Federal Signal Corp (FSS) 2011 Q4 法說會逐字稿

Good day everyone. Welcome to the Federal Signal Corporation fourth quarter 2011 earnings conference call. Today's event is being recorded. For opening remarks and introductions I will turn the call over to Mister Bill Barker, Senior Vice President and Chief Financial Officer.

Thank you. Good morning and welcome to Federal Signal's fourth quarter 2011 conference call. I'm Bill Barker, Federal Signal's Chief Financial Officer. Joining me on the call today is Dennis Martin, President and Chief Executive Officer, and Jennifer Sherman, General Counsel and Chief Administrative Officer. We will be using some slides in the presentation. The slides can be found by going to our website, www.federalsignal.com, clicking on the investor call icon and selecting the webcast. We'll 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 the 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. We expect to file our Form 10-K shortly. Now I'd like to turn the call over to Dennis Martin.

Thank you, Bill. Thanks to those on the call for joining us today. We continue to see good signs of progress in the fourth quarter. Our strong order trend continued and our backlog continued to build. Each of our four business groups ended 2011 with an order backlog that was at least 40% higher than the prior year. ESG orders were extremely strong. Its year end backlog more than doubled and was $100 million higher than a year ago.

Q4 revenue increased by 20% versus last year and our Q4 operating income, excluding impairment and restructuring charges in both years, increased by over $12 million versus last year. Earnings per share for the quarter, excluding charges, was $0.06. We continue to see strong markets for our safety and security products and received sizable orders from the nuclear industry, as well as strong international orders for our industrial warning systems. We generated positive cash flow and reduced our net debt in the quarter. As we recently announced, we completed the refinancing of our balance sheet a few weeks ago. Each of these points has positioned the Company well as we head into 2012. Bill will cover the financials in more detail in a few minutes. And I'll give you some thoughts on our future a bit later. First, I'd like to give you my perspective on the quarter.

Demand for the majority of our products remains robust. We continue to see very strong orders for each business in the ESG group. Total ESG orders for the quarter were up 74% and for the full-year orders were up 40%. In the SSG group, Q4 orders increased 23%, led by our industrial systems and alerting and notification businesses. Bronto Q4 orders remain solid despite the challenges in the European economy and orders for the full year were ahead 36%. FS Tech won a large multi-year contract and Texas. Q4 orders exceeded $100 million and the project pipeline remains strong. Despite the strong orders for FS Tech, we recognized a non-cash impairment charge in the quarter as the profitability in 2011 was below expectations. And the expected timing of future revenue and profit has shifted somewhat from our forecast last year.

One other factor I would like to touch on is the refinancing of our balance sheet, which was completed a few weeks ago. Bill will talk to the details, but the key element of our new debt structure is the flexibility it gives us as we move forward. We have the ability to repay the term loan at par with proceeds from the sale of certain assets this year, and we can refinance the term loan paying a relatively modest premium at any time after one year. Both of these provisions were very important to us, lowering our debt level, combined with our expectations for improved results in 2012, should improve our credit profile and continue to create more attractively financing opportunities for us in early 2013.

To sum it up, it was another quarter of improvement, we are excited about the direction we are headed, and encouraged by our position as we begin 2012. After Bill goes through the financials, I will be back with a few more thoughts before we take your questions. And now I'd like to turn the call back over to Bill for the financial review.

Thanks, Dennis. I will give a fairly brief review our financial results for the quarter, which are included in today's press release. Looking at our P&L for the fourth quarter, sales of $223 million were up 20% versus last year. Gross margin was down 1 point, primarily due to product mix at Bronto. However, our SG&A ratio was significantly reduced versus last year from 27% to 20%, due to three factors. The absence of non-recurring items we occurred last year, such as separation costs related to the former CEO and cost related to settlement of a portion of our hearing loss litigation, lower ongoing corporate cost in 2011 due to the corporate restructuring actions, and strong Q4 top line revenue growth that enabled us to leverage our SG&A cost base. As Dennis mentioned, operating income before impairment and restructuring costs improved by $12.6 million. Our reported EPS for the quarter was a loss of $0.27. But excluding this year's non-cash impairment charge, Q4 EPS would have been $0.06.

On slide 4, we show the results by segment for the quarter. For purposes of comparability, I have excluded restructuring and impairment charges in both years. Our environmental solutions group, or ESG, had a very strong quarter with continued strong growth in orders and revenue, and a significant increase in operating profit and margin. Orders increased 74% versus last year, with strong order growth across all lines of business. [Holds] and street sweepers, Vactor sewer cleaners and hydro-excavators, Guzzler industrial vacuum trucks and Jetstream high pressure water blasters. Revenue was up 30% versus last year and operating income more than tripled, with operating margin increasing from 2.8% last year to 7.2% this year. ESG's continued strong orders increased its year-end backlog to $183 million, which is $100 million higher than a year ago and over $50 million higher than at the end of the third quarter. As Dennis said, we believe ESG is well-positioned for a strong year in 2012.

Bronto returned to a double-digit operating margin in Q4 as strong orders from earlier in the year were turned into shipments and the business generated a 12% operating margin. As a reminder, Bronto is our longest lead time business with an order to revenue cycle that averages about nine months. Bronto's orders in Q4 were about flat to last year as demand in Asian markets continue to offset weakness in Europe. For the year, Bronto's orders increased 36% to $138 million and Bronto's year end backlog increased to $80 million, versus $57 million a year ago. The first quarter is traditionally a low seasonal quarter for Bronto shipments, but given the high backlog and steady order trends, combined with the continued progress on the manufacturing efficiency initiatives, we expect Bronto to generate significant profit growth in 2012.

Our safety and security group, or SSG, generated strong order growth of 23% in the quarter, with particular strength in our alerting and notification and industrial system segments. However, due to some market challenges in the public safety businesses, SSG's operating margin slipped below 10% in the quarter. Our expectation is for the SSG group to return to a solid double digit margin business in 2012. We're taking steps to address the margin challenges in the public safety businesses. Q4 order growth pushed SSG's backlog up to $32 million, versus $18 million a year ago, and we continue to see robust demand in the markets for Safety and Security Systems for industrial plants, nuclear facilities, campus environments and outdoor warning environments. The increase in backlog is notable for SSG and an encouraging sign for 2012, as SSG tends to run a much lower backlog than our large truck businesses and orders for SSG products turn into shipments much more quickly.

FS Tech orders were $109 million for the quarter, driven by a large multi-year contract in Texas of $68 million. Revenue increased 11% and operating loss was reduced versus last year. The FS Tech business in the process of ramping up the support several significant contracts and is incurring upfront cost to do so, which limited its profitability in 2011 and will likely do so in Q1 2012 as well. Corporate expenses in the fourth quarter were $6 million, which was significantly lower than last year largely due to the essence of last year's costs associated with the hearing loss settlement and separation costs related to the former CEO, as well as savings recognized in 2011 related to the corporate restructuring we announced previously.

Turning to the balance sheet, our total debt at year-end was $222 million, and our net debt after cash was just under $213 million. I have highlighted the net debt line at the bottom of the page which illustrates our trend through the year. We had a challenging first quarter in 2011 and also made some cash payments in Q1 for some of the charges we took in the fourth quarter of 2010 for the hearing loss settlement and the corporate restructuring. As you can see on the slide, at the end of Q1, our net debt increased to $229 million, which we then steadily reduced to $213 million at year end. The pace of our debt reduction slowed a bit in Q4 as working capital increased due to a combination of strong sales, which increased our receivables. Q4 sales increased $29 million versus Q3, combined with maintaining inventory levels necessary to fulfill our growing order backlog.

On slide 6, we show our cash flow for Q4 and year-to-date which illustrates the net debt trend I just highlighted. For the quarter, we generated $4.8 million of operating cash flow and just over $2 million of net cash flow, which was impacted by a significant increase in Q4 working capital. A combination of the big Q4 sales increase and a high year-end order backlog is very good news for the business, and we've increased our investment in working capital to support the future revenue growth from our sizable backlog.

As Dennis mentioned, we refinanced our balance sheet last month with two debt facilities, a $100 million asset-based revolving credit facility and a $215 million term loan. The asset-based revolver has an interest rate equal to LIBOR plus a spread between 1.75% and 3.5% based on our usage of the facility. Currently we are paying about 2.5% spread over LIBOR. The revolver has a five-year maturity and is secured by domestic inventories and receivables. The asset-base is updated monthly. Our current borrowing capacity under the revolver is about $76 million.

The term loan has a five-year term and an interest rate of LIBOR plus 10% with a 2% LIBOR floor. We've paid a 2% closing fee on the loan and that fee gets amortized over the life of the debt. As Dennis discussed, the loan is structured to give us the flexibility to pay down the loan balance this year at par with proceeds from certain assets sales. In addition, we can repay the loan in part or in full at any time after one year with a 2.75% premium, provided we reduce our domestic debt below a certain level.

We incurred about $1.9 million of non-recurring expense in February of this year related to this refinancing. This is a combination of May co-payments for the early termination to our private placement note holders, and a recognition of deferred financing costs related to our prior bank debt agreement. The $1.9 million expense will impact our P&L by $0.03 per share in Q1. We currently expect our Q1 EPS to be about breakeven, including the $0.03 impact of the non-recurring financing costs. As a final point, the Company will not pay a dividend in the first quarter, the Company will review the dividend each quarter. That wraps up the financial summary, I will now turn the call back over to Dennis.

Thanks, Bill. As we begin 2012, I feel good about the state of most of our businesses. Our orders and backlog are in good shape, as are our market-leading positions, our superior products, and our reputation for quality have enabled us to benefit from the improving market conditions. In addition, we've been able to expand in some growing market segments for several of our businesses including Jetstream water blasters, Vactor hydro-excavators, Bronto Skylifts and our industrial safety and security business. We are making good progress on margin improvements and efficiency in many of our businesses. The stronger level of demand has enabled us to implement 80/20 business simplification actions and focus on our more profitable products and customers. And our working capital metrics such as inventory turns, DPO and DSO have all improved. As a result, we expect each business unit to generate improved levels of profitability in 2012.

However, at this point, we will not be providing guidance for 2012 beyond Q1. As we have discussed, our new debt agreement enables us to pre-pay the term loan on which we are currently paying 12% interest at par with the proceeds of certain asset sales. We are currently in the process of evaluating a variety of scenarios regarding the potential sale of assets and the resolution of this process will have an impact on our earnings guidance for 2012 and beyond. Once we've reached the resolution of our valuation process, which we expect to be within the next several months, we will set up another call to discuss earnings guidance and our outlook for the Company.

You'll recall in our Q4 2010 conference last year, that I outlined that my sole objective is to improve shareholder value. In order to accomplish this, I said I would focus on four things, cash management, including reducing working capital, margin improvement in all the businesses, achieving financial results that we commit to, and transparency and cooperation with shareholders and we are sticking to those plans. We continue to focus on cash management with a particular focus on improving inventory turns, and reducing inventory levels. By effectively applying 80/20 tools, we are cutting out slow moving and unprofitable part numbers, aggressive working capital targets are included in the bonus objectives of each group president and down through each organization. Similarly, margin improvement is being achieved through operating improvements at every business. We are implementing our profitable growth strategy by customer, by product, and by segment. And at this point, I'd like to open up the call, the line for questions.

(Operator Instructions). Charley Brady, BMO Capital Markets.

With regard to the backlog, how much of that backlog is next 12 months and specifically on FS Tech and the large three year order, how is that going to be recognized through the revenue line over the three years, or is it evenly split?

If you look at the backlogs for Bronto ESG, and SSG, we would expect almost all of that to ship this year. FS Tech on the big order, the $68 million order, that is pretty evenly split over the next three years. In their backlog is a couple other big orders, so it probably is about, I would say if you take the $70 million to $80 million, it is going to be longer for that backlog that will probably spread over a two or three years. But the other businesses we should all ship this year.

As you look to the margin that is in the current backlog, more particularly the margins that you are getting current bookings, how would that compare to margins you saw in Q4?

Last year, we mentioned to you, Charley, that we were setting objectives on our margins and we feel like we are still in line with our margins that we expected. So, we feel good about it.

Can you fill us in on FS Tech it sounds like the profitability has been pushed out a little bit, can you give us a timeline of when that out of turn profitable? Is it Q2?

We are considering a lot of different scenarios here. We're not going give guidance beyond what we talked about Q1. We talked about the backlog and the expectations, but at this point we're not going to talk much more about too much beyond the current.

Will all the start up costs at FS Tech is incurring for upcoming projects be expensed by the end of Q1?

I think by the end of the first half.

Deane Dray, Citigroup.

Hi, good morning. Jim [Spank] filling in for Deane. Essentially, just going back to those prior questions, the margin targets, you are basically reaffirming with the exception of FS Tech?

Yes, I think that is right, James. The targets we put out before were basically 10% plus for ESG and Bronto, SSG more in the mid-teens and we feel we've got pretty good line of sight there. FS Tech is still a little bit of an open question for us.

If I could maybe go to FS Tech or potential divestiture candidates, would this be something in terms of a whole segment or business pieces of a segment? I guess what I'm asking is what is the criteria here, something that is salable or an underperforming piece or maybe high-value piece?

We really can't go there. There are many things being considered.

What was the FX impact in the quarter?

It is very minimal in the quarter, actually. Virtually nothing on orders revenue or income. If you look at the average exchange rate and quarter-over-quarter, not much there. For the full year it was about a 1% benefit for across-the-board orders, revenue and income, but in Q4 really no impact.

Almost all the 19 % plus was organic?

I'm sorry the 19 % plus?

You're year-over-year sales growth is organic?

Yes.

While I know you will not comment beyond the first quarter, but I was wondering if you could maybe help us, given the fact that the first quarter is practically over here, and maybe give a little more color on the trends that you are seeing in municipal markets, both here, as well as in Europe?

The municipal market in Europe is still very flat. In the US we've seen good activity on the ESG municipal side, the police side is still -- it is moving some, but it is not really exploding or expanding rapidly. The Bronto business, which is impacted obviously by municipals and Europe is slow, but they are seeing good activity on a global basis. We've seen an uptick, generally, in that market other than police and fire, domestic.

We continue to see strong demand more on the commercial side and on the industrial side, particularly for safety and security products, as we talked about. We really haven't seen much change in the dynamic that we talked about in the fourth quarter in terms of market and demand. We expect to see good revenue growth in the quarter, and continued good order strength.

Walt Liptak, Barrington Research.

You are in discussions right now for asset sales, but we don't get a view on what segments that may be coming out of, or how much cash flow you maybe taking in?

If you look at our public announcement, Walt, we announced that we have a financial plan that allows us to sell certain assets. If you go back to our third quarter last year conference call, we said we would evaluate businesses, and businesses that do not meet their criteria for advancing shareholder value beyond this year will be considered. We have a lot of things we are looking at, but we really, at this point, can't get into much detail on what those pieces are.

It sounds as if you maybe fairly fair along. Do you expect during the first half that you would have an asset sale done?

I'm sorry, Walt, did you say in the first half?

Yes, the first half.

We certainly hope that we would have our process concluded about what we are going to do, whether or not we -- if we do decide to do down a path, what the closing schedule will be we is still open. As Dennis said, we do expect to be back and set up another call in the next several months to talk about the decisions we've made and what that looks going forward. In terms of actually getting a deal done, if there is one, we can't really talk about that, yet.

In the environmental group, the order pick up, it looked like largely US-based. Can you give us some color on is this replacement demand, are these parts sales that are coming in, stronger-than-expected?

It is all of the above, it is domestic. We have some going into Canada, but it is parts sales at it also is new equipment. On the industrial side especially. The industrial side is very active right now. Anything that is surrounding oil refining, the refracturing they are doing in mining, all those things are really driving demand. Our Vac business is doing well, Jetstream is doing well, just a good heavy industrial mix with a good lift in municipal.

Going back to the full-year, I guess the guidance that you can provide. How about revenue for the first quarter? You said breakeven on EPS, but would you expect revenue to be about flat with where it is at the end of the fourth quarter?

Yes, I think that is a pretty good call, Walt. It is probably flat with Q4 and if we stayed there that would be about 20% to 25% versus last year in the first quarter. I think that's a pretty reasonable number.

Other items for 2012, what kind of tax rate are you expecting?

I think 25% is a reasonable proxy to use.

(Operator Instructions). At this time I'll turn the conference over to Dennis Martin for any additional remarks.

Well, thank you for joining our call and for your questions, and we will talk with you as soon as we can. Thank you. Have a good day.

That does conclude today's conference. Thanks you for your participation.