Federal Signal Corp (FSS) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Federal Signal Corporation's fourth-quarter conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Brian Cooper, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Good morning, and welcome to Federal Signal's fourth-quarter 2015 conference call. I'm Brian Cooper, the company's Chief Financial Officer. Also on this call with me are Dennis Martin, our Executive Chairman and Jennifer Sherman, our President and Chief Executive Officer. We will refer to some presentation slides today, and to two news releases which we issued this morning. The slides can be followed online by going to our website, federalsignal.com, clicking on the investor call icon, and signing into the webcast. We have also posted the slide presentation and the news releases under the investor tab on our website.

Before we begin, 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 releases and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website. Our presentation also contains some measures that are not in accordance with US Generally Accepted Accounting Principles. In our earnings news release and our filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-K later today.

Dennis is going to begin today with some introductory comments. Jennifer will follow that with some important context for our key topics. And I will go into some detail on our fourth-quarter and full-year results. Jennifer then will address our agreement to acquire Joe Johnson Equipment and wrap things up with thoughts on our outlook for 2016. I would now like to turn the call over to Dennis.

Thank you, Brian. As you all know, Federal Signal recently announced some important management changes, and most notably, my move to Executive Chairman, Jennifer's promotion to the role of President and Chief Executive Officer and the appointment of senior vice presidents for each of our groups. These senior leadership changes were the result of a thoughtful and orderly transition plan.

Jennifer has played an important, pivotal role in our successful turnaround in recent years. And she has developed strong working relationships with our customers, dealers, employees, investors, and our financial partners. We are working hard to ensure a seamless transition for the benefit of our stakeholders. I would like Jennifer to provide some perspective on what we have accomplished, and what we plan for. So let me just say what a privilege it has been to lead Federal Signal for the last five years. I'm extremely proud of what we have accomplished, and I will remain actively involved in M&A activities, investor relations, and development of our leadership team.

I want to emphasize my confidence that we have a solid platform that will assure Federal Signal's continued long-term success. I appreciate the opportunity I have had serving our shareholders and stakeholders, and I look forward to guiding our future success as the Executive Chairman of the Board of Directors. Thank you, and with that, I would like to turn the call over to Jennifer.

Thank you, Dennis. And thanks to all of you for joining our call. I am honored to be speaking today as the President and CEO of Federal Signal. I am also very proud of our team for turning in another strong year and solid fourth quarter. Following a strong 2015, we have had a busy and productive start to 2016. We acquired Westech, refinanced our credit facility, sold our Bronto business, and we announced this morning executed an agreement to acquire Joe Johnson Equipment.

For a number of years we've considered whether the Bronto Skylift business was strategic to Federal Signal. Our investors have also asked the same question. We have now divested Bronto, which was not considered close to our core and suffered from an inconsistent earnings stream. We were very pleased with both the price and terms we received for the business. As we move forward, we will be able to redeploy the sale proceeds to fund strategic acquisitions, like Joe Johnson, and position the Company for growth. All of these changes are built on the foundation we have been laying for several years. This foundation positions us to pursue profitable growth, and to remain healthy, while we weather economic headwinds and business cycles.

Let me talk about a few of these building blocks in this foundation. First, we have worked to communicate our strategies, objectives, and plans more effectively. Shareholders know about our 80/20 culture; our operating margin target; our capital priorities; our acquisition approach; and our strategic initiative. Next, we have steadfastly pursued operating efficiencies through our 80/20 effort, and we have nurtured our flexible manufacturing model. That is, we have managed capacity needs and costs by flexing what we source internally and externally by shifting production among our facilities and by building a strong core of dedicated employees.

On the capital structure front, we are now debt-free. We have leveraged our assets and steadily increased our return on capital employed. We have reinstituted and grown our dividends. We have refinanced our debt agreement so that we can continue to invest for the future. And with respect to investment, we have built a solid organization, and we continue to add capabilities in depth. This includes additional sales resources, M&A capabilities, and a focused innovation effort that is helping us move forward with market-based, faster, new product development initiatives.

I was just at an industry trade show for Environmental Solutions Group where we introduced four brand-new products. These include a water recycling option for sewer cleaning equipment and a purpose-filled Hydro-excavator truck for the utility market. And of course, we are well-positioned to invest in acquisition opportunity. More about that later.

2015 was another strong year of financial performance. Now I'd like to turn the call back to Brian to take us through the numbers.

Thank you, Jennifer. Our consolidated fourth-quarter and full-year financial results are provided in today's earnings news release. A historical and current-year information presented in the release exclude the results of the Fire Rescue Group, which was discontinued in connection with the sale of the Bronto Skylift business, which was completed in January this year.

For the full year, I would like to briefly highlight some of our consolidated results. Net sales totaled $768 million, down 1% versus 2014. Despite the slight reduction in sales, operating income of $103 million was up 16%, translating to a much-improved operating margin of 13.4%.

On an adjusted basis, we reported full-year earnings per share of $1.02, up $0.16 from $0.88 per share last year. Operating cash flow for the year was also outstanding at $91 million, up 12% from last year. We delivered this cash flow on the strength of our earnings, even as we continue to invest in our businesses and fund operating expenses and working capital to support our growth initiatives.

Overall, our full-year results are very good, and our improvement has been impressive in spite of the challenging conditions in some of the markets we serve. For the rest of my comments, I will focus mostly on the comparisons of the fourth quarter 2015 to the fourth quarter of 2014. Starting with the top line, consolidated net sales were $186 million for the quarter, down 11% compared to the prior year quarter. Operating income was $24.3 million, down 6% versus last year, and fourth quarter consolidated operating margin was 13%, up from 12.3% one year ago.

Income from continuing operations was $17.4 million for the quarter, compared to $19.9 million in the prior year. After adjusting for certain special tax items in both the current and prior year periods, adjusted fourth-quarter earnings were $0.25 per share, which is unchanged from last year. Orders continued to be soft, and were15% lower than last year. At $171 million, our backlog was down, from $179 million at the end of the third quarter of 2015, and from $255 million a year ago.

Looking briefly at our group results, our Environmental Solutions Group reported a net sales decrease of $18.3 million, 13% versus last year, largely due to reduced sales of domestic sewer cleaners and vacuum trucks, including hydro excavation products. Despite the lower sales, ESG operating income was up slightly, translating into an operating margin of 17.9%, up from 15.5% last year. Orders were down 19% for ESG, when compared to high levels a year ago, reflecting reduced demand for vacuum trucks associated with the significant downturn in oil and gas markets. With our expanded capacity and shorter lead times, we also continue to see fewer advance stocking orders, which contributes to lower backlog. ESG backlog at the end of the year was $133 million, down $4 million from the end of the third quarter of 2015.

At our Safety and Security Systems Group, sales were down 7% compared to last year's quarter. Operating income of $9.1 million was down 17%, while operating margin was 14.7%, compared to 16.4% in Q4 last year. Orders at SSG were down 5%, compared to the fourth quarter last year. As we have noted previously, it is normal for most of SSG's businesses to operate with relatively low backlog.

Corporate operating expenses of $7.1 million were in line with prior-year levels. From a consolidated perspective, we reported a gross margin of 29.7% for the quarter, up from 27.5% last year. Selling, engineering, and general and administrative expenses of $31 million were down 3% compared with the prior year quarter. All these factors roll into the Company's $24.3 million of fourth-quarter operating income.

We also reported other income of $600,000 in the current year, compared to an expense of $900,000 a year ago. Current-year income and prior-year expense primarily relate to foreign currency transaction effects. On lower debt levels, interest expense was down $300,000 compared to the prior year. Income tax expense for the quarter was $6.9 million, compared with $4.1 million one year ago. The effective tax rate for Q4 2015 was low, at 28.4% largely due to the inclusion of a $1.4 million net benefit from special tax items. This included $4.2 million of benefit associated with tax planning strategies, offset by $2.4 million adjustment of deferred taxes and $400,000 of expense associated with the change in the UK income tax rate.

The effective tax rate in Q4 of 2014 was also lower than usual because of certain special tax items, including the impact of a $3.5 million release of valuation allowance on certain foreign deferred tax assets, as well as a $400,000 benefit from a change in the enacted tax rate in Spain. I would also note that our effective tax rate in 2015 for the full year, excluding special tax items, was approximately 36%. We currently expect our financial book effective tax rate to be in a similar range in 2016. Cash taxes paid will be lower than that, at a percentage rate the we estimate in a range of about 15% to 20% based on our anticipated use of deferred tax assets, consisting largely of net operating loss carry-forwards, and tax credit carry-forwards.

On an overall GAAP basis, we therefore earned $0.27 per share from continuing operations in Q4, compared to $0.31 per share last year. To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for any unusual items recorded in the current or prior year quarter. In the fourth quarter, we made adjustments to GAAP earnings per share in each of reported periods to exclude the special tax items I just discussed. On this basis, our adjusted earnings for the fourth quarter were $0.25 per share, which is consistent with the fourth quarter of last year. I would note, too, that our strong performance this quarter brings us to adjusted earnings of $1.02 per share for the year, which is up 16% compared to $0.88 in 2014.

I'd like to turn now to the balance sheet, which remains extremely strong. In fact, with our robust cash flow and proceeds from the sale of Bronto, it continues improving. Operating cash flow was $91 million for the year, up 12% from last year. On the strong cash flow, our cash position is up significantly from last year.

At the end of 2015, we had $76 million in cash, up from $24 million at the end of 2014. Total debt was $44 million, down from $50 million a year ago. Cash on hand at the end of fourth quarter exceeded total debt by $32 million. We used some of our cash flow to pay an increased quarterly dividend of $4.3 million. For the full year, we paid dividends totaling $15.6 million in 2015, up $10 million versus 2014.

We funded $10.6 million of share repurchases throughout the year, and have approximately $69 million remaining under our share repurchase authorization. That concludes my comments and I would like to turn the call back to Jennifer.

Thank you, Brian. Before we talk about the acquisition of Joe Johnson Equipment, I would like to briefly provide some color on the performance in our groups. At SSG, we continue to see healthy performance from our public safety systems operations, which are focused on police lights, sirens, and related businesses. The end markets in the US have been relatively stable the last couple of years, and we continue to see improvement in southern Europe. Our teams have been steadily working on 80/20, including things like streamlining our product offerings and reducing our lead times to improve our competitiveness and profitability.

Our Integrated Systems Business, which provides customized warning and security systems to municipalities, government agencies, and industrial customers has lumpy demand and industrial exposures, including oil and gas. This business offers profitable growth opportunities, where we continue to invest. As Brian mentioned, the Environmental Solutions Group reported a robust 17.9% operating margin, despite lower sales in the fourth quarter. This outstanding performance is a reflection of our continued execution on 80/20, and lean initiatives, maintaining discipline on our pricing and leveraging our capacity.

It also reflects quick responses to significant changes in our marketplace. In particular, the crash in oil and gas markets has had a much larger impact than we initially anticipated. You have seen the impact in slowed orders during 2015, and a much smaller backlog as we started 2016. While oil and gas may have represented only about 10% of our overall revenue, adjacent markets are absorbing used equipment that has been redeployed from oil and gas, displacing our sales of new equipment. We have seen an influx of used equipment into our markets at reduced prices, or rental equipment rates that are lower than historical levels, such that renting may be more attractive than buying new equipment. We have also seen a sharp decline in demand for industrial vacuum trucks, particularly our hydro excavation products, which tend to have higher margins.

In addition, projects on the SSG side has slowed significantly as well. One obvious response to such a market change is careful cost management, and our flexible manufacturing model allows us to adjust our capacity more rapidly than in prior downswings. However, we have also taken advantage of our expanded capacity and shorter lead times to capture additional sales opportunities, including our pursuit of opportunities in adjacent markets, such as utilities. The two individuals that we recently promoted to lead our Environment Solutions and Safety and Security Groups are tasked with driving these initiatives and the execution of our strategic plan.

While demand from oil and gas markets, and to a lesser extent, other industrial markets has been soft recently, we have seen steady demand in our municipal-based businesses, both domestically and in Europe. With municipal demand partly offsetting softness in our industrial markets, our backlog is down about 4% from the end of the third quarter, but there's been something of a shift in the mix of our backlog, which now carries a higher concentration of municipal orders. Faced with the challenges created by oil and gas effect, we continue to focus on new product development and believe these efforts will provide additional opportunities to further diversify our customer base.

Vacuum excavation demand, outside of oil and gas, continues to grow. Municipalities, utilities, and construction companies continue to adopt vacuum excavation as a best practice, and our continued investment in people and products dedicated to these markets will position us to capitalize on this growth. We are committed to investing in new excavator designs to target broader markets. Within SSG, we have also introduced internationally certified safety products to expand our global reach.

As we enter into 2016, we are continuing to work these strategies and initiatives that should help us sustain our profitable growth. We've talked about these initiatives previously. I want to briefly revisit them. Our first initiative is disciplined growth. As I just mentioned, we have a variety of new product element initiatives and investments that we're driving to stimulate organic growth in our businesses. We also want to complement that growth with acquisitions that leverage our core competencies or give us access to adjacent or new markets, like Westech and like Joe Johnson. We continue to be committed to a disciplined approach and evaluating acquisition opportunities in the market.

We are also continuing to focus on leveraging our invested capital and improving our manufacturing efficiencies and cost. With 80/20 now an important part of our Federal Signal culture. Our strong 2015 performance depended heavily on these two areas of focus.

The final initiative is to diversify our customer base. Historically, 60% or more of our domestic net sales were derived from municipal and other government markets. Municipalities will continue to be important customers, and our leadership in municipal and government markets remains a strength of our Company. At the same time, our organic and acquisition growth initiatives generally will focus on expanding our industrial customer base. Although near-team term industrial demand has been soft, notably in relation to oil and gas markets, we continue to believe that industrial markets tend to offer better margin and growth opportunities over the longer-term.

Our long-range goals remain unchanged as well. On the top line, we want to grow faster than GDP while increasing the share that comes from industrial. We aim to generate a strong return on invested capital. We also strive for a long-term consolidated operating margin of 12%, and we've targeted an average growth of earnings per share at a rate in the low-to-mid teens.

As part of our commitment to growth, we've also talked previously about our aspiration of adding $250 million of revenue to our annual run rate over the next three years. With that goal in mind, we are delighted to report that today we signed a definitive agreement to acquire substantially all of the assets and operations of Joe Johnson Equipment. Joe Johnson Equipment is a leading Canadian-based distributor that specializes in serving municipalities, municipal contractors, and industrial contractors with high-quality equipment that includes street sweepers, sewer cleaners, vacuum trucks, snow removal, and refuse collection. Joe Johnson Equipment represents a number of leading brands that include our Environmental Solutions Group, Elgin, Vactor, Guzzler, and Jet Streamline.

It also offers equipment rental options, parts, service, and ancillary equipment. It's headquartered in Innisfil, Ontario with 13 branches throughout North America. Joe Johnson Equipment also has operations in Chile, and we are currently in discussions with respect to potentially acquiring these operations at a later date. Joe Johnson Equipment brings us a comprehensive platform that will allow us to grow our business in Canada and better serve our customers across North America, with broader product offerings, including rental and used equipment options. It's an outstanding organization with impressive leadership, attractive customer and supplier relationships, a commitment to excellence, robust business processes, and a history of success.

Joe Johnson's revenues in North America were approximately $112 million during its FY15. We estimate that in 2016, the Joe Johnson acquisition will be modestly accretive to non-GAAP adjusted earnings per share, which exclude acquisition-related and purchase accounting effects. The acquisition is likely to result in changes in the timing of revenue and profit recognition that should normalize over a period of about three years. We therefore expect Joe Johnson Equipment to be about $0.10-$0.15 accretive on an annual basis by the end of 2018. We aim to close the transaction by the end of the second quarter of 2016.

On the heels of an extremely strong financial performance in 2015, we continue to believe in our long-term operating margin targets. Our municipal markets, which represent about 60% of our revenues, remain healthy. However, similar to other companies that have recently provided guidance, we expect 2016 industrial markets to be challenging. The negative impact of the oil and gas downturn on some of our industrial businesses has been greater than we anticipated.

For example, there is excess oil and gas-related equipment in the marketplace that could take up to 18 months to be fully absorbed. It also creates pricing pressures on these products. Overall, the broader impacts of the oil and gas downturn are expected to reduce our 2016 operating income by about $12 million to $14 million.

In addition, we entered the year with a smaller backlog, with a less favorable mix compared to last year. This lower backlog makes us much more dependent on the flow of orders and reduces our visibility into revenue for the year. In each of the last three years, we have also benefited from a low level of hearing loss trial activity. Consistent with our past practice, the Company will vigorously defend itself in such actions, but we may see a rise in hearing loss defense costs in 2016, if the number of trials increases.

So considering the headwinds that we are facing, and the ongoing uncertainty in industrial markets, we are tempering our expectations for 2016. Assuming no further significant deterioration in industrial markets, we expect adjusted earnings per share for the year to be between $0.70 and $0.80, including a modest contribution from JJE. As we move forward, we're expanding our focus on new markets, accelerating the introduction of new product offerings, managing our costs and maintaining our 80/20 effort. Our strong cash flow, healthy balance sheet, Bronto sale proceeds, and new credit agreement give a significant financial flexibility to invest in these growth initiatives, pursue strategic acquisitions, and continue to return value to shareholders through dividends and share repurchases. We will update you as the year develops.

At this point in time, I would like to open the line for questions. Operator?

Thank you.

(Operator Instructions)

Walter Liptak with Seaport Global.

Good morning, Walt.

Hey, good morning, guys. I wanted to ask about the revenue that's assumed in your 2016 guidance. And specifically for ESG, what kind of a revenue decline are you expecting for this year?

Walt, we don't guide to revenue. However, we expect our revenue to be down on a year-over-year basis. And that is really being driven by the impact of oil and gas in our ESG businesses, particularly Vactor.

We are seeing reduced sales of our hydro excavation products -- a little bit at Jetstream. And then our Safety and Security business, our industrial systems business that's focused on oil and gas -- we'll see downturns there.

I do want to emphasize that municipal demand remains stable. And we've introduced new products. So, a lot of it depends on the adoption rate of those new products, but the initial signs are encouraging.

Okay, I appreciate that you guys aren't giving revenue guidance. But if I make some assumptions, looking at the order level -- the order declines over the last couple of quarters, and then if I start looking at your decremental margins -- the decremental margins look a little bit larger than I would've expected. And so, I am wondering what kind of margin level are you expecting in ESG specifically and/or what kind of decrementals are you looking for? And if they are larger, is it a pricing issue, is it a volume issue -- just a little bit more color, I guess, on what is leading to your guidance for this year.

Walt, I think your insight there is correct. It is not purely a revenue impact. We are getting some negative leverage effects on our operations from the lower volumes. We are also seeing some price pressure in the market.

On the municipal side, again, things are pretty solid, as Jennifer said. It's really on the industrial side, and we are looking at a different mix of products. So, when you combine the mix and some of the pressures that are coming mainly because of the oil and gas impacts through the markets, the margin is coming down some as well.

Okay, I also wanted to ask about the acquisition. And it looks like it was very strategic. And so, I wonder if you could just provide a little bit more color on the strategy behind the acquisition, and maybe what valuation metrics that you are looking at? And then I will go back into queue.

Sure, absolutely. We are pleased with this opportunity. We think this is strategic; it remains close to our core.

What was particularly attractive about it was that Joe Johnson gives us a footprint in 13 locations, and a distribution channel that allows us to introduce our industrial products, particularly our Guzzler products, our Westech products, and our Jetstream products, and grow our Business in Canada. We also have an initiative on our Public Safety Systems side to introduce products through that same distribution channel.

In addition, it gives us an option with respect to rentals. Joe Johnson currently has a program in place where they partnered with four of our current dealers on a rent to re-rent program. This allows us to offer that program to all of our municipal dealers. And that will be another tool in the toolbox. They have a parts and service platform that we think is attractive, and, over time, has high-growth and attractive margin opportunities.

And in terms of valuation metrics, Walt, I think -- I don't think we did anything terribly unusual. We looked at cash flow from the businesses, synergies we can get and so forth in valuing it. We didn't talk in terms of a multiple, but you can see we are spending about CAD126 million at the upside, in Canadian dollars, or about $93 million, on this transaction. And we expect it to have a return in excess of our cost of capital.

Okay. Is their revenue more stable than yours is on the equipment side, because this is a rental business?

Their mix of equipment, Walt, is different. They're serving in municipal markets. So, beyond the traditional Vactor, Elgin and Guzzler products, they have a broader mix, includes both service, rentals and that mix of equipment. So, it is more stable, more consistent.

One of the things we love about Joe Johnson is they have great relationships with their customers. That does provide stability going forward.

Okay, sounds good. I'll get back in queue.

Thank you. Steve Barger, KeyBanc Capital Markets.

Good morning.

Morning, Steve.

I'm going to go back to ESG for a minute. If we assume that oil prices -- they won't come back any time soon, what is the right long-term growth rate for ESG that you think about?

We believe that we are committed to our long-term ESG of operating margin. We have a number of initiatives right now to grow our hydro excavation business outside of oil and gas, particularly focused on the utility market and construction markets. We're starting to see traction in some of those initiatives.

As I mentioned, we've introduced new products, particularly our recycling products and our Jetter products. Those also provide growth opportunities. So, long term, we feel really good about this business.

JJE, or Joe Johnson Equipment, is an important part of that growth strategy. And we think the margin targets we previously set forth are achievable.

And, Steve, one of the things we like about all of those products is the hydro excavation adoption rate is still increasing. Although it's been slowed by oil and gas, we're pursuing it in other markets, like utility, and targeting our innovation to help us get there.

Understood. And you guys have done a nice job on the margins. But I'm just thinking, when you talk about ESG from a top-line perspective, over the longer term, do you think it's a 5% growth business? Do you think it can be double digit on a regular basis? Just trying to get an idea of how you think about growth there.

We think it has the opportunity for high single-digit growth, without acquisitions.

Got it.

And then, when oil and gas comes back, Steve, that's a wild card.

Understood. Right.

But like you, we're not counting on oil and gas coming back in 2016.

Right. And ESG orders averaged $112 million per quarter in 2015 versus $139 million per quarter in 2014. And I would say that 2015 level is basically in line with what you put up in 2011, 2012 and 2013.

So, the question is: Should we be thinking the 2015 run rate is the right number for the next couple of years? Or do you think you potentially come in below that on a quarterly basis?

I think it's the right number, Steve, once we get past another quarter or two of the excess sale of used equipment into the market. I think that is a pretty good estimate for a run rate.

I think part of what you're seeing, Steve, is the second half of 2015, oil kept going down. So, the pressure on the markets got worse.

And then in addition to that, you have the inventory effect, if you will, of the rental market, and the other equipment coming out of the oil and gas patch, and diluting -- just creating a glut of equipment, frankly. It competes with our new equipment. So, there has been a headwind.

Those numbers tend to fluctuate, depending on large fleet orders. For example, in 2014, we had a number of large fleet orders, and those tend to be every couple of years, depending on the cycle.

How do you gauge excess used equipment in the market? Does the Rouse data, for instance, which covers some of the other rental companies -- is there a service like that, that helps you understand where the market is?

No, we don't see it that way. What we really have been doing is monitoring auctions and sales.

And rental rates.

And rental rates have dropped significantly, and the monthly rates. So, it's really not as -- it's not reported.

Is there a business that tracks those rental rates, or is that anecdotal from talking to your dealers in the channel?

Primarily dealing with our dealers in the channel.

Okay. And so, looking at ESG margin, obviously the guidance implies a pretty big step down in 2016. So, the question is: Given really strong orders in 2014, and very good production in 2015, did you over-earn relative to longer-term trends, or do you view it more as 2016 will be unusually low?

If you recall, we went back, we gave you estimates of our margin expectations by business unit prior to last year, and then we actually ended up exceeding that during a few of the quarters because of just running at the very high end of the capacity curve. We still believe in the run rate percentages that we put out there as margin targets.

And there is a little bit of extra headwind in 2016. So, I think we would expect the volume side to pull back as we move forward.

I think you also have to look at the mix issue. Municipal margins are typically less than the industrial margins. We are focused on both from an acquisition perspective and organic growth perspective, on growing that industrial business.

We have a number of initiatives to diversify our product offerings, particularly out of oil and gas. So, I think that this is an unusually low year, and we're encouraged by where we are investing, and we think we're well positioned to grow. Also, depending on what happens in oil and gas in 2017 and 2018, we think we are very well positioned to supply any demand there also.

Understood. One question -- just for modeling, and then I'll ask a couple of acquisition questions.

For SG&A, should I be thinking low $30 million range per quarter with the exit of Bronto, and JJE coming in? Is that fair?

That sounds about right, Steve

Okay. And CapEx for 2016 and D&A?

We expect -- it has generally run between $10 million and $15 million. We expect 2016 to be in a similar range.

Okay.

G&A is around $12 million.

Okay, perfect.

Is there any room for conflict with you buying a distributor? And how do you even gauge the risk of that, given that you sell through distribution?

The first thing I want to talk about -- this is not a distribution roll-up strategy. We believe that the acquisition of Joe Johnson, in fact, helps us enhance our current municipal dealers. We have had an opportunity this morning -- I've talked to three so far, of our major dealers, and they have really embraced the idea that they are going to have a rental fleet available to re-rent to their municipal customers. So, we look at this as giving them another tool in their toolbox moving forward.

Whenever you make a move, Steve, in a market like this, there's a potential for some disruption. And we're going to do our best to minimize it. But we think our forecast includes any amount that might occur with that.

And we have limited conflicts between dealers. So, one of the things, when you look at acquiring a dealer, they have a geography, and certainly on the municipal side, that's more contained.

Right. And I hear you, it's not a distribution roll-up strategy. But if the other dealers like the idea of re-rent, does that mean you need to open more facilities beyond the 13 or 14 that you said are already in North America? Or are you well covered to provide that to the dealer network?

If you look at our Business today, Steve, we have our solution centers -- we have 9 or 10 solution centers, plus their 13 -- now in addition. So, there would be some additional ones open, but the market will drive that.

And all of our distributors have substantial yards and service capabilities. So, partnering with them -- we were hoping to leverage off of their locations with them, and give them the benefit of doing that with us. We are not going to wholesale open tons of locations.

Right, okay. I saw in the press release that it's won the best-managed company award for five years, so obviously already well run. Are you doing this strictly for the revenue synergy, or the opportunity to grow the business? Or even with those awards, do you view it as a margin expansion story, and how do you get there?

There is a couple of answers to that question. One: 80/20 works everywhere. And I think they are excited about investigating how 80/20 could help with their business model.

We also know we can learn an awful lot from them. And we can bring that to how we go to market, serving the municipal user markets.

We will learn a lot more about products and services that the end municipal customers demand or need. And also, I think it's an opportunity not only just to add revenue immediately, but to leverage the better service of customers and users, to grow that way.

And specifically, it gives us a distribution channel that allows us to grow our industrial market share through our Guzzler, Westech and Jetstream products.

Okay. Can you give us an idea of where JJE's EBIT margin is now, and how much they have in D&A?

JJE will operate within a division of ESG, and we typically don't talk about the division result, or break those out.

Okay, well, can you give us a routing number associated with the $0.10 to $0.15 accretion in 2018, just to at least help us think about what the return profile is of the acquired company?

They had revenues last year of CAD154 million, so $112 million or so. We'll have some offset to that, in that we sell to them. So, we don't get to count that twice. And then we expect them to grow at a pretty healthy pace, especially in some of their service businesses and their municipal businesses remain strong. (Multiple speakers)

Pretty healthy meaning above the high single-digit rate that you think about ESG with?

In the high single-digit range, yes. I think that is a fair assumption at this point.

I will hop back in line, and see if anybody else has any.

Thank you.

Thank you.

(Operator Instructions)

Walter Liptak.

So, as a follow-up to the last question -- you discussed the new products. I wonder how much of the utility trucks, and some of the hydro excavators are factored into the 2016 guidance, and maybe any color on how the utility truck is selling?

For 2016, we've assumed a modest adoption rate. So, there is upside there.

We remain very committed to our new product development that requires R&D investment. And just to give you some color, our R&D spend in 2015 was about $14 million, which was up 7% versus 2014.

We have the innovation team that is continuing to go out and study markets, and identify new product opportunities. They work closely with our engineering group.

The feedback will be in full production on one of our purpose-built utility trucks by the beginning of the third quarter. And the initial interest has been extremely high.

We've also introduced our Jetter product to our distribution network, and again, the interest is high. And then, we think the patent recycling product that we are offering for our vacuum trucks presents significant growth opportunity. We're not going to stop investing in new product development, and 2016 reflects that.

Okay. Do some of these products go, like the hydro excavators, I know the application is going into utility; do any of these new applications go into the construction markets?

Yes, some of the contractors that utilize this equipment also use them for the construction markets.

Okay, sounds good. And the corporate expense -- what number are you using for 2016?

We are assuming it's fairly flat, with the exception of hearing loss expense, which we are anticipating will probably be higher in 2016, based on the number of trials that we foresee at this point in time.

Okay, got it. All right, thank you.

The trials are currently scheduled in the second half of the year. Depending on whether they move forward or not, we would update our guidance accordingly.

(Operator Instructions)

Alex Yaggy, Cortina Asset Management.

Hi, good morning. I wanted to follow up on the revision to -- the guidance that you've given for the year. I want to try to understand what is actually going on underneath the surface here. I understand that oil and gas has come down quite a bit.

Sequentially, are we to expect a big downturn in the first half of the year, and a pickup in the back half, or are you assuming a steady run rate? It's such a big decremental, as one of the earlier questions was referring to. It's obviously surprising to investors. Can you help put a little color on that?

Sure. We entered the year with the low backlog. We've talked about the mix; and the mix is less favorable. Our municipal business remains strong.

We expect the first half of the year to be lower. And the second half of the year, candidly, is a wait-and-see game.

We are seeing traction on our new product development and the adoption rate. But we need to see more orders in order to give you a better picture in terms of what the second half of the year. The hearing loss expense, as Brian previously mentioned, is also an issue.

We continue to be positive about both our municipal markets and some of the diversification we're doing on the industrial side. So, it is a wait-and-see game for the second half.

I was just going to add -- some of the equipment that's moving back into the market from the used rental and also from contractors selling up their equipment that are getting out of the oil and gas exploration, really has moved into the industrial side. It's really, as we said before, there is no direct way to gauge the percentage.

We think it is moving through, and we're hopeful that over the next 12 months it is all through. It's hard to gauge because there's just no way to record that amount of equipment that's coming into the market.

So, you can't really estimate how much of lost sales opportunities you think have developed as a result of this?

We've tried to estimate it in our forecast, and brought down our numbers.

But can you put a revenue number, roughly?

It's hard to know, factually, what it is.

Basically we don't know how long it will take for the overhang to work its way through. We're anticipating in the second half that that has not really occurred yet. To the extent that it does, we will feel better about it. At this point in time, we just don't have good visibility for the second half.

Okay, thank you.

Thanks, Alex.

Steve Barger.

Hi, thanks. Thinking about JJE just from a modeling standpoint, is there seasonality in that business, or should we think about the revenue as basically level-loaded?

There is seasonality in that business; they primarily sell to municipalities and government entities. So, a lot of it depends on their buying cycles.

A good deal of their business is in Canada, so they have a little more severe weather, certainly in the west.

So, the summer months tend to be higher.

Okay. Since you brought it up, Dennis, what percentage of revenue is US versus Canada, and can you give us an idea of how the Canadian side is growing right now?

Are you talking about for Joe Johnson?

Yes.

It's about 75/25 split between Canada and the US.

And they've been growing in both markets.

At the same rate, plus or minus?

Pretty much, yes.

And when you think about EBIT for Joe Johnson, what's the primary driver for the business? Is it new equipment sales, or rental, or parts and service? And maybe can you give us an idea of those three buckets from a percentage standpoint?

New equipment sales is the primary driver. The parts and service has been growing impressively over the last couple of years, and we expect that to continue at relatively high margins. The rental business is a smaller portion of that.

Smaller, but growing.

So, are they going to face the same headwinds that you are, on the new equipment side for 2016? Is that the expectation?

Actually, their mix of products is different, Steve. While we're the largest categories with Vactor and Elgin products, they also have a number of other products related to the winter snow removal, refuse and other things. Their mix is different -- it won't be impacted the same way.

And it's primarily municipal.

Over 80% of their business right now is municipal markets. So, they have very limited exposure to oil and gas.

So, it could be confusing. They are primarily municipal today. But one of the things we like about them is the opportunity that we can use to leverage them in the industrial markets.

I see. And just two more -- can you talk about working capital and CapEx characteristics for JJE? Is it more intense, from a capital standpoint, than your Business?

It has not been in the past. The rental business, if it grows, will be more capital-intensive, to a certain extent.

They also have some cyclicality to it; they tend to build up on their working capital and their inventory through the winter months, and then bring it down as they have higher sales in the summer periods.

I guess, when you think about growing that rental opportunity for the other dealers, is that something that you'll use your balance sheet for? Or will you -- is there any way that you would start to finance deals or things like that, or would that all be from a third party?

At this point, Steve, that is a great question and a hard one to answer. I think at this point, we are assuming we would be using our balance sheet, and we're evaluating opportunities to make sure they have good returns and provide a solid opportunity for us. It's harder to go outside and do financing of those things in today's world.

Right.

Right now, we believe they currently have a rental fleet of about [$50 million]; we think that is generally sufficient to meet the current market needs. We do plan on supplementing that rental fleet with some industrial products, particularly our Guzzler, our Jetstream and our Westech brands. So, we estimate that to be somewhere between $15 million and $20 million in 2016, if, in fact, the market supports it.

Okay. And you should have pretty good free cash flow in the primary business this year, I would think, even with the decline in guidance. And you've said this is not a distribution roll-up strategy. What is the other -- what is the next avenue that you will look to, in terms of acquisitions as you try and augment organic growth?

We continue to be committed to, or close to, our core, in terms of where can we leverage our existing capabilities, either in adjacent markets and new geographies, within the margin targets that we've set? And we have a -- right now -- we have been working diligently on that. We have a good pipeline of opportunities that we'll continue to pursue in a disciplined way.

And, Steve, they go across really all three of our business units or business groupings. We've been looking at things in Europe with our police business. We're looking at things in the SSG side, as well as on the ESG side.

As Jennifer said, there's quite a few things in the pipeline. And it's varied, which is what we like about it.

All right, thanks so much for the time.

Thank you.

We'll go back to Walter Liptak for a final question.

Okay, this will be the final one for me. The balance sheet's in great shape. How much net cash do you expect to take in this quarter from Bronto?

So, the sale proceeds are about $88 million, and we'll get most of that this quarter. There is a post-closing adjustment that might increase or decrease that number a little bit. And then we will end up paying taxes on the gain. So, there is a little bit of a reduction for that.

Okay. It sounds like a minor tax adjustment.

It's a fairly good-sized tax piece, but the proceeds will still be north of -- easily north of $60 million.

Okay. And so, with that cash coming in, with the Company cash flowing well, the balance sheet debt-free, can you talk to us about the appetite for strategic acquisition versus your own share repurchase?

You said we did, or you want us to?

I'm wondering, with your stock down this much, maybe you can refresh us on just how much is left on that repurchase program, and --?

We have $69 million remaining on the authorization. And our Board would be flexible on that, so I wouldn't view that as a cap or a limit or anything. We will look at that. And Joe Johnson acquisition is a good return on our money; our stock would be a good return on our money right now, too, I think.

I agree. Thank you.

Thank you. And now I would like to turn the conference back over to Jennifer Sherman for any additional or closing remarks.

In closing, I want to thank Dennis for his significant contribution to the Company over the last five years. I am fortunate to have him both as a mentor and a friend. We look forward to working together in our new roles.

I also want to emphasize that we remain committed to growing our Business and leveraging our profitability. Our strong fourth-quarter and annual results are a product of the hard work of our employees, the dedication of our distributors and dealers, and the depth of our relationship with customers. Thank you. We remain optimistic about the long-term prospects for our businesses, and we'll look forward to talking with you again after the first quarter.

With that, thank you.

Thank you. Ladies and gentlemen, once again, that does conclude today's conference. Thank you all again for your participation.