Federal Signal Corp (FSS) 2012 Q1 法說會逐字稿

Good day everyone, and welcome to today's Federal Signal Corporation first quarter 2012 earnings conference call. Today's call is being recorded. For opening remarks and introductions, I would now like to turn the conference over to Mr. Bill Barker, Senior Vice President and Chief Financial Officer. Please go ahead.

Good morning, and welcome to Federal Signal's first quarter 2012 conference call. I'm Bill Barker, Federal Signal's Chief Financial Officer. Joining me in the call today is Dennis Martin, President and Chief Executive Officer, and Jennifer Sherman, General Counsel and Chief Administrative Officer. We'll 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'd 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. We expect to file our Form 10-Q shortly. Now I'd like to turn the call over to Dennis Martin.

Thanks Bill, and thanks to those on the call for joining us today. We last spoke to you on our year end call less than two months ago, and our first quarter results reflect a continuation of the improving trend we discussed with you then. Our orders and backlog continue to grow in Q1, our revenue increased significantly, and our operating results were much improved versus the prior year. Bill will go through the financial details in a few moments, but at a high level, our strong growth and trend continued, and our backlog continue to build. Q1 orders increased 16% versus last year, and our quarter end backlog was $455 million, compared to $258 million a year ago.

Q1 revenue increased by 29% versus last year, and our reported Q1 operating income, executing restructuring and impairment charges in both years, increased by over $10 million versus last year. Reported earnings per share for the quarter was a loss of $0.01. This included a $0.03 impact from costs associated with our February refinancing, and $0.01 for restructuring actions we took at our Safety and Securities Systems Group. Excluding these charges, Q1 EPS would have been $0.03. By comparison, last year's Q1 EPS excluding charges, was a loss of $0.11. On our March call, I told you that I believed each of our business units was positioned to deliver improved profits in 2012 versus 2011.

Our Q1 results, our strong order momentum, and our sizable order backlog have reconfirmed this view. On our year end call, I also told you that we are in the process of evaluating a variety of scenarios regarding the potential sale of the business. Our process is still ongoing, and therefore I don't have any more information to share at this point, other than to reiterate we expect to reach some resolution within the next few months. As we indicated previously, the resolution of our process could impact our earnings guidance for 2012 and beyond, so we won't if giving earnings guidance beyond the current quarter. For the second quarter, we expect earnings to be $0.05 and $0.10 per share. Once we reach resolution of our valuation process, we will set up another call to discuss additional earnings guidance and our financial outlook to the Company. Now I'd like to turn the call over to Bill for the financial review.

Thanks, Dennis. I'll give a fairly brief review of our financial results for the quarter, which are included in today's press release. Looking at our P&L for the first quarter, sales of $225 million were up 29% versus last year. Gross margin increased 1 point to 25%, and our SG&A ratio was significantly reduced versus last year, from 25% to 21%, as our strong top line revenue growth enabled us to leverage our SG&A cost base. As Dennis mentioned, operating income before impairment and restructuring costs improved by $10.6 million versus last year. We incurred $900,000 of restructuring costs at our Safety and Securities Systems Group, primarily targeted towards our public safety light bar and siren business.

We also recognize $1.6 million of costs related to debt settlement. These were costs associated with replacing our old debt agreements, that were recognized when we completed our refinancing in February. Our reported EPS for the quarter was a loss of $0.01, but as Dennis mentioned, that included a $0.01 impact from the restructuring charge and a $0.03 impact from the debt settlement cost. Excluding both of these charges, our EPS for the quarter would have been $0.03. 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 another very strong quarter, with continued strong growth in orders and revenue, and a significant increase in operating profit and margin. Orders increased 24% versus last year and revenue was up 41%. Given that ESG's orders exceeded revenues in the quarter, ESG's order backlog continued to grow. The backlog now stands at $199 million versus $183 million at year end and $106 million a year ago. Operating income for Q1 increased to $12 million versus less than $1 million a year ago, and ESG's operating margin increased to 11% for the quarter. As we said on the year end call, we believe ESG is well positioned for a strong year in 2012, and Q1 was a terrific start to the year.

Bronto's orders were up slightly versus last year, as demand in Asian markets continued to offset weakness in Europe, and Bronto's backlog increased to $88 million at the end of the quarter, versus $77 million a year ago. However, Bronto's operating margins slipped from 3.8% last year to 2.5% this year, primarily due to unfavorable product mix in the first two months of the year. The product mix margin impact improved in March and is expected to improve further as we ship the orders in the current backlog. Given Bronto's higher back log and steady order trends, combined with continued progress on their manufacturing efficiency initiatives, we continue to expect Bronto to generate significant profit growth in 2012.

Our Safety and Securities Systems Group, or SSG, generated order growth of 16% in the quarter, with particular strength in our alerting and notification and industrial systems segments. Excluding this year's restructuring charge, SSG's operating margin was flat to last year at 10%. As we said on our year end call, our expectation is for the SSG group to return to a solid double digit margin business in 2012, will benefit from the structuring actions taken in Q1. Q1 order growth pushed SSG's backlog up to $38 million versus $19 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 have a shorter order-to-revenue cycle then our large truck businesses. FS Tech's orders were about flat last year at $20 million. Revenue increased 22%, and operating loss was about half of last year's, excluding last year's impairment adjustment. The FS Tech business is in the process of ramping up to support several significant contracts, and is incurring upfront cost to do so, which limited its profitability in Q1 and will likely continue to do so in Q2. Corporate expenses in the first quarter were $7.5 million, which was higher than last year, driven by the absence of an insurance recovery recognized in Q1 of last year, costs associated with the refinancing completed in February, and costs related to our strategic business review process.

Turning to the balance sheet, I have highlighted the net debt line, which increased by about $7 million in the quarter, primarily due to $6 million of debt fees paid in connection with our February refinancing. Our total debt at the end of Q1 was $236 million, and net debt was $220 million. On slide 6 we show our cash flow for the quarter compared to last year. Operating cash flow was $3.7 million, which was a significant improvement versus last year, due to improved operating results and improved working capital usage. Our working capital metrics continue to improve.

We are seeing encouraging trends in our inventory terms, as we've continued to focus on business simplification across all of our businesses. Net CapEx was $3 million, and we paid $6.2 million in fees associated with our new debt agreements, which put us in a negative cash flow position for the quarter. We expect to generate positive cash flow for the balance of the year. As a final point, the Company will not pay a dividend in the second 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 I said at the beginning of the call, our business outlook hasn't changed much since our last call two months ago. The key themes remain orders and backlogs are up, revenue growth is strong, and our Q1 results reconfirm my perspective that each of our business groups is positioned well to generate improved levels of profitability in 2012 versus last year. The progress our teams have made also reconfirm my belief that each group can achieve the margin target I established shortly after I became CEO 1.5 years ago.

For ESG, the operating margin target was a range of 10% to 12%. ESG achieved an 11% operating margin the first quarter, and is poised to post strong results for 2012. A combination of improved market conditions, our leading market shares, and expansion into evolving markets segments have fueled ESG's top line growth. Jetstream has opened more rental centers to better serve and expand their customer base, and Vactor is capitalizing on the increased use of hydro excavation by offering products with engineering that meet customer needs. In addition, cost initiative and 80/20 simplification processes have helped improve ESG's operating margins. Given ESG's large order backlog, the team is focusing on streamlining their production processes and improving production efficiency in 2012.

For Bronto, I also established a margin target of 10% to 12%, and Bronto achieved this level of profitability in Q4 of last year. Although Bronto's Q1 margin was down versus last year, their strong backlog and steady order trends, combined with the operating improvements that are now being fully implemented, give me confidence that Bronto will deliver margin improvement Q2, and will deliver double digit margins in the second half of the year.

SSG's operating margin target range is 14% to 16%. I expect SSG to achieve this level of profitability in the second half of this year. As we discussed earlier, we took restructuring actions in the first quarter to lower SSG's cost base, and we will realize the benefits of these actions going forward. In addition, orders and backlog remain strong for our industrial warning and [a learning] and notification businesses, and a higher revenue in these businesses will improve SSG's overall margin. SSG has dedicated considerable effort to 80/20 business simplification projects and cost reduction projects, and is streamlining their production process at our University Park production facility, which will all contribute to an approved margin during 2012.

FS Tech's operating target was a range of 5% to 10% by the end of 2012. Although FS Tech is taking longer to reach their goals than the other groups, the team has made significant progress in terms of winning sizable contracts, both domestically and internationally. The team is now focusing on operations and contract execution. As Bill mentioned, they are spending upfront money associated with projects in Texas, Virginia, Turkey, and Taiwan, and will start benefiting from the revenues from these projects in the later part of this year. In addition, sales of PIPs ALPR camera increased over 40% in the quarter.

The FS Tech team has accomplished its mission in terms of winning contracts and building a sizable backlog, and is now well positioned as a significant player in the intelligent transportation market. So in sum, I believe the margin targets I established for each group are achievable; in some cases they've already been achieved. Clearly, the improved economic conditions domestically have helped our businesses, and we've been able to capitalize on the improved conditions. Thanks to our market-leading products and solutions, and our dedicated teams, I look forward to the continued improvement in the operating income as we move through the year.

Finally as I mentioned upfront, we are still in the process of evaluating 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. As we have discussed, our new debt agreement enables us to repay our term loan at par with the proceeds of certain asset sales. I realize it may be somewhat frustrating that we don't have more news to report on the issue, but in my experience these processes do take time, and I can assure you that we will make the decision that we believe will best enhance shareholder value. Once we are have reached a resolution of our process, which we expect to be within the next few months, we'll set up another call to discuss earnings, guidance, and our outlook for the Company. At this point, I'd like to open the phone line for questions.

Thank you.

(Operator Instructions)

Steve Barger, KeyBanc Capital Markets.

Just broadly speaking, can you talk about order rates so far in 2Q? Any notable changes you're seeing across the segments, or things we should be thinking about?

Hi, Steve. It's Bill. Nothing has really changed that much in the first month of the quarter. We expect to probably, it's hard to look out too far given the current economic uncertainty, but we'd expect order rates to stay about where they were in the first quarter. The growth rates will start coming down because we're starting to [colap] the higher order rates. Last year Q1 is when things started picking up, but right now we haven't seen any big change in order rates.

Okay, and nice performance on ESG on the margin side. I know it's in your guidance range, but you think we're sustainable at this level, and can you talk about margins in the backlog versus what you delivered in 1Q?

I think in the near term it's sustainable, but we do know that we had some catch up going on in the market on the sweeper products. So it'll be interesting for us to see if that pace maintains, and the fact we've seen a little bit of a slowdown on the replenishment of the sweepers. The Jetstream products, the Vactor products, the SSG products are all pacing pretty much where they were earlier, but as I said, sweepers are the one we just kind of keeping an eye on. They got an early sweeping season this year because there was little snow. So I --

Right.

I think that kind of drove a little bit of the early market, but we'll watch it. We're just not certain.

Okay. Just can you talk about the general tone you're hearing from municipalities in terms of budget constraints and where they are in their own revenue cycles?

I think it's a mixed bag but I think many of them are still being very, very, very conservative.

Got it. So does that make you think there's still pent-up demand out there on the street sweeper side, it's just not being -- they're just waiting to place orders?

Really hard to say. Part of what happened last year with low budges is that they actually quit operating a lot of them. We were in New York City a month or two ago talking to the operations people, and so they weren't even running the street sweepers because they've laid people off. So there could be some pent-up demand, but they may also change their cycle, but we don't have any evidence of them changing their cycles.

Got it, okay. One last and I'll get back in line. I was just at the Waste Expo show, which is more on the garbage truck side, but the big theme was conversion to compressed natural gas vehicles. Are you getting any inquiries on that, and do you currently offer CNG products in ESG?

We're the single largest supplier of the sweeper products, primarily in Los Angeles, California. California clearly pushes it. Most of the other states and municipalities don't yet push it, but we have some in New York City as well. So yes, we're positioned well for that, and we're seeing other green efforts on our product lines, because we think that's really part of the future value that we bring.

Dean Dray, Citi.

James, filling in for Dean. I was wondering if you could just elaborate on the three projects you mentioned in the release. It looks like one was $2 million. Was that the Texas DOT project for FS Tech?

Hang on one sec.

We just have to make sure we've got the right one on the release.

Then there were two other projects that you mentioned that shipped, because the sequential drop in orders for FS Tech was quite meaningful. So I just want to get my hands around that.

Yes, just going to that point. The orders on FS Tech are going to be quite lumpy as we get big projects in. So last year we got the big order for the Texas project in. That was a very large order. So you're going to see that order number bump around. I think the thing to keep a closer eye on is the revenue line on there. Yes, the big projects I think we talked about, we've got the project in Texas that we talked about, we've got one in Virginia, and then we've got a couple of foreign projects in Taiwan and Thailand.

Okay. Now, moving to the margins. Just wanted to dig into fire rescue as well as FS Tech. Fire rescue, we've definitely seen you put up some double digit margins, but in the first quarter with the unfavorable product mix, was that more regional or was that more pricing? I was wondering if you could just give us --

It was regional and it was Europe. So we shipped a strong backlog of European orders. That was a big part of the mix during the quarter. So that was really what the impact was.

So looking at their orders and backlog, I would assume that not a lot of European business in there. Is that what is giving you the confidence that you --

Right. Starting in this quarter or next quarter, it really bumps up to more traditional margin product.

Yes, we're seeing more demand in the last six months, really, as you might expect out of Asia and Australia versus Europe. So the backlog is sort of shifting to those markets.

Right, and lastly, FS Tech margin. Is this something they might be able to hit by the fourth quarter, even on the low end?

The 5% to 10%? Yes, they're ramping up right now. They're expensing a lot of stuff upfront. If we can execute these contracts and get the revenue to ramp up in the fourth quarter, we could be at that margin, but it comes down to a question of execution, and some of this is customer acceptance, and so the revenue recognition rules can be a little bit tricky, but we think they're headed in the right direction.

Charlie Brady, BMO Capital Markets.

This is Andrew in for Charlie Brady. I was wondering about, what the breakdown of Bronto sales were, how much was industrial versus fire and safety?

I don't have the exact number, but probably 80/20. Probably 80% on the fire and safety and 20% on the industrial during this last quarter. Primary we're shipping the safety product to Australia and Asia. The units all that went to Europe are fire as well.

Okay, great. The other question I had was in terms of environmental, how much was the product mix affect on margin and kind of what was the product mix, and how much was the price increase affect on margin?

It's a long question, but I'll give you the best I can. What affected the margin the most was probably the volume through the plants, because we've been able to increase the productivity and the flow through the plants. So that added to the margin. There was maybe a point or so of price increase in the plants, and from a mix point of view, we hit on all cylinders. So really it was just strong mix of Jetstream factor (inaudible).

Walt Liptak, Barrington Research.

It does look like things are starting to turn more favorable for you. So start by congratulations, early congratulations, but a couple of things. On the ESG, the order growth and the backlog growth, you called out a couple of things like Jetstream and initiatives there and hydro. If you could gauge it, is it more your own internal initiatives to gain market share and grow revenue and take in orders, or is it the market? You talked about pent-up demand for sweepers. Can you talk about that?

Yes, I think it's really both, Walt. We're doing a lot in our Jetstream business to expand our market. We've opened a number of rental centers to rent our big power equipment, and then therefore driving more sales of the components and cleaners, and in the hydro excavating market, that serves the oil refining, refracting, all the things that are going on there. So really, we could sell every machine we could make on that side. So that's really being driven by the market. On our sweeper business, I think the market return is part of it, but also we think we've gotten some good successes taking a little bit of market share.

Okay, and then just to ask the question that was asked earlier, and I think this is what it's coming down, is we've seen some truck data come in over the last couple of months, and I know these are specialty vehicles. They're not over-the-road or medium-duty trucks, but there seems to be more corporate caution out there on spending trends, and have you seen your order rates continue at kind of the current level, or was it front loaded to the quarter?

I think except for the sweeper activity, which has slowed a little bit, I think that we're seeing about the same level. Sweepers definitely did a bump. There was a demand need there, and they bumped, but it slowed down a little bit from the peak level, but on the rest of it, it's continuing.

Okay. Let me switch gears a little bit. In safety products, you took the restructuring charge.

Right.

This is probably the University Park. What did you do down there, and what kind of benefit do you get from it?

Well, we really are looking at doing a lot of things in University Park. We're really digging deeply into the 80/20, doing some cellular manufacturing, trying to reduce complexity. We have a pretty significant overhead in some of the products on the fleet side. So it was really steps around just trying to move things more toward variable, but we think it'll have an impact and it's helping us through the year.

Okay. Then just switching again to corporate expense. You called out some compensation expense and legal. Can you provide some more color and talk about what that corporate line's going to look like in the back half?

Yes. Well, part of it, last year we had an insurance recovery in the first quarter that we did not have this year. So that was the year-on-year comparison there. I think going forward, probably between a run rate of $7 million to $8 million is a reasonable benchmark right now.

Okay, and would you ex items, Bill, you mentioned the $0.03. What kind of tax rate did you use on that?

Our tax rate right now, well it varies because we're in evaluation allowance situation. So domestically, we really don't have a tax rate. Everything goes straight through. Internationally we are paying taxes. So we expect going forward to have about a 25% to 30% tax rate for the total company.

Okay, and then the last one I have is working capital accounts. It sounds like you're getting some improvement there, which is usually kind of the precursor to margin improvement. Can you talk about how you're getting the working capital to improve at this point, especially with the revenue ramping?

Yes, it's a couple of things. It's really across our metrics inventory terms. It's the combination of the business has picked up, and because of that we're able to simplify and focus more on our high volume items. Like 1.5 years or 2 years ago when the economy was really down, we didn't have the ability to pick and choose orders a little bit and to prioritize things. So we're actually taking a lot of steps to streamline the plants, but in addition we're able to be a little more selective in our business priorities here and focus more on the high margin stuff. So that improves the throughput, plus as Dennis mentioned, we're adding people back to a couple of our plants to improve the throughput there. So we're getting more stuff through the plants. Payables and DSO are both improving a little bit as well, and that's from increased focus from the team, and also, again, as the economy improves, you've got a little more leverage to improve both those metrics.

(Operator Instructions)

Follow-up from Mr. Dray.

James, again. Just real quickly, what was the foreign exchange impact on sales in the quarter?

Very minimal for Q1 versus last year. It was about $2 million, or less than 1%.

Okay, and then lastly, you spoke briefly about your municipal markets. I was wondering if you could just update us on Europe, and we just talked about Bronto and the mix shift there, I guess, or excuse me, the product mix for them, but if you could just update us on the trends that you're seeing in Europe?

Yes. I would say all we have to do is listen to the news. That was a smart act, but, no. The European market is very, very weak.

It's been that way for a while. So in terms of the trend, we don't see a huge change, but we don't see a big rebound.

Right, either way.

Okay, so steady as she goes?

Right.

With no further questions in the queue, I'd like to turn the conference back to our speakers for any additional or closing remarks.

Well, once again, thank you for your support and questions, and we look forward to talking to you next quarter or sooner. Thanks.

Ladies and gentlemen, that does conclude today's call. We thank you all for joining.