Federal Signal Corp (FSS) 2008 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Federal Signal fourth quarter 2008 earnings conference call. My name is Alika and I will be your Operator for today. At this time all participants are in listen only mode. We will have a question and answer session towards the end of this conference. (Operator Instructions). As a reminder this conference call is being recorded for replay purposes.

At this time I would now like to turn the call over to Mr. Bill Barker, Senior Vice President and Chief Financial Officer. Please proceed.

Thank you. Good morning and welcome to Federal Signal's fourth quarter 2008 conference call. Joining me on the call today is Bill Osborne, our President and Chief Executive Officer. Before we get to the business review I will 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 releases and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website www.FederalSignal.com. We will file our Form 10K shortly. We will be using some slides in the presentation a little later in the call. The slides can be found on our website. Now, I will turn the call over to Bill Osborne.

Thank you, Bill. As we discussed in our press release we reported earnings per share from continuing operations of $0.10 for the quarter compared to $0.23 per share last year. This year's figure includes an $0.08 per share related to one time costs related to obligations associated with our China joint venture and $0.04 per share primarily for severance for costs related to restructuring actions. I'll discuss both of these charges in a moment.

I feel the Company performed well in the fourth quarter considering the economic environment we find ourselves in. Our revenues for the quarter were virtually flat to last year, down less than 1% despite a negative 2% net currency impact and we continue to see good growth in some of our key public safety businesses. Although our orders were weak, down 20% versus last year due to the global economic challenges, we entered 2009 with an order backlog of over $300 million. Bill Barker will review the sales and income results by business unit in a few minutes, but I'd like to address a few overall points first the actions that resulted in our Q4 charges, an update on our hearing loss expenses, the current marketplace, and our expectations for the first half of the year.

First, the Q4 charges. There was a $10.4 million pre tax charge related to our China joint venture primarily due to our obligation to guarantee the joint venture's debt. The JV was established to produce and sell refuge vehicles and sweepers in the Chinese market; however, the joint venture has not generated the expected profitability since its inception a few years ago and the current economic challenges make it unlikely that the joint venture will be profitable at any time in the near future. We're currently working with our local partners to take the appropriate steps to curtail future losses from the JV so we can redirect funds and management focus towards some of our more compelling growth opportunities over the next few years. We will continue to expand our efforts to sell other products into the Chinese market as we go forward.

We also incurred a $2.7 million pre tax charge for restructuring costs in the quarter, primarily related to severance expenses. As I have discussed previously, we have targeted over $20 million of savings in annual spending and we have taken the necessary steps to achieve this goal, including combined some of our related business units within our SSG division, reducing headcount in some of our corporate and shared services areas, and reducing the use of outside contractors. In addition, we have instituted a salary freeze for 2009 and have suspended matching contributions to the Company's 401(k) plan. Finally, both the Board and I have agreed to reduce our compensation for 2009. I'll discuss additional steps we're taking to improve our profitability in the strategy discussion a little bit later.

Turning to our hearing loss expenses, we had a $10.5 million of net expenses related to hearing loss in 2008 and expect a similar level of expense in 2009. The Company has had a string of successes in defense of hearing loss claims. Since the year 2000 the Company has either won verdicts or obtained dismissals of 74 plaintiff's cases in Cook County. Last week, we received an unfavorable ruling in connection with a hearing loss claim filed by nine fire fighters in Illinois. However, we believe the Company has strong appeal arguments in these cases and we'll fight aggressively to overturn the initial verdict. We continue to believe strongly in the merits of our case based on the numerous successes that we've experienced and we'll continue to defend the Company's life saving products.

As everyone is keenly aware the marketplace is extremely challenging right now and it is likely to remain challenging throughout 2009. Our total orders were down 20% for the quarter compared to last year and that was with our SSG division posting a modest 2% decline for the quarter. US municipal budgets are under considerable strain and our orders are reflecting that. Total fourth quarter orders from the US municipal market fell by 27% versus last year. Municipal orders remained weak in January. The US industrial market was similarly challenged in the fourth quarter with our orders down 18% versus last year. However, despite these significant order declines we head into 2009 with an order backlog of just over $300 million and we continue to have strong brands and leading market share.

In terms of guidance, as we look forward into 2009 we're in the most difficult forecasting environment that I can remember. Current marketplace dynamics, particularly in the municipal markets, are very difficult and have not yet shown any signs of improvement. The timing and magnitude of the stimulus bill impact is not yet fully known or visible, although we are aggressively targeting opportunities from the stimulus across all of our businesses.

Given the current economic uncertainty I don't feel comfortable giving any financial targets beyond the first half of 2009. For the first half of the year we expect revenues to be down approximately 15% with a slight loss at the pre tax income level. We expect the second quarter to be modestly improved versus the first quarter and we are driving for improved results in the second half of the year, but don't feel that we can discuss any expectations beyond the first half at this time.

I will now turn the call back over to Bill Barker for a more detailed financial review after which I will discuss my vision and strategy for Federal Signal's future.

Thanks, Bill. I will give a fairly brief review of the numbers, most of which are included in today's press release and some of which are on the slides that we'll be using. The slides can be found at www.FederalSignal.com. I would be happy to answer any questions at the end of the call or later today.

Looking at our P&L for the quarter revenue was $254 million, which was down less than 1% as Bill mentioned. The net currency impact on revenue for the quarter was a little more than negative 2%. Strong revenue growth at Bronto offset modest declines at ESG and SSG. Gross margin for the quarter improved from 26.3% last year to 27.3% this year, driven by improved throughput and cost efficiencies at Bronto following the completion of the capacity expansion and by growth in some of our high margin SSG businesses including our PIPS Automated License Plate Recognition camera business and international warning systems business.

Operating expenses increased $6.3 million. The key drivers of the increase were higher net costs for the hearing loss trial, costs associated with executive changes and higher selling expenses related to the Bronto sales increase. As Bill discussed, restructuring costs for the quarter were $2.7 million primarily related to severance expenses. Operating income for the quarter was $14.3 million or 5.6% of sales compared to $21.3 million or 8.3% of sales last year.

Interest expense of $2.6 million was below last year's $6.1 million due to lower borrowings in the quarter. We had a total of $11.1 million related to our loss in the China joint venture in the quarter which includes the $10.4 million pre tax charge Bill mentioned. Our reported EPS from continuing operations for the quarter was $0.10 per share, which included $0.08 for the cost associated with the China joint venture and $0.04 for the restructuring costs. We also recognized a $16.4 million loss from discontinued operations in the quarter related to final adjustments from the E ONE sale and costs to close the tools business in China.

Turning to the segments, SSG net sales declined 2% versus last year for the quarter from $98 million to $96 million due to a negative net 3% net currency impact for the quarter. Our PIPS business, warning system business and industrial business all had sales increases in excess of 20% for the quarter. These gains were offset by double digit declines in our parking business and our mobile emergency products businesses, our light bars and sirens, in both the US and Europe. SSG entered 2009 with an order backlog of $51 million.

Q4 operating income for SSG was $12.8 million for a 13.3% margin, roughly flat to last year's $13.1 million of operating income at the same 13.3% margin. The 2008 numbers include $1.8 million of restructuring expenses. For the full year, SSG generated revenues of $372 million and operating million of $40.3 million for a 10.8% margin. SSG's full year income was impacted by the $1.8 million restructuring charge and the $6.9 million charge in the year to settle issues related to a parking contract at the Dallas Fort Worth airport.

Bronto, which is shown FRG on the chart, had a very strong quarter with sales up 16% to $53 million and operating income up from $4 million last year to $5.8 million this year generating a Q4 operating income margin of 10.9%. As has been mentioned previously, the recently completed capacity expansion enabled higher volume throughput and reduced costs related to production outsourcing. Bronto's full year results were revenues of $146 million and operating income of $10.4 million for a full year margin of 7.1%. Bronto's backlog remains robust at $144 million.

ESG sales for Q4 were down 6% to $105 million. Vactor, Jetstream and Ravo, our European sweeper business, generated sales increases ranging from 4% to 13%, but Elgin had a sales decline in excess of 20% for the quarter. ESG entered 2009 with an order backlog of $106 million. The $6 million sales decline in the quarter resulted in a $3 million profit decline. ESG operating income was $6.2 million for a 5.9% margin, compared to $9.1 million last year, which yielded an 8.2% margin. This year's results include $300,000 of restructuring costs. For the full year, ESG's revenues were $442 million and operating income was $35.5 million for an operating margin of 8.0%.

Corporate expenses in the fourth quarter increased by $5.6 million. The key drivers of this increase were a $2.7 million increase in net costs related to the hearing loss trial, $600,000 of restructuring costs and $1.7 million related to severance and executive changes. Full year corporate expenses increase from $21.1 million to $30.7 million into a $9.9 million increase in legal costs associated with the hearing loss litigation. Thus, the Company's full year P&L shows revenues of $959 million, operating income of $55.5 million, which includes $2.7 million of restructuring charges, and loss on investment and joint venture of $13 million. Income from continuing operations was $31.3 million and reported earnings per share from continuing operations was $0.66.

Turning to the balance sheet, we had $33 million of cash and short term investments at year end and had $122 million of availability under our $250 million revolving credit agreement. The revolving credit agreement matures in April of 2012. At year end we were in compliance with all of our debt covenants. We have $25 million of private placement debt maturities coming due in 2009, which we plan to fund with a combination of our current available liquidity and our expected operating cash flow.

Our balance sheet and the Company underwent something of a transformation in 2008. The sale of E ONE and the remaining tool business, the liquidation of the [leaping] portfolio and the sale lease back transaction executed in the third quarter enabled the Company to pay down over $150 million of debt and generated an additional $20 million in cash.

And now, I will turn the call back over to Bill Osborne.

Thank you, Bill. With the completion of the part of this call dedicated to our recent results, I will now discuss Federal Signal's strategy for enhancing near term earnings and cash flow, as well as growing shareholder value.

Since I joined Federal Signal I have performed an extensive review of each business within our portfolio to determine the optimal role each have played in pursuing our mandate to create shareholder value. I have visited every facility, seeing firsthand how we work and talking with some of our employees in the field about how we can operate better as a company. I've also met with many of our customers and asked for their feedback. Putting together this strategy aimed at returning Federal Signal to consistent profitable growth has been a team effort and I appreciate the perspectives of the Board and our management team. I have also been able to bring my own fresh perspectives to Federal Signal, keeping all options on the table from the outset.

In 2008, Federal Signal began its transformation. We have sharpened our strategic focus by divesting E ONE, the tools business, and the vast majority of our leasing portfolio. Today, most of our businesses have the number one or two market position in their respective categories. Additionally, we've improved our financial flexibility by using proceeds from those divestitures to pay down debt and improved our risk profile by decreasing the capital allocated to non core or higher risk businesses. In short, today Federal Signal has enhanced liquidity, a leaner capital structure and a more focused business portfolio.

The next few slides will outline Federal Signal's two pronged strategy to achieve consistent, profitable growth and deliver value to shareholders. Execution of this strategy will enable us to meet our long term profitability and growth objectives. Specifically, we believe we will be able to achieve consistent double digit margins across all of our businesses and achieve long term profit growth in excess of 10% per year.

First, we will undertake a number of initiatives to improve margins and extract efficiencies within the Company's legacy businesses. In our Environmental Solutions Group, we will focus on streamlining our product offerings, reducing product design costs and consolidating excess capacity. In our Safety and Security Group, we will seek to outsource non core manufacturing, consolidate excess capacity and simplify the business structure. As I mentioned earlier, we've already consolidated a fragmented business group by integrating our light bar and warning systems businesses into public safety systems.

Finally, at Bronto we will continue our margin improvement efforts which already began to generate tangible results in the fourth quarter of last year. As we execute on our strategy for margin improvement across all of our business we will move concurrently on a parallel path to drive growth through our public safety systems platform. The public safety systems mission is clear to become the global leader in the public safety systems market.

In January, we consolidated with our public safety systems business our leading PIPS, Federal Warning Systems, Riverchase, CodeSpear and our light bar businesses. Together these businesses represent over $200 million in annual sales.

So, why focus on public safety systems? Well, when you combine our leadership position with the global market growth potential you quickly come to realize that our public safety systems business has an exciting set of opportunities. We see significant demand for public safety solutions. The US Homeland Security budget illustrates this point. Enacted appropriations by the federal government grew 53% from 2003 to 2008. Further growth will be driven by the introduction of new products and services to an increasingly receptive and better funded global customer base. Over time we intend to introduce a services delivery model by introducing the concept of the public safety network. We will fund this growth using operating cash flow and available liquidity. Over time this may include divestiture proceeds as we optimize our portfolio.

Let me now discuss the near term plans for each business group. ESG contributes significant cash flow to Federal Signal and comprises a variety of brands that have market leadership in their segments. I'll spend a moment highlighting some of the opportunities to grow revenue as well as improve margins in this business. This slide lays out our leading brands and the markets they serve.

Let's talk first about Jetstream. Jetstream is well positioned in markets with strong long term growth characteristics. Jetstream's global brand strength is increasing and we are building our international distributor channel to increase our share of the global water blaster market. Jetstream's strategy is to maintain core machining operations in the US and to ship pump kits around the world. This enables low startup costs in emerging markets. This strategy has allowed Jetstream to deliver double digit growth in recent years.

Moving on to Vactor. Vactor also has a growth opportunity in the form of federal funding that has been allocated for airport glycol recovery vehicles, which can quickly and efficiently clean up spent fuels on the airport apron area. ESG manufactures the largest and most effective vehicles currently used in glycol recovery. We have also seen an important trend in the increase in sales to rental companies and have supplemented our dealer network with an important direct selling effort. To further grow revenue we intend to take ESG's brands into emerging markets.

Finally, we believe we can further improve margins by reducing our SKU count. We will eliminate marginal sweeper products from the lineup to achieve improved standardization in our manufacturing process. Similarly, we expect to bring increased standardization to our Vactor product line which will improve manufacturing velocity and reduce lead times. Shorter lead times are critical in the contractor segment because when a contractor wins a bid that customer needs a machine quickly or his revenue opportunity is lost.

As we mentioned earlier in the call we're committed to eliminating losses from our China joint venture. Let me remind you now that we have two operations in China and we'll focus on our profitable wholly owned subsidiary. At Elgin we will target a significant margin improvement through a major design cost reduction effort on the Pelican Sweeper line. As we have completed our capacity expansion at our Vactor facility we will also look to share fabrication and assembly capacity between our Vactor and Elgin businesses. All of these efforts collectively should allow ESG to produce consistent double digit operating margins in the future.

I'll spend a moment now discussing Bronto on slide 13. As you know, this business is the global leader in the truck mounted hydraulic aerial platform market. We completed Bronto's capacity expansion in 2008. This allowed Bronto to in source fabrication at lower cost. We expect further margin improvement as Bronto continues to in source more of its components. We're also evaluating low cost country sourcing of fabricated parts. We see long term opportunities for Bronto in the North American wind power market as well. We believe the Bronto sky lift will represent the preferred access tool for the maintenance of wind turbine towers. Bronto's growth potential in this segment is significant. There are currently over 25,000 installed wind turbine towers in the United States with planned construction of an additional 20,000 towers over the next several years. Additionally, Bronto continues to enjoy a strong backlog which has helped to provide Federal Signal with stable cash flow.

I will now discuss how we intend to drive growth through public safety. Due to tight budget constraints and the need for more productivity, law enforcement is fast becoming an IT based business. We're seeing the same thing in transportation management. We will help our customers approach these challenges with the new concept of the public safety network. Let me define for you the public safety network. A public safety network consists of intelligent devices monitoring an entire geography. Those devices have alerting and notification capability. The network has data storage and management and data mining and reporting capability.

Our leading PIPS platform is our future growth opportunity for the public safety network. CodeSpear will provide interoperability for this network. As you know, PIPS is the market leading ALPR technology. ALPR stands for Automated License Plate Recognition. We will deploy PIPS cameras into existing municipal infrastructure. We'll provide 24 hour monitoring maintaining a valuable database of information. That information can be used to manage traffic flows, enforce laws, identify threats and control access. These needs are what drove a 46% increase in PIPS orders in the second half of 2008. PIPS is the most accurate and reliable ALPR solution on the market today. This was proven in an October 2008 study conducted by the Department of Homeland Security. PIPS received the highest overall score and the highest scores in capability, usability and deployability categories.

The left side of page 16 represents applications already available today. However, once the public safety network is in place these future applications on the right side represent incremental revenue opportunities that can be easily added onto the existing network. We envision adding our complementary video technology and a suite of software based applications to the network to enhance its value.

We have numerous success stories and have shown a few on this slide. Let me talk a little bit about our Rings of Steel project in the City of Cincinnati. This is our first application of the Public Safety Network where we're deploying approximately 400 cameras in Cincinnati and surrounding jurisdictions. The project was partially funded by a Homeland Security grant and represents a multiple year commitment to deploy a services model. Cincinnati has been one of our most innovative customers. They mined the data collected on our public safety network to effect over 1,100 arrests, 147 stolen vehicle recoveries and solved over 20 robberies and multiple homicides. These statistics represent a tangible improvement in public safety.

Another example is the City of London, which uses hundreds of PIPS cameras in the world's best known congestion tolling system. This represents a significant revenue sharing opportunity. We can deploy an open road tolling system without the need to install expensive infrastructure like toll booths or transponders on every vehicle.

To illustrate the growing priority placed on safety and security markets slide 18 shows the estimated funding for state and local funding categories that our products serve. In 2008 addressable state and local funding amounted to $2.6 billion and this comprises less than 20% of the estimated domestic addressable market. While this slide just shows a portion of the available domestic funding increased funding for public safety is a global phenomenon. In this context we are supporting our customers to help them receive access to available government funds. A large part of our selling effort is now designed to identify these funding sources and work with our customers to tap into them.

There are huge benefits to the customers of our services model. The services model significantly lowers acquisition costs and the benefits that Cincinnati has seen are only attainable from the public safety network, not from purchasing individual cameras. With the ubiquitous coverage that a public safety network provides you get a safer community and a better quality of life and that's what we're about. Federal Signal protects people, property and the environment.

We intend to deploy a services model over time. We think a services model drives growth in three ways. First, we can achieve faster market penetration by offering customers lower acquisition costs. Second, the services model will then drive increased customer loyalty versus a one time hardware sale. We will get to know our customers better by working with them to design and operate a network that fits their needs. Third, the opportunity to add products and service over time after the initial sale. That customer knowledge will allow us to identify and design new products that will truly add value to their existing network.

I'll conclude my prepared remarks by emphasizing the two equally important elements of our strategy to deliver consistent profitable growth and shareholder value. First, we will pursue margin improvement across all of our business. I've outlined the initiatives underway at SSG, ESG and Bronto. Our focus will be on enhancing near term earnings and cash flow while pursuing profitable growth. Second, we intend to drive long term growth through public safety systems. We will leverage the competitive advantages of our technologies to deploy public safety networks. Growth will be driven by increasing customer acceptance, increased funding and value added services.

With that, I'll now open the call up for questions.

(Operator Instructions). Your first question comes from the line of Charlie Brady with BMO Capital Markets. Please proceed.

Thanks. Good morning. Could you give us some color as to on this new strategic plan as to what you expect the cost might be over what time frame? And kind of when you're looking out at the double digit margins sort of what's your goal as far as getting that margin up there in terms of time frame?

In terms of costs it's a little bit difficult to quantify because it depends solely on the source of funding. For example, in the case that I noted in Cincinnati a lot of our costs were offset by federal grant funding and we've been able to offset the cost of the Rings of Steel project by partnering with Cincinnati. We believe we have the lowest cost camera solution in the market, so we believe the overall cost to deploy the model will be able to be funded through existing cash flow. And the second part of your question again, Charlie?

You talked about getting the Company back up to double digit margins. Maybe you can give us some color as to sort of in your mind a timeframe that might happen.

Well, none of these initiatives are short term. We have some initiatives that we expect to begin to bear fruit in the next couple of months, but others will bear fruit over the next couple of years. But we believe that over a relatively short business planning period we can get all of our businesses consistently to double digit margins. A lot of the efforts that we outlined at ESG will take significant time. For example, the design cost reduction effort takes time as you redesign and retool new parts.

Okay. Switching gears for a minute. Your guidance for the first half of '08 revenue is down 15%. Does that embed a foreign exchange head win expectation?

No, we hedge about 70% of our currency exposure.

Okay. And so, the backlog numbers are those adjusted for any currency or is it neutral?

It's Bill Barker. It's neutral. It's an absolute number.

Okay. Thanks. I'll get back in queue.

Your next question comes from the line of Walt Liptak with Barrington Research. Please proceed.

Hi. Thanks. Good morning, Bill and Bill.

Hi, Walt.

Hi.

With regard to the first half guidance for the 15% revenue decline and recognizing that some of the initiatives are going to be further out beyond the second half what do you expect your negative leverage to be on operating profits?

Well, we're very sensitive to volumes, particularly in our most capital intensive businesses. So, what's important for us is to keep a constant eye on the incoming order rate. We as I mentioned our plan is to take ESG into emerging markets to try to offset some of the decline that we've seen in our traditional North American markets. But we're very sensitive to volume. That's the highest negative lever on our profits.

Okay. Let me ask it this way. Can you stay profitable in most of your segments with a 15% revenue decline?

Our plan is to be profitable in 2009. That obviously depends on seeing a stronger order rate coming in for the second half of the year. A couple benefits that we have going for us is we still have a strong backlog at Bronto. Bronto is now selling October production, so we believe we've got an opportunity to continue to drive sales through Bronto. We're managing our backlog very carefully at both the Vactor and Elgin business units. And surprisingly, our order rate has held up pretty well in the public safety sector. In January, orders were flat versus last year, so we still have a plan to remain profitable for the full calendar year.

Okay. Are you implying that in the first half we might see breakeven or an operating loss in one of the quarters?

A very small operating loss. We expect the second quarter to be better than the first, but we expect a small operating loss in the first half of 2009.

Okay. All right. As you were talking strategically, Bill, about the direction for public safety, you mentioned divestitures. I wondered if that meant that some of these legacy businesses with the vehicles were something that were is that what you were thinking of for divestiture and then focusing more on the higher technology business and CodeSpear type products or am I is my thinking going too far with what you meant when you said divestiture?

Well, we think ESG has a very important role to play in this strategy. It provides significant cash flow that allows us to continue to invest in our near term growth opportunities. Given the valuations in today's market we don't think it's an opportune time to divest businesses. So, given that fact we think it's a little premature to discuss specific businesses, but when valuations normalize we'll be better prepared to discuss specifics. Let me just emphasize that we're going to be disciplined sellers in any divestitures. We aren't holding a fire sale here.

Okay. I understand. Bill, I wonder about corporate expenses in 2009 if you can give us guidance. Are we looking at a number lower than the $31 million because of lower legal expenses?

This is Bill Barker. We expect the number to be about the same. We expect our current forecast is that the hearing loss number, which was $10.5 million last year we currently got that in at about the same this year. So, we don't see significant other changes in the budget. So, we're relatively flat year on year.

Okay. And then I want to get back in the queue, but I want to ask one more just about the one of the things that we're hearing about and you mentioned the stimulus that the government is looking at things that they can control like the AFG or their kind of Homeland Security funding is shovel ready projects and even military projects getting accelerated. I wondered if there had been the phenomenon where you're seeing lower municipal spending right now as municipalities hold back on their cash with the expectation that there's going to be more funding ahead? I wonder if you can just comment on that.

Well, most of our municipal customers do expect to get improved funding in the second half of the year. That's the anecdotal evidence we've heard. Most of these customers can't be specific, though, because the funding is being funneled through the states. And so, obviously, there's a bit of negotiation going on between state and municipal governments as to how the money will be spread around. We are expecting some improvement in the second half of the year. But as those projects get identified, as I mentioned earlier, our team is focused on identifying the appropriate sources of funding and helping our customers get access.

I might mention the other opportunity we see is the reauthorization of the Highway Bill in the fourth quarter of this year. That particular bill and our products line up very well with the new administration's initiatives on green funding. We think our technology will allow us to create traffic management systems that reduce carbon emissions and increase the efficiency of the traffic flow in major urban areas.

Okay. I understand. I'll get back in queue.

Your next question comes from the line of Steve Barger with KeyBanc. Please proceed.

Hi. Good morning.

Hi, Steve.

Hi, Steve.

Sorry if I missed this. Are there any other debt or investment obligations or guarantees for JV partners that we should be worried about?

No. The charge that we took in the fourth quarter was the full debt to guarantee the JV's full debt as well as to guarantee one of our partners' investments, but there's no other debt related to the entity.

Okay. Will you be doing anything like that in the future on potential partnerships?

Anything like what, Steve?

Guaranteeing obligations or debt for JV partners?

It's hard to say what we'll do in the future. It would depend on the opportunity. So, we'll leave it at that.

Okay. The run rates of the litigation. How do you have the $10 million visibility already? Are you just assuming that the current run rate is what you're going to incur over the next year? What do you think the chances are that this issue extends into 2010?

Steve, it's difficult to say how far the issue would extend. We have a very good track record in defending these cases. It was not what I would call unexpected that we might experience a couple losses. That's the nature of mass tort reform litigation. But I can tell you we're committed to continuing to defend these cases as we think we are on meritorious grounds. We don't believe the Company's products are actually causing these potential hearing losses.

Right. I get that. But is the $10 million expectation based on a current run rate of expenses per quarter?

Steve, it's basically based on the fact that we currently have four more trial dates scheduled for 2009. We already have those on the calendar. It's what's driving the budgeting.

Okay. The pre tax loss that you discussed. Does that include charges or is that excluding restructuring activities?

Sorry, which pre tax loss?

I think you talked about a potential pre tax loss in the first quarter or maybe the first half.

That would just be from continuing operations.

Okay. And with that expectation of a first half loss should we be worried about any debt covenants or can you remind us of what is due on the debt side in 2009?

We've got $25 million coming due on the private placements and as I mentioned we've got liquidity both in cash and in the revolver to cover that as well as operating cash flow. We do have debt covenants out there that are somewhat restrictive and some of that is going to depend on how things play out in the first and second quarter of the year. Given the visibility of the order pattern in our revenues, we're going to drive that. We're keeping a very close eye on it, but right now we're okay. We'll see how it goes.

So, you're expecting positive operating cash flow in first half '09 regardless of whether you have a pre tax loss or not?

I believe that's right.

Okay. Moving to public safety systems are you going to report that as a separate segment going forward now that it looks like it's around $200 million with the inclusion of light bars?

That is not our intention. We haven't changed the business structure such that there's a separate business head that reports to the CEO, so the division remains the SSG division.

Okay. I think you said the order rate there for it was either PIPS or PSS was 46% in two half '08. Where are you year to date on the comparable products versus that metric?

At PIPS?

Is that what the 46% metric was?

Yes, that was PIPS.

Do you know what it is year to date so far?

Steve, that was PIPS was the number. It's running about the same in January. The PSS number that Bill referred to, which is the group of businesses that total over $200 million in revenue those businesses were about flat in January, but PIPS was up about the same amount as we saw in the second half last year. Just for January.

Okay.

Is your question full year or January?

Well, I said year to date, but January is fine if you're seeing the same kind of growth rates. I just want to make sure that you're not seeing a drop off relative to that strong performance in two half '08 or in 2008.

And I know this is going to be a hard question to quantify, but for the service model for PIPS that you're talking about how did you calculate the mix of revenue growth versus margin or cash flow implications in providing lower up front capital costs to customers? Can you talk us through the thought process there in terms of why you're approaching it this way?

Well, we're approaching it this way because we've seen a significant increase in federal funding and that's allowed us to offset the up front costs. So, in our current project that we're running at Cincinnati we know that the grant cycles run up to three years for an individual grant and that you're able to increase the penetration rates of these projects by driving grant funding. That allows us to offset the initial costs. We expect to achieve the contract renewal rates of at least one per year, so that gives you at least once per cycle, so that gives you at least a six year funding cycle. That allows us to reduce the up front costs for customers.

Steve, Bill referred to the Cincinnati project, the Rings of Steel project. That is not currently being run under the services model, but it gives us a framework to build the financials and the cash flow model using that and the returns and the cash flow returns and the paybacks are all very good.

Have you been out talking to other cities or brought other mayors or police chiefs through to kind of look at this and can you tell us how they're responding to the potential of having that network there?

We're talking to a number of municipalities at both the city, state and county levels. And so, we're using Cincinnati as a proving ground, but we're also talking to individual customers about their particular geography. We think every one of these systems is unique and it's important to drive a network that works specifically for that customer's geography. I can tell you that there's a lot of excitement out there amongst our customers for this concept.

Well, that's the question and this is the last one. I'll jump back in line. Is it too early in the Cincinnati deployment to really be able to bring people in and explain to them what's happening? Is it still in the conceptual stage? Can they look at tangible proof? I know you put out the statistics of what the systems provided, but can they start going back and planning so that you can see further installations like this potentially in 2009?

Well, Cincinnati is still in the deployment phase. Of the 400 or so cameras that we talked about that were planned that are planned for Cincinnati we're probably about 50% through that installation. So, to get the full benefit of the Public Safety Network we probably will finish deployment sometime mid year and then we'll begin monitoring crime statistics. But we're very encouraged by what we've seen so far with only a partial deployment of the network.

Okay. I guess I will ask one more. What's the revenue opportunity, whether up front and with the service opportunity from a city like Cincinnati on a full year basis? Do you have kind of an expectation that you can throw out there in terms of what the opportunity size is?

I don't think we're prepared to discuss that just yet particularly because we're still in a pilot phase with Cincinnati. I'd like to get those contracts signed and agreed to before we talk those kinds of specifics.

Okay. Thanks. I'll get back in line.

Your next question comes from the line of Ned Borland with Next Generation Equity Research. Please proceed.

Good morning, Bill and Bill. Most of my questions have been answered. I just have a quick one here on ESG. What were the international orders and sales like in the fourth quarter?

Just a second. We'll get that number for you, Ned.

International for, Ned, across the business or just for ESG?

Well, across the business if you've got it there.

In total in the fourth quarter international orders were down about 15%. For the full year it was about flat.

Okay. And then as a percentage of ESG since you're going to be trying to penetrate developing markets with some of your products there what is the percentage of ESG sales that is internationally currently or where do you see that going?

I don't know that we break it out by business group. In total international sales for the Company are about 50%. About half of our orders are international. But as Bill mentioned, we still consider some uncapped areas that we want to try to get into developing markets as well as driving our existing market.

ESG's international profile is perhaps the lowest in the portfolio. So, that's one of the reasons we are targeting some emerging markets. ESG is disproportionately dependent on the North American market.

Ned, sorry; Bill again. Let me correct myself. We do break that out. It's about 25% of ESG's business is the international orders.

Okay. All right. Great. Thanks.

Your next question is a follow up from the line of Walt Liptak with Barrington Research. Please proceed.

Hi. I just wanted to clarify one thing. As the business has transformed and changed and you look to federal funding, is there more Homeland Security money and things like the Highway Bill because I hadn't thought about the Highway Bill as a funding source unless AFG funding.

I'm sorry. I didn't get your question.

I guess the question is your federal funding sources. In the past AFG because of the fire truck businesses and light bars, et cetera, that was a significant funding source. But now with the business geared more towards the PIPS and public safety it may be more transportation bill related or more Homeland Security related. Is that the case now?

Yes. The funding sources obviously change for the public safety portion of the business, but I think that this concept lines up well with the new administration's initiative because not only is there an increase in spending related to public safety, there's also a huge push on now for green projects. And fundamentally, you can use this network to manage traffic flows, do congestion charging and that's huge, really, for carbon emission abatement and efficient traffic flow. So, we think there will be multiple funding sources beyond just Homeland Security.

Okay. In the Highway Bill the way I'm understanding it is that there are line items for PIP type expenditures.

The Highway Bill hasn't been written yet. We're working to get those earmarks in the Highway Bill.

Okay. Good. Thank you.

Bill Barker. We're getting near the top of the hour, so I think we're going to wrap it up here. Thanks everybody for being on the call. As I mentioned our 10K will be filed in the next day or two and Bill and I are available for calls afterwards. So, I'll throw it back over to Bill to wrap things up.

Okay. I'd like to thank you for participating in today's call. Let me conclude the call by noting that although the economic outlook is uncertain is as uncertain as at any time in recent memory we have strong market positions and well respected brands. We'll continue to make prudent investments to capitalize on our growth opportunities while remaining focused on executing our cost reduction programs and identifying additional cost savings. The changes of 2008 have given us a more focused business portfolio, which puts Federal Signal in a better strategic position as we start 2009. I'm particularly excited about the opportunity we have to generate shareholder value by growing our public safety systems business and I look forward to sharing our progress with you on future earnings calls. Thank you very much.

Ladies and gentlemen this concludes the presentation. You may now disconnect. Thank you and have a good day.