-ONE remains actively engaged in discussions that we believe will culminate in filling three open territories in the coming months. We continued to add to our national account sales staff during the quarter to augment and assist our dealer network.

Last week, in a dramatic underscoring of our intention to reclaim our heritage as the industry's product leader, E-ONE was the star at the FDIC. At this, the largest show in the fire apparatus industry, we unveiled four major new product offerings and several other innovative product features. The highlight was out new Quest custom chassis that unquestionably offers firefighters the most comfortable and functional operating environment in the market. Second, we introduced a brand-new, 100-foot rear-mount aluminum aerial platform that has the shortest wheelbase and the narrowest setup footprint, resulting in superior maneuverability and flexibility to operate in tight spaces. Third, we introduced a 134-foot Bronto articulated aerial device with new electronic controls that provide faster setup and additional safety features. And finally, we introduced a brand-new airport rescue and firefighting model called the Titan Force. This vehicle provides an expanded range of new options that will increase E-ONE's competitive position in the FAA and international markets.

This list of new products is only one of the initiatives that will fuel the resurgence of E-ONE. In conjunction with the new product introductions, we have launched the Company's most comprehensive marketing campaign, at least in recent memory. As you know, we have our E-ONE sales configurator to a fully implemented, including the new products I've just discussed. We're the only manufacturer with a Web-based configurator, and this provides us with the capability to easily add increased functionality for our dealers and customers.

For example, at the FDIC show, we introduced an enhancement named EZ Writer. This tool is accessible by fire departments over the Web and enables them to configure an E-ONE truck on their own at their leisure. We believe EZ Writer will be very popular with rural departments that are not instantly accessible by our network of dealers. Once the department has configured a truck that meets their needs, they can hit the Submit button, which results in a quick e-mail response with a drawing of the custom truck they've just configured, along with a .pdf file which includes a brochure for the type of truck they've configured. A copy of this truck file is instantly e-mailed to the local E-ONE dealer, who will contact the customer to help them finalize the specification and negotiate the price.

Next I'd like to comment on the work that has been underway in regard to E-ONE's new plant project to replace our existing Ocala, Florida, facility. We began this study last summer, realizing that our existing footprint of four separate assembly buildings and a number of offsite parts warehouses would become a constraint in the future as we make continuous improvement.

After careful consideration of the proposals and in view of all of the other initiatives that we already have underway at E-ONE, we've decided to remain in our existing facilities in Ocala. We felt the project was too expensive and too risky for us to undertake in view of the other priorities in the business. Even though E-ONE's need for economic assistance was sometimes contentiously debated in the community, its contribution to the local and state economy was not. And at the end of the day, we deeply appreciated that many, including City, County, and State leaders, went out of their way to encourage us to stay in Ocala. That fact, and recognizing that the talents and skills of our dedicated employees are what got us this far, were important considerations in our decision. We made the announcement yesterday afternoon to our employees and immediately afterward issued a public statement to that effect.

Our E-ONE team is now fully focused on creating great products that our customers value, continuing the transformation in our distribution channel, and improving our business processes and manufacturing operations. We continue to invest in these areas as top priority initiatives.

With the benefit of terrific new product offerings, aggressive marketing and sales initiatives, an increasingly re-energized dealer partner group, and the commitment and determination of our leadership team and all employees at E-ONE, we believe we will make important progress this year to restore the Company to a leadership position in the fire apparatus industry.

Now moving on to our Safety and Solutions Group--Safety and Security Systems Group. New orders at the group were up an outstanding 24% over Q1 last year, with strength across all product lines. Police products were particularly strong domestically and internationally, as our new product offerings are being received very well by the market. The Mobile Systems business unit within SSG alone introduced 19 new or upgraded products in 2006, with even more scheduled for 2007. This success results from the Company's strategic initiative to spur organic growth through increased investment in market intelligence and product development. And as a testimony to the great talents of our employees around the Company and around the world to envision what customers really need and to be able to quickly introduce innovative solutions that help them solve real problems.

In our emerging Municipal Network Security Systems business, a few weeks ago we announced the award of a $5 million order from Marion County, Indiana, to install a pubic safety wireless broadband network in conjunction with a major outdoor warning siren upgrade project. This was our first application of technology we've been working on for the past two years.

Today I'm happy to announce our second win. We've been selected to provide the City of Pocatello, Idaho, with a Federal Signal public safety broadband wireless network. The network will be deployed and become operational over the summer months and will provide Pocatello's first responders with a high-speed, secure, broadband wireless access to the Internet and video surveillance capabilities. Just as in Marion County, Pocatello has had a positive experience with Federal Signal's products for many years, and the City officials felt that our technology and responsiveness would enhance their ability to better protect people, property, and the environment. We expect to have more of these kind of announcements in the coming months.

After closing on the acquisition of Codespear in late January, we've been hard at work training our application engineers, field salespeople, and dealer partners on the expansive capabilities of this software platform. One immediate synergy is that we were able to incorporate the software into our Marion County system to provide the interoperability function, enabling new features for them while saving us months of custom software development work. With this, the interoperability platform will be in place in Marion County, and additional functionality can be added onto the network simply and easily in the future.

After our people had a chance to work closely with the Codespear folks for a couple of months now, we're absolutely delighted about how the software platform will accelerate our ability to introduce new comprehensive solutions that help municipalities and large industrial and institutional customers improve security. This is on top of the solutions that Codespear already had on the market that we can sell more broadly with our extensive distribution channel.

One of these applications is the SmartMsg solution. It provides the ability to instantaneously send out emergency alert messages to hundreds, or thousands, or hundreds of thousands of individuals and reach them over any kind of communications device out there. The message can be prerecorded or typed in or spoken over a microphone. The message is automatically converted from text to voice, or voice to text, whatever's required, and sent out over the various platforms simultaneously.

A second application is a solution that provides for communications interoperability between first responder agencies that are converging on the scene of an incident. The various agencies can continue to use the significant radio investments they already have in place. The software provides interoperability between any type of radio system, be it analog or digital, or landline phones, cell phones, instant messaging, or e-mail. This is one of the lowest-cost and simplest to implement solutions to the interoperability problems that first responders face across the country.

Another one of the original Codespear applications is a collaboration solution to use in emergency response situations, where again the software bridges the different communications platforms to enable the responders to participate in and view a chalkboard discussion, no matter where they are in the world.

An example of the new solutions Federal Signal is now able to provide the market gets highlighted by the tragic shooting incident at Virginia Tech last week. The FS Codespear SmartMsg solution provides the kind of instant individual alerting capability that could have possibly reduced the exposure of the students to the gunman. As was found in this incident, relying on only one communications platform to get the message out is less effective than communicating across multiple platforms when you need to reach a lot of people immediately, and not only to alert them, but to inform them of what they should do to stay safe.

With SmartMsg, each individual has the capability to create a profile indicating their desired priority on how to be reached with an alert message. For each individual, the system will attempt their first priority communications platform first, and if the individual does not acknowledge that they've heard the message, the system will try the second, then the third, and so on. Back at the emergency operations center, the managers are viewing a response dashboard screen with real time information about who has, and who has not yet, acknowledged the message.

Unfortunately, in today's world, we're exposed to this type of threat that can happen at any time, any place. Although improvements can and will be made to prevent incidents like this from occurring in the first place, that can never be 100% effective, and so we're faced with a need to be able to alert people when something is happening and tell them what they should do.

Federal Signal has been providing outdoor warning systems to campuses for years with our Campus Alert solution. With the ability to integrate mass warning, public address, and individual warning, we are positioned extremely well for the future. On our Web site, federalsignal.com, we have links to a couple of newscasts from around the country that aired last week that talked more about this. I'd encourage you to check this out and to see what we've been doing and what we can do in the future to help improve security and well being in campus communities.

This is what our new vision's all about. Federal Signal aims to be the clear leader in advancing security and well being for communities and workplaces around the world and to develop innovative solutions that help municipal, institutional, and industrial leaders address their profound responsibilities with increasing effectiveness.

Finally, I'll comment briefly on the Tool group. New orders in the group were down about 6% compared to Q1 last year. We saw some strengthening in Europe and Japan, with international orders up 8%, but North America was weaker, as expected in view of the difficulties in the auto and housing industries. Our initiative to add additional salespeople has been largely completed, and we are seeing the benefit of additional orders in each of the regions that we've augmented, and this is helping to offset some of the auto- and housing-related weakness. We expect this gain in market share to continue in the coming months, as we are knocking on more doors in regions that we did not cover very well in the past. We're expecting the auto industry side of our business to begin to recover in the second half, as unsold car and truck inventories are declining to levels that are more in line with that targeted by the U.S. automakers. However, we're expecting little recovery in housing for the remainder of the year.

At this time, I'd like to turn the call over to Stephanie, who will comment further on the numbers behind the story.

Thank you, Bob, and good morning. I'll start by adding some commentary on order conditions in our broad markets, then I'll cover the results from our four business groups, and conclude by discussing our consolidated financial position and liquidity.

As you saw from our release, we're off to a good start with orders up 8% in the quarter, totaling $346 million. The headline growth within the business outside of the U.S., where we booked $144 million worth of new business, up 32% from the same quarter of 2006. This represents a continuation of our favorable international growth trend. We saw particular strength in sales of Bronto aerial devices and our light bars and sirens. Although we're not counting on the year to continue this strong in the international arena, this quarter's bookings do give us confidence that we're making good progress towards our goal of having at least 40% of our sales outside of the U.S. by the year 2010.

The Far East is becoming an increasingly important market for us. In 2006, only 13% of our international orders were from Asia-Pacific versus 20% in Q1. We expect Asia to continue to grow in significance for us, particularly as we introduce the street sweeper production later this year.

U.S. municipal orders totaled $112 million, down 8% from the prior year quarter. We saw some weakness in both our sewer cleaners and fire trucks versus the prior year. We believe our lower sewer cleaner order rate reflects acceleration of business into December of 2006, so we see the forward market continuing strong. Our fire truck orders were down due to issues in North America where, as Bob noted, we're continuing to be impacted by changes in our order process and dealer appointments.

Largely offsetting these weaknesses was the strength in the police products market. Police departments have good funding and are allocating much of it to vehicle purchases, where they are increasingly adopting our newer LED light bars. Also in this quarter, we booked $3.9 million with the Marion County siren order, which boosted our year-on-year performance for this product line as well.

Moving on to the U.S. industrial and commercial sector, orders rose 2% compared to the prior year quarter and totaled $87 million. Our industrial tooling business continues to suffer from the effects of the weak U.S. housing and automotive markets, although as Bob said, we're expecting some recovery in the back end of the year due to improved automotive inventory situation. On a positive note, we had strong orders for parking systems and industrial signaling and communications installations. The combination of strong orders and seasonally light shipments resulted in a quarter end backlog of $455 million, which is a record for the Company.

Next, I'll cover results from our four business segments, all of which delivered improvements against prior year performance. Safety and Security Systems had a strong quarter, with orders up 24% and sales increasing 15% to $79 million. We experienced strong double-digit sales growth in our mobile vehicular light bar and siren business, plus our industrial systems business. Our operating margin rose to 12%, up from 10.9% a year ago. The 2006 results included some one-time charges associated with the management change. Q1 is traditionally the weakest volume quarter for this business, and with the addition of sales from the Codespear acquisition in January, SSG is well poised to deliver strong sequential quarterly growth in sales and operating income.

Moving on to Fire Rescue, the group booked orders of $107 million in the quarter, up 13% from the prior year, but with growth disproportionately in our Finnish aerial business. Sales declined 8% from the prior year due to lower sales of low margin brush and wildland trucks, which used to be produced in the unprofitable Canadian plant, which we closed last year. Also impacting sales adversely were delayed completions in both factories. In Finland we experienced some delivery problems linked to pending customer inspections, but we'll catch these up. In the U.S., we wrestled with the engine changeover during the quarter and had some units delayed due to late changes in specifications.

The operating margin was a negative 3.2%, a little better than the prior year but disappointingly negative. The improvement reflects better pricing, offset in large part by lower shipped volume. As we look into Q2, we expect an adverse quarter-to-quarter comparison in this group due to a weak backlog and lower margin production mix in the U.S. plant, which will be only partly offset by higher volume throughput in Finland.

Next, our Environmental Solutions group continued its impressive performance. Orders remained strong at $110 million, although down slightly from the prior year quarter. Sales totaled $114 million, up 16% from the prior year as we began to work down a little of the high backlog. At $125 million, our backlog in this business remains almost 20% higher than a year ago, and operating margins benefited from the higher volume, rising to 8.9%, up from 8% a year ago.

Our Tool business experienced 6% lower orders in the quarter due to weakness in North America but saw strength in many of our overseas markets. Despite weaker volumes, the operating margin recovered to 6.9%, up 190 basis points from the prior year, due to improved productivity and the absence of the restructuring costs we incurred at Dayton U.S. in the first quarter of 2006.

Now to look at our consolidated financial results. Our consolidated gross margin averaged 23.2% in the quarter, up 70 basis points from 22.5% a year ago. Margins in our Tool and Fire Rescue groups were higher, and we also benefited from a higher proportion of sales coming from our higher margin safety systems businesses. During the quarter, SEG&A declined to 18.1% from 19.6% last year, a welcome improvement. The prior year period included some one-time charges for management changes and workforce reduction, and in this year our corporate expense benefited from lower hearing loss litigation expense, including the impact of a $1.2 million insurance reimbursement. Due to the expansion in gross margins and the reduction in SEG&A expenses, our operating margin improved to 5.1% versus 2.8% a year ago. Our first quarter is traditionally our weakest volume quarter, so we expect the margin to improve as the year progresses.

Our income tax rate was 30.7% in the quarter. We expect that rate to decline over the course of the year as we resolve and complete the execution on key tax strategies. We still expect a full year rate in the range of 26% to 30%.

I should mention that, like other reporting companies, we adopted the new financial standard FIN48 in the quarter, and this resulted in a small $750,000 charge to equity. Below the continuing operations line, we recorded a significant $25 million gain on the divestiture of our cutting tool businesses early in the quarter.

Overall, we're off to a good start in Q1. Orders were up 8% against a full year 8% to 10% revenue growth estimate. We improved our first quarter operating margins significantly--by 230 basis points--and we remain on track to deliver a composite margin of between 6% and 7%. Our full year earnings outlook remains unchanged. We expect to deliver about a 30% increase in earnings from the 2006 level.

A few comments on cash and liquidity now. First quarter operating cash flow was a negative $8 million, including the impact of contributing $6.2 million to our pension fund and increasing working capital by $4 million. Net cash flow was considerably higher due to the receipt of $67 million in proceeds from the cutting tool divestiture. At the end of the quarter, our net debt-to-cash ratio was 30%, at the low end of our target capital structure. We were in compliance with all debt covenants and had no drawings on our revolving credit facility. After quarter end--in fact, yesterday--we expanded our revolving credit facility to $250 million and improved the borrowing margin to LIBOR plus 150 basis points. The additional capacity will be used to cover $27 million in maturities on our private placements and for working capital and acquisitions financing. At the same time, we converted more of our floating rate debt to fixed so that our fixed debt currently represents about 60% of the total.

This completes my prepared remarks, and I'll now turn the call over to Kelly to open up the line for questions.

Thank you. (Operator Instructions.) And our first question comes from the line of Charles Brady of BMO Capital Markets.

Good morning. This is [Kiniko] sitting in for Charlie. Can you hear me okay?

Yes, we can. Good morning, Kiniko.

Hi. Thank you for taking my question. My first question, first I have a couple of questions on your Fire Safety and Rescue segment. First off, can you give us a little more color on sort of where the operating loss came from, sort of on a weight perspective? I understand you gave a couple of reasons, and I guess a little more color would be much appreciated here.

You said, you know, we don't give details on individual operating units, but I think, as I said, what we're having is more strength in Finland and weaker sales in North America.

I guess, can you maybe give us an idea as to when we can sort of move on and perhaps when operating loss becomes, sort of goes out of the question? I guess another way to phrase it would be, I understand there is certain issues going on, like the continued disruptions in your dealer channel because of the changes you're implementing. Maybe can you give us an idea as to when that situation will settle down?

You know, we were profitable in Fire Rescue last year, and we said we expected to increase our profitability this year. Our first quarter is typically weaker and has been for a long time. I think Bob wants to add.

Yes, I think the initiatives that we've been working on over the last couple of years, implementing the product configurator and so on, we're starting to get traction with those. As Stephanie reported, our gross margin improved over last year, and that's an indication that the trucks that we're building are profitable trucks, and so we're very encouraged by that. The volume out of North America was lower than what we expected, and so that's really the key in the coming months. What we saw on the floor of the FDIC show last week was the culmination of a tremendous amount of work that we've been doing over the last two years or so. We've talked a lot about the product configurator, and that's been out there now for a while--the sales configurator, rather. We've talked about the work that we're doing in new product development, and we showed those last week, and I don't know how long it's been since the Company was able to introduce four major new products all at the same time. And I hope that you can appreciate the amount of work that it took to do that, and I compliment our people at FRG for pulling that off.

And these are not prototypes that we had at the show. These are fully tested, fully defined trucks that we are accepting orders for, which is another thing new for us. So as we've been developing the configurator tools that provide our dealers with the absolute best sales tool available in the industry, introducing new products, and just launching a very extensive marketing campaign, we believe that 2007 will show that we've recovered some market share points that we've lost in the previous couple of years. And this is what it's going to take now. We've gotten, the trucks that we're building are profitable trucks with the cost structure we have in place, we need to get the volume back to where it was, and we intend to make good progress on that throughout the remainder of this year and into 2008.

Thank you. That was very helpful. And now, I suppose, switching gears to orders and backlog within Fire Rescue, I noticed that the orders were up year over year, but your backlog was down. I was wondering if this is maybe a result of an improved lead time, or maybe if it's a mix issue, if you'd comment a little bit on that.

Yes, our backlog is about flat with where it was. And in fact, our lead time has improved, for sure. I mean, both in--well, in North America. In Finland, some of our lead time has stretched out because of the very heavy level of orders in the last couple of quarters.

I think the backlog is flat, but if you look at the two different parts of it, in North America, it is down, because the lead times have been reduced and the order intake has been a little slowed than what we expected. And in Finland, it's growing.

Okay. And finally, I was wondering if you could give us an idea as to how, the number of service centers you have within E-ONE, both sort of in-house and through your dealer network? They have grown from where it was maybe last year, and maybe if you give us ideas to, you know, if you still plan on growing that number going forward?

By service centers, I assume you mean dealer outlets?

Yes.

Okay. You know, a normal number of dealer outlets is around 42, historically. As you know, we've had some transitioning out and transitioning in. Today we're a little short of that, but as we look down the road, and the transformation continues in our dealer network, I don't know if we'll continue to--we'll still have 42 locations, for sure, but within those 42 locations, there may be some consolidation. So we intend to cover the country. We can't have a service outlet that's extremely convenient to all the markets, because of the, particularly in the western states, because of the population density. But we fully intend to cover the country in the coming years.

Okay. Thank you very much.

Your next question comes from the line of Ned Borland of Next Generation.

Good morning. A couple quarters, just staying with Fire for a minute here. Your comments about an adverse margin in fire in Q2--so am I to interpret that that you are going to see down margins versus a year ago Q2?

Yes, that's what we expect.

Okay. And as this builds throughout the year, I know you haven't changed guidance in terms of segments, but is this going to be more of a back end loaded feel to it for segment margins in Fire Rescue?

Yes, the second quarter was quite strong for us last year. I think my main comment was focused on the fact that although we had year-over-year improvement in the first quarter, we're unlikely to see that in the second quarter.

Okay. And then going with environmental orders saw a decline this quarter. You talked about the pull through, which may have happened from fourth quarter '06. Can you quantify that at all, how much, how many orders were pulled forward?

I think--I don't know if we should talk about specific orders, number of orders.

I mean the dollar amount.

I can tell you that. I think our December orders for sewer cleaners were about double our normal run rate. We think part of that is frankly because we have been--our delivery dates have been stretched out because that plant has been so fully loaded.

Okay. And then, SG&A as a percentage of sales. You talked about the legal expense, but it is down quite a bit on a percentage-of-sales basis. What else was in there? There was some management changes? I'm just trying to understand it.

Last year we had about $1 million or so in charges for management change.

Okay. That's all I have. Thanks.

And your next question comes from the line of Walt Liptak of Barrington.

Hi. Thanks. Good morning. I've got a couple of questions on the Fire and Rescue segment. You mentioned that there was going to be some delays in the Bronto business due to inspections. Can you provide a little bit more color--maybe how many orders, what the dollar amount is?

You know, what happens in Bronto is that these are very complex units, and we're very strict about our revenue recognition, and it's not unusual for us to have a situation where a customer--these are being sold all over the world--is waiting for a visa or we're having a delay in arranging the shipping of a unit out of Finland. So it's not unusual that that catches us up at the end of a quarter. This happened to be a particular, it just happened to be a particularly significant factor this year--this quarter.

Okay. Would revenue have been flat if you had shipped those Brontos?

I, I believe--let me think about that, Walt. Did you have any other questions?

Okay. Yes. Those Brontos. I wonder if, are those Brontos for the European market, or are they? I know you said they can go anywhere in the world, but are they for the European market or are they for the U.S. market, primarily?

Our Brontos are predominantly sold outside of the U.S. So, and in fact, they go all over the world. They have very strong demand in Asia, Latin America, Western and Eastern Europe. So, and typically, where we have, see them--the visa issue springing up--tends to be when someone is coming in from somewhere other than Europe.

Okay.

All of these that were delayed at the end of the first quarter, I don't think any of them were North American bound.

Okay. And then another question about Fire and Rescue. Just the, I think you said that there were delays in the U.S. because of the engine emissions change? Did I hear that right?

No, not on orders. But we did have some production interruption. When we began installing the '07 engines, there was some calibrations that weren't right, so we had to bring the engine supplier in to recalibrate engines. You know, that was mostly in January and February, and I think by March it was running much better. And we also had some late components arriving, components that were required for the new engines that were not required for the old ones, and we just had some--you know, there was a lot of pressure on the industry to roll these engines out all at the same time, and there was just a problem getting some of the components on time. But, and so that tripped us up early on, and we didn't recover from that by the end of the quarter. But those problems are essentially behind us.

Okay.

And Walt, let me come back to your other one. In fact, if we had been able to get these shipments cleared for Bronto, you're correct. Our revenue would have been flat. And I'm looking--they were going to, for example, a few of them into India, Pakistan, Australia, so they were largely delays with customers receiving them in the Far East.

Got it. Okay. Thanks. And then, just on the Fire Rescue margin in the second quarter. I understand that comp, I guess, would be a little bit difficult, but I guess I don't understand why the profitability's not coming up. Could you talk about some of the things that were impacting the second and third quarter margin?

Well, our backlog is lighter than we'd like it, so from a gross margin standpoint, we're building profitable trucks, but we just don't have enough flowing through in the second quarter. That's the largest piece. But also in the second quarter, we have, we're building a lot of trucks to serve some of the larger contracts that we've gotten. And of course for those multiple units, those tend to come with a little bit less margin.

Okay. So then do we, is this a selling problem? I mean, is this still--and I'm sorry. I missed the first part of the conference call. Is this a selling problem going back to the dealer issue?

Yes, we talked about that early in the conference call. You know, the transformation that's occurring in our dealer channel. We, still in some areas, we have either new dealers or no dealers, and the new dealers take a while for them to get up to speed. But also in the first quarter, at least anecdotally, we've been told that we have customers that are waiting to see the new products that they had heard we were going to be showing at FDIC. You know, it's hard, it's difficult--in fact impossible--to quantify to what extent that was a factor. But we're pretty sure it was.

Okay. Okay. Thanks.

Your next question comes from the line of Jack Kelly of Goldman Sachs.

Good morning. Stephanie, just really an accounting question to start. Two things. Impact of acquisitions, so the impact of Codespear on sales and orders, and then secondly, any impact from currency in terms of the bottom line?

Currency was kind of a fraction of a penny.

Okay.

You know, Codespear, we're not--because Codespear is a platform and it's ultimately going to be an enabler for all of our products, we're not positioning that and reporting on it as an individual, as a separate profit entity. When we made the acquisition, we said we expected the acquisition to be slightly accretive for the year, and we are in fact seeing some uptick in our profitability and sales volume, particularly in our Safety and Security book.

Okay. But if we excluded the revenue contribution from Codespear, I just want to kind of get an apples-to-apples comparison on sales gains year over year. Can you do that?

No, we're not breaking out the Codespear revenues.

Okay. And then, Bob just gave a lot of detail on the Safety group. Orders were pretty strong, up 24%. Do you see this as sustainable over the next couple of quarters, and if so, why? And it sounds like it might be new product driven.

Well, orders are still strong, Jack. So whether we'll be up 24% again, I think, remains to be seen, but certainly we would expect to have very good, very good results at the end of the second quarter. It's really across the board, Jack. You know, we talked about our Mobile Systems Group, and that's the new name for what we used to call Emergency Products. This is the fleet and emergency vehicles, lights and sirens. But it was strong in our integrated security solutions for large industrial plants. That's been a great business. That was up very, very well last year, and again, we had a very strong quarter. That's a relatively small portion of our business so far, but for the quarter, it was up, it was double from what it was last year, the order intake. And we expect that to continue to grow along those lines.

The parking business, new business, new orders for our parking business were higher than what we expected during the quarter and very, very good compared with last year. Our outdoor warning sirens, I think, was down just a little bit, but still strong numbers. So there really wasn't any kind of weakness in the group. And the kinds of things that we're involved in, and with the way the world is these days, we just are very excited and very encouraged about this business. And, as we've said in the past, we would expect this business, or this group, to grow much faster than our other groups, just because of the kinds of business that we're in.

But what's really fueling a lot of this, Jack, is our new product offering. Not only did the street products, like new light bars that Stephanie mentioned, but it's the new comprehensive security systems, where we're bringing together, adding additional functionality, additional capability, and additional sophistication to these products and providing more solutions. And this is resulting from the investment that we've been making over the last couple of years in more market intelligence and increased product development.

Okay. Just on Fire Rescue, I guess, two general questions. One on the dealer side and the second on the manufacturing side. Can you share with us, Bob, in terms of dealers, I think you said your goal is 42. I think Stephanie mentioned you have three open territories, so I guess simple arithmetic would get us down to 39. And so if we're looking at the dealers that you have, the newer ones where you obviously expressed they had to get some method going. But away from them, you know, dealers that you've had for 10 or 15 years, five years, what's been the experience there in terms of orders and sales? I mean, is that group still effective and it's just being bogged down by the churn on the newer dealers?

We have a number of dealers that have been with us for a long time and have been very successful and have built their business, and these guys, by and large, are still doing very well. For the past several years, we really haven't introduced any significant new products, and this has been one of the problems, and it's a problem for our dealer channel. And so that's affecting it somewhat, because in areas where we used to be a clear product leader to the point where we were almost the only game in town, we've lost some of that in some segments. We've, we're back out there, and we have clearly demonstrated that we're not going to let that happen again. So as in anything, Jack, you have some, a portion of the dealers that are just doing an outstanding job, and some that are doing well, and some that we hope can do better in the future, and we're trying to provide additional training and support to bring some of those dealers up. But the guys that have done a good job for a great number of years are still doing a good job.

And the addition of national salespeople. I mean, I guess, the pattern there is they would turn the sale, your salesperson would complete the sale in turn, whether the distribution is servicing over to the dealers. So it sounds like there shouldn't be any channel conflict, but I'm just somewhat concerned as you increase the number of your national salespeople, that might develop. Can you kind of give us an update on how many you have and how many you might go to?

Okay. Well, it's not our intention to displace anything that the dealers are doing. You know, these, our dealer partners are an important part of our past success and will be an important part of our future success. What we're doing with the national accounts people, or the direct salespeople, are a couple of things.

First of all, as we talked about in the previous conference call, in the top 100 markets of the country, of North America, most of those, we haven't been very active in, in the past many years. And whether we didn't provide the dealer with the right kind of product, or the dealer didn't have the necessary relationships, or what have you, we're focusing on, we've targeted some of these top 100 markets that we're going after. And we're doing it on a direct basis, because the fire departments of the major, these locations, want to be able to deal directly with the factory, typically. Now, if the dealer already has a strong relationship with one of these major manufacturers--or one of these major customers--we're not going to push him out. We're just going to provide some help from the factory.

So that's one thing. The other thing is, in these areas of the country where we're not covered very well right now, we have some direct people that are providing, that are kind of plugging the holes while we, while we work to replace, to find a very good dealer for the future.

The third thing is that, Jack, over the years our products have become a lot more complicated. On the aerial devices, typically we've had--in fact, in probably almost all the cases--we've had one of our factory people out there with the dealer doing the demo of an aerial product. With our focus on growing the Bronto share of North America, and the Bronto's even more sophisticated, more complicated, well, that requires more support. So that's the third thing that we're doing by augmenting our dealer channel--by augmenting our direct channel--is to work with the dealers to provide them with assistance to sell a product that's becoming a lot more complicated.

Okay, great. And this is finally, in terms of the outlook that you have, that Fire Rescue profits this year will be up from last year. You had less of a loss in the first quarter, so that's going in the right direction. Second quarter sounds like profits will be down year over year. What gives you the confidence, Bob, to think that the second half, or the second half will be up? Is that because of orders you have in hand or manufacturing efficiencies that are yet to be seen?

I think it's the comfort of the new products that we've introduced and the enthusiasm around them, which we're expecting to kind of boost our order intake as we move forward. Because that's the real issue. We think a lot of our operational problems are improved, and we need increased volume through our Ocala plant.

Okay. Good. Thank you.

We also, to add one more thing, we also have the benefit of the product structure now we have in EZ-ONE. In the first quarter, about a third of the vehicles that we were producing had been configured with EZ-ONE. As we go through the year, every quarter, obviously, that increases. And we're seeing the benefit of that. And that will help us improve the gross margins on the plant floor and help us reduce our SG&A costs per truck as well as we streamline that upfront part of the process.

Thank you.

(Operator Instructions.) And your next question comes from the line of Steve Barger of Keybank Capital Markets.

Good morning.

Good morning, Steve.

I hopped on the call a little bit late, so if this has already been asked, just let me know, and I'll check the transcript. But how was order uptake post-FDIC? Were you able to turn any of that new product launch into firm orders?

We haven't commented on that, Steve, so it's a good question. All we have is anecdotal information so far since FDIC closed is that we had a tremendous amount of excitement at FDIC from our dealer partners who were there, and also from customers that were there. And there was a buzz around the building, again, about E-ONE. So we're very comforted by that show, I know, and some of our new products, and we're very, very encouraged by the discussions that were going on there. So we don't have the orders in hand yet, but there's an awful lot of activity going on.

Okay. Great. Going back to Jack's question about the direct sales force where you don't have dealer coverage, are you seeing any quotes or order activity in those non-covered regions right now, or are you really still in the process of building out that force?

Certainly, in the large municipalities, you know, that's the area, these top 100 cities. So that's an area we're focusing on, and we are seeing activity. If our practice is to issue a press release if we have a sizable--you know, $10 million type--order, then the only one you've seen of those so far has been Montreal.

Right. So, are you--I mean, is there a lot of quoting activity even if it's not turned into orders yet, or are we on the front edge of that?

No, we're, again, anecdotally, our people in Ocala are indicating that in the last several weeks, and even prior to FDIC, that there just seems to be an awful lot of activity going on, an awful lot of demos happening with aerial, so from that standpoint, we're encouraged.

Okay, and just one last one. I think you're pushing through the integrated solutions approach through the Safety and Security segment to start. Can you talk about how you're thinking about rolling out Codespear and what the timing is for some of the other segments to kind of integrate that?

Yes. What we're doing is the pubic safety broadband network has to be in place. Once that's in place, now, our products can communicate and can integrate with the rest of the products across the city if that network's in place. So that's the first order of business, and we're doing that through the Safety and Security Systems group in helping communities deploy this network.

What we will be doing, though, is integrating the Codespear platform--and when I talk about platform here now, it is a capability to provide interoperability with various communications platforms, communications systems. So as we go through the next month and year, we will be embedding the Codespear platform in more and more of our products. And it does provide interoperability on the product itself. And if you think about a fire truck, for example, it does have an electronic control module on it. We use electronics to control the various processes or various functions of the truck. Well, when we embed Codespear in that, it will become part of the electronic control module now, and we can begin using that to provide a linkage between a wireless radio, for example, back to the truck and on to a wi-fi network. So we're, we'll be, there will be Codespear inside our products in the future. It may not be obvious to our customers that it's there. They may not even be aware that it's there. But now, as their community becomes enabled with a broadband network, now we can start to light things up with our products, and that fire truck, in this example, can now start, become an integrated piece of the overall security network.

An example I like to use, Steve, is think about a street sweeper.

Right.

Okay, a street sweeper with Codespear in it. When that wireless network is up in the community, now the street sweeper could be equipped with a video camera that can be snooping for stolen cars and things like that and communicating back to the operations center. So the capability will be there, and when the network's in place, then we can turn it on.

Now, that sounds like it makes the fire truck more sophisticated, and to go back to your Bronto example, you said because it is more sophisticated, you need direct sales support. It's still a fire truck. Does that mean that more sales are going to need that help to dealers as you kind of push down this strategy?

Well, the form it's likely to take, Steve, is that the sale of a wireless broadband system to a community is made to the team of community leaders. That discussion involves the fire chief and the police chief and the emergency operations director and the IT guy and the mayor or city manager.

Right.

So many of those discussions, as you and I talked at the show, also involve me in some of these sales calls, because we're dealing with the top leadership of the community. So we need to access that leadership team to sell them on the benefits of this overall idea of a security network. And once we do that, then the fire chief instantly realizes the advantage of having Codespear inside, if you will, of the fire truck. Because even though he may not use it today, he knows he can, all the great things he can do tomorrow.

So the dealers, of course, we will, we will certainly train them over time to be aware of what this means, what it means to say, "Codespear Inside," and to have them be able to talk about the capability and advantages that that provides, because not only the fire chief needs to be aware of that, but the people that are involved with the process, the truck specification process as well.

Very good. Thanks.

And folks, you have no further questions at this time.

Okay. Boy, it's been a lively discussion. We really appreciate your continuing interest in Federal Signal. We're happy with the first quarter progress. We fell a little short with what we wanted to do in Fire Rescue, but everything else is doing very well, and we're very encouraged about what will happen during the remainder of the year as a result of all the work that our folks have been doing down in Ocala over the last two years. We've invested a considerable amount of money in these initiatives, in the new product development and new marketing. We have an outstanding leadership team there. Our dealers are becoming much, much more enthused because we now have some new stuff for them to sell, and we believe that we can show significant progress in Fire Rescue during the course of the year. While we're doing that, as the markets seem right now, we should continue to do very well across the rest of the Company.

So thanks again for your interest, and look forward to talking with you a few months down the road. Okay, Kelly?

Yes. Ladies and gentlemen, thank you for participating in today's conference. This concludes the presentation, and you may now disconnect. Have a wonderful day.