Federal Signal Corp (FSS) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Federal Signal earnings conference call. My name is Carol, 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 toward the end of today's conference. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. David Janek, Vice President and Treasurer. Sir, you may begin.

Thank you, Carol, and good morning everyone. Welcome to Federal Signal's 4th quarter and year-end 2007 conference call. Joining me today are Jim Goodwin, our President and Interim Chief Executive Officer, and Stephanie Kushner, our Senior Vice President and Chief Financial Officer.

On the call today, Jim will discuss some recent initiatives underway at the company, and he will provide an update on the status of our four business groups. Stephanie will then comment on our financial results for the 4th quarter and full year of 2007, and she will provide an outlook for the first quarter and full year of 2008. Following these prepared remarks, we will open the call for your questions.

Before we begin, I must remind you 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 filings with the Securities and Exchange Commission. These documents are available on our website, www.federalsignal.com. With that, I'll turn the call over to Jim Goodwin.

Thanks Dave, and good morning everyone.

As you know, I stepped into the leadership role of Federal Signal a little over 2 months ago, and I'm very excited to be here. While our 2007 proved to be a challenging year in some respects, we continued to make progress in realizing our goal of positioning Federal Signal as an industry leader in providing solutions that advance safety, security, and well being for workplaces and municipalities around the world. You should expect during my assignment that we will continue with many of the same strategies for growth, but we will have a greater focus on operational and financial performance.

Over the last few months, I've spent a great deal of time with our customers and our employees, and I am confident that our strategy and vision are sound. We are delivering what our customers are looking for, quality products and solutions for an ever-changing marketplace, and I believe we are uniquely capable of addressing these market needs by leveraging our core competencies and continuing our transition to a market-focused organization.

As we wrap up 2007, and look ahead to 2008, we have a number of important initiatives underway that will significantly enhance our ability to generate shareholder value over the long term. First, as you saw from our press release, we continue to review our portfolios of business. After careful consideration, our Board has decided to consider strategic alternatives with respect to our E-ONE businesses. Although the business is showing positive trends from the recovery plan, we have yet to generate positive shareholder return. Accordingly, we have engaged an investment bank to review strategic alternatives, and I am pleased to report that we have indications of interest from several potential suitors.

We also announced last quarter that we would be meeting with buyers for our remaining tool businesses during the fourth quarter. While the economy is providing a difficult sales environment, we can report that we are in advanced discussions with several suitors. Second, we're focused on improving the profitability of our operation through various cost containment initiatives. As you would expect, we're watching the economy closely for signs of weakness, and we are seeing some sales challenges ahead.

But while we are sensitive to the market conditions, these reductions are a reflection of a need to lean our overall spending. The management team has developed a plan to reduce costs and make staffing changes which will result in head count reductions during this -- during the quarter, and will lead to more rationalization of our global manufacturing footprint. Stephanie will cover this in more detail during her remarks. That said, we ended the year very strongly, with orders up 17% from the prior year. January results were also higher, up 6%.

While these order rates are encouraging, the economic backdrop has us taking a cautiously optimistic view of 2008. We will maintain flexibility to respond if the markets stay strong, but we will also be mindful of costs should there be a significant downturn. Fortunately, our downside risk is somewhat limited, if the U.S. economy were to head into an economic recession. We have roughly 40% of our sales outside of the U.S. today, and with the aforementioned portfolio changes, our exposure to the U.S. market will likely decrease further.

We also gain confidence in the fact that our Bronto plant is essentially sold out for the year and Vactor well into the third quarter, so our concerns related to the U.S. economy are predominantly isolated to some of our domestic municipal businesses. And lastly, we are prudently allocating our capital to the highest priority initiatives. For example, we've commenced our capacity expansion for our Bronto facility in Finland.

Aided by mild weather, we now plan to complete this project early, which means the building will be finished by midyear. Once complete this expansion will add 40% of additional capacity, which will allow us to in-source some of the component build which we have previously outsourced. That will reduce our costs, shorten our lead times and reduce our working capital. Given the continued strength and performance of our Bronto business and a healthy backlog of orders, this use of capital will generate double-digit returns for our shareholders.

Now I'd like to provide you some highlights for our business segments, starting with FRG. Our Bronto business had an extremely strong fourth quarter and fiscal 2007. Orders more than doubled in the fourth quarter, and were up 50% for the year. The business has continued its momentum during January, posting another double-digit increase in orders during the month. Highlighting the innovative nature of this company, sales from new products accounted for 65% of revenues during 2007. And in addition, this business continues its global expansion with fourth quarter shipments to China, Russia, Thailand and India. We are pleased to report that Bronto is now sold out for 2008 and the business is currently taking orders for the first quarter of 2009.

While our E-ONE division has struggle in the past several years, the business has been re-energized under the leadership of Peter Guile. Peter has worked closely with our current dealer partners, as well as expanding our dealer network across North America. The business has been successful in appointing dealers in five important territories since the beginning of the fourth quarter, with negotiations ongoing for several others. All the new dealers have secured orders for E-ONE, with significant volume of contracts secured in several of the most significant territories.

With Peter's success in cultivating new dealer agreements, we are happy to report that our dealer coverage is now up to 90% of North America's fire truck market. Orders for E-ONE trended up during the fourth quarter, raising the backlog for the first time in many quarters. Moreover, we recorded a strong January, with orders up 51% compared to the year-ago period. Some of our largest competitors I know have reported significant reductions in backlogs during 2007, and weak market conditions. Certainly, E-ONE is subject to the same conditions. But our new dealer coverage, particularly in large markets such as Texas and northern Illinois and Indiana, are driving strong quarter activity for us.

Turning to safety and security, orders were up 21% over the year-earlier period. The increase is attributable to strong organic growth and the impact of the PIPS acquisition. In the U.S., municipal spending appears to be bifurcating. While we continue to see significant [quote] activity for large, municipal and governmental projects, municipal spending associated with product lines such as police light bars and sirens has slowed recently. We will be monitoring the market closely during the year and continuing to adjust our plans as necessary.

International business, however, remains brisk. We haven't yet experienced a softening in our Western European and UK markets, so we expect strong first quarter sales. Further, we're starting to see heightened activity in Mexico and the Middle East. In China, we're working hard to establish a manufacturing presence with our signaling and other safety products for the underground mining industry. The integration of our PIPS business is proceeding as planned. Just this month, we received a large camera system order in Europe valued in excess of $5 million.

Moving on to our Environmental Solutions Group, ESG had a strong finish to the year, with order intake up 14% year-over-year. Municipal new business was quite strong, including several mid-sized municipal orders for sweeper and sewer cleaners. However, as we start the new year, we are seeing some signs of softness in the municipal market. Again, we will be monitoring these markets closely and will remain cautious with our spending.

Orders for industrial vacuums and waste and water blasters are strong from large rental companies. As we've noted in the past, we are continuing to expand our U.S. service centers to provide equipment rental in parts and accessories to some of our environmental equipment customers. We opened our second Jet Stream rental store located in Long Beach, California, during the fourth quarter, and we will continue to look for other expansion opportunities.

Now I'd like to shift gears and touch on a couple of important developments, starting with our executive leadership search. At this point, the search process is well underway. We've engaged an executive search firm, whom the Board has met with on several occasions, and while it's difficult to predict the timing of the new hire, we're working aggressively to put a world-class candidate in place, and we will keep you appraised as the situation develops.

The second development that bears mention relates to our hearing loss litigation. We are thrilled to report a recent win with the dismissal of the case filed in New York last year. The judge granted our motion and dismissed the lawsuit in this jurisdiction.

Separately we are facing a significant trial here in Chicago beginning next month. We have retained Phil Beck as the trial counsel from the premiere law firm of Bartlett Beck to represent us in this case. Beck has an unprecedented record of success in the courtroom, and hiring him underscores our commitment to aggressively defend our company and resolve this litigation in our favor.

As these lawsuits are costly to defend, you should expect our spending to be heavy during the first half of 2008, and Stephanie is going to provide more details on the cost increases in her comments. With that, I'd now like to turn it over to Stephanie, who will comment further on the Q4 results and provide you with our guidance for the first quarter and full year 2008. Stephanie?

Good morning, thanks, Jim.

As Jim indicated, our order intake was strong in the fourth quarter, up 17% from the prior year. About 1/4 of the increase reflects the impact of the weak U.S. dollar on our non-U.S. sales. However, the balance of the uptick was broad based and therefore very encouraging.

Our U.S. municipal and governmental orders were 14% above the prior year, due to higher orders for sweepers, sewer cleaners and fire apparatus. And U.S. industrial orders rose 10% year-over-year, mainly due to continued strong demand from rental companies for industrial vacuum and sewer cleaner trucks, and to a lesser extent additional parking systems orders. Orders outside of the U.S. totaled $140 million, up 25% from the prior year or 13% excluding the impact of currency.

We've made a lot of progress on our international growth initiative. For the full year, orders for Federal Signal products outside the U.S. totaled $526 million, representing nearly a $100 million rise from $430 million a year ago, of which only one third of the increase is due to currency.

Two years ago, when we embarked on a strategy to increase our international sales growth, we set a goal of having 40% of our sales outside the U.S. by the year 2010. Given the strength of the foreign businesses and strong export demand, we were nearly there at 39% in 2007. Half of those orders were in Western Europe, but we also have a strong and growing customer base in Asia, the Middle East and the rest of the Americas. This growth outside the U.S. reduces our reliance on the domestic economy as we navigate through a difficult economic period. So all in all, a solid quarter for orders. At year end, our backlog had risen to $479 million, up from $403 million at the end of 2006.

Consolidated revenue totaled $351 million, up 4% from a year ago primarily due to currency. Revenue for our domestic businesses was essentially flat, with increased shipments of sewer cleaners and the addition of PIPS' U.S. sales, offset by lower shipments of fire apparatus from E-ONE.

Our consolidated operating margin was 4.8%, 160 basis points below 6.4% in the year-ago period, due to lower margins in all segments. Our gross margin averaged 22%, down from 23.5% in the prior year quarter. The decline reflects low overhead absorption of E-ONE, and reduced margins in our domestic environmental products businesses.

At 17.1%, our SEG&A expenses were in line with last year. Our operating income totaled $17 million, down from $21.7 million in 2006, mainly due to the weak performance at E-ONE.

Our income tax was a credit in the quarter, bringing our full year effective tax rate to 13%. In general, the growth in our offshore earnings has been beneficial to our consolidated tax rate, because the rates in most European countries are now several percentage points below the U.S. We also benefited from two late breaking tax items, a U.S. deduction on a tax abandonment of our prior investments in Canada, which provided a $1.4 million tax credit, and the reversal of a foreign tax credit reserve in response to a December tax regulation change which contributed to an $800,000 dollar lower tax provision.

Now, I'm going to focus on the individual segment results. First, safety and security. Fourth quarter revenue was $98 million, up significantly from $82.7 million dollars a year ago. Excluding our parking systems business, revenues for all our product lines were up nicely year-over-year, and we had the addition of PIPS, plus we continued to enjoy strength in the businesses linked to offshore oil and underground coal, which together account for 15% of the SSG segment sales. At the operating income level, this segment underperformed our expectations in the quarter, with operating income of $13.1 million and a margin of 13.3%.

So let me first be clear that our core business has performed very well in the quarter, for example, our mobile solutions businesses, both in the U.S. and Europe, had significantly higher earnings due to share gains associated with our new product launches. For example, in a flat year for U.S. police car purchases, our sales were up 25%. So we know we made significant share gains. The story is very similar in Europe, where our new LED light bar designs are helping our [Bama] subsidiary gain share across Western Europe and begin to get a foothold in Eastern Europe.

However, there are two isolated areas where SSG margins were hurt in Q4. First, we incurred higher costs associated with the large Tier 1 airport parking project installations in Dallas, Ft. Worth, and New York. We have continued to increase spending for project management and engineering to complete these projects satisfactorily. We incurred about a $1.3 million loss in Q4 for these contracts, which reduced our operating margin in this segment by 180 basis points. The operating margin excluding the loss on these projects would have been 15.1%.

In addition, this group is spending about 1 percentage point more in engineering and about 40 basis points more in selling resources to support the launch of our municipal and governmental systems businesses. This is still a relatively new product area for us, and it requires expanding our direct sales force and packaging our technologies for sale into municipalities, universities, hospitals and other institutions. We're confident that over the medium term, these investments will bring solid returns for our shareholders but we are in an investing mode today.

We announced yesterday the formation of a new SSG division, Public Safety Systems, which includes all of the recent acquisitions plus our federal warning and municipal WIFI businesses. This division will report to Mike Wons. Mike is a seasoned technology leader who joined Federal Signal as our CIO from Microsoft 16 months ago. He is familiar with these investments and will hit the ground running as we accelerate the execution of our strategy with our customers and partners.

Looking at 2008, we're very well positioned in our SSG segment to support the growing security needs in the U.S. and globally, and find ourselves bidding on increasingly sizable contracts and public safety and security installations. As Jim noted, however, we're seeing more caution on the part of U.S. municipalities, which still comprise more than 25% of this segment's business. Our ability to continue to deliver double-digit growth will depend on the relative importance of security spend and the rollout of our new technologies, versus what could be an underlying weakness in municipal purchases of our off-the-shelf or boxed products.

At this point we believe our sales growth will remain strong in double-digits but below the 20% rate we experienced this year. Margins should increase from 2007 levels for the full year but continue to be impacted by about 1 percentage point, due to costs in the final stages of the large airport contracts. We believe our municipal and government systems business will lose about $1 million in the first quarter but become profitable by midyear.

We expect first quarter margins, which are seasonally our lowest to be about 1 percentage point below last year. The impact of higher margin PIPS business is likely to be more than offset by weaker sales of light bars and sirens in the U.S. municipal market and lower overhead absorption. We can see a slowing of police car deliveries, and some indication of municipalities pushing off their purchases given their own economic uncertainties.

Environmental Solutions performed as expected in the quarter, with sales of $112 million, up 9% from the prior year. We had strong shipments in the quarter of both sewer cleaners and sweepers in the U.S. The operating margin averaged 8.5% down from 9.5% a year ago. The decrease is due to higher materials costs, and lower margins on the next generation three-wheeled Pelican sweeper that was introduced in the second quarter of 2007. Margin compression on this product cost the segment about 70 basis points of margin in the quarter.

We did see a small improvement from the prior quarter on this product line, due to flow through of some of the material savings recently negotiated. We will see further improvement as the year progresses, and we still expect that in the second half margins on this product will have been restored to previous levels. In addition to the impact of the Pelican, this group was affected by higher volumes of company-supplied chassis sales. Because chassis are generally passed through to the customer with little markup, a shift in volumes can depress our reported margins.

Looking into 2008, we're forecasting the top line more cautiously with this business, where U.S. sales - U.S. municipal sales account for nearly half the orders. We expect fairly modest top line growth, particularly in the first half of the year. Our Vactor sewer cleaner and industrial vacuum plant has a strong backlog, so it should be cushioned from any market weakness. Our expectation is for this business to continue to perform in the 8 to 9% operating margin range, trending up as the year progresses.

Fire Rescue performed in line with our expectations in the quarter. Orders rose 20% in total, and 4% in the U.S. The U.S. uptick is notable because it represents a reversal of the trend we've experienced in the last several quarters, and ensures that our E-ONE plant in Ocala has adequate backlog well into the third quarter.

Bronto aerial orders continue to be very strong, notably including several units for the United Arab Emirates and China in the quarter. Sales for industrial lifts which don't transport water were also strong. Bronto is our most diversified global business, with strong sales into the Middle East, Asia and Latin America, as well as its European base.

Net sales for the Fire Rescue segment were about 10% below the prior year, due to the low production rate at E-ONE. As discussed last quarter, the low run rates are resulting in overhead under-absorption in this plant, which is causing losses for the business. During the quarter, E-ONE management successfully reduced their inventories by $19 million, as they sold a number of stock units and reduced their work in process. This contributed significantly to the company's operating cashflow.

The operating loss for the segment was $2.7 million in the quarter, bringing the full-year loss to $11 million. Bronto on a standalone basis earned $4 million on sales of $46 million in the quarter. For the full year, Bronto earned $7.9 million on sales of $118 million or a margin of 6.7%. Bronto's margins were impacted adversely by the extent of local outsourcing in Finland of sub-component builds, as they ramp up production in advance of completing their plant expansion. We would expect that margin to increase gradually this year and next, with completion of the expansion on strong volume growth.

Our tooling segment, 100% industrial, continues to bear the brunt of the weak U.S. housing and automotive markets. Sales at $30.1 million were essentially flat from the prior year, with weak U.S. punch and dye sales offset by strength in international markets, particularly Japan. The margin averaged 6.7%, down from 9.4% a year ago, due to the low U.S. sales level and increased pricing pressure. For 2008 our outlook for this group is for moderate top line growth driven by offshore sales and new product introductions, and some modest improvement in profitability due to the cost reduction actions that have been taken.

Corporate operating expenses totaled $4.8 million in the quarter, down $2.7 million from the prior year, due to lower bonus and stock compensation expense linked to weaker year-over-year financial results and the management changes. Also favorable in the quarter were $700,000 in lower expenses for the hearing loss litigation. Our spending is ramping up for these cases, especially for the March trial in Chicago, and exceeded $2 million in the fourth quarter. However, we received a refund from our insurers of $2.5 million dollars in the quarter, which covered a share of prior year defense expenses.

Going-forward, we have reached an agreement with our insurers to cover a fixed proportion of future expenses. As Jim mentioned, spending will be heavy in the first half of 2008, particularly. Net of the insurer contributions, we expect to spend between 3 and $4 million per quarter to defend these suits in the first half of the year, and 8 to $10 million in total for the year.

Our operating cashflow was strong in the quarter and brought our full-year total to $65 million. For the year, due to the Q4 inventory liquidation for E-ONE, we ended up with a $2.4 million reduction in primary working capital. We ended the year with DSO of 35 days and averaged 40 days for the year. At the end of the year, our manufacturing debt to capitalization net of cash totaled 38.8%, at the high end of our policy band. We had $99 million drawn on our revolving credit facility, and we are in full compliance with our covenants.

Jim made reference to the cost reduction initiatives that are underway to improve profitability and protect our margins. We recently implemented the cost reduction contingency plan to reduce budgeted SEG&A and fixed overhead costs by about $20 million. Among other actions, we will be eliminating about 50 existing positions and will not fill 100 open positions. The net effect should be to ratchet down our SEG&A run rate by 1% or more from the 18.4% of sales we averaged in 2007; and that includes the impact of substantially increased spending for hearing loss defense, which will be up about $8 million year-to-year.

As you may recall, our longer-term objective has been to reduce SEG&A expense to the 15 to 16% range. We will incur 2 to $3 million in Q1 to support some of these reductions. In addition, we continue to work to rationalize our global footprint and look for other areas of cost reduction opportunity. We will provide more updates on these initiatives as the year progresses.

In summary, then, as we progress through 2008 we have a lot of moving pieces. With our current set of businesses, our first quarter comp will be tough due to the heavy litigation spending, which will be about 4% higher year over year, and due to the weaker U.S. municipal outlook. Plus, we'll see no real benefit from our cost reduction efforts.

As the year progresses, however, we believe we will post improved year-over-year earnings due to lower spending, increased traction with our new security businesses, the benefits of our Bronto expansion and normal seasonality. Given the murky economy, it is difficult to be more specific at this time. However, we plan to be more positive and specific as the year unfolds.

This completes my prepared remarks and I'll turn it back over to Jim to manage the Q&A.

Thank you, Stephanie. Do we need to go to Carol?

Yes.

Thank you, sir. (OPERATOR INSTRUCTIONS)

Your first question will come to you from the line of Walt Liptak of Barrington Research. Sir, you may proceed.

Hi, thanks, good morning. Jim, Stephanie and Dave.

Good morning.

My first question is about the corporate expenses, and, you know, I -- I guess my -- you know, you mentioned that - they were lower than I thought. You mentioned an insurance refund of $2.5 million. Did that show up in the corporate expense line as an offset?

Yes, it's a credit in corporate expense, so year-to-year our corporate expenses are lower on hearing loss by $700,000, a piece of which is that $2.5 million.

Okay. So let me ask you this way. So your corporate expenses would have been the 4.8 plus the 2.5, is that right?

Yes.

Okay. What's the run rate that we should use on a quarterly basis?

The problem is our corporate expenses include our hearing loss. And as we go into 2008 we're going to have between 8 and $10 million of hearing loss expense, so we will -- we'll talk about that publicly, because it's becoming such a significant piece of corporate.

Okay, but the -- I guess what I'm asking is, the 4.8 plus the 2.5, that 7.3, should we add the $2 million of litigation expenses to that?

Let me think about this.

Are you going to be at 9, $9.5 million of corporate expenses?

We have taken some cost reductions in our corporate expense, so I think our run rate on corporate expenses should be down -- our baseline should be down to about -- between 4 and $5 million a quarter. But then you'd have to add the hearing loss to that.

Okay. 4 to 5.

Which would be -- yeah, so maybe I'm coming at it a different way, Walt, but basically, if you think of that as kind of the baseline run rate of the expenses and then later the hearing loss into the --

That's fine.

- probably into the first two quarters.

That's fine, I think I got it. And then the $20 million of cost reduction actions, you're talking about 2 to $3 million in charges in the first quarter?

That's correct.

Does that -- you get -- that's a pretty good return, a $20 million - or is there more charges that will come after that in the second and third quarter as you figure them out?

We are working on other things, but that will support approximately $20 million at a lower cost.

The 2 to $3 million charge?

Yeah. So, the reduction in existing head count is about 50 positions, and then a lot of the other savings is coming from positions that are not filled today. So there's no kind of restructuring cost.

Okay. Let me ask one more that, you know, is maybe more of a strategic question and I'll get back in queue. What's the catalyst behind Bob Welding's exit, and what's the catalyst behind the divestiture of E-ONE? You've been struggling with E-ONE for 10 years, now you've -- the timing, you know, I guess -- I just question that, being in a recession and municipal spending turning down?

I think the Board has been concerned about the performance of E-ONE for some time. We have been working aggressively on trying to find a recovery plan that would work. And I think as I said in my comments at the beginning, we're really excited about what Peter's been able to do to reenergize the business, reenergize the dealer network, improve the quality of our product, reduce the labor Input on the trucks. But at the end of the day, as I look at how we use the capital in this business and the opportunities we have to increase shareholder return, I believe - we've come to the conclusion that we can better deploy that capital and improve shareholder return in other ways. And that's how we got -- that's basically the decision on E-ONE. We're encouraged by the progress, but I think as you look at the timeline, we see better opportunities to enhance shareholder return.

With respect to Bob's departure, Bob decided to retire. We had a long discussion with the Board about what he had tried to accomplish, and felt that he had reached a point where he would like to probably take it easy for a little while. It's been a tough business that he's been trying to turn around. So it was a mutually-agreed decision between Bob and the Board.

Okay, fair enough, thank you.

Thank you, sir. Your next question comes to you from the line of Ned Borland of Next Generation Equity. You may proceed.

Good morning Jim, Stephanie and Dave. I don't know if I heard this, but an organic order growth rate for safety ex-PIPS?

You didn't hear it. I think it was 17%. We'll verify that, Ned.

Okay. And just moving on here, some of the implementation costs related to the parking systems. Are those systems, you know, fully in now and completed, or is there going to be some cost overrun there?

They're going to still impact us this year. They should both be fully in and completed by the end of this year. We have parking lots operating at both, but the completion, the full tie-in of the system is not yet complete. So I think I mentioned that's still going to cost us, probably -- at least for the first three quarters this year.

Is it going to be the same magnitude that you saw in the fourth quarter, on a quarterly run rate?

Yeah, it will probably still shave a percentage point off of our operating margins.

Okay. And these head count reductions, are these going to be immediately in the 1st quarter, or are some of these reductions going to take place later on?

The head count reductions will take effect immediately. People were notified yesterday and today. They won't officially go off the payroll until the first of the month, but all the affected employees have been notified.

Ned, I can confirm that 17% number.

Perfect, thanks. Thanks.

Thank you.

Your next question comes to you from the line of Charlie Brady of BMO Capital Markets. You may proceed.

Thanks, good morning.

Good morning, Charlie.

Within the fire segment, is it safe to assume -- is it Bronto business, if you sell the E-ONE, is - Bronto would be included in that sale, or would you hold on to that?

Bronto is not included in the sale. Bronto's a separate business unit today and from a -- an operating perspective, and we would intend to continue to hold on to that business unit and continue to grow it. We see it as a profitable growing business.

What would you anticipate a larger term operating margin for that business, if you look out three, maybe five years? What sort of goal do you have for that business?

They should be trending up to something closer to 10%.

Thanks. And on the Chinese joint venture, it continues to lose money, is that part of your strategic look at your businesses and what's your thinking on keeping that business or not?

You know, we have been producing - sorry, our intention is to keep that business. We've been producing refuse trucks which are -- that was kind of our starter product line coming into China, and we are just now doing demos on a - street sweepers that we'll bring in as well, which are going to kind of help boost the top line. In addition to that, on the site of our joint venture, we also are starting up a wholly-owned business, which is going to be producing some basic light bars and some products for the mining industry, which is very, very strong in China. So we're leveraging the investment there to help us bring some 100%-owned business lines into the same production site.

And within the environmental segment, as you look at the orders and the mix of sort of chassis that you had relative to the fourth quarter, obviously that impacted the fourth quarter margins. As you look at the order intake in that business, the mix of chassis, how does that compare with Q4 sales, I guess?

Going-forward?

Yeah, obviously the orders fall away. I'm wondering, what would be more succinct, in Q4 you had some mix issue in that the chassis number was higher and that hurt your margins. I'm wondering as you look at the current order book that's come in and the backlog, I guess, has that -- is that mix about the same as Q4, or does the mix on the lower margin chassis become less in '08?

You know, what has been happening in ESG is the fact that they had pre-bought -- they had bought ahead some of the pre-2007 emissions chassis, so they ended up having some heavier sales of those from customers who might otherwise procure their own chassis. So it's predominantly a 2007 effect. Having said that, as we move into 2008, they have a similar -- they have a similar issue in that the new emission chassis prices are significantly higher than they were a year ago. So again, because we passed those through, you know, it's going to have something like, I think a 30 basis point impact on our reported margins. So they're two quite different chassis-related issues. You know, but in both cases, they're having downward pressure on our reported margin.

What's your expectation for tax rate in '08, and I'll jump back in the queue.

You know, we're probably the mid-20s. Assuming some strong recovery in our U.S. businesses, we won't have such a difference between our foreign income versus our U.S. income; which should, all else being equal, raise our tax rate.

Thanks.

Thank you, sir. Your next question comes to you from the line of Steve Barger of KeyBanc Capital. You may proceed.

Hi, good morning.

Good morning.

I know it's difficult to predict timing for naming a CEO, but is there any additional detail you can give? Are you thinking more 2Q or does that fall into the second half potentially of '08?

It is hard to predict, Steve. We are having regular meetings with our recruiters, and we will get someone in place as soon as we can. But my estimate is it will probably be late Q2, early Q3, just knowing the marketplace.

Okay. Any -- you talked about the $20 millions, I think that's really encouraging in terms of savings and SG&A. Are there any other options for manufacturing cost reductions you've identified that we can think about for '08?

Well, I think there's several things underway. One, we mentioned the plane expansion at Bronto, that's going to certainly be a plus for us on the material cost side. We continue to work on lean initiatives throughout the enterprise. We're seeing some very good fraction at SSG on lean improvement, which is ultimately going to reduce the labor hours for product produced as well as inventory, and we're beginning to see a takeup in improvement in ESG as well. Stephanie mentioned that we've been working hard to get the material costs on the Pelican back down to where it was on the old Pelican model. We're seeing a lot of traction there. So I think you're going to see continued effort to focus energy around improved processes, reduce labor Input into our production, and shorten the cycle times on what we have outsourced to reduce our work-in-process inventories.

That sounds good. Is there any -- can you help us frame up the potential savings from those initiatives as you go through 2008?

I don't think we can right now, but I think as we start to see the quarter unfold and we see the benefits of some of these efforts we've got in place, that we'll be able to talk more about that at our next call, which will probably be around the corner before we know it.

Right. What would consolidated operating margin have been, excluding that Tier 1 parking project? And were there any other timing issues that affected margins in the quarter?

Yeah, the March -- I'm sorry the consolidated margin?

Yeah, do you have that handy?

So I know the SSG margin would have been 15.1.

Right, we can figure it out. Was there anything else in the quarter that affected that? Whether it's in SSG or any other segment?

That affected our consolidated margin? Let's see.

From a timing standpoint maybe.

Yeah. We had severance in FRG of about $900,000. We had -- but the hearing loss went the other way, that was --

Right.

$700,000. We have still the impact from the Pelican, so that's a timing that should go away. And then probably the biggest thing is the under-absorption in E-ONE; as their plant ramps up with the added volume, the depressed margin in that business should reverse.

Okay. Great. Sorry if I missed this, from a revenue and operating income standpoint. Did you say how much KOA Speer and PIPS contributed in the quarter, and can you talk about the pipeline there?

I'll take the first part, I'll let Jim talk about the second part. We don't break out. Because KOA Speer and River Chase are platforms we're kind of taking across our businesses, we have not reported those independently. In the case of PIPS we had, I believe, a little over $5 million in sales, and their margins were about the same as SSG overall. It's a business that's very lumpy and very levered to volume, so any incremental sales start raising that margin pretty dramatically.

Okay. And then the pipeline?

Steve, I think the pipeline is certainly building for PIPS. I think, you know, one of the things that's been exciting to learn about this technology is that Europe is clearly way ahead of our country in deploying this type of technology, and we have a wonderful installed base, and -- in the UK in particular, and as I mentioned on the call at the beginning, we just received another order for in excess of $5 million for additional PIPS cameras for the UK. Here in the U.S., we're seeing the uptake begin on the police and traffic management side, where the technology is helping municipalities recover stolen vehicles to find people that have extensive traffic violations and potential criminal activity.

We have not yet seen but are beginning to hear cities talk about using this technology similar to what's being done in the UK. New York is beginning to look very heavily at tolling systems for people driving in and out of the city, and I suspect if we will begin to hear other cities start looking at that as they start to manage their traffic congestion. We have a lot of active bids out there now, both in the municipal market for police activity as well as parking applications, shopping center applications and cities starting to look at tolling. So I think as this business starts to become more acceptable here in the U.S. from a user perspective, there's good upside for PIPS here in the United States.

Okay. Great. One more and I'll jump back in line. Your steel contracts, are you protected via -- do you have contracts in place for steel, and how long do those run typically?

We do have contracts in place for steel, for the entire year at the moment. I say that at the moment, because I'm sure as you're aware, there's a tremendous amount of volatility right now in the steel marketplace, and prices are up dramatically over where our contract levels are. We're watching the steel market closely, and I think as you'll recall back in the - early 2000, 2003, 2004, we found ourselves in a similar situation with steel, and the suppliers basically said, we know you have contracts, but we don't have steel at that price. We're watching this closely, there's a lot of developments going on, I -- you might have noticed yesterday the article about the beginnings of trading steel futures, which we haven't seen before. We're taking a hard look at that, and we're also taking a lock at our build requirements - near-term build requirements and we'll probably be buying a little more inventory in the short term to protect ourselves.

Thanks.

Your next question comes to you from the line of Ajay Kejriwal of Goldman Sachs. You may proceed.

Thank you. Just wanted to follow up on PIPs, and maybe you gave this number and I missed it. What was the revenue contribution in the quarter and what was the growth rate year on year?

Yeah, the revenue contribution in the quarter was $5.4 million. And I don't actually have the 4th quarter of last year. We didn't own the business at that time. I think the run rate -- their run rate was about $20 million in 2006.

So --

As near as I recall, so it's very similar to where it was in 2006. Again, it's a lumpy business, so that you can get -- Jim talked about a single contract that was $5 million that we'll be shipping. So I want to make sure that you know that particularly in the UK it tends to come in big lumps.

So just thinking '08 is 20%, 25% in growth rate. Is that what you've been thinking about or - I mean, it looks like it was flat as opposed to '07, right?

Yeah, I think that's -- I'm sorry, say that again?

It sounds like it was flattish in '07? On a run rate basis?

Yeah, I think that's right. The business and the markets are growing 15% plus per annum.

Okay. And just coming back to the cost reduction, the $20 million, is that an '08 number or is that an annual run rate number?

It's actually an '08 number. But it's a savings off of our plan. So that's why it's easier to think about it, I think, in terms of reducing your percentage of SEG&A.

Got it. And sounds like 150 positions would drive the bulk of the saving, is there anything else or is it mostly expenses related to manpower?

There were also outside spending on some initiatives that were underway that have been cut. So a lot of -- some amount of discretionary spending.

Okay. And lastly on steel prices, I'm wondering how much flexibility do you have in passing on cost increases? In that scenario, if those contracts that you have, you know, they don't hold and your raw material costs go up, would you be able to pass on those cost increases or --

Having lived through the events of '03-'04, we have changed our contracts with our customers and our dealers to provide us a reasonable amount of protection in the event of an unexpected change in our commodity costs. It's not 100%, but it's -- we're in - just in a much better contractual position than we were going through this the last time. You know, it's with something like -- aluminum, which is not the one we're focused on right now, for example, we buy forward, we make sure our backlog is protected. In the case of steel, which is predominantly our ESG business, they look for protection through a combination of their contracted steel buy, their stock on hand and their contracts with their customers.

So maybe just one more on E-ONE. The 51% increase in orders in January, maybe you could talk a little bit about that, and how sustainable do you see the improvement in fourth quarter performance?

Well, I think the order uptake that we're seeing at E-ONE is a direct reflection of the efforts that Peter Guile and his team and our entire dealer network have put forth. As you know, we went through a long period of time where we had insufficient dealer coverage, and the fact that we've been able, in a very short period of time with the new leadership team, positioned some very strong dealers in some markets that are very important to us, I think is indicative of the value that E-ONE has in the marketplace. So it's hard to predict what's going to happen from a future perspective, given the municipal spin situation right now. But we're encouraged by the performance of the dealer network, and I think they're going to continue to be aggressively pursuing every opportunity in the market.

Great. Thank you.

Your next question comes from the line of Walt Liptak of Barrington Research as a follow-up. Sir?

Walt?

Sorry about that, my phone was on mute. The orders at E-ONE, I want to make sure I understand, 4% during the fourth quarter and then how much were they up in January?

E-ONE orders in January were up 51%.

Okay. Who's buying them? Are these stock trucks that are going to the dealers or are these end customers that are placing orders?

These are end customer orders.

Our dealer is to hold very little stock, Walt, at any point in time. We might have 20 units out there in the dealer stock pipeline.

Okay. And -- I'm sorry, you're attributing this to the fact that your dealers are just getting out there and gaining market share in a tough market?

Well, I think -- we're attributing it to the fact that we have filled some significant gaps in the dealer network which certainly weren't there a year ago, and in some markets that are very important for E-ONE. Texas has clearly been an E-ONE -- an important E-ONE market, and northern Illinois and Indiana as well. So I think it's just -- yeah, the dealers are certainly being aggressive, and that's what we would hope. But I think it's just a reflection of a lot of things coming to place [there].

And I don't think we would suggest that orders are necessarily going to continue up 50%.

Yeah, it was -- and it's very contradictory to what the overall market is doing, too. Yeah, it's probably the worst fire truck market in 10 years, in my opinion. Let me ask you about the CEO search, are you going looking for a strategic guy that is going to continue the work that Bob started or are you looking for someone who's an operational fixer-upper kind of CEO?

Well, we obviously are looking for someone who has a broad set of credentials. People in CEO roles today have, in any company really, have to be able to crossover, but I think we're going to be looking for people that have some financial strength, customer facing strength that can deal in the marketplace, people with some exposure to technology as our business evolves. So I don't know that we would be specifically looking for someone that's just a strategist.

Okay. Thanks.

I think we have time for one more question.

You do. And the last question comes from the line of Charlie Brady from BMO Capital Markets. Sir, you may proceed.

Thanks. Just a follow-up to Walt's question with the fire truck orders in January. What do the orders look like in January of '07?

They were down. So I think we will be up nicely for the first quarter. I don't think we'll be up as much as 50% for the quarter, but remember that in the first two quarters of '07, we were really struggling with our dealer network and there was some confusion about the extent to which we were going to be selling direct versus via the dealer channel. That's -- that is what I would say is maybe kind of an order hole which has had -- which has brought us to the point of having some fairly significant losses later in the year. It's about recovery of our position and our dealers, notwithstanding a weak fire truck market.

And the pricing on the order intake that you're seeing most recently is at levels that you would find acceptable?

Yes, absolutely. We monitor very carefully at multiple levels, the -- our discount level, and that has not changed.

Can you just speak to the cancellability of orders, not just fire, but across the segments. What kind of protections are in place, or historically in an economic downturn, what's been kind of a pattern on orders either being canceled or not across the segments?

Fire truck orders just almost never get canceled. Same thing applies for Bronto. When you get into our environmental businesses, I think the only thing we're watching carefully are contractor orders on sewer cleaners and industrial vacuums, we have a pretty strong backlog there and, you know, I think the cancellability is a little more risk than in the case of a municipal bid, where they have the money appropriated, they do a bid, they open it and award it.

If you get to safety and security, the backlog is a lot shorter. There you only have a six-week backlog or so, unless it's a big project or a big installation. Big installations, again, once they're awarded we have not had any history of cancellation. So as I kind of go through the business, that's a -- the boxed product sales, which are about 70% of SSG, are short lead time and, therefore, unlikely to have a cancellation, but of course because they're short lead time, they're exposed to the market. And then, of course, tooling is a day-in, day-out business. They order them, they want them. But you know, you are subject to economic cycles.

I don't know if you mentioned it or not. Can you give us a CapEx and D&A expectation in '08?

You know, I didn't mention -- our CapEx is up -- should be little over $30 million because we're paying for -- the expansion in Bronto is about a $7 million investment, and we're still doing JD Edwards' implementation. The D&A should be in the low 20s, I think. Yeah. A little over $20 million.

Thanks.

Okay. Thank you.

I'd just like to close by thank you all for joining us today. Hopefully you share some of our excitement on the issues we're trying to address, and the things we're trying to do to improve the shareholder return. I'd just like to say I'm confident that I think these initiatives to all our portfolio businesses, the focus on improving profitability and to prudently allocate our capital will drive shareholder value over the long term. While we are excited about what we're doing, we recognize that we still have a lot of work ahead of us to generate an acceptable improvement in shareholder value this year. I believe the outcome of all this effort is certainly going to be a stronger, more profitable foundation for our future and we're committed to ensuring this success. So again, thanks, we look forward to talking to you one-on-one, and of course at our next quarterly update.

Thank you, sir. Ladies and gentlemen, this concludes your presentation for today. You may now disconnect. Have yourself a great day.