Brian Cooper - CFO Dennis Martin - CEO & President Jennifer Sherman - COO.

Steve Barger - KeyBanc Capital Markets Walter Liptak - Global Hunter Securities.

Welcome to the Federal Signal Corporation First Quarter Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brian Cooper, Senior Vice President and Chief Financial Officer. You may begin..

Good morning and welcome to Federal Signal's first quarter 2015 conference call. I'm Brian Cooper, the company's Chief Financial Officer. Also on this call with me are Dennis Martin, President and Chief Executive Officer and Jennifer Sherman, our Chief Operating Officer.

We will refer to some presentation slides today, as well as to the news release which we issued this morning. The slides can be followed online by going to our website at federalsignal.com, clicking on the investor call icon and signing into the webcast.

We have also posted the slide presentation and the news release under the Investor tab on our website.

Before we begin, I would like to remind you that some of our comments made today may contain forward-looking statements that are subject to the Safe Harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website.

Our presentation also contains some measures that are not in accordance with U.S. Generally Accepted Accounting Principles. In our news release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-Q today. I'm going to start by addressing our financial results.

Dennis will then provide his perspective on our performance and market conditions and Jennifer will wrap up our prepared comments with a discussion of our growth, initiatives and outlook for the remainder of 2015.

As you have seen in our earnings release news release, our first quarter results reflect strong sales growth and significant improvement in operating margins as we continue to execute against our strategies and 80/20 initiatives.

Consolidated net sales for the quarter were $222 million, up 11% compared to the prior year period and operating income of $24.8 million was up 94% versus last year. Consolidated operating margin rose to 11.2%, up significantly from 6.4% a year ago.

Income from continuing operations of $14.9 million for the first quarter was almost double the prior year income level. That translates to EPS of $0.23 per share which is up 92% from $0.12 per share last year. There are no material adjustments to GAAP results in either period.

Despite these outstanding results, we did see a 20% decrease in the consolidated quarters during the first quarter. Dennis will go into more detail on some of the contributing market factors. The Fire Rescue Group accounted for approximately 65% of this decrease.

As you can see from our group results, all three of our business groups reported increases in sales and operating income and much improved operating margin versus Q1 last year.

Sales at ESG were up 16% versus last year on significant increases in shipments of street sweepers and vacuum trucks and operating income was up 57% as we continue to benefit from operating leverage, capacity enhancements and product mix. ESG's operating margin rose to a record high of 17% compared to 12.6% a year ago.

Orders at ESG were down 7% year over year. At SSG sales were up 2% compared with last year's quarter, primarily reflecting improved sales in the global public safety markets. Our public safety businesses also delivered improvements in operating margin and operating income for the quarter, driving SSG's improvements.

Group operating income jumped 53% to $6.6 million and operating margin was 11.7% compared to 7.8% in Q1 last year. Orders at SSG were down 13%, mainly due to a comparison against some large orders received in the first quarter last year. As we have noted previously, most of SSG's business normally operates with relatively low backlog.

In the Fire Rescue Group, net sales were up $0.6 million. Excluding the effects of foreign currency translation, FRG's net sales increased by $4.5 million or 18%. Operating income improved to $0.3 million versus an operating loss of $0.8 million last year.

FRG's first quarter orders of $22 million were down 57% compared to the first quarter of last year. Corporate operating expenses at $6 million were in line with last year's levels.

Turning now to the consolidated income statement, our 11% increase in sales helped drive a 26% improvement in gross profit and a consolidated gross margin of 26.7% for the quarter. This compares to 23.4% last year.

Selling, engineering, general and administrative expenses of $34.4 million were up slightly compared to the prior year quarter which also included a nominal benefit from restructuring activity. All of these factors roll into the company's $24.8 million of first quarter operating income.

Other items affecting the quarterly results include a $0.4 million reduction in interest expense resulting from our lower level of debt and an increase in other expense which is primarily due to currency effects.

Tax expense for the quarter was up, paralleling income with an effective tax rate for the quarter of 36.1% compared to 35.6% in Q1 last year. Our full-year effective tax rate for 2015 is currently estimated to be approximately 36%.

This is slightly higher than previously anticipated due to expiration of the R&D tax credit and changes in the mix of our earnings, with less income expected to be generated in lower tax rate jurisdictions. From a cash perspective, we're projecting a cash tax rate in the low to mid-teens.

The difference between our effective tax rate and our cash tax rate relates to use of deferred tax assets to reduce our tax payments. These assets primarily consist of net operating loss carryforwards and tax credit carryforwards.

On an overall basis, we, therefore, earned $0.23 per share from continuing operations in Q1 compared with $0.12 per share in Q1 last year. Looking at the balance sheet and cash flow, the first quarter of each year is typically a period in which our businesses add primary working capital and this year was no exception.

The effect this year was muted by FRG's strong fourth-quarter sales in 2014 which created higher primary working capital than usual at year end. In addition, we generated more cash flow from higher earnings in the first quarter of 2015. In total, operating cash flow improved by $10.4 million.

We generated $3.4 million of cash from continuing operations compared to use of cash during Q1 of last year of $7.0 million. Total debt of $53 million was down from $58 million in the first quarter of last year and net debt was low at $30 million. Our leverage ratio of debt to adjusted EBITDA dropped 0.4 times.

That is lower than the ratio of 1 times a year ago as a result of steady improvement in both lower debt and higher earnings. Our strong operating performance and our low level of debt obviously give us excellent flexibility to fund growth initiatives and return value to shareholders.

During the first quarter, we doubled our quarterly dividend to $0.06 per share, paying a total dividend of $3.8 million. We also funded $3.6 million of share repurchases. We have about $76 million remaining under our share repurchase authorization. That concludes my comments and I'd like to turn the call over to Dennis..

Thanks, Brian. I'm happy to be addressing such a strong first quarter which gets our 2015 off to a solid start. Brian has covered the numbers and I would like to add some color on the results of our markets. First, the Environmental Solutions Group had another outstanding quarter.

Its 17% operating margin reflects strong market demand for our products and three key areas of dedicated focus that we've had in the recent years. And these areas of focus are satisfying our customers, 80/20 and lean manufacturing improvements and the leverage of capacity and flexible manufacturing model that ESG has been utilizing.

At the Safety and Security Group, we had steady performance on integrated system side, complemented by improving performance of the public safety markets. We've been executing a turnaround plan in our public safety business for the last several years and it's rewarding to see it pay off.

We have honed our products, reduced SKU counts and introduced new products and service offerings such as our upfitting of police vehicles. We have also leaned out our production and taken out cost.

From a markets perspective, we have gained some market share in North America during a period of stable market demand the last few years and then southern Europe's police market, it is showing signs of improvement. The Fire Rescue Group which is our Bronto Skylift business, produced modest earnings after a very strong Q4 of 2014.

Q1 is also an improvement over a weak Q1 a year ago. Last year we talked about factory disruptions due to the installation of major paint, welding and machining systems. We have largely resolved most of these disruptions. Our supplier issues also appear to be behind us. With this, we're beginning to see the benefit of these investments.

We have also focused on more profitable sales opportunities, particularly in Europe which had contributed to Bronto's poor results during 2014. We will continue to focus on improving Bronto's performance in 2015. So across our businesses, financial results for Q1 were very strong.

On the other hand, the level of FRG orders was particularly disappointing. FRG has had a long history of lumpy orders and sales. The prior year quarter included a number of large multiunit orders from Asia-Pacific and the U.S. that did not repeat during this quarter.

There also has been a concerted effort to reduce the intake of low margin orders and we lost a couple of large European bids during the quarter. In addition, unfavorable currency translation reduced the dollar value of orders by $4.6 million. Orders and SSG were down as well.

In general, SSG is more of a book and ship business, so backlog is not as large a factor. We had a number of large orders in the first quarter of 2014. In addition, we believe a lot of the softness comes from the direct and indirect effects of weak oil and gas markets and a strong dollar.

Slower orders at ESG also reflected some effects from oil and gas and foreign currency. A key initiative over the last year has been reducing our lead-times and enhancing our capacity. We expected to see a reduction in long-term stocking orders from many of our customers as a result of these improvements.

In the past, customers placed orders way ahead of the market demand to hold slots in our production schedule. As our lead-times have reduced, our dealers can satisfy market demand without placing advanced orders. This reduction in dealer advanced orders does not indicate the deterioration of market demand.

On the municipal side, demand has been steady and feedback from our dealer group has been encouraging. Overall we remain optimistic about ESG's performance for 2015. Now I'd like to turn the call to Jennifer..

Thank you, Dennis. Today I'd like to provide a brief update on our growth initiatives and our earnings outlook for 2015. As we've discussed on previous calls, our priorities for capital in descending order are first to fund organic growth; second, grow acquisitions; third, dividends; and finally, share repurchases.

We would typically target a capital structure with debt at about 2 times EBITDA. Brian noted that our debt is currently about 0.4 times EBITDA, so we have significant capacity in our capital structure. I talked last time about our organic growth initiatives and I would just like to reiterate our focus on acquisitions.

First and foremost, we're committed to being selective and disciplined. We aim to find acquisition opportunities that create value. To do that, our criteria are focused primarily on tuck-in acquisitions that fit closely with our products and services, manufacturing competencies, channels and customers.

For example, we value opportunities to put our products through expanded channels or to take acquired products through our existing channels. These synergies should help us create lasting value. Other criteria that will make acquisitions attractive to us include an industrial markets focus, recurring revenues, sound management and earnings accretion.

You will notice that the size is not explicitly part of our criteria, but we do not intend to overstretch our balance sheet. As part of our focus on acquisitions, we also added some acquisitions expertise to our management team with the appointment of Svetlana Vinokur as Vice President, Treasurer and Corporate Development.

Svetlana's M&A experience will be an important resource as we step up our acquisition efforts. With that, I would like to move on to our earnings outlook. Two months ago we laid out our expectation that adjusted earnings per share for 2015 would fall in the range between $0.95 and $1.02. Since then, we have a few more data points on our markets.

While there has been some softness in orders, the outlook in many of our municipal and industrial markets remains solid and we're pursuing opportunities to gain ground in both new and existing markets.

We're uncertain what impacts the factors that diversity affected our first quarter orders, particularly lower oil and gas prices and unfavorable foreign currency translation, will have on our performance for the second half of the year.

Despite this uncertainty about the second half of 2015, at this point in time, we continue to expect our adjusted earnings per share for the year to be in the range from $0.95 to $1.02. Finally, I would like to close by noting again that we had an excellent first quarter.

We invite you to watch our annual report video that recaps our key accomplishments in 2014 and our goals for 2015. We previewed this video at our annual meeting of stockholders earlier this week. It is posted on our website under the Investors tab. With that, I think we're ready to open the lines for questions.

Operator?.

[Operator Instructions]. Our first question comes from Steve Barger with KeyBanc Capital Markets..

So I guess the first quarter, just on the guidance, your results this quarter bucked the quarterly trend of a weaker first quarter. You maintained the full year. I think we all understand why, but that implies that the rest of the quarters will look like 1Q, plus or minus.

Is that the right way to think about it or are you expecting a stronger 2Q and then a more conservative back half? I'm just trying to get a sense for cadence..

I think, Steve, if you look at what we're looking at is, we were not insulated like everybody else from the effects of the first quarter as everything chilled, but we do have a substantial backlog still in place in all the businesses as we look at backlog. Bronto is an exception.

It did drop since we shipped a lot of the backlog, but our ESG backlog is normal, down a little bit. The SSG backlog -- so we had a pretty good visibility for the second quarter. If the order rate stays cold or chilled like the first quarter, then it will obviously affect in the third-quarter and fourth-quarter margins.

But, as Jennifer said, our dealers are feeling pretty good in most cases on the municipal side. We do have the headwinds from the oil and gas. I think it's yet to be seen what the total impact on that is..

Got it. And looking back over the last few years, it's certainly been a great turnaround -- nice topline growth, but really kind of more of a standout at ESG and that's true on the EBIT side as well.

Given that that segment is so important to consolidated results, can you give us some more color around topline initiatives and just how you are thinking -- what's your strategy for growing the topline there?.

Yes. I think as we look at the ESG group, we understand exactly what you just said.

So in this last year, we have spent a good amount of attention on both of our main factories and actually jet-stream as well, so all three of the factories, to really make sure that these are well lubricated machines that can react up and down with the markets in a flexible way and be able to leverage our costs and our operating income opportunity.

But we've also spent a lot of time on building our sales forces and giving our dealers more tools on the municipal side. And, on the direct side, we've added almost double our salesforce. We've also done a lot on the server side. We've added more solution centers. We've enhanced our rental programs at jet-stream.

Because it is so valuable, we've really been putting resources -- so you'll likely see some of that in the SG&A side. We've enhanced our FS Solutions business in all those things.

Our acquisition strategy also centers around trying to expand our industrial business, as well as our municipal, but a lot of the items -- things that we're really trying to focus on center on the industrial side of the environmental systems group.

Every indication we have is if infrastructure continues to deteriorate, people are going to continue to have to spend money on that. So we believe that we're well-positioned to go after it..

I guess what I would add there, too, is we've talked previously about our new focus on new product development and our innovation efforts and we've hired a dedicated individual to lead that. Our first projects have been focused with our Environmental Solutions Group.

Last summer, we went out and visited 67 different customers in terms of really understanding the utility markets. We're fast tracking prototypes for new product development there. So we've got a lot of different initiatives in the queue right now focused on growing that business..

And I guess just a follow-up question on that, margin has certainly been great there and you mentioned the SG&A might become a little bit more of an issue as you focus on some of the things you are talking about.

But are there still opportunities in terms of labor or raw or component purchases or efficiency there that you can see?.

We believe the 80/20 still has room to go, for sure. And I think what we've seen is we've learned how to flow materials to the assembly lines a lot better -- reduce costs, so I think the answer is yes..

Okay, a question on Bronto. Obviously it's been pretty flat on the topline for the last three years -- not a lot of EBIT generation.

If you look at it on an annual basis, is it free cash flow positive and what percentage of the working cap is it?.

It's a very capital-intensive business, Steve. So it does have a -- it probably uses twice as much working capital on average as our other businesses for the same amount of sales. So that's a factor when we look at that business..

Okay. Well, I guess more broadly speaking, if you look at free cash flow divided by net income, you've been running around 90% in 2013 and 2014.

Is there room for improvement on that? Obviously the other two segments are running pretty well, but I guess can you get above that level?.

Well, we're working on improvements constantly at Bronto and it has been more or less cash flow neutral the last few years a little positive. It should be contributing a lot more..

With all the investments we've put in there, Steve, it should be contributing more. We've been at a very competitive market with the European markets being soft, so pricing has been stressed some there. But yes, we think it can contribute better than it has..

And it will always be a lumpy business, so that's one of the things that makes it hard to look at. I think when you mentioned looking at it on an annual basis, that's a fair way to look at it as opposed to quarter by quarter..

Right..

[Operator Instructions]. Our next question comes from Walter Liptak with Global Hunter..

I wanted to ask about just the order pattern and, with the orders I guess down in Europe and in Asia, just what the quote activity looks like or the pipeline and specifically about the Bronto business, anything outside of in order that would look like visibility?.

I think the order pipe or the quote pipeline for FRG has slowed some. I think we've seen a little bit of a slow in Asia. In Europe we lost some orders in the first part of -- in the first quarter. So I think the proposal flow was there in the first quarter.

We just didn't get a number of orders that we felt were not profitable and really couldn't pursue them to the level on a pricing basis that we wanted. So there is still a good amount of activity. Again, we're just trying to balance production with profitable orders and that had some impact on the first quarter..

Okay.

I guess how do you react with Bronto? If the order activity doesn't pick up at some point, is there more costs that you can take out? Is there more that you can do?.

We have for the last year been analyzing the different strategies we can employ such as reducing inventory -- I'm sorry, reducing overtime, insourcing more of the product.

There are things we can do to tighten it up and you recall we didn't really get the new paint system, machining system, our automatic welding robots up in position until the third quarter of last year. So we believe we should be getting some of the benefits of our productivity enhancement.

We've invested a great deal of money in that business since 2008. You might recall back then we doubled the size of both plants so that we could insource the production, as well as launch a series of new product lines and we're in the middle of working on those product lines.

We did stumble a little bit last year with one of them which was some of the extra labor that was spent. So I think we'll become more efficient in the general production, as well as get some of those new lines out and we should see the benefit of all that..

Walt, I would add that we're very focused on improving the profitability of Bronto.

During 2015 and 2016 and one of our top operation's general managers who has previously run Baxter for us has run our FS Solutions and FS Depot Group will be locating relocating to Finland starting next week and focusing on some of the things that Dennis talked about..

And from a sales perspective, you need to remember Bronto is a very well-positioned product in the marketplace. It's a niche market, so the orders can come unexpectedly and you can see them coming for a long time and other times you just don't know exactly when they will land.

So when you look at some of the markets, they've been a little, as Dennis said, slower. That doesn't necessarily mean that the demand isn't there and Bronto is very competitive in most of those markets and they have great products. If you look at the global economy, it's slowed everywhere, China, Europe, the U.S. in the first quarter.

So I think part of what we're seeing, that is our only truly global business. It ships every year to 40 different countries and I think they are feeling a little bit of that, too..

I wanted to also ask about the oil- and gas-related order activity and just was it down, how much was it down and what pricing looks like in that sector of the economy?.

We don't really break out every dollar of oil and gas on the ESG side because of the rental business and some other things are clouded, but we do know it's down. We've seen pricing maintain, but a lot of the front-end oil and gas new expiration is certainly off.

But in terms of the maintenance of the fields that are there, our service centers are busy in those areas and we're seeing activity. On the SSG side, we're seeing some slowness in orders and also some hesitation as the global market tries to digest what's really going to happen with oil and gas.

So I think we have to have another quarter or so to really understand what the impact of that is. But, certainly as we look at our business, it had some impact on it, but again, we were in so many other markets that we believe we will be able to overcome the negative on that..

[Operator Instructions]. It appears there are no further questions. At this time, I will turn the conference back to Mr. Dennis Martin for any additional or closing remarks..

In closing, I would like to reiterate that we're excited about our progress and the opportunity in front of us. We appreciate the continued support of our stockholders, our employees, our distributors, our dealers and all of our customers and we thank them and we thank you for joining us today. With that, we will say goodbye..

That concludes today's conference. We appreciate your participation..