Federal Signal Corp (FSS) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Federal Signal earnings conference call. (Operator Instructions). I would now like to turn the conference over to your host for today, Mr. Bill Barker, Senior Vice President and Chief Financial Officer. Please proceed.

Thank you. Good morning, and welcome to Federal Signal's fourth quarter 2009 conference call. I'm Bill Barker, Federal Signal's Chief Financial Officer. Joining me on the call today is Bill Osborn, our President and Chief Executive Officer. We will be using some slides in the presentation. The slides can be found by going to our website, going into the Investors tab in the Calendar of Events section and clicking on the webcast. We will also post the slide presentation 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-K shortly. Now I will turn the call over to Bill Osborne.

Thank you, Bill. Overall, I felt the Company delivered solid results in the fourth quarter and in 2009. As was discussed in our press release, we reported fourth quarter earnings per share from the continuing operations of $0.18 compared to $0.06 last year. Before I hand the call back over to Bill Barker, who will go over our financials in some detail, I would like to offer some observations. As we began 2009, we knew the revenue environment would be challenging, and thus, we needed to have a strong focus on cost reduction. I'm pleased to report that we finished the year with a $30 million net reduction in overhead costs, which we define as fixed manufacturing expenses and SG&A costs. The year on year reduction in overhead costs included $5 million of one-time costs in 2008 related to a dispute regarding a Parking Systems contract.

Excluding that one-time favorability, we reduced overhead costs in the year by $25 million, which was a result of a lot of hard work and tough decisions by our management team. These actions enabled us to remain profitable in every quarter this year despite double digit revenue declines which resulted from the global recession. Similarly, we knew 2009 was the year we would need to focus on generating cash flow from all areas of our businesses. For the year, we generated $60 million of cash flow from continuing operations compared to a net use of cash of $7 million in 2008. The key driver of our improved cash flow was reducing working capital by $28 million this year. Working capital efficiency will continue to be a strong area of focus for us in 2010. Turning to our balance sheet, the combination of our cost reduction efforts, good working capital management and the sale of two of our businesses enabled us to fund our CapEx and our dividend, complete the acquisition of Diamond Consulting Services and still reduce our net debt by over $60 million in 2009.

Before Bill goes into the financial details, I'd also like to comment on the performance in some of our key business groups. Our Safety and Security business produced another strong quarter, with an 11% operating margin. Our Bronto Skylift business had a record quarter and increased its Q4 operating margin to 16%, which was up 5.5 points compared to last year. This caps a very strong 2009 performance for Bronto, as capacity investments made in 2008 yielded significant efficiency and margin improvements this year. For the year, Bronto's operating margin increased by 5 percentage points and operating income increased 85%. We also made progress on our goal of transforming Federal Signal into a more focused Company. We divested Ravo, our European street sweeper business, and Pauluhn, a business focused on industrial lighting. This provided us with additional financial flexibility to pursue more strategic growth opportunities both internally and externally.

As I mentioned before, we reduced our debt significantly in 2009 and we began 2010 with over $160 million of available global liquidity, which will enable us to continue to pursue growth opportunities. To sum up 2009, we made progress on several fronts. We significantly reduced our costs, generated strong cash flow, delivered good performance in some of our key businesses and took steps to make Federal Signal a more focused Company. I will now turn the call back over to Bill Barker, who will give a financial review, after which I will come back with some perspectives on our business outlook and our future.

Thanks, Bill. I'll give a fairly brief review of the financial 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 fourth quarter, revenue was $206 million, which was down 11% versus last year. Gross margin was $10.2 million lower than last year, primarily due to the lower sales volume. The key to our improved operating performance in Q4 was lower operating expenses or SG&A, which were reduced by $12 million versus last year. Our operating margin for the quarter was 6.7% compared to 5.2% last year.

Our effective tax rate for the quarter was 26.3%, which resulted in EPS from continuing operations for the quarter of $0.18 versus $0.06 last year. Last year's Q4 EPS included an $0.08 after-tax charge relative to our China joint venture, which also impacted last year's Q4 tax rate. Turning to the segments for the quarter, our Safety and Security Group, or SSG, generated $8.8 million of operating income in the quarter, resulting in an 11% operating margin. SG&A was reduced by $2.5 million versus last year, which partially offset lower sales volumes. New orders for SSG declined 10% versus last year, but were 8% higher sequentially versus Q3, and the sequential order improvement in new business was seen across all of our groups. Orders and sales for our PIPS Automated License Plate Recognition cameras were very strong; both increased over 40% versus last year. SSG ended the quarter with an order backlog of $33 million versus $48 million last year. Most of SSG's business have shorter order-to-ship cycles than our other businesses, since the lower backlog is not as significant a factor for SSG's revenue as we start 2010.

As Bill mentioned, Bronto had a record quarter for sales, profit and operating margin, which capped a year in which Bronto's operating profit increased 85%. Bronto's Q4 orders were up 6% versus last year and increased 8% sequentially versus last year. The Q4 order increase reverses a series of order declines Bronto experienced in the first three quarters of the year, which has resulted in a year-end back log of $74 million or about half of what it was a year ago. Bronto is the business that has the longest order-to-ship cycle, and the lower backlog will likely impact the year on year sales growth for the first part of the year. Sales for Environmental Solutions Group, or ESG, were down 23% to $69 million in the quarter, with orders down 16% versus last year. Similar to SSG and Bronto, ESG Q4 orders were up essentially versus Q3, increasing 21% in the quarter. Our Elgin Sweeper business had a particularly strong quarter in Q4 for orders, increasing 48% sequentially versus Q3 and growing 23% versus last year. However, ESG's year end back log is $68 million versus $98 million in 2008, which could impact sales in the early part of the year. ESG continued its strong cost management program in the quarter, with SG&A costs reduce $18% versus Q4 of last year.

Year to date, ESG overhead costs have been reduced by $11 million. ESG generated $3 million of operating income for an operating margin of 4.3% in the quarter. Corporate expense in the quarter were lower by $2.9 million over last year, driven by lower legal expenses associated with hearing loss litigation. Slide 5 shows our full year P&L. Prior quarters have been restated to reflect the discontinuation of the Pauluhn business, which was divested in the fourth quarter. Moving the Pauluhn results to discontinued operations reduced EPS from continuing operations by about $0.04 for the first three quarters of the year. For the full year, our continuing operations generated $753 million in revenue and $33 million of operating income. As Bill has has mentioned, we reduced overhead costs by over $30 million in the year ,with a $5 million reduction in fixed manufacturing overhead costs and a $25 million reduction in operating expenses or SG&A. Interest expenses lower due to lower debt levels and lower interest rates. Our full year EPS from continuing operation for 2009 was $0.36 versus $0.57 last year. On slide six, we show our cash flow for the year.

As Bill mentioned, cash flow from continuing operations was $60 million. CapEx for the year was $14.6 million, and dividends paid were $11.7 million. The proceeds from the divestitures of the Ravo and Pauluhn businesses are included in cash flow from discontinued operations at the bottom of the slide. The other line primarily reflects the liquidation of cash that had been invested in the CD as of the end of last year. The CD was redeemed in June and the proceeds were used to pay down the outstanding balance on our revolving credit facility. Some key points to highlight in our cash flow statement; we generated $28 million in cash from our primary working capital in 2009 compared to an increase in our working capital of $43 million in 2008. Reduced levels of accounts receivable and inventories more than offset related lower balances for customer deposits and accounts payable. Our CapEx was about half the level of the prior year as we completed some facility expansion projects in 2008. CapEx was about equal to depreciation and amortization. which was our goal for the year. Given the Company's strong cash flow this year and the expectation of positive cash flow in 2010, the Board recently approved another quarterly dividend of $0.06 per share to be paid in April.

Turning to the balance sheet, as Bill mentioned, we significantly reduced our debt in 2009 from nearly $280 million at the end of 2008 to just over $200 million at the end of the year. Both our debt to capital ratio and our net debt to capital ratio declined by 11 points. We had $21 million of cash on hand at the end of the year and had $120 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 over $160 million of available global liquidity at the end of the quarter. Our revolving credit agreement matures in April of 2012. We are in good shape on all of our debt covenants. 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 Bill indicated, we're seeing continued improvement in the revenue environment across our businesses. New business continued to improved sequentially in the fourth quarter, with orders up 13% versus the third quarter. This continues the trend of sequential improvement we saw beginning in the second quarter of this year. Q2 orders were down slightly versus Q1, then Q3 orders were flat sequentially with Q2, and now Q4 is up 13% versus Q3. Based on what we are seeing, we expect year on year order growth in the first quarter and throughout 2010. I can tell you that our January orders were well above those from last year in both our municipal and industrial markets. However, as Bill alluded to, our revenue growth trend for the first half of the year will be challenged by the fact that our year-end backlog is substantially lower than last year, particularly for our longer order-to-ship cycle businesses. Last year's strong back log enabled us to generate first half revenue that included $73 million of backlog reduction. Said another way, our shipments were $73 million higher than our orders in the first half of last year when the global economy was very weak and our orders declined more than 30%.

Thus for the first half of the year, our revenue trend will lag our order trend due to the difficult year on year comparison. We expect to see a stronger revenue trend resuming in the second half of the year as our orders [builds] and the backlog drawdown becomes less significant. In addition to the general improvement in order trend across our businesses, we are excited about the revenue dynamics of our public safety business and our increasing presence in the intelligent transportation market. As Bill mentioned, orders for our PIPS License Plate Recognition cameras were up more than 40% in the quarter. Additionally, we broadened our product line of best-in-class technologies in intelligent transportation with the acquisition of Diamond Consulting Services, which we completed in December. Diamond specializes in vehicle classification systems for tolling and other intelligent transportation systems. In open road tolling, Diamond's software identifies the vehicle and ensures the proper tow is charged.

Diamond's technology complements our existing PIPS technology, which provides the enforcement function for open road tolling If a vehicle goes through a toll lane without the proper toll tag, our PIPS camera identifies the license plate and notifies the tolling authority. As we have indicated, we will continue to explore opportunities both internally and externally to grow our presence in the public safety and intelligent transportation markets. Consistent with these goals, in January we announced that we reached agreement to acquire Sirit, a global supplier of radio frequency identification, or RFID technology. Sirit's RFID technology enables vehicles to pass through open road toll lanes without stopping as the toll is charged electronically. We have raised our initial offer for Sirit in response to an unsolicited offer received by Sirit. The details are set forth in our press release yesterday. Due to the sensitive nature of this process, we will not be making any further comment on the Sirit transaction during this call.

Similarly, we will not be giving specific earnings guidance for 2010 at this point. Among other things, we want to wait until the Sirit transaction is finalized before we discuss our expectations for this year and beyond. We do plan to make a separate presentation on our future strategy and outlook by mid-March. It's safe to say that we will continue to build on our successes in the critical areas of margin improvement and cash generation that enabled us to get through a very difficult 2009. We are very aware of the potential for cost and inefficiencies to creep back into the business once the revenue line begins to recover. and we will remain diligent on costs and cash flow as our markets continue to rebound. As you know, we have market leadership position in most of our businesses, which is a great place to be when the market trends improve.

To wrap up, I feel we ended 2009 on a very positive note, and I'm excited about the future of the Company as we move into 2010. Our businesses are well-positioned to benefit from an improving revenue environment. We will build on our 2009 successes in margin improvement and cash flow. We have over $160 million of available liquidity, and we have taken steps to focus the Company and capitalize on the growing global market for public safety and intelligent transportation systems. I look forward sharing more details with you about our future vision and expectations by mid-March. Thank you for your time, and we will now open the call for questions.

(Operator Instructions). Your first question comes from the line of Charles Brady with BMO Capital Markets. Please go ahead.

Thanks, good morning. I just want to talk on the Bronto, obviously that order pickup is pretty substantial. Can you give some more granularity on where you're seeing those orders coming out of in the Bronto business?

Well, Bronto, as you know, operates in a number of markets around the world. So what we've seen is a slowly improving trend in many of Bronto's markets, and I think one of the more interesting deliveries that Bronto had in the fourth quarter is we delivered our first two units to the first U.S. wind power market. We believe that market has some upside potential in the future, and we look forward to exploiting that here in the U.S. So we saw a general increase across a number of markets for Bronto in the fourth quarter.

Okay. And looking at the backlog for Bronto and for ESG, I'm assuming that's a next 12 months backlog? I that correct, or does some of that fall beyond 12 months?

No -- well, the backlog is based on the number of orders we have waiting, and the length of it is just based on the sales rate. So you have to basically look at the monthly sales rate to determine the days outstanding -- days sales outstanding.

Would you expect the backlock in those businesses to be delivered within 2010?

Oh, absolutely, yes.

Okay.

Absolutely.

Thank you.

Your next question comes from the line of Ned Borland with Hudson Securities. Please go ahead.

Good morning, guys.

Hey, Ned.

Great finish to a tough year. On the sweeper orders, the uptick there, can you shed a little light on that in terms of geographic exposure? I think in the release it said that there was some non-US growth there. How does non-US versus US compare?

Well, the vast majority of Elgin's business is US, so we have a very small portion that have business that's international. So most of that growth that you saw is in the US.

Okay. And would you -- I mean, would you construe this sort of huge surge in orders sequentially -- I mean, is that somewhat of a budget flush at the municipal and state level, or is that definitely a trend?

Well, it's difficult to say this early, Ned, but one thing I can tell you is January orders were up as well, so we're very hopeful. We saw a pretty positive trend in ESG's businesses, both in the industrial and the municipal markets in January. So we're not popping the champagne corks yet, but what we saw in the fourth quarter appears to have continued at least through January.

Ned, it's Bill Barker. Just looking at our orders on the muni and government side of the business, I think one of the things that might be somewhat surprising to folks is in the fourth quarter, our orders in the municipal and government segment were down only 7% versus last year and they were up 8% for the quarter. For the full year, orders in the muni and government market were down 14%. So I think it's somewhat surprising that that part of our business has held up relatively well this year with all the stories out there about the troubles municipalities are having.

Yes. No, definitely. Oka,y and I guess, with this surge in orders, and it looks to be a trend, I mean, would you say that your backlog is likely to improve over the first half?

Yes, yes. I mean, we do project order growth to continue through the first half of the year. We do project an increase in backlog. As our order patterns continue, and we ramp up to ship, there will obviously be a slight lag between shipments and orders. But we do project an increase in the backlog log in the first half of the year.

Okay, and then switching back to Bronto for a second here, there's an exclusivity arrangement, I think, with E-1 for emergency and fire and rescue vehicles. I mean, does that -- that expires this year, does it not?

That is correct. It expires in the fourth quarter of this year.

Okay. So that should improve orders in the US for Bronto, shouldn't it?

Well, it certainly gives Bronto an opportunity to sell in the fire market in the US, and we're very excited about that opportunity. We think it's a good opportunity for Bronto.

Okay. And then finally, we've been hearing that tucked into some version of the Jobs Bill on Capitol Hill, there's a provision for continuing highway funding at the '05 levels. Would that be meaningful at all to you guys in terms of your PIPS business?

Well, not in terms of additional funding. I mean, the continuing -- for the last several months, Congress has approved a continuing authorization of the current highway bill. That does not add new and incremental funding to highway programs. Where we expect a stepfold increase in intelligent transportation funding is when a new highway bill is passed. I don't think any of us know when that will be at this point. It's been bottled in Congress for -- for all of 2009, really, so we're not projecting at this point when we might see passage of a new highway bill and what that might mean for PIPS.

Okay. Oh, and one last question. With the $30 million of cost takeout on the fixed costs, what sort of cost initiatives are you looking at currently?

Well, we have continued programs that we started in 2009 that involve both looking at design costs in our products as well as fixed manufacturing costs and so facility consolidations; so we haven't set -- we haven't publicly determined or disclosed what that cost target will be. We'll have -- excuse me -- we'll have a lot more to say about that when we come back by mid-March to discuss our guidance.

Okay. Thank you.

(Operator Instructions). Your next question comes from the line of Steve Barger with KeyBanc. Please go ahead.

Hi, good morning.

Good morning, Steve.

I know you don't want to talk about Sirit and that's fine, but just directionally, if you're successful in that bid, it could use about half your domestic liquidity. I'm just trying to get an idea of what else you need to buy to round out the technology platform with what will be left of your liquidity position?

Well, Steve, I mean, there's -- there are a number of opportunities that we're looking at both domestically and overseas to help build out that technology platform. I wouldn't want to give a direct answer on targets or on categories that we're looking at today. But I can tell you that we don't think that we will be constrained in the long run by our available liquidity. We have long-term plans to ensure that we'll have enough liquidity and flexibility to build out the technology platform that we're looking at.

Is the -- does the potential for portfolio-shaping of the legacy product lines exist to bolster that liquidity position as you -- is that part of the strategy of transforming to a more tech-based Company or are you happy with what you have right now?

Well, I would say that we're looking at all options. We haven't ruled out anything. It's very likely that as we become more and more focused, that we'll continually look at our portfolio and optimize it where necessary, but we have other options as well. So I wouldn't want to be too specific about individual businesses, but I can tell you that we have good opportunities in all of these businesses, but as we become more and more focused, we'll continually look at the portfolio and optimize it.

Okay. And APL saw a 40% growth rate. Are you seeing big orders from the tolling applications, or is that more broad-based orders from police departments? Or can you characterize what kind of entity is buying and inquiring in ALP right now?

We're seeing much bigger order quantities in the tolling business. That's one area that our average order size increases dramatically in tolling applications versus law enforcement. So that's one reason why that's an attractive market for us because the average order size is significantly higher in that segment than the police segment.

And can you talk about inquiry activity that you're seeing? And I know everybody's waiting for a highway bill. Are there other entities that are talking about good-sized orders?

Quota activity is up in that business and we expected to see continued strength in 2010.

And can you talk directionally about margins on the tech-based products? Or if not yet, where gross margins can go as you get to whatever sustainable volumes are in your platform?

I can tell you the margins in that business will be significantly higher than our corporate average. I'm not at a point where I want to give you a specific margin ranges; but when we sit down again in mid-March to give guidance, I think we can be a little bit more specific at that point.

Okay. And can you remind me what size the end market opportunity is there -- in intelligent transportation or ALPR, just in general?

Well, I wouldn't characterize it as ALPR. I would say the global market for intelligent transportation products and services, we believe, is in the range of $4 billion to $5 billion globally.

On an annual basis?

Yes. And we view this as a global market. We don't view it as a US or North American based market, we view it as a global market.

Okay, one more and then I'll get back in line. In the prepared comments, Bill, you indicated the current efficiencies should translate into higher margins as revenue recovers, and I think that was a total Company comment.

Yes.

As revenue recovers, what do you think a sustainable OP margin is for Federal Signal?

Well, I think we need to go by business. We want to see the SSG business comfortably into double digits on a recurring basis. We believe that the ESG business can also be in the double digit range, perhaps the low double digit range, as revenue recovers. But it's going to be a moving target for us because we have more and more cost reduction efforts that we're putting in place, and as the business recovers, we expect margins to grow. So we want to see SSG comfortably into double digit margins, and ESG perhaps in the low double digits. Bronto, we think those margins at these shipping levels are sustainable -- at these revenue levels.

Right. And okay, so as I think about Federal Signal in aggregate, as you trend back towards $1 billion, those targets that you're talking about are achievable? Or do you need more than $1 billion in revenue to kind of get there?

No, I think we can get there with a billion dollars of revenue. I don't see that as an issue at all.

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

Other questions?

There are no additional questions. Mr. Barger, if you do still have questions, go ahead.

Well, the only other thing that I would ask is you talked about the -- kind of the whole end backlog as a function of the orders coming down. In all your product lines, are you seeing those trends through January sustainable? And in terms of the inquiry activity that you're seeing, I guess the question is, how confident are you in that back half revenue ramp based on what you can see right now?

We're pretty confident about that. One of the most important elements is that the industrial business seems to be coming back, and that's an area that really, really hit environmental solutions group very, very hard. As Bill mentioned, we saw about a 15% revenue reduction on the municipal side, but on the industrial side it was pretty dramatic. And the heartening thing is we're starting to see that come back in ESGN, and that, I think, will bode well for them throughout the year. SSG has been relatively steady. We expect that over the course of the year that those revenue trends will increase. Order trends will increase as well throughout the year, and Bronto's January's orders were also up, so we felt pretty good about that as well.

So -- and I know you're not giving guidance on this call -- but is it your thinking that you can see a mid-single digit revenue growth in 2010? High single digit? Just help us frame up kind of how you're thinking about the broader full year picture.

Well, like you said, Steve, we're not giving guidance on this call. So we'll have a lot more to say about that in mid-March. There are a couple of moving pieces that we want to get nailed down before we give guidance, but we'll have a lot more information to share with you in mid-March.

All right. Sounds great. Thanks.

Just before we wrap up, its Bill Barker. I just wanted to clarify the point where we talked about the EPS in the first part of the year being adjusted for moving Pauluhn into discontinued operations. We reported previously Q1 was $0.02 a share from continuing Ops. I think moved down to a break even quarter in the first quarter of 2009. Q2 because $0.11 reported, that goes down to $0.09. And Q3 was $0.10 reported -- that goes down to $0.09 as well.) So that will all be in our 10-K, which we'll file in the next day or two, but just if you're updating your numbers to lineup with what's in the press release, those are the adjustments by quarter from moving Pauluhn to discontinued opposite.

As there are no additional questions, I would like to turn it back to Mr. Osborne for closing comments.

Okay. I'd first of all just like to thank Federal Signal employees for a very strong year in a very difficult environment. I'd like to say that Federal has a bright future ahead of it as we continue to grow our markets and offer new products around the world, and we look forward to talking to you again in mid-March. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may disconnect and have a great day.