Federal Signal Corp (FSS) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2009 Federal Signal earnings conference call. My name is Kiana and I will be your operator for today.

At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the call over to Mr. Bill Barker, Senior Vice President and CFO. You may proceed.

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

We will be using some slides in the presentation. The slides can be found by going to our website, clicking on the Q3 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. Overall, I am pleased with the progress the Company made in the third quarter. As was discussed in our press release, we reported earnings per share from continuing operations of $0.10. This was in line with our internal expectations, although it was lower than last year's third quarter.

Before I hand the call back over to Bill Barker, who will go through our third-quarter financials in detail, I would like to offer a few observations. One consistent theme for Federal Signal in 2009 has been our emphasis on reducing overhead costs and we continued to make great progress in the third quarter.

We reduced overhead costs, which we define as fixed manufacturing expenses and SG&A, by over $12 million compared to last year's third quarter. They year-on-year comparison included $3.6 million of one-time costs in 2008 related to a contract dispute regarding parking operations at the Dallas-Fort Worth airport. Thus, excluding that one-time favorability, we reduced overhead costs by about $9 million in the quarter.

Year-to-date we have reduced overhead costs by $20 million including $5 million of cumulative 2008 costs related to the contract dispute. Our team has worked hard to drive overhead costs out of the business and we will continue to execute meaningful cost reduction initiatives as we go forward. We now expect to deliver a reduction in reported overhead costs of more than $25 million this year, exceeding our objectives by $5 million.

Our cost reduction efforts and good working capital management enable us to generate strong cash flow from operations. This combined with the proceeds we received from the previously announced sale of our Ravo European sweeper business enable us to reduce our debt by over $26 million in the quarter, providing us with additional financial flexibility.

Additionally, the revenue environment stabilized over the past few months. Our total third-quarter orders were flat with second quarter and after Q2 had been down 4% versus the first quarter. We did see sequential corner growth in several of our businesses, including our Bronto Skylift and PIPS license plate recognition and Jetstream water blaster businesses.

Orders for most of our other businesses were flat or down slightly compared with the second quarter. Total orders in the US municipal segment were down 4% versus the second quarter while orders in our international markets increased versus the prior quarter. That increase was about 12%.

We expect to see continued improvement in our sequential order trend with the fourth-quarter orders coming in above what we experienced in the third quarter. I will talk a little more about our expectations for the fourth quarter after Bill goes through the Q3 financials.

We had good performances in some of our key business groups. Our safety and security business produced another quarter with a strong operating margin despite an 18% decline in sales. And our Bronto Skylift business more than tripled its third-quarter operating profit and increased its operating margin by 5.5 points compared to last year.

This continues a strong 2009 performance for Bronto as capacity investments of 2008 have yielded significant efficiency and margin improvements this year. Year-to-date Bronto's operating margin has increased by 4.4 percentage point.

As I indicated before, we have made significant progress in the third quarter on several fronts. We reduced our costs, generated strong cash flow, strengthened our balance sheet, and delivered good performances in some of our key businesses as order trends began to show some improvement. I expect us to make further progress on each of these areas as we finish out the year.

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

Thanks, Bill. I will give a fairly brief review of our third-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 $167 million which was down 21% versus last year. The net currency impact on revenue for the quarter was negative 1% or about $2 million. As indicated on the slide, we reduced our fixed manufacturing overhead costs by $2.8 million in the quarter.

Total operating expenses, or SG&A, were reduced by $9.5 million versus 2008. The sum of the cost reduction in fixed manufacturing overhead costs and that in operating expenses generates the $12 million number we refer to as our total overhead cost reduction in the quarter.

As Bill mentioned, our year-to-date reduction in total overhead costs is $20 million, which includes $5 million of cumulative costs in 2008 related to the parking contract dispute. Operating income for the quarter was $7.5 million or 4.5% of sales compared to $12.3 million or 5.8% of sales last year.

Interest expense of $2.6 million in the quarter was below last year's $3.6 million due to lower borrowings and lower interest rates in the quarter. Our effective tax rate was 17.9% compared to a net tax benefit last year. Last year's tax benefit reflects utilization of capital loss carry forwards resulting from sale leaseback transactions for two manufacturing facilities. Our reported EPS from continuing operations in the quarter was $0.10 compared to $0.31 last year.

Turning to the segments, our Safety and Security Group, or SSG, is Federal Signal's most profitable business group generating $6.7 million of operating income in the quarter and a 9.1% operating income margin. Sales for SSG declined 18% versus last year for the quarter to $74 million. SSG orders were down 19% versus last year and were 2% below Q2 of this year. SSG ended the quarter with an order backlog of $43 million.

Bronto had another strong quarter of profit improvement with operating income more than tripling and operating margin increasing 5.5 points versus last year. As we have discussed previously, the capacity expansion that was completed last year has enabled higher volume throughput and reduced costs related to production outsourcing.

Reported sales were $27.4 million, down slightly versus last year. The decline was due entirely to currency. Bronto's Q3 orders were down significantly from last year. However, orders were up 24% sequentially versus Q2 and Bronto's current backlog remains robust at $107 million.

ESG sales were down 30% to $65 million in the quarter and orders were down 28% versus last year. ESG Q3 orders were down 5% versus Q2 and ESG ended Q3 with an order backlog of $59 million. ESG continued its strong cost management program in the quarter with overhead costs reduced by $4.4 million versus Q3 of last year. Year-to-date ESG overhead costs have been reduced by $9 million.

ESG generated $2.7 million of operating income for an operating income margin of 4.1% in the quarter. Corporate expenses in the third quarter were lower by $1.4 million versus last year, driven by lower legal expenses associated with hearing loss litigation.

On slide five we show our cash flow for the first nine months of 2009. Cash flow from continuing operations was $43.2 million, CapEx was $11.9 million, and dividends paid were $8.7 million. The other line for 2009 reflects the liquidation of cash that had been invested in a CD at the end of last year. The CD was redeemed in June and the proceeds were used to reduce the outstanding balance on a revolving credit facility.

Some key points to highlight in our cash flow statement. Our CapEx was about equal to depreciation and amortization, which was our goal for the year, and we saw continued improvement in working capital usage. We have generated $21 million in cash from our working capital so far this year compared to an increase in working capital of $16 million for the first nine months of last year.

Reduced levels of accounts receivable and inventory us have more than offset related lower balances for customer deposits and accounts payable. The cash flow from discontinued operations shown for 2008 resulted primarily from the liquidation of the Company's municipal lease portfolio last year.

Given the Company's strong cash flow this year and the expectation of positive cash flow in Q4, the Board recently approved another quarterly dividend of $0.06 per share to be paid in January.

Turning to the balance sheet. We have reduced our total debt by $40 million so far this year from $279 million at year-end to $239 million at the end of the third quarter. Both our debt to capital ratio and our net debt to capital ratios have declined by four to five points since year end. We did not have any debt come due during the quarter. We do have $8 million of private placement notes coming due in December of this year, which we expect to fund with existing cash and our projected Q4 cash flow.

We had $21 million of cash on hand at the end of the quarter and had $90 million of availability under our $250 million revolving credit agreement. We also had another $19 million of availability in our foreign credit facilities giving us a total of $130 million of available global liquidity at the end of the quarter. Our revolving credit agreement matures in April of 2012.

On slide seven we show that we were in compliance with all of our debt covenants at the end of the third quarter with a net worth and debt to capital calculations shown as defined in our credit agreements. As we mentioned in our previous call, we have aligned the governments for our private placement notes 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 will turn the call back over to Bill Osborne.

Thanks, Bill. As I mentioned in my earlier remarks this was a solid quarter for Federal Signal and I am confident we are headed in the right direction.

We delivered third-quarter EPS from continuing operations of $0.10. Our previous guidance had been that we would generate between $0.20 and $0.25 of EPS from continuing operations in the second half of the year which would yield a full-year EPS range of $0.33 to $0.38 for 2009. We do not see a need to change that outlook and our current expectations for 2009 are consistent with our previous guidance.

Based on what we are seeing and hearing in our markets, we expect to see fourth-quarter orders above the Q3 level in most of our businesses. We are still in the process of developing and refining our forecast for orders, revenues, and costs for next year and thus it is too early to discuss 2010 guidance. We will have more to say about our 2010 outlook during our fourth-quarter earnings call.

Now I would like to talk about the progress we are making on our key strategies. There are two basic parts to our strategies. Part one is focused on reducing costs, improving margins and cash flow, and streamlining the portfolio. Basically driving efficiencies to improve profits and provide cash flow to invest in growth opportunities.

As both Bill and I have discussed, we feel good about the progress that we have made here. We are succeeding in driving down costs. The Company has reshaped its business portfolio over the past 18 months and we have delivered strong cash flow.

Part two of the strategy is to build our public safety businesses and take advantage of the growing global market for public safety and intelligent transportation systems. The revenues for our public safety businesses are currently approximately $200 million.

The strategy to grow our public safety businesses can be broken down into a few separate components. First, leverage our leadership position in light bars and sirens. Second, continue the growth of our global warning systems business which has been enhanced by our Codespear interoperability software. Year-to-date sales for this business are up 10% and Q3 orders were up 24% versus last year.

Third, build on our PIPS automated license plate recognition business to capture a larger share of two markets -- public safety and the global intelligent transportation market. Intelligent transportation refers to the evolving global market for increased use of technology to monitor and improve surface transportation. One of the exciting growth opportunities we face within the transportation arena is in open road toll collection.

Open road trolling is a process of collecting toll without the use of tollbooths or gates or otherwise stopping to pay a toll. To pay for their toll customers can use transponders which users affix to their windshield and are read from overhead gantries. Customers who choose not to use a transponder are detected at toll zones and an image of their license plate is captured. This is where our PIPS license plate camera recognition are put into use.

We believe the global market for electronic toll collection exceeds $5 billion and is growing up to 20% a year.

There are a number of factors driving increasing global acceptance of electronic toll collection. Drivers benefit from faster, safer, and more efficient toll transactions resulting in improved traffic flow and shorter commute times. Road operators benefit from lower toll collection costs and higher net revenue compared to manual collection.

Also, certain kinds of tools allow operators to expand capacity without being required to build more infrastructure. High occupancy toll lanes illustrate how carpool lane utilization has improved and lane access is extended to single-component vehicles willing to pay a toll charge. Finally, everyone benefits from the fuel savings and reduced emissions that electronic toll collection delivers.

Denver's E-470 toll road is an example of how new toll technologies are providing toll road users, operators, and other constituencies economic and environmental benefits previously unavailable. In the third quarter E-470 converted to become one of a handful of fully cashless toll roads in the United States.

PIPS and its technology partners, including E-470, deployed an electronic toll collections solution that yielded a number of benefits including a significantly lower level of manual review in potential toll violations. Specifically, PIPS and our technology partners delivered a solution that reduced the number of violations requiring manual review by over two-thirds.

Lower manual review brings significant benefits to the toll authority given the cost of automated review is less than $0.05 per review whereas manual review can be well above $2.00 per transaction. This results in significant savings when applied to hundreds of thousands of road users during a particular time.

The E-470 project provides a case study of how Federal Signal is positioned to leverage its best-in-breed technology offerings to grow its footprint and its capabilities in transportation environments. Over 30 states are now planning, building, or operating major highway contracts financed with tolls. Innovative toll technologies are offering motorists the use of new state-of-the-art highways with increased efficiencies and improved driving experience.

Our PIPS technology provides us with a platform to participate in this growing global market for intelligent transportation systems. In addition, as we have discussed previously, our PIPS technology is also being applied in the public safety markets as license plate recognition systems are critical in several areas of law enforcement, including stolen vehicle recovery.

Our objective is to position Federal Signal to enhance its market share through internal business development and acquisitions in both the public safety and intelligent transportation markets. We have recently hired three experienced individuals to help us execute our strategy by leading our combined sales and marketing efforts for our public safety businesses, heading up our government affairs lobbying efforts, and leading our M&A strategy and execution.

In terms of M&A, we will seek acquisitions that bring complementary technology and enable us to broaden our capability and strengthen our geographic reach in the public safety and intelligent transportation markets.

We will keep you updated as we continue to execute on part two of this strategy and we will have more tangible progress to discuss in the future. I can assure you will we will remain focused on part one by continuing to implement cost reduction initiatives, drive margin improvement, and generate strong cash flow.

I would now like to spend a moment to discuss a recent development in the area of corporate governance. Over the past year the Board has made a number of improvements to the Company's corporate governance structure as set forth in our last proxy filing.

Continuing that effort the Board has been studying its structures since the Company's last annual meeting and have concluded it will seek shareholder approval to declassify the Board at its next annual meeting. The Board sees this decision as one more step along a continuing journey of improved corporate governance.

To wrap up, my goal remains to position the Company to generate strong growth and profitability as we move forward. We continue to have a number of exciting opportunities across our businesses. We are beginning to see signs of improvement in our order trends and we will continue to focus on strong execution.

Thank you for your time and we will now open the call for questions.

(Operator Instructions) Charlie Brady, BMO Capital Markets.

Could you just give me more granularity on the foreign exchange impact, not only to Bronto but to the other two businesses as well?

Sure, give me one sec. The impact at Bronto on the revenue line was about $1 million, ESG was about flat, not a lot of impact there, and SSG was around $1 million as well.

Thanks. And tax rate in Q4 that we should be looking at?

Probably something in the low 20%s. I am sorry that is a full-year number. It's probably more in the mid-20%s for Q4. Full year would be more about 22%.

Okay. And then just looking at the order trends, in your prepared remarks your comment was that you expect sequentially to see orders up in most of your businesses. Can you give me any more granularity on that as far as, I guess importantly, which businesses you still think are having the most trouble?

And I guess given that some of your businesses are pretty short cycle, where are you picking up that sort of -- is it inquiry levels or where are you getting that comfort level that you will see sequential order increases?

Well, a couple of questions embedded there. The business obviously with the shortest order-to-delivery cycle is Safety and Security Group. And we have seen on an uptick in orders in October so far this year for Safety and Security, so we expect to see a bit of improvement there.

In the ESG group that is obviously a much longer lead time business and very heavily exposed to US municipal spending. We haven't seen as strong an increase at ESG and I might point out that we expect that ESG will lag slightly the recovery of our other businesses given its exposure to US municipal spending.

We have seen continued strength in Bronto orders. We saw a 24% increase quarter-to-quarter sequentially and we are seeing early indications in the fourth quarter of strong orders for Bronto as well.

Thanks. I will hop back in the queue.

(Operator Instructions) Walt Liptak, Barrington Research.

Good morning, guys, and good job on the working capital. You may have addressed this already, but the -- I wanted to know about the fire rescue group and the Bronto group. The $27 million in revenue, was there a push out in orders or in shipments, I mean?

I am sorry, Walt. Can you say a little bit more on that?

I mean, it looks a little bit low sequentially.

Yes, traditionally the third quarter for Bronto is the lowest quarter or lower quarter. We have seen this pattern for the last three or four years that shipments in Q2 were higher than Q3 and then they rebound back up in Q4. I think part of that is due to the fact that Bronto is a very European focused business and the European summer holidays tend to slow down the business there.

Okay. And then I guess the outlook for the rest of the year with the quarters up 24% suggests that the market is still, even in this deep recession, still pretty good?

Yes. Again, remember that is 24% sequentially versus second quarter, not versus last year. But we do expect to see a significant growth in Q4 orders for Bronto versus Q3 consistent with the pattern we have seen the last several years.

Okay. And I probably missed this, but the stability of the marketplace looks pretty good. It looks like the data shows that, but I want to hear you say it.

We have seen no further deterioration over the last several months across all of our businesses. Obviously we would like to benefit. We are well-positioned to benefit from a strong economic recovery, but we think our businesses will experience that benefit at staggered times.

As I said, our shortest cycle business is Safety and Security Group. We expect to see near-term improvement with them. The Environmental Solutions Group is a much longer-term business and tends to be heavily exposed to US municipal spending and we think US municipal spending will lag the current economic recovery. It's highly correlated to consumer spending and unemployment. And so I think until jobs rebound in the US we think ESG will lag the general economic recovery.

Okay. Are you impacted any more buy the firefighter grant program, AFG, because I believe those -- that fund was not flowing during the quarter?

I don't think we are impacted by that at all, Walt.

Okay. And you mentioned the driving costs out, reshaping the business. I wonder if we can get a little bit more color on some of the actions that are happening, the specific programs. Is factory floor space getting freed up, plant consolidation or is it just overhead? How much cost comes back?

Well, we have some pretty big projects to free up plant floor space. We are consolidating some operations. For example, we are moving some warehousing operations and excess facilities into major facilities. We are also -- we have a laser-like focus right now on inventories where we are consolidating the number of offerings and SKUs that we offer. Not only to reduce inventory, but also to free up plant floor space so that we can consolidate operations.

So you will see some very small restructuring charges in the Q related to those activities.

Okay. Is this across the board within all of the operations or -- I mean is all Federal Signal getting restructured now?

Yes, I mean we are not -- we are taking a very tough look at costs in every business. There is no business at Federal Signal that is sacrosanct with respect to that. But, obviously, we have some businesses where we have more opportunity than others and other businesses where we have to invest.

So we are taking a very balanced approach. We are investing internally in our growth businesses and we are taking a very aggressive position on costs across all of our businesses. As I have said in earlier calls, that is going to be part of our DNA.

Okay. I am sorry if I missed this, but what is the tax rate that you are expecting for the fourth quarter?

Fourth quarter I would use mid-20%s, probably use 25% as a proxy, which gets you to the low 20%s; around 22% for the full year.

Okay. Any idea for next year?

Still working on that.

Okay. All right. Thanks, guys.

Charlie Brady, BMO Capital Markets.

Thanks. Just another follow-up question on Bronto. In the past you have talked about getting that margin level up into double digits. Is that still the goal and do you think that would happen in fiscal 2009?

That is still an objective for us. We do have a number of cost reduction projects still teed up for Bronto in 2010. So I am not quite sure if we will get there on a full-year basis in 2009, but certainly by the end of 2010 we should be there.

Charlie, it's Bill Barker. Again, some of the volume fluctuations on the seasonality affects the margins. So in Q2 we had a margin of around 12% at Bronto. Q3 down a little bit because of the volume impact, and then Q4 we do expect to get it back up into double digits with the higher volumes.

Okay, fair enough. Thank you.

With no further questions in the queue, I would like to turn the call over to Bill Osborne for closing remarks. You may proceed.

I just want to reiterate that Federal Signal has gone through a very important period of consolidation and cost reduction. Our objective has always been to position the Company well for economic recovery. We think we have done that. We think that we have created value by becoming more efficient, paying down debt, and creating opportunities for ourselves to grow and invest.

I think it's fair to say that after this period of consolidation we are looking to invest internally as well as externally and to begin to grow in the years ahead. Thank you very much for your attention.

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