Federal Signal Corp (FSS) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter Three 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 and we'll be conducting a question and answer session towards the end of today's 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.

Good morning everyone and welcome to Federal Signal's Third Quarter 2007 Conference Call. Joining me today are Bob Welding, our President and Chief Executive Officer and Stephanie Kushner our Senior Vice President and Chief Financial Officer.

The format of today's call was similar to our recent quarterly call.

First, Bob will provide an update on the status of our four business groups, then Stephanie will comment on our financial results for the quarter and provide an outlook for the year by group. Following these prepared remarks, we'll open the call for your questions.

Before we begin, please be advised that some of our comments may contain forward-looking statements that are subject to the Safe Harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website federalsignal.com.

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

Good morning, everyone. Thank you for joining our third quarter 2007 conference call.

I'll start off by stating the obvious; our financial results for the quarter are very disappointing. In spite of our respectable new order intake that was up 9% compared to a year ago and a revenue increase of over 6%, our operating income was down significantly, $0.10 per share compared to $0.20 last year.

The unfavourable comparison is attributable primarily to our domestic fire and rescue apparatus operations.

We had warned at the end of last quarter that the third and fourth quarters would show unfavourable year-over-year comparison for E-ONE due to fixed cost absorption issues with the reduced production schedule. But the shortfall exceeded our expectations.

In addition to the absorption problem we anticipated, we missed a material number of expected truck shipments due to, unfortunately, the same kind of problems I've talked about in prior conference calls, namely getting the trucks over the finish line and getting customers in for final inspection and approval.

Both Stephanie and I will provide more details around these results, but first, some general market comments.

Overall, I would describe our market condition as generally solid especially in view of the uneasiness caused by high oil prices and the credit market turmoil. Notable exceptions to this overall market strength were in our Tool group which continues to be adversely impacted by the weak auto and new housing construction sectors that collectively represent about 65% of their business in the US and, in the North American fire and rescue apparatus market which has been soft all year.

Our Elgin sweeper new business intake is somewhat impacted by the slowdown in the new housing construction as well.

Now, I'll go through the groups individually starting with safety and security.

SSG's new business was up a robust 20% compared to Q3 last year and is also up 20% year to date. All of the business units in SSG continue to experience market strength.

Our Pauluhn and Victor business units making hazardous area lighting have been leading the way all year from a new business standpoint. Combined, they're up 33% for the quarter and 33% year to date. These businesses are leaders in the design and manufacture of lighting equipments that goes into coal mines and to offshore oil drilling rigs. Applications that will continue to provide a lot of headroom in the coming years as investment in the energy production remain a global priority.

Also continuing to grow nicely is our mobile systems business unit with police car, light bar and siren orders remaining robust in Q3. Orders are up 22% year to date compared to last year.

Conversion to LED-based lighting continues to drive the market and our innovative new product offerings are helping to gain market share around the world.

Showing up in Q3 are orders from our newly created municipal and government business unit within SSG which include the Codespear and Riverchase acquisitions and orders received by our PIPS technology business unit acquired in August. We're in discussions on a number of exciting high profile bids and expect that these businesses will help drive strong revenue growth in the group in the quarters to come.

We're particularly excited to have the PIPS automatic license plate recognition technology or ALPR for short in the company.

We envision strong growth for these products for the next several years as the application of this technology expands throughout the world, but in particular in the US.

Recall that ALPR is used in three major areas.

First, enabling intelligent transportation systems by providing enforcement tools for automated revenue collection in highway tolling systems, parking lots and city center congestion tolling. Like the system implemented in London and the system being planned for New York City. Second, in providing tools that enhance public safety, ALPR helps law enforcement officers recover stolen cars and locate and track movements of persons of interest. Finally, ALPR provides access control tools that help provide security at borders and high profile installations.

We see demand in all three of these application areas increasing significantly in the coming years.

The effectiveness of ALPR technology in regard to security was recently seen again in the UK where the suspects in the Glasgow airport bombing incident were identified and apprehended in a matter of days with the help of data collected and analyzed by PIPS equipment and software.

I'll now move on to our environmental systems group where new business was up 14% over Q3 last year.

Our Jetstream high pressure water blasters led the way up 20% with Vactor and Guzzler up 16%. Our strongest segment for these products continues to be in industrial markets with orders from contractors remaining very strong.

Our U.S. municipal orders for street sweeping and sewer cleaning machines are down year to date compared to a very strong last year, but have been picking up some momentum in recent months.

Most of the reduction is due to the fact that we have a number of large fleet orders last year that have not repeated to the same degree.

The market fundamentals are fine so we expect strengthening orders in Q4 from the municipal segment in ESG.

From an income standpoint, ESG is doing very well except at the Elgin sweeper division. The results are being impacted by higher cost then expected for the new designed Pelican sweeper that was launched in Q2. Our folks are working very hard to mitigate the impacts through an aggressive cost reduction program and they should have restored margins to appropriate levels by Q2 or perhaps Q3 of next year.

The new Pelican is receiving rave reviews by our dealer channel and from our customers that have taken delivery on the first units.

Now, on to our Tool group.

Our domestic new business is down about 10% year to date while internationally orders are up about 10%. Our businesses in Japan and Europe are enjoying strong orders in recent months from automakers in those regions releasing tooling programs for new model vehicles.

We're seeing the opposite in the US where union negotiations and the Chrysler buyout caused additional drag in the segment in Q3. But encouragingly, U.S. orders have begun strengthening late in Q3 and are running better so far early in this quarter.

We announced at our last conference call that we had retained an investment bank to explore options for the remaining two businesses in our Tool group. In this regard, we will commence discussions with potential suitors in November.

Finally on to fire rescue. Bronto orders continue to be very strong with Q3 almost matching last year's strong numbers. To the third quarter, orders at Bronto were up about 36% and we expect a good Q4 showing as well. We've begun a plant expansion project to double our capacity which will be online about a year from now.

Demand for our Bronto articulated aerial device continues to be robust from fire departments throughout the world and from rental companies and contractors servicing the electrical power distribution industry. Our fastest growing markets are China, Russia, and India.

The demand from these areas on the fire fighting side results from the construction of high rise buildings in the past several years and the need to modernize the fleets and improve the capability of the fire brigades in view the different challenges presented by these new buildings.

Additionally, we received orders for five Bronto units from Beijing to support fire fighting and rescue preparedness for the Olympics next year.

Domestically in FRG, our E-ONE business unit continues to struggle. In my remarks last time I indicated that we are taking steps to reduce fixed cost and thereby lowering our breakeven point, and that our mandate in the ensuing quarters was to demonstrate meaningful progress in recovering the market share that we had lost since 2004.

As one of top priorities, we've made some good progress on strengthening our dealer channel in the past couple quarters. We're delighted that Hall-Mark, our largest volume dealer covering the State of Florida has taken over Texas which is a sizeable market and where there is a very large E-ONE install base. Many of our good customers in Texas are delighted to see the Hall-Mark folks take over the territory and we're excited about our prospects in that region in the future.

We highlighted a number of other dealer expansion successes in a press release a few weeks ago. Although the other markets aren't as large as Texas, we're very happy to see our successful dealer principals expanding to cover larger territory. It's good for them and it's good for us.

And I'm very happy to report today that we have reached agreement with Fire Services to take the Northern Illinois and Indiana region, another large and important market force. We're delighted to have Fire Services join our family as they bring with them years of experience and an outstanding reputation for service in this region as a former dealer for one of our competitors.

We've made a number of other dealer channel -- we have a number of other dealer channel expansion projects in the works and expect to make additional progress in Q4. However, in contrast to our progress on this critical front is data that indicates that the domestic market has softened significantly in the first half, down about 20% from last year.

Our sense is, that once the results are tabulated, the Q3 total market numbers will not have shown meaningful improvement, and we're prudently planning that the weakness will continue into Q4 and into the next year. Obviously, this adds to our challenge. We are improving our share but the pie is smaller at the moment.

Peter Guile, the new president of E-ONE has brought new energy and optimism to this business and our employees, dealers and customers are responding very well. There's a healthy collaborative effort underway with our dealer council to tweak our now structured product offerings and option content to zero-in better on market needs and opportunities.

Before I turn the call over to Stephanie for more detail on our operating results, I'll make a few comments about what we see ahead.

First of all, a preview of the fourth quarter. Q4 is typically our strongest both from a new order and a new revenue standpoint and this year should be no different. At this time we're expecting orders to be up over 10% from last year which would set a new high watermark for us. There is risk to that of course given the uncertainty in the U.S. economy.

We're still working on forecast and budget for 2008 while like everyone else trying to estimate the potential impact of higher oil prices and housing weakness on economies around the world and particularly on our markets.

As we are entering a time of increased uncertainty, I really like where we are in regard to our emerging business profile. As you know we've been shifting our focus to product and services that address security and wellbeing needs of municipalities and high profile workplaces throughout the world.

Excluding Tool, approximately 25% of our projected sales in 2007 will have been in the area of addressing water quality and environmental compliance needs. This is a high priority around the world and becoming more of a concern in many places.

About 55% of our projected sales address the need for enhanced safety and security. About 5% address the installation and maintenance of electrical and communications infrastructure. The remaining 15% goes into maintaining productivity of expensive assets in industrial plants.

On the same basis, that is without Tool, of our new orders year to date through Q3, over 40% are from customers outside of the U.S. This compares to about 33% for the year 2005.

This profile suggests that Federal Signal is better positioned than most companies to withstand an economic down -- slowdown. The vast majority of our products and services address the highest priority needs of governments, municipalities and high profile workplaces around the world. And increasingly we are not as concentrated in one economy.

The results of our transformation bode well for us and for our shareholders in the future.

Stephanie?

Good morning.

Orders totalled $298 million in the quarter, up as Bob said 9% from the prior year. The year over year increase is in all our market categories.

U.S. municipal and governmental orders were up 5%. We continue to see some weakness in our fire truck order intake but that is being more than offset by strong orders for our police light bar and siren products. We're also encouraged by stronger year over year sweeper orders which had been down in the first half of the year.

U.S. industrial orders were up a healthy 13%, primarily driven by strength in industrial vacuums and water blasters, plus some growth in new parking systems projects including a significant order from JetBlue for an access control system for their JFK airport employee parking lot.

Our non-U.S. orders remain robust although not as strong as they have been earlier this year. Orders for non-U.S. markets were up 9% to $113 million. About half of the increase was due to currency and the total also benefited from the acquisition of PIPS UK in August.

To date, international business accounts were 40% of our order intake, up significantly from last year due to our globalization efforts and also aided by the weak U.S. dollar. As you may recall, our 2010 objective is to have half of our sales coming from outside of the U.S. At quarter end, our backlog was stable at $452 million, up 8% from a year ago.

Consolidated revenue totalled $307 million, up 6% from last year due principally to the favourable impacts of price and currency. Our consolidated operating margin averaged 3.6% in the quarter, down significantly from 6.2% a year ago due to the erosion of gross margins at our E-ONE unit and increased SEG&A expenses to support growth and restructuring initiative.

Our consolidated gross margin declined to 23.5%, down 90 basis points from a year ago. The deterioration was focused in E-ONE where the business was impacted by low overhead absorption in the phase of significantly lower production and higher employee, medical and IT expenses.

After the setback this quarter, our nine-month consolidated gross margin averages 24%, up 60 basis points from 2006 level. As you may recall, our 2007 objective is to raise full year gross margins by about 1 percentage point to 20 -- from 23.5% a year ago.

SEG&A expenses averaged 19.9% in the quarter, up from 18.2% a year ago. The 170 basis point increase is due to higher engineering expenses, increased sales and marketing expense, and the impact of severance cost and the management change at E-ONE.

The increased engineering expense links to the growth in sales from new products. Year to date, sales from new products comprise 17% of the total. With the large number of new product launches earlier this year we're making good progress renewing our product line.

The increase in sales and marketing expense reflects headcount additions as we increase our direct sales organization in most businesses and to increase marketing activities. Although this increase in spending has been made to jumpstart entry in the new market, we do not see this percentage spending level as acceptable and have accelerated our focus on areas where we can reduce spending to compensate.

Turning to the businesses. First, safety and security which had another strong quarter, orders and sales both up 20% to $89 million and $94 million respectively. Operating income was $12.7 million or 13.5% of sales, down 10 basis points from a year ago. Given the strength in orders plus the recent acquisition, we now expect full year revenue for this group to be up more 20%. Margins should rise above 15% in Q4 and average close to 15% for the year.

Within fire rescue group we saw third quarter's decline 5% to $78 million from $82 million a year ago with small declines in both the U.S. and international orders.

Net sales totalled $74 million significantly below last year due to the weak backlog in North America, manufacturing inefficiencies, delayed material deliveries and low customer acceptances.

FRG's operating margin was a negative 9% for the quarter, down from 2.7% a year ago. The deterioration was in Ocala where the impact of the low volume throughput and lower customer shipment plus restructuring cost put the operation into a loss.

Of the total year over year $9 million profit erosion, $5 million was attributable to lower volume. The balance includes $1.6 million of cost associated with severance and management changes, higher medical expenses and the absence of the $1.6 legal settlement received in the third quarter or last year.

We've had to revise down our outlook for this segment. We now expect full year revenues could be down 15% or more from 2006 and expect a $9 million to $12 million operating loss for this segment for the year.

Our environmental solutions business is performing well. They experienced some rebound in new orders which totalled $103 million in the quarter, up 14% from $90 million a year ago. Sales revenues rose 14% to $109 million due to the strength in this same product line.

The operating margin declined to the 8.7% from 9.5% a year ago. We are experiencing, as Bob said, some erosion in our Elgin margins due to higher than planned material cost associated with our new three-wheeled Pelican. We have a cost reduction team actively engaged and are beginning to see some benefit.

Elsewhere in the group, our Vactor and Jetstream businesses continue to deliver impressive year over year performance. We are still looking for full year sales growth of 12% to 15% for this business, but have tampered our full year margin expectations to about 9% given the weaker Elgin result.

Our Tool business sales were essentially flat in 2006 due to weakness in the housing and auto markets in North America offset by strength in our overseas market. The operating margin declined to 3.7% as the impact of lower sales along with the impact of increased discounting and adverse geographic and product mix more than offset the benefit of cost management and improved productivity. This business has essentially no backlogs so projections are difficult, however we expect and are currently seeing a modest impact -- uptake in Q4 volume. We now expect the full year revenue down about 2% to 3% from last year and a slight deterioration in operating income from the prior year.

Below the operating line as we indicated last quarter, our tax rate came down in the quarter to a year-to-date rate of 21%. The low rate in the quarter reflects the implementation of a foreign tax planning strategy. The full year tax rate should stay at about the 20% level.

Turning to cash flow, at $26 million, our operating cash flow was strong in the quarter bringing the nine-month figure to $40.5 million against $14.7 million a year ago.

Working capital declined slightly contributing $7 million cash flow in the quarter. Inventories particularly in fire rescue remain high. While a portion of this is cyclical, we are taking specific actions to make reductions between now and the year end and we expect it to reduce inventories across Federal Signal by $12 million to $15 million before the close of the year.

At quarter end, our net manufacturing debt to capital ratio was 40%, at the high end of our policy bond but inline with our expectations at the time of the PIPS and Riverchase acquisition. We had $131 million drawn on our $250 million revolving credit facility and we're in compliance with all covenants.

This completes my prepared remarks and I'll turn the call back over to Bob to moderate the questions.

Okay. Kelly, would you open it for questions, please?

Yes. (OPERATOR INSTRUCTIONS)

And our first question comes from the line of Steve Barger of KeyBanc Capital Markets.

Good morning.

Hi, Steve.

Hi, Steve.

Hi. Just to start focusing on the fire market. What's driving the perceived 20% decline? Is it related to housing market declined in the thread of lower -- I mean, municipal tax revenues?

We don't see that direct connection right now, Steve. I mean, there is really not one thing that we can put our finger on. There are some things going on that we know are having an impact. One is that as fire departments progress through the year they're spending a lot more money on employee costs and fuel costs than they had budgeted. And we've heard anecdotally from a few of our dealers that fire departments who have had a new vehicle in their budget for 2007 are delaying that because they don't have enough funding because they're spending in other places. That's really the only specific thing that we have heard.

The other kind of anecdotal thing I suppose is that in the deals that we are involved in, they're just taking a lot longer to get finalized and I don't know if that's just putting in a one-time delay or if in fact that's what we're going to be seeing.

Are you seeing -- as we think about where we are in the fourth quarter right now, are you seeing less quoting opportunities, or is that weakness bleeding over it all into other municipal markets such as the street sweepers?

No. we're not seeing -- first of all fire rescue, our folks at E-ONE are still bullish on the order intake for the fourth quarter, but, you know, there is a -- there is an unfortunate kind of heartbeat in this industry where things -- everything kind of happened the last few weeks of the quarter. So, it's hard for us to tell what's going to happen, but right now I would characterize the quote activity as being okay.

In -- we're not seeing any downturn that we can attribute to municipal budgets, at least that we have line of sight to on our other municipal orders. As I indicated in my remarks, our sweepers and Vactor street cleaning orders are down year to date, but as we look at the details, last year we had a large number of fleet orders from larger customers, Los Angeles and cities like that. And we're not -- those large fleet orders we're not seeing as many of those this year.

I suppose that some of the larger, more, perhaps sophisticated customers were looking to buy ahead to get '06 engines, but, again, that's nothing that we have a direct line of sight to.

What we are encouraged by improved activity in the third quarter and our regional sales folks are optimistic about the fourth quarter. So, right now we're not seeing it.

On the SSG side, the orders from police departments are still strong. Outdoor warning sirens, that's a very lumpy business to begin with. Year to date I think we're about the same as we were last year. So, we're not seeing any weakness so far there either.

Okay.

Shifting back to FRG, can you give us a little more detail on the throughput issues. I know they've been with you for a while, but shouldn't lower production levels increase sufficiency, and why can't you get in front of that?

Yeah, you're right, Steve. You would think that we should be able to get better if we're not as under as much pressure. What is happening is that as our backlog is thinner, where in the past if we were missing a critical component that we have to stop the truck because we didn't have the part, we would look into our backlog and pull in other vehicles and we have good visibility into what the inventory is for the other ones, we would have a number of other ones that we could pull in and pull ahead. With a weaker backlog you don't have that much flexibility.

The other thing is that, when the backlog is strong, we -- as we assemble these trucks we do establish a flow as opposed to doing a [bay build] so we like to bunch similar trucks together so that we can achieve a smooth flow. For example, if we do ten simple trucks in a row, then those things flow relatively consistently.

If we now have two simple trucks, and then a difficult one and then followed by a couple more simple ones, then that really causes disruptions because it -- the tough one kind of clogs the system up.

Right.

I don't want to make excuses. I think our guys have really struggled with this and we need to do better.

Okay. The prior (inaudible) that we've talked about indicated that you might return the profitability in Q-half '08 in fire. Are you changing your outlook there?

Well, I'm -- I think the kind of progress that we had envisioned that we needed to have on feeling the dealer holes were making good progress on that. As we look at the market share numbers, and I've cautioned about this before, the way this industry runs, you can't look at a quarter's data and make any kind of decision. Because, if there is fleet order of 50 trucks for example, whoever gets that, their market share number goes up immediately.

So -- but as I look at the first half of the year and if we could make a decision based just on that, we have made some improvement in market share.

So, from that standpoint we're encouraged. The problem is, we were expecting to increase the share points on a market, which is much bigger than it is now.

So, right now we're looking at '08. We're going through and trying to see whether or not we can hit the numbers even if the -- the unit numbers, even if the market is softer. And we don't have that answer right now, but it's important to us to make progress and to do everything we can to reach that objective.

Okay. One more and then I'll jump back in queue.

Incremental good news at Hall-Mark is in Texas and the Fire Services moving to Illinois. What -- realistically, when can you expect to see orders from them and how are the dealers thinking about those new territories relative to the current throughput issues?

Well, first of all, I think in Texas this has been underway for a while, for long enough, that the folks at Hall-Mark have already made -- have been meeting with customers for a few months. What we have to do is to comply with the state laws and they can't take orders until they have the franchise and the franchise is not available until the other one, you know, until it's resigned from the other party they have backlogs that they want to clear out. So, once we do have agreement, it takes a while for that momentum to start building.

In the case of Hall-Mark, because they are well-known throughout the fire industry because they are a very large dealer and have a very good reputation, that the response in Texas has been very positive. And so we expect in Q4 some meaningful improvement.

On these other regions it will take a little longer, I believe, in order for the new guys to get established and to understand the product offering.

In the other markets that we disclosed in the press release a few weeks ago about current dealers expanding their territory, they know the product, they know the company, they know the business, they have to get to know the customers which will take a while as well.

So -- I mean, just putting it all together, is it fair to say you're not going to get meaningful order intake from those new regions until sometime in mid 2008?

I think, Steve, in Texas, I expect to see some meaningful improvements in this quarter. In the other regions, I think we'll start to see some orders drift in in Q1. Meaningful, you're probably right, it might be Q2.

Okay. All right. Thank you. I'll jump back in line.

Your next question comes from the line of Jerry Reavis of Goldman Sachs.

Good morning.

Good morning, Jerry.

Your Bronto business has certainly been extremely strong in recent history. Did the flat orders and sales this quarter indicate some market saturation or where their other factors in the quarter?

No. We're capacity constrained right now, our backlog -- if you look at our backlog number, it continues to build and that's why we're putting this capacity improvement in place.

We've -- that the business has been building over the last couple of years and we've increased our throughput by outsourcing a lot of stuff. And we're at the point now where we're limited on how much more capacity we can get through outsourcing. So the -- from a revenue standpoint where we end up this year is probably going to be similar to what we could expect for 2008 and then after that we should be able to build nicely.

And if we are interpreting your numbers right for Bronto, it implies a sequential decline in orders as well. So, have you, I guess, cut your order intake rate even worse than expected supply or execution or anything -- ?

No. I think, you know, similar to the fire market here, you really can't look at one quarter and declare a trend. As we look at year to date we're up 36% I think. Some of that is currency, of course, but most of it is nice new solid orders.

Yes. The sequential move is -- was about 2% down and that's just not meaningful in the context of the -- kind of the lumpiness in their orders.

Third quarter, the other thing I would mention, half of their sales are to Europe and the third quarter does to be seasonally weaker for Europe.

Okay. And on your newly acquired PIPS business, were there any non recurring charges, anything like the inventory write-up impact that we would expect in an industrial company acquisition? And also, if you could tell us the sales contribution in the quarter please.

PIPS generated about $4 million in sales and about $1 million worth of operating income and there were no unusual charges.

And you mentioned product development and spending on growth initiatives and your safety and security segment, you spoke about the situation improving in environmental, can you give us the same assessment on the safety and security side? Do we expect less impact in 2008 and so far this year?

I'm not sure I understand.

Yeah. Let me take a shot of it.

These -- that the new product development costs are -- there's a lot of upfront expense into that as we are spending time developing the products and spending time developing marketing plans and marketing programs and that kind of thing. We also -- during -- I mean, during the quarter, specifically, but throughout the year as we've acquired Codespear and Riverchase and PIPS. When those businesses come in to the company, those bring in chunks of marketing and sales and engineering cost as well. So, there is some assimilation going on here. But, I think, I expect -- again, we were still working on the 2008 budget, but my expectation would be that our revenue grows into our expenses in that regard.

Did that --?

Your next question comes from the line of Brad Evans of Heartland.

Yes. Thanks for taking the question.

So, if I have my math correct her, Bob -- can you hear me?

Yes. Yes. Go ahead, Brad. Good morning by the way.

So the $9 million to $12 million loss at FRG consolidated, your Bronto's probably about $120 million, my guess about a 10% operating margin, so call it within the range $10 million to $15 million of operating income coming from Bronto, you got income coming off of a leasing operation. Call it a handful there so $3 million to $5 million, I don't know what the exact number is so I'll call it $4.

So pre E-ONE you got a $13 million to $20 million operating profit out of FRG implying a $25 million to $30 million loss at E-ONE. I guess I just -- I'm just kind of amazed that there isn't a distinct line drawn in the sand irrespective of what type of market conditions you expect that, you anticipate or have a plan in place to at least break that business even as you get in 2008. Can you please respond to that?

Yeah. Well, first of all Brad, the numbers that you tribute to Bronto are a bit aggressive. We've drawn revenues substantially or significantly over the last couple of years and we've been able to do that because we've done a lot of outsourcing.

So, at the time, our margins are not at the 10% level and our revenue I think -- yeah. But -- so, your math is off a little bit, but I understand the question.

The -- and E-ONE as you know is losing a considerable amount of money. This has been a issue for a long time for the company and it's something that we review all the time and we review with the board in detail every board meeting.

We've made a number of investments over the last several years in order to improve that situation. Those investments are in place now and are just beginning to work. And we - the things that we've been doing, we're convinced are the right things, they're not showing up yet in our financial results.

You didn't answer my question. I guess it's a credibility issue, Bob. I mean, how can you -- I guess, your stock price since you've taken over the company is down 12%. That's even before the dividend as cut in half. So, call it around 2% annualized decline. The S&P 500 industrial index is up 80% over that same timeframe or basically 18% per annum. It's gotten to the point now where the waffling type of answer that you've just given with respect to your expectations for E-ONE into next year is unacceptable and I think it's fair for shareholders to ask the question as to what you expect for E-ONE in 2008.

I hope our directors are asking those questions, and I think you owe us an answer.

Brad, you're right, the directors are asking those questions. We had a meeting two days ago and we reviewed it in detail. We're putting together our '08 numbers right now, the guidance that we provided three months ago about getting to a breakeven run rate in the second half of next year. We will, either late in the year or early next quarter, communicate what our expectations are.

Again, there are a lot of moving parts. We're satisfied that the things that we've been working on are getting -- are making progress. We have some new headwind in our face at the time and we're trying to assess the likely extent of that headwind in the coming quarter.

Well, I just like to urge the board to consider the strategy and it's -- this has been an expensive experiment for shareholders. Clearly a lack of focus on E-ONE is causing, you know, significant shareholder destruction. I for one think it's probably prudent to the board in directing their interest, in protecting shareholder value, as fiduciaries to higher and independent third party whether it'd be a consultancy or even an investment bank to consider alternatives for the company in it's entirety. Because, at this point, Bob, I think credibility is on the line here and to go through another year of substandard financial performance at E-ONE is unacceptable. That's a comment, not a question. Thank you.

Yes. Thanks, Brad. I appreciate your comments. I do understand and most assuredly our board will hear your comments.

The next question comes from the line of Charlie Brady of BMO Capital Markets.

Hi. Thanks. Good morning.

Good morning, Charlie.

And I apologize if you've addressed it already, I was jumping back and forth between calls. Just with respect to the fire division and E-ONE in particular, could you just talk about plans and moving parts and things you're going to do? I wonder if you could just articulate for us with some degree of specificity exactly what the steps are or you are contemplating or considering even if some of those might not come to correlation, just sort of what's the thought process going on there with steps they can possibly be taking whether or not they actually go forward or not.

Okay. Yeah, Charlie, let me start by going back to what we said three months ago about the task that we had again. First of all we identified that we were taking a -- we're reducing the fixed cost by a significant amount, $10 million, and that we would have that in place by the end of this year. And we're progressing on that and expect to reach that target.

The other thing we said is that, for us to reach a breakeven point, we needed to pick up several market share points. Going back to the fixed cost comment, that is designed to lower our breakeven point by a significant amount.

So, I am satisfied that we were making the progress that we planned in the fixed cost side. What is still playing out is, will we be able to regain the orders that we need to in order to reach that breakeven level.

If the market were stable, we're running at the 5400 unit a year level that it has the last couple of years I would feel a lot more positive about that. At this point we're prudently anticipating that over the next couple of quarters, it's going to be weaker than that and so we're going back in looking at our plans and seeing what we need to do in order to reach that target.

Where are you at with the $10 million reduction? I mean, we only got one more quarter to go. Are you at $8 million or $9 million or we're about -- how close are we to $10 million?

We are still actually exiting. Some people are actually still leaving and we'll leave between now and the end of the year. By 12/31 we should be starting off 2008 with that $10 million behind us.

Okay. And can you just address the supply chain issues? I guess what I'm looking for is a little more detail on a lot of stuff and plans and actions that are expected to be taken as opposed just to saying, this are -- these are things we're thinking about. I kind of like to know what exactly you are thinking about.

So the supply chain issue will be sort of the next question. Do -- specifically, you know, you've got a team in place in place, again, what steps are you doing to improve supply chain and reduce your cost structure on supply?

Okay. You may recall that we had an announcement about five months ago. Now, I think that Fred Lietz was joining our company as Chief Procurement Officer. What we have done -- what Fred has done in the last few months is we've centralized the reporting relationships so that all of our purchasing professionals throughout the company report to Fred. We now have commodity managers that, for example, there's a person that's responsible for aluminium company-wide, a person responsible for chassis components company-wide. And he -- Fred and his team have or outlining now some pretty aggressive cost reduction goals for each of our businesses.

And from a material cost standpoint, where we are right now is, historically we're about where we run for the last several years. Even though we had some commodity cost increases and component cost increases over the last several years, we have adjusted our prices such that materials or percent of sale is about where it has been. That's not to say we're happy with that, we want to reduce it. So, there is a lot of activity going on in that regard. And they have identified a goal for each of our business units and now are implementing those plans.

The -- from the other specific standpoint, Steve, we identified that the most important thing, we'll get the fixed cost down, we'll get our breakeven point down, what we have to do is increase our volume. We have -- even with the reduction in fixed cost, we still have a cost structure that supports a fully integrated full scale fire apparatus manufacturing company. And we've either, you know, our task is to recover enough market share that we can support that overhead and grow profitably from there.

We do have the advantage of the Ez-ONE configurator in place now and that's -- we expect that to continue to allow us to take cost out of our products in the quarters ahead by making our order process more efficient, making our purchasing process more efficient and our production process.

So, there is a lot of activity going on and this has been going on for some time. And, again, we identified where we hope to be by the third quarter and we're working on that again. And we'll have an update a couple months from now.

Thank you.

(OPERATOR INSTRUCTIONS) There are no further questions at this time.

Okay. Thanks, Kelly. And I just like to thank everyone for your interest in Federal Signal. Obviously we're very disappointed in the results that we're reporting on today. We have a lot of great things going on in the company, a lot of growth that we've already charted and some very good prospects for the future. We do have one very, very significant problem that we're still working on and we certainly intend to report improvements as we go forward.

Thanks again for your support and we look forward to talking with you in a few months.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.