Federal Signal Corp (FSS) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Federal Signal earnings conference call. My name is Ahmad, and I'll be your coordinator for today. (OPERATOR INSTRUCTIONS.) As a reminder, 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. You may proceed.

Thank you, Ahmad.

Good morning, everyone, and welcome to Federal Signal's second quarter 2008 conference call. On the call today you will hear from Jim Goodwin, our Interim President and Chief Executive Officer, and Stephanie Kushner, our Senior Vice President and Chief Financial Officer.

Jim will provide an update on our strategic initiatives and discuss some performance highlights for the quarter. Stephanie will provide details around our financial results for the quarter. 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's filings with the Securities & Exchange Commission. These documents are available on our website, federalsignal.com.

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

Thank you, Dave. And good morning to everyone. I'd like to welcome you to Federal Signal's second quarter 2008 conference call. I'm going to start with some of our strategic initiatives.

With the impending sale of E-ONE, we will have completed the portfolio adjustments necessary to accelerate our strategic transformation. Currently, we stand with a focused portfolio of higher growth businesses that provide us with a strong foundation from which to grow profitably long term. And, importantly, we can now put the full weight of our resources and focus towards seizing the opportunities in front of us.

As you likely saw from our press release last week, we signed a definitive agreement to sell E-ONE to American Industrial Partners, a leading middle market private equity firm. The deal is expected to close by mid August, and Federal Signal will recognize $20 million from the sale. Proceeds from the sale will be used to pay-down debt.

E-ONE has been a part of the Federal Signal family for a number of years. Over the past six months, [Peter Guile] and his team have made significant strides in liquidating excess inventory, restructuring the workforce, and keeping the business cash positive. In addition, business development has picked up, and the backlog continues to strengthen.

I'd like to take this opportunity to thank Peter and his team, as well as E-ONE's hardworking and dedicated employees, for their important contributions and services over the years.

After the sale of E-ONE we will no longer be a competitor to fire truck manufacturers, and this will give us an increased access for our other products that are sold into fire applications.

For example, despite their superior performance, our light bars and sirens have not typically been the preferred product for other U.S. fire truck manufacturers, given the competitive situation with E-ONE.

This presents an opportunity for us, as we expect to retain E-ONE as a customer, and we are already seeing some growth in equipment sales to former E-ONE competitors. This is clearly up side for our business at SSG.

During the past quarter, we also scaled back our financial service activities, highlighted by our recently announced sale of our municipal leasing assets, the [Bank of America Public Capital Corporation]. As many of you know, our leasing activities have strong ties to E-ONE's business, and based on the announced divestiture of E-ONE, many of these services were no longer being core to the Company's long-term strategy. This move simplifies our balance sheet and reduces our dependence on the credit markets at a challenging time.

Now, I'd like to shift gears and discuss our performance highlights for the quarter and the broader market environment. While we are operating under a cloud of uncertainty, driven by challenging economic conditions, our businesses are showing resilience. With the exception of our U.S. industrial businesses, order activity has been solid. During the quarter we booked $261 million of new business, and our book-to-bill ratio was positive in all three business segments.

Why are we seeing this resilience? I believe it's a reflection of some of the core strategies and decisions made over the past several years. First, our end markets are increasingly well diversified. Less than 30% of our business is with U.S. municipalities and U.S. governments, and most products are high priority and, more importantly, our new products are often funded by grants.

For example, in our Public Safety Systems Division, we are seeing a trend where 80% of our bids to have at least partial grant funding. We just announced a PIPS sale to Washington State Ferries to test ALPR, our license plate recognition equipment, on the ferries. Funding for this project has been provided by the Department of Homeland Security.

Another 20% to 25% of our U.S. business goes into industrial and commercial markets, but much of this is linked to energy and commodity businesses. For example, sophisticated communications systems for offshore oil platforms, including a major installation for Shell Oil in the Middle East, and explosion proof lighting for underground coalmines.

Additionally, we've been growing our rental and secondary market business for industrial and commercial customers. Rental demand is strong, with utilization in our new centers approaching 80%. This is a growing business, and new centers are being added to the Gulf Coast region.

And our business outside the U.S. is growing to be half our sales. Our international business is spread across Europe, the Middle East, and increasingly Asia, Africa, and South America. So we are diversified by market, and we are increasingly diversifying by geography.

In China, we are adding multiple new product lines to our plant outside of Shanghai. For example, we just shipped our first made in China explosion proof connectors to a Chinese coalmine. Refuse trucks orders are up, and we are beginning the delivery of locally manufactured street sweepers. Our next opportunities for the China market will be water blasters and vacuum trucks.

Secondly, we've invested in our product portfolio. Several years ago our new product R&D had declined significantly, and our rate of new product introduction had trailed off to where less than 10% of our sales were coming from products introduced in the last three years. We set a goal of increasing that figure to 30%, and in the first half of this year we are averaging 26%.

This reflects the introduction of a new [Pelican] sweeper, the introduction of an entire new generation of Bronto aerial devices, that are stronger and lighter than the competition. The Safety and Security Group has continued its aggressive launch of new products, with over 20 new products launched in the second quarter. In particular, a new horn and amplifier alerting system, which was designed for the Chicago Transit Authority, a new light bar that incorporates our PIPS cameras, versus two separate installations.

In addition, our ROC technology and LED light bars are continuing to take market share in the police, fire, and emergency vehicle markets around the world. So our product leadership is helping us remain resilient. Thirdly, we've made some key acquisitions, with the additions of Codespear, Riverchase, and PIPS during 2007.

Under new leadership, our Public Safety Systems Division booked new orders in the first half at a rate 22% above the pre-acquisition level, and we see the new prospect pipeline growing due to the additions of direct sales personnel. We've actually doubled our feet on the street in the last three months, and our alliances with important resellers, such as AT&T and Siemens, are also adding feet to the street.

As we enter the second half of the year, although encouraged by strong second quarter orders and a healthy backlog, we are mindful of the global economic headwinds that continue to persist. Few economic indicators suggest a near-term recovery, and most suggest broader demand will soften in the second half of the year.

That said, we continue to prudently invest in higher return opportunities, while we optimize our cost structure. We are taking this balanced approach to ensure that we not only weather the current economic environment, but also emerge a stronger Company with a healthy rate of growth.

The investments we are making to our businesses today are primarily focused on capacity expansion at our Bronto and Vactor facilities, as well as the ongoing rollout of an integrated business system.

The Bronto capacity expansion project, which we've discussed in the past, finished ahead of schedule, and we are currently in the process of moving into the new facility. As a reminder, the expansion not only provides us with 40% of additional capacity to meet growing demand, but it will also help us reduce operating costs, increase throughput, and reduce working capital expenditures. We expect Bronto to begin ramping up production late this quarter.

We also continue to make progress on our expansion plans at our Vactor Plant in Streeter, Illinois. We recently received approval from the Board of Directors to invest $7 million, to expand capacity at this facility. This project will take us approximately nine months to complete, and it will also add another 40% of capacity to help boost our output, lower our backlog, and improve our overall operating efficiencies.

On the cost containment front, we continue to execute our plan to rationalize our expense structure, with a goal of reducing budgeted SEG&A and fixed overhead costs by $20 million, and ultimately reducing our SEG&A and expenses as a percentage of revenue to 15% to 16%. With the heavy legal spending and a flattish top line, our progress may be limited this year, but it will be an area for continued focus.

In addition, we are addressing the unprecedented rise in raw material costs, which has had an adverse impact on the broader market and Federal Signal. Since the beginning of the second quarter we've instituted a comprehensive price increase across all of our businesses in the range of 2% to 6%.

While it's still early, I'm pleased to report that these price increases appear to be taking effect. And assuming raw material costs level off during the remainder of the year, we expect our existing prices to fully neutralize the cost of raw materials. If raw material prices continue to increase, we will take the necessary steps to manage our profitability.

I'm also very pleased to report that the plaintiff's counsel in the hearing loss litigation has voluntarily dismissed the 39 plaintiffs that were set to go to trial in Chicago in September of this year. This supports the Company's position that the cases are without merit and validates the Company's decision to vigorously defend the cases at trial.

The dismissals follow a string of successes in the defense of this litigation during 2008, including a trial win against 27 plaintiffs in Chicago in April, the voluntary non-suit of all pending claims in Missouri in May, and the dismissal of the New York firefighters' complaint in January.

Now, before I turn the call over to Stephanie, I'd like to provide an update on our CEO search. I am pleased to say that we are in the final stages of the search process. It would be inappropriate for us to discuss the specifics of this search process on today's call, but let me assure you that this process has been robust and comprehensive, and the Search Committee of our Board of Directors has overseen this process in a very thoughtful and deliberate manner. We are very excited about the highly qualified and seasoned candidates we are considering, and we expect to make an announcement in the near future.

That concludes my prepared remarks, and now I'd like to turn over the conference call to Stephanie, who will comment further on our second quarter results.

Good morning. As Jim mentioned, orders exceeded shipments this quarter in all segments. At the end of the quarter our backlog had risen to $375 million, up from $368 million last quarter, and $307 million a year ago.

Our U.S. municipal and governmental orders totaled $79 million, up from $66 million in the first quarter, and $74 million last year. Importantly, our domestic sweeper orders rebounded somewhat in the quarter, which will help with the plant loading at our Elgin, Illinois Facility.

Sales of light bars and sirens for police departments improved a little sequentially but were still down about 15% from a year ago. This was not all demand driven, in fact, we believe that some of the weakness was due to GM's curtailment of Impala vehicle production during the quarter, which was linked to a component supplier strike.

For the first five months of the year the last industry data we have available, overall registrations of police vehicles were down 20%, with Impala down about 50%. Therefore, Q2, which is normally our strongest quarter for these sales was relatively weak.

Conversely, with that strike now settled, Q3 shipments will be a little stronger. And, as Jim mentioned, we're expecting some new sales opportunities as a result of the E-ONE divestiture. Nonetheless, it is clear that our full year 2008 sales of these products will be down and the weakness could well extend into next year.

Warning siren demand remained strong and is well up from a year ago. We're making some good inroads with our campus security solutions, including the successes with Duke University and Northern Kentucky University, which were announced during the quarter.

We are building momentum on sales of our public safety system's products, which encompass our warning sirens plus license plate recognition and interoperable communications systems.

Regarding industrial and commercial orders, we booked $54 million of new business, down about 6% from a year ago. Many of our product lines are holding up well, but we are seeing more orders of our marine, lower orders of our marine lighting for offshore oil platforms, as oil exploration and production companies are increasingly shifting their investment focus outside of the U.S., where our current marine lighting products do not meet regulatory standards. Sales of sweepers to commercial contractors were also very low, linked to the sluggish housing starts.

Internationally, we remained strong in the quarter, up 20% to $127 million, about $15 million of the increase was due to currency translation, but the balance is encouraging, given the growing weakness in the European economies, which generally account for about half of our sales outside of the U.S.

Sales outside of the U.S., again, represented about half of our total orders. Export orders jumped, with some significant fleet orders from Mexico, South America, and the Middle East.

Bronto's intake remains strong. Their orders in Europe, particularly for industrial and rental customers, which comprise between a quarter and a third of their typical volume, are down significantly from last year, but this is being offset by brisk demand for fire service units in the rest of the world.

The only real area of strength in Europe right now is in Spain, where there's heavy investment in wind farms, and where Bronto aerials are used for turbine blade de-scaling. With the growing interest in alternative energy, we're evaluating alternatives for boosting our Bronto industrial presence in the U.S., perhaps by leveraging our rental centers.

Turning now to the income statement, consolidated revenue totaled $254 million, up 5% from a year ago. The increase was mainly all due to translation affects of the strong Euro. We reported a consolidated gross margin of 26.7%, down 80 basis points from the year ago quarter, but up slightly from 26.3% in the first quarter.

The reduction from last year was mainly in our Environmental Solutions Group, where sweeper margins are down due to lower volumes in both the U.S. and Europe. At our Elgin, Illinois Plant, we went live with a new integrated business system during the quarter. As with most new system introductions we encountered some production delays which we expect to make-up early in Q3. Also, at Bronto margins declined because of the extensive outsourcing that is going on in the midst of the expansion. Partly offsetting these factors were higher margins in SSG due to increased sales of higher margin systems products.

Our operating expenses averaged 19.3%, up from 18.2% a year ago, but down from the first quarter. However, the $3.7 million increase in litigation expenses alone accounted for almost 150 basis points or more than all of the increase. So if you were to exclude this we would be showing favorable year-to-year comparison, consistent with our cost reduction objective.

As I said last quarter, this ratio will continue to trend down as the year progresses in response to some of the cost savings initiatives implemented in Q1. Also, as Jim mentioned, we no longer expect any additional hearing loss trials before 2009.

Our consolidated operating margin averaged 7.4%, up from Q1 but down from 9.3% last year. Again, most of that difference was directly attributable to the increased legal fees.

Our effective tax rate rose to 32.3% in the quarter, up from 26% a year ago, that reflects the mix of earnings, specifically lower profits in low tax jurisdiction, foreign locations.

Turning to the segments, our SSG net sales of $94.8 million were very close to last year. Sales of light bars and sirens were down about $10 million, which was offset by the addition of $8 million of PIPS revenue and favorable currency affects.

At PIPS UK during the quarter we began the implementation of a new phase of the London system, which is allowing the authorities to limit the inner-city emissions by controlling the access of commercial trucks within London. We expect to complete installation of this multimillion dollar contract in the third quarter.

Operating income totaled $10.9 million for SSG, down from $14.3 million a year ago, but up sequentially from the first quarter. The year-to-year reduction was mainly due to reduced volumes in the light bar and siren business. The business was also impacted, the segment was also impacted by a $700,000 inventory write-off, following an audit at a satellite location.

The improvement from the first quarter, although less than we'd like, came despite continued heavy SG&A investment to ramp-up our public safety systems business. We expect margins in this segment to continue to improve in the second half.

Results for ESG were very consistent with last year. Lower sweeper revenues and profits were essentially offset by increased earnings from the vacuum and water blaster businesses.

Sales for fire rescue, which is now mainly Bronto, rose from $31 million a year ago to $43 million this year, half of the increase was due to currency translation. The operating margin declined from 11.7% to 10.1%, due principally to higher outsourcing expenses and additional costs associated with the plant expansion, and also for expediting an order for the Beijing Olympics.

Bronto has been fighting a tight European chassis market all year, which is only recently starting to come back into balance. For the Beijing order, for example, we incurred additional expediting charges once the late chassis were received, which adversely impacted our margins. Also higher were R&D expenses which are linked to the rollout of the next generation of products.

The impact of outsourcing this business has been significant because more than 70% of the value added labor is currently outsourced to local fabricators, mainly in Finland. When the new capacity is in place shipments will rise and some of that outsourcing will be moved back inside.

Corporate expenses at $7.7 million remained high in the quarter due to the impact of the Chicago hearing loss trial, which substantially occurred in April. Total hearing loss defense expenses net of insurance collections were $4.6 million in the quarter and will be close to double that for the year. We expect another trial after the first, not until after the first of 2009.

Also impacting corporate expenses favorably was a $1 million reduction in our products liability reserve, arising from our midyear actuarial study, and the impact of reduced staffing expenses, triggered by our cost reduction initiatives at the beginning of the year.

A few comments on cash flow and liquidity, our operating cash flow this quarter was $75 million versus $27 million last year. The improvement resulted from steps taken to exit our financial service activities, principally municipal leasing and dealer floor plan financing.

As Jim noted, we sold the first $53 million of municipal leases to Bank of America in Q2, and will likely sell the balance before the end of the year. The floor plan receivables with E-ONE's dealers will be sold with the business and the remaining floor planning that we manage for ESG will be transferred to a third party later this quarter.

We also completed the divestiture of our Tool Group in April, generating about $60 million in cash. The proceeds from this transaction and our operating cash flow have been used to pay down debt, and importantly we have reduced our debt by $108 million since the beginning of the year.

With strong operating cash flow and asset sales we expect to reduce our debt by more than $220 million this year, to a net debt balance below $200 million by yearend.

Our manufacturing net debt to cap ratio stood at 41.4% on June 30th, down from the first quarter of 45.2%, but up from the yearend position of 39%. The increase from prior yearend is partially the result of the noncash charges booked this year from our divestitures.

Availability on our revolving credit facility stood at $140 million at the end of the quarter, and we were in compliance with all debt covenants.

Looking forward, with our total debt at or below $200 million, and with an average interest rate currently of 5.35%, we expect to exit the year with a quarterly interest expense run rate of between $2 million and $3 million.

So, in summary, we've made progress this quarter, despite the heavy legal expenses. We've streamlined our balance sheet, and expect it will be even stronger by yearend. We are positioning ourselves conservatively, given the banking and economic environment.

We expect the second half to compare favorably to the prior year, due to our growing PSS pipeline, increased production from Bronto, the impact of price increases, and as the full impact of expense reductions take effect.

Although we're still watching the economy closely, our full year outlook is unchanged from last quarter. We are focused on achieving full year operating earnings of $0.82 per share.

This completes my prepared remarks. I'll turn it back to Jim to moderate questions.

Thank you, Stephanie. We'll now open up the call for questions.

(OPERATOR INSTRUCTIONS.)

And your first question comes from the line of Ned Borland from Next Generation Equity Research. You may proceed.

Good morning. A couple of questions on the interest expense line, I mean getting to a $2.3 million run rate, is that reflective somewhat of the getting rid of the leasing assets, or is that more a function of the debt pay down?

Ned, I said that $2 million to $3 million a quarter run rate.

Right.

So it'd be between $2 million and $3 million, and it's a combination of the asset sales and the leasing, so we're going to end up with $200 million of debt, there or thereabouts. If you can imagine, at a little over 5%, of course, depending on what the Fed does, we're going to have an interest in the $10 million to $12 million annual run rate.

Okay. And then on the raw material impact, you said the pricing, Jim, was taking hold. What are the raw materials we're talking about here? I mean are we talking about plate steel, or where are you exposed?

Well, Ned, good morning.

Good morning.

Principally, our concern has been around steel prices. We had a fixed contract in place for our steel since the beginning of the year, and during the quarter we were able to continue to take delivery of our steel at that contract price.

Since the end of the quarter we've been advised that we will be receiving a surcharge on future steel orders, and that clearly has been baked into our price increases of 2% to 6% going forward.

We also are seeing some exposure in componentry that has steel in it, hydraulic cylinders, et cetera, that we've also addressed as part of the pricing increase. And we're watching our plastics and resin product lines very closely. Obviously, with crude prices at where they continue to stay, we are going to see increases in our resins, as well.

Okay. I mean on the backlog, how much of your backlog is going to have this steel impact embedded into it?

Well, the largest steel consumers, of course, are Vactor, Bronto, and Elgin, all of which have instituted price increases. The backlog is clearly something we are watching. Probably the most critical backlog in that area is Bronto. We believe we've sufficiently priced the steel implications for Bronto into the backlog at the time the orders were booked, but we're going to clearly have to watch it very closely.

Okay. And then switching over to Bronto, with E-ONE now out of the portfolio, does the North American market open up a little bit for Bronto?

Well, Bronto has two, of course, two product lines, the industrial product line and the fire product line. The industrial product line is sold direct by Bronto's salespeople here in the country and, as you know, the fire product line has been sold through the E-ONE distribution channel.

As part of our agreement to sell the E-ONE business to AIP, we have given them an initial exclusivity agreement which will expire and that will then give us the ability to distribute our Bronto product across all the manufacturers.

And how long does this exclusivity agreement last?

24 months.

Okay. Okay. Thanks. That's all I hd.

Your next question comes from the line of Walt Liptak from Barrington. You may proceed.

Hi, thanks. Good morning, Jim and Stephanie.

Good morning, Walt.

Good morning.

I wonder if, and maybe I missed it, but I wonder if you can give me the Bronto backlog and orders? And what I'm trying to do is get some more color about how that industrial part of the market has trended in terms of orders, both the income and orders this quarter for the fire service?

The orders are actually in the press release, so $44.8 million in the quarter.

Okay.

And then their backlog is still, it's about $175 million, so they've got a year plus in backlog.

Basically, Walt, Bronto has clearly sold out for the balance of this year and well into next year, and we continue to see strong buying activity for Bronto. As Stephanie mentioned the fire service applications in Europe continue to be healthy, and we continue to see strength in some European countries, but the real growth that we've been seeing recently has tended to be in the Asian countries, China, India, Africa, and that bodes well, we think, because those are all clearly emerging economies.

Okay, the -- okay, that's great. Can you just talk about what the order entry looked like during the quarter for the industrial business, the Bronto industrial?

The industrials are -- I think they're about two-thirds the level of last year, so they were down about a third.

Okay. All right. Great. And with the changes you're making in capacity, it sounds like next quarter the margin will improve in the Bronto business?

I think we'll see some in Q3, but the real impact of the new facility and being able to in-source and get our working capital levels down probably won't hit us hard until we get into Q4.

Yes, I would say Bronto, their deliveries tends to be lumped in the second and the fourth quarter, so, in fact, it's really going to be the fourth quarter, Walter, when we're going to see the improvement.

Okay. Last year that business operated at 11%. Can you get above that? I mean or how far above that can you get for the full year?

Actually, Bronto was about, I think, 6.7%, I think I commented on that last quarter. What we also have running through that line is interest income on the municipal, on the leasing portfolio, so that distorts the total. And, of course, as we're exiting that, that's running off during the course of that year, so I've been trying to give some flavor on Bronto on a standalone basis. As I said, last year I think 6.7% and this year they should be in the 8%, north of 8%. I think our objective is to get them over 10% in the relatively -- and their objective, as well, in the relatively short time horizon.

Okay. Great. Yes, that helps a lot. And then the legal spending, you know, I don't know how you want to comment about this, but I wonder if you could talk about maybe what the corporate expense line might look like in the back half of the year?

I think we're still expecting the full year spend for the hearing loss to be in the $9 million to $10 million range, but we've spent $7 million of it already, so I think first half to second half there'll be about a $3 million improvement.

We were clearly delighted that the September trial was vacated, and the next trial will not occur until January, at the earliest. Anticipating a January trial, we will, however, have to anticipate some expenditures as we ramp-up to prep for that trial late in Q4.

Okay. Okay. Thanks very much.

Your next question comes from the line of Terry Darling of Goldman Sachs. Please proceed.

Thanks. A couple of clarifications. Stephanie, I'm not sure I understood the answer to the last question on Bronto margins, and so I'll just ask it straight up. Where do you expect the margins in the fourth quarter for Bronto? I mean I thought sort of at 10% this quarter, and maybe I missed something on the adjustment for the interest expense, but aren't we already at 10% for Bronto?

No, we're not, because included in the operating income line for that segment is some interest income on the portfolio, so you have to ...

So that goes away, and then we ...

That goes away, so.

... operational improvement?

Yes, so ...

And, hopefully, we get back to 10%?

... we'll probably still -- it depends on what happens with that leasing, but we'll probably still be reporting segment numbers in the fourth quarter that are 10% or more, but the underling Bronto number will be a couple percentage points lower than that.

Okay.

And by 2009 you ought to see a clean Bronto figure and at that point we would be disappointed if the numbers were not in double digits.

Okay. And then in terms of the guidance, just the $0.82 compares to a first half of $0.26? Is that apples to apples?

That's right.

Okay. So 56 ish, $0.28 a quarter, heavier loaded to the fourth quarter is the right way to translate?

Yes, yes, and if you just look half to half we've got some improvements, just the legal spending and the impact of the cost reductions we had. We've got Bronto production in the second half up -- it's actually going to be up about 30% from the first half. We've got lower interest expense. We have -- we're seeing good positive momentum in our PSS Division, so all those things together is what we're expecting to get us over that $0.80 number.

Okay. And wondering if you can talk about expectations for the second half margins in the Safety and Security Group, which are down a lot year-over-year, and do you see an uptick in the second half or what do you see? Sort of the same year-over-year degradation there?

No, well, they'll certainly be up sequentially in the second half. And here's, for us, is the wildcard. Our margins on our new systems businesses, our gross margins are among our highest. They're good numbers.

We're spending a lot to develop that business right now, and we don't want to shortchange the business on that investment, so whether we are better than last year in the last half is going to depend on the success we get on booking and shipping those orders relative to the SG&A spending we're making to support it. At the same time, we've got a little bit of a drag because of the weakness on the light bars, so it's sort of a fuzzy answer, but.

Okay. No, no, that's helpful. That's good color. Appreciate that.

And then I guess Jim or Stephanie, I wonder if you could talk about sort of what you're seeing in the municipal markets, kind of a little bit of a breakdown. You know, the results this quarter would suggest maybe the police channel is cutting back, while the sanitation channel is holding up. But maybe you can get a little more granular there for us, in terms of what you're expecting going forward?

I think your view is pretty good on what we're seeing. I think the encouraging thing is that we continue to see strong grant activity coming out of the federal government, that is clearly playing more into our Public Safety Group. A lot of those dollars are being targeted at transportation, notification systems, which we're seeing strong growth in outdoor warning sirens on campuses and in municipalities.

So I think that the grant funding is clearly shoring up a lot of the marketplace out there that's important to us. Obviously, we've seen a downturn in the police marketplace. Some of that is obviously municipal spend, some of it is driven by the automotive manufacturing issues, that Stephanie mentioned in her comments.

I believe municipalities are going to probably continue to spend at a slower rate until they get a better sense of where tax revenues are going. But we're seeing strength in many sectors, and we're seeing the obvious weakness in the police side.

Okay. And, lastly, actually one more here, if I can? Have you or can you try to put a ballpark on what the selling opportunity into the fire truck OEMs might be now that you're not competing there?

Put a dollar number on it? I'd certainly be hesitant to do that. We've clearly made estimates. I think we believe that there's significant up side with the ability now to penetrate the [Pierce] product line and the [Rosenbauer] product line.

And, as I indicated in my remarks, we are already beginning to see that happen, and hopefully as we get a little better visibility we'll be able to give you a little better estimate of where that may take us. But I think it's juts a little too early right now for me to try to size it for you.

Yes, but we ought to think of it in a modest positive versus very large incremental type of opportunity?

Yes.

Got it. Thank you.

Okay. Your next question comes from the line of Steve Barger. You may proceed.

Hi, good morning. This is actually [Joe Bachs] filling in for Steve.

Good morning, Joe.

Good morning, Joe.

Just wondering if you could maybe provide a little bit of granularity with respect to growth rates within your Public Safety Division? And maybe if you could just comment on where you think they might be in the near term and then potentially somewhere in FY '09?

You know, the overall security market we think has kind of a long-term growth rate, or at least a medium-term growth rate in the 8% to 10% level. So I think you would start there, but then this public safety and security because it's an emerging market, the demand for these systems is occurring sort of as we speak. We think that the growth rates there are likely to be considerably higher.

And I don't know whether that's 20%, 30%. We're getting, we've been working with the Gartner Group to try and get a better understanding of the size of these markets, and the amounts of dollars that are being spent by border security and municipalities and so on for products like ours, and it's a big number, you know, $5 billion plus across a series of markets. So early to say, but what we would think that the growth rate on these businesses is going to be well north of that average rate of 9% or so.

And do you think that that growth rate actually could, or your internal growth rate could exceed the industry growth rate, given you're coming off a much smaller base?

Yes, I certainly do. The business is looking or wants to double their sales rate relatively quickly. Now, I don't want to count on that particularly in this economy, but I think there is some huge up side there.

Okay. That's a good call. Also, can you maybe quantify how much your investment in sales personnel was during the quarter, and maybe how long you think it'll take to get to that critical mass point, where you might start to actually get some leverage on the business or margin expansion?

You know, I don't think it's going to be like a light switch flipping on. I mean our -- I'm not going to tell you exactly how much we're spending. I will just tell you our SG&A in this business area is at least 10 percentage points above where it is elsewhere in the Corporation. And that will all be worth all of that investment as these orders and deliveries start to get pulled through.

Okay.

So I think the third quarter will be better -- certainly, the second quarter was better than the first, our pipeline is growing very, very nicely -- our third quarter I'm sure will be better than our second, and so on. Hopefully, next year we won't even be talking about it because it will be making a nice contribution to the bottom line.

Great. And I have one final question for you. Wondering if you could maybe just talk a little bit more extensively about your opportunities for Bronto in the wind power space? And potentially the opportunity that you might see here domestically? Thank you.

Joe, I think that's a very good question. Obviously, with the attention being put on alternative energy sources around the globe, but particularly here in the U.S., you're beginning to hear a lot more talk about additional wind farm activity here.

We are already seeing extensive wind farm development here in the State of Illinois, and in fact in a meeting I had two weeks ago with people from the Underwriters Labs, they have estimated that given the wind patterns in the U.S., with strategically placed wind farms it would be possible to replace the entire electrical generation power that's currently being produced by fossil fuel.

So, obviously, this focus on wind generation in the U.S. is real, and we believe as we have seen in Europe that the products that Bronto manufactures are ideally suited to service the air foils on these windmills.

So consequently we are actively looking at what that opportunity might mean for Bronto here in the U.S., and, as Stephanie mentioned, we are looking hard at the ability to place those units through our existing rental centers to potentially service that marketplace.

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

Yes, good morning. This is actually [Tom Brinkman] filling in for Charlie Brady. Just wondering about some of the segment margin targets, if you want to give us an update, and when they should be reached? I know you've talked in detail already about the Bronto margins, but what about some things from the other segments?

I think, SSG, our target margins are still in the 14% to 16% range, and I expect we will be exiting the year at that level.

With respect to ESG, they've been pretty consistent in the 9% to 10% margin range, and I think that's probably a good number. With ESG you have to remember one of the things that happens is that they're buying chassis, particularly for those Vactor units, and that goes into the gross sales number, but we don't get much margin on that. It's pretty much a pass-through with the customer. That's why that business, even though they've got strong market positions getting above a 9% or 10% margin is tough.

Okay. And can you give us a feel now for, I mean it's just a little bit tough to keep up with some of the changes, wondering about how much of your revenue is now from the PIPS platform, in particular?

When we bought PIPS, itself, it was about a $30 million business. And what we're trying to do is grow that, and we don't actually disclose individual product lines.

Okay. Well, I guess I'm not looking for a particular dollar amount, but a percentage of your sales, I guess overall, what it's trending towards, as all these moving parts go around in the Company?

Well, we are emerging, we're looking, we're about a billion dollar business now, so I guess I'll let you do the math.

Okay. And can you give us a little bit more information about the outlook for the light bar business? I mean there's obviously some puts and takes with different end markets. You're talking about how you can maybe grow it with now opening up the markets to former competitors of E-ONE, but maybe give us a sense for the growth rate, if it's possible, there I guess?

The one thing I would say is that we know the registrations this year are down about 20%, and yet our police business is only down 15%. So we think we're still gaining share in the police market. I think that's important. We've done -- we've made a lot of investments in new products, and we think we're getting some real success, real traction in the marketplace.

I think we're concerned that that municipal weakness will stay there, perhaps until the next -- till the end of the next budget year, which would be June of next year. So we're pretty cautious on that basis.

I don't know if you can add to that?

But I think your observation is right. The exposure to the other fire truck manufacturers is clearly going to be a plus. The down side is what's happening with vehicle registrations for police use, which are down 20% so far this year.

I think the other thing, though, that's working to our advantage is the amount of R&D work that SS&G has been putting into the light bar product line, and we're really excited about this new integrated PIPS light bar capability, which is going to provide a much more simplified installation for mobile mounted PIPS camera systems. So that's an emerging new market opportunity there that we will be watching closely, but clearly is a product line that will be rolling out later this year.

Okay. And you talked about some of the international sales growth opportunities you're seeing, and, in particular, one of the barriers you mentioned was the marine lighting and how it doesn't meet some codes in other countries. Are there any similar I guess barriers that other product lines are running into, that might limit international growth? How can we think about that?

Well, I guess, let's talk about sweepers, for example. Our U.S. sweepers are very, very strong in the U.S. market, and they can typically be exported to Saudi Arabia, to the Middle East, for example, but they aren't the right -- sorry, Mexico, Latin America, but they are not the right design for Europe. So we have a lot of kind of product specific either style or regulatory limitations. We are always working to make improvements to expand, to find opportunities, to be more global, but definitely growing off of a domestic U.S. base, this has been a challenge for us, and that's been part of the reason we've had this focus on increasing our international position.

So go to the marine lighting, I mean we are working on design and regulatory, and products that will meet the non-U.S. regulatory standards, but we don't have those today.

No, and in the emergency lighting field, the police and light bar field, we have strong presence in that marketplace in Europe because we're manufacturing those products at [Vama], which is in Barcelona. But the offshore marine lighting side is an area that we are rapidly working on all the approvals necessary to be able to market those products in the European market against European electrical codes.

Over time we will have regional centers of excellence. We will have, you know, we're building out the product lines in China. We will do -- we will be expanding more into Europe, and we will continue with significant U.S. production facilities.

Okay. Thank you very much.

Do we have one more?

Your next question comes from the line of Terry Darling of Goldman Sachs. Please proceed.

Stephanie, just wondering if you could give us the foreign currency impact on revenues by Division, as well as what the EPS impact was for the whole Company?

I have that. Hang on. Do you have anything else you want to ask?

I want to just ask about the acquisition, contribution to revenue, overall, as well? I think there's only one Division where that has an impact?

So the EPS, we typically only talk about this across the Corporation in total, so the EPS impact was about a penny-and-a-half on currency. The impact on orders was about $15 million, to sales about $9 million.

Okay. And ...

That's in from about a million dollars.

Okay. So and then, I'm sorry, acquisitions you said was what?

Sorry. The impact of the acquisitions, I think I said PIPS was about $8 million.

Okay. The organic in Safety and Security Group minus 15%, is that about right?

You mean without currency?

Yes.

That sounds too low, there's not that much currency in SSG. I'd have to -- let me talk to you later. I'm not sure I know that number off the top of my head.

All right. Thank you very much.

That concludes the question and answer session. I would now like to turn it over to Jim Goodwin for closing remarks.

First of all, I'd like to thank everyone for joining us this morning. We're excited about where we are now with, clearly with the E-ONE divestiture almost behind us, and we think that, as I said earlier, that's going to position us for a stronger more focused business as we go forward.

I also am excited about the fact that we're getting close to getting a CEO named, and I'm very hopeful that we'll have that done in the very near future. And this Company can continue to move forward and produce the kind of earnings that all of us want to see this business produce.

So, again, thanks, again. And we look forward to talking to all of you soon.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.