Federal Signal Corp (FSS) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Federal Signal earnings conference call. My name is Gina and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (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. Bill Barker, Senior Vice President and CEO. You may proceed.

Thank you. Good morning and welcome to Federal Signal's second quarter 2009 conference call. I'm Bill Barker, Federal Signal's Chief Financial Officer. Joining me on the call today is Bill Osborne, our President and Chief Executive Officer.

We will be using some slides in the presentation today. The slides can be found by going to our website, clicking on the "Q2 Investor Call" icon, and selecting the webcast. We will post the slides to our website after the call.

Before we get to the business review, I would like to remind you that some of our comments made today may contain forward-looking statements that are subject to the Safe Harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website, www.FederalSignal.com. We will file our Form 10-Q shortly.

Now I will turn the call over to Bill Osborne.

Thank you, Bill, and good morning. Overall, Federal Signal had a solid second quarter. The Company continued to generate profits and positive cash flow in these challenging economic times. As was discussed in our press release, we reported earnings per share from continuing operations of $0.11 for the quarter. This represented an increase from our first quarter of earnings per share of $0.02, but was lower than last year's second quarter. Bill Barker will go through the second quarter financials in detail in a few minutes, but I'd like to first offer a few observations.

We had quite a bit of positive news in the quarter. We continued to reduce our overhead costs. The capacity investment in our Bronto Skylift business is generating strong results. Bronto's operating margin increased four points versus last year.

Our Safety and Security Group maintained its 11% operating margin in the quarter, flat to last year's second quarter despite a very tough sales environment.

We had over $100 million of global liquidity at the end of the quarter, and the proceeds from the recently announced sale of our Ravo Sweeper business has further improved our liquidity.

We also got some positive news on the Chicago hearing loss trials, which have now been stayed until the resolution of our appeal, and our Board just approved another quarterly dividend of $0.06 per share.

We continued to make progress on our key strategic initiatives in the quarter. A primary focus for Federal Signal is continuous improvement in our costs, and we are generating excellent results. Specifically for the second quarter, we reduced overhead costs, which we define as fixed manufacturing expenses and SG&A costs, by $4 million compared to last year. We generated a similar level of savings in the first quarter.

We will continue to drive cost efficiencies as we move throughout the year, and we are on track to deliver the $20 million of year-over-year overhead reduction, as we previously discussed. We are making aggressive cost reduction a way of life at Federal Signal, and I'm very pleased with the energy and diligence our management team has devoted to this effort. In addition to overhead cost reduction, our teams are also implementing projects to reduce product costs and more effectively leverage our asset base.

Another key element of our strategic evolution is to bring more focus to our business portfolio and pursue opportunities for revenue and profit growth in our core businesses. To that end, we recently announced the sale of Ravo, our European sweeper business, for about $12 million. We've used these proceeds to pay down our short-term revolver debt balance and further improve our liquidity position.

Now, I'd like to emphasize that we remain committed to leveraging our leadership position in the North American sweeper market through our Elgin business. We will also pursue opportunistic growth in other select sweeper markets as appropriate. However, we did not see the opportunity to develop sufficient scale in the European sweeper market, and thus we made the decision to exit. The liquidity provided from this transaction is incremental to what is shown in our June 30 financial statements.

The revenue environment remains somewhat unsettled. Although our second quarter orders were down significantly versus last year, we continued to see signs of stability on a sequential basis. Our total orders in the second quarter were 4% below Q1, but we did see a sequential increase in orders for some of our key businesses, including our Elgin and Bronto businesses.

While it now seems that a return to year-over-year growth may not occur until early 2010, we do expect to continue to see improvement in our orders as we move through 2009. In addition, we have an order backlog of $218 million at the end of the quarter, which helps to provide some stability for our revenues in the near term.

In terms of guidance, the forecasting environment still remains very challenging. While it does appear that orders of many of our key markets are stabilizing on a sequential basis, we still have not yet seen a consistent order pattern of growth across all of our businesses. Fortunately, our cost-cutting efforts and our order backlog will continue to provide support for our margin, and we expect to continue to generate positive cash flow.

Currently, we expect to generate earnings per share of between $0.20 and $0.25 for the second half of the year, which would yield the range of $0.33 to $0.38 for the full year.

I will now turn the call back over to Bill Barker, who will give a financial review of the quarter, after which I will come back with some closing thoughts and remarks.

Thanks, Bill. I will give a fairly brief review of our second quarter results, which are included in today's press release. 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 $204 million, which was down 15% versus last year. The net currency impact on revenue for the quarter was negative 4%, or about $10 million. Sales volume growth at our Bronto Skylift business partially offset revenue declines at our ESG and SSG divisions.

As indicated on the slide, we reduced our fixed manufacturing overhead costs by $2 million in the quarter. However, gross profit fell from $65 million last year to $54 million this year due to the sales decline. Total operating expenses, or SG&A, were reduced by $2 million versus 2008. Lower operating expenses in the business units were partially offset by higher corporate costs versus last year, as we incurred $2 million of expense this year related to a proxy contest. As Bill mentioned, the combined $4 million reduction in overhead costs met our cost reduction target for the quarter.

Operating income for the quarter was $9.3 million, or 4.6% of sales compared to $17.5 million, or 7.3% of sales, last year. Interest expense of $2.8 million in the quarter was below last year's $4 million due to lower borrowing and lower interest rates in the quarter. Our effective tax rate was 22.3% compared to 36.3% last year. The lower tax rate reflects better foreign tax effects due to reduced losses in China and the benefit of R&D tax credits which were not recognized in Q2 2008. Our reported EPS from continuing operations for the quarter was $0.11 compared to $0.16 last year.

As we previously announced, we recently sold our Ravo European sweeper business. Ravo's results, and the non-cash loss from the sale, are included as discontinued operations in our financial statement.

Turning to the segments, our Safety and Security Group, or SSG, remains Federal Signal's most profitable business group, generating $9 million of operating income in the quarter. Sales for SSG declined 17% versus last year for the quarter, from $95 million to $79 million. Currency negatively impacted SSG sales by $3 million in the quarter. Strong cost reduction actions kept SSG's operating margins over 11% and flat to last year, although operating income was lower by $2 million.

SSG orders were down 27% versus last year and were down 5% versus the first quarter of this year. The sequential order trends were pretty consistent across our SSG businesses, with most showing a slight decline in the orders versus Q1. SSG ended the quarter with an order backlog of $46 million compared to $53 million at the end of the first quarter and $51 million at the end of 2008.

Bronto had another strong quarter, with operating income up more than 50% and operating margin increasing four points to nearly 12%. Reported sales were $41.5 million, which was flat to last year due to a negative currency impact of 12%, or $5 million. As we have discussed previously, the capacity expansion that was completed last year enabled higher volume throughput and reduced costs related to product production outsourcing.

Bronto's Q2 orders were down significantly from last year due to economic weakness across the market it serves. However, orders were flat to Q1, and Bronto's robust backlog of $108 million provides us with confidence about Bronto's revenue for the balance of 2009.

ESG sales were down 19% to $84 million in the quarter, and orders were down 37% versus last year due to market weaknesses in both the municipal and industrial sectors. As with our other businesses, these market sectors stabilized from Q1 to Q2. ESG's Q2 orders were down 5% versus Q1, with orders for our Elgin Sweeper business showing an increase in Q2. ESG ended Q2 with an order backlog of $64 million.

Strong cost management at ESG partially offset the sales decline, as ESG reduced its overhead costs by $3 million versus last year and continued to take actions to reduce its cost base in the face of the current economic environment. ESG generated $6.2 million of operating income, for an operating margin of 7.4%.

Corporate expenses in the second quarter increased by $3.2 million. The key drivers of the increase were $2.1 million of expense associated with a proxy contest and a $1.4 million increase for incentive compensation. The compensation increase versus last year was driven by comparing against a one-time accrual adjustment in the second quarter of 2008.

On Slide 5 we show our cash flow for the first six months of 2009. To summarize, cash flow from continuing operations was $19.1 million, CapEx was $8 million, and dividends paid were $5.8 million. The "Other" line in the cash flow reflects the liquidation of cash we invested in a CD last year. The CD was redeemed in June, and the proceeds were used to pay down our revolver.

Some key points to highlight. Our CapEx was equal to depreciation and amortization for the six-month period, and we saw continued improvement in working capital usage. Our teams are continuing to focus on working capital improvement, and we expect working capital to provide more than $10 million of cash in 2009.

We did have about a $2 million cash outflow related to discontinued operations, relating primarily to the buyout of some IT assets earlier in the year.

Turning to the balance sheet, we have used some of our excess cash to pay down debt during the year and reduced our total debt from $279 million at year end to $256 million at the end of the second quarter. Our debt-to-capital ratio declined from 50% at year end to 47% at the end of Q2.

We redeemed $17 million of private placement notes in June using our cash revolving credit facility. We have an additional $8 million of notes coming due in December of this year. We had $12 million of cash on hand at the end of the quarter, and also $75 million of availability on our $250 million revolving credit agreement. We also had another $16 million of availability in our foreign credit facilities, giving us a total of over $100 million of available global liquidity at the end of the quarter. Our revolving credit agreement matures in April of 2012.

On Slide 7 we show that we were in compliance with all of our debt covenants at the end of the quarter. As we mentioned in our Q1 call, we have aligned the covenants for our private placement notes along with those in our revolving credit facility.

That wraps up the financial summary. As I mentioned before, I would be happy to answer any questions at the end of the call or later today.

And now I'll turn the call back over to Bill Osborne.

Thank you, Bill. As I mentioned in my earlier remarks, this was a good quarter for Federal Signal. In addition to delivering solid profit and cash flow results, we continued to make progress on our three key strategies.

First, driving cost improvements and higher margins in our key legacy business. We lowered our overhead costs by $4 million.

Second, investing to grow our higher-margin businesses. For example, Bronto's operating margin increased four points to 12%.

And third, expanding our Public Safety Systems platform. A key example here is the continued growth in orders for our US PIPS cameras. This is a recognition of the value that PIPS brings to public safety and intelligent transportation application.

These are some examples of the progress we're making, and we still have a lot of things going in our pipeline. Our teams are in the process of implementing initiatives which will further reduce our costs and better leverage our asset base. We are continuing to leverage some of our newer technology to drive future revenue opportunities in several of our Safety and Security businesses. And Bronto recently booked its first orders for the US wind power market, evidence that we can expand our existing businesses into new segments.

While the economy is not yet growing, we are seeing signs of stability on a sequential basis in our key markets. Our cost reduction initiatives and our market-leading positions and brands have the Company positioned to generate significantly improved profits when the global economy improves. In addition, our improved liquidity has given us more financial flexibility.

We will continue to drive for improvements from our businesses and in our cash flow, and I'm excited about the progress that we've made. Our employees are working harder than ever to deliver these results, and I would like to take a moment here and now to thank them for their commitment and dedication.

My goal remains to position the Company to prosper in any economic environment and to keep our teams focused on executing the key elements of our strategy. We continue to have a lot of exciting opportunities across our businesses, and we will continue to focus on strong execution.

I thank you for your time, and we will now open the call for questions.

(OPERATOR INSTRUCTIONS.) And your first question is from the line of Ned Borland from Next Generation Research. Please proceed.

Good morning, guys. Just if we could delve into Safety for a minute and just talk about some of the product categories which you're seeing some slippage in orders and what you're seeing in some of the Public Safety businesses.

What would you like to know, Ned? Overall, the weakness in Public Safety, or SSG businesses, was what I'd say, mostly what we've seen is a bit of a slowdown in Europe. Europe appears to be lagging the US in terms of the economic recovery. So I would suggest that it's more of a secular element of the European business.

Okay, but if we went by product category, there's none that are much weaker than others? Or is it just pretty broad-based?

I'd say the weakest segment that we saw in the quarter was light bars and sirens, and that element is driven, of course, by--we have both the European and the US business in that product segment. And as I said earlier, the largest slowdown we've seen, the biggest weakness, has been in Europe.

Okay. Did you, you did see growth in the ALPR business?

We saw growth in the US ALPR business. US orders were up for PIPS cameras over 30%. We were somewhat flat in the UK business, but I believe that's primarily due to the calendarization of orders. We've had a couple of orders that were pushed out in the quarter.

Okay. And then on the cost savings, getting to the $20 million for the year, you've realized about $4 million a quarter for the first two quarters. How do you expect to realize the remaining $12 million in 3Q and 4Q? Is it going to be more heavily weighted towards 4Q, or is it roughly $6 million for each quarter?

Yes, I would say it's going to be flat quarter to quarter. We'll deliver roughly $6 million in each quarter.

Ned, it's Bill Barker. In the first and second quarter, we incurred some extra one-time costs related to initiatives that we're putting in place. So we had some severance costs in Q1 and Q2 that actually brought that net number down to $4 million. If we didn't have those one-time costs, we'd be running at a higher quarterly rate, and we expect to see that the balance of the year.

Okay, all right. That's helpful. Thank you.

Your next question comes from the line of Charles Brady with BMO Capital Markets. Please proceed.

Good morning. This is actually Tom Brinkmann standing in for Charlie Brady. Just curious about your monthly order trends for the quarter, and how does July look so far?

July looks a little bit better than what we saw at the run rate at the end of June. Obviously, the toughest element of our business has been ESG. They've seen an improvement in quote activity in July, but SSG appears to be coming in nicely for July. And Bronto orders are sequentially about flat. One of the issues that I should point out, though, is Bronto typically takes a summer shutdown period in July. So we expect shipments in July for Bronto to be seasonally adjusted down.

Okay. And also, I just wondered if you could provide some details on the sales mix impact in the environmental segment in the quarter, and do you see that continuing? How much did it help the margin?

Say again? I'm sorry.

Oh, just looking for some details on the sales mix impact in environmental for the quarter. Do you see that continuing? And then, and also, how much did it help the margins?

It's Bill Barker. Our gross margin was up about a percentage point from Q2 to Q1. Part of that was due to cost reduction and part of it was due to the fact, as you pointed out, that our ESG business was coming down more quickly than some of our other, higher-margin businesses. I think we'll probably expect to maintain that margin we had in the second quarter for the balance of the year.

Okay. And then, also, I was just curious. The environmental segment results exclude the Euro sweeper business that was sold?

Yes. We put that in discontinued operations, and year to date, we have restated our operating results for that.

Okay, okay. So I take it that helped the margin somewhat as well?

Yes, a little bit, although it wasn't a particularly large business for us, though, on the overall magnitude of our total company. It wasn't a big impact.

Okay. And also, just the last question. Do you expect a significant decline in revenue in Bronto following the order trend?

As we pointed out, we've got over $100 million of backlog, and our revenue for the quarter was about $40 million. So we're pretty fully booked for the back half of the year, which gives us some time to see how the orders play out in the second half. So we don't expect any--as Bill pointed out, there is a seasonality in the third quarter for the European markets over there, but we don't expect to see any impact of the slowing order rate on our sales for the second half of the year.

Yes, I should point out Bronto's delivery and lead times are--it's a fairly long-lead product cycle. And so there may be some, there may be several months involved before an order decline is reflected in a decline of sales. So we still have a strong backlog, and we're projecting some improvement in the economy in the beginning of the first half of 2010. So we expect Bronto's revenue to remain solid through 2009 and begin to, the order patterns to pick up in the early part of 2010.

Okay, thank you. That's all I have.

(OPERATOR INSTRUCTIONS.)

If there are no more questions--are there any further questions?

You have no further questions in queue. Mr. Bill Osborne for closing remarks.

Well, I'd like to thank you all for joining us today. As I mentioned in my remarks, Federal Signal had a solid quarter. We'll continue to deliver on our commitments, and we look forward to talking to you again in the next quarter.

I should mention that Bill Barker and myself plan to get out later this fall to speak to investors directly and update them on Federal Signal's strategy. Thank you very much.

Ladies and gentlemen, that concludes your presentation. You may disconnect. Have a great day.