Brian Cooper – Chief Financial Officer Jennifer Sherman – President and Chief Executive Officer Dennis Martin – Executive Chairman of the Board.

Walter Liptak – Seaport Global Steve Barger – KeyBanc Capital Markets Alexander Yaggy – Cortina Asset Management.

Good day ladies and gentlemen, and welcome to the Federal Signal Corporation Fourth Quarter Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Brian Cooper, Senior Vice President and Chief Financial Officer. Please go ahead..

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

We'll refer to some presentation slides today, and 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 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. 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 her thoughts on our outlook for 2016. I'd 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 group.

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. She has developed strong working relationships with our customers, dealers, employees, investors and our financial partners.

We're 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've 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've 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'd like to turn the call over to Jennifer..

Thank you, Dennis and thanks to all of you for joining our call. I'm honored to be speaking today as the President and CEO of Federal Signal. I'm also very proud of our team for turning in another strong year and solid fourth quarter. Following a strong 2015, we've had a busy and productive start to 2016.

We acquired Westech, refinanced our credit facility, sold our Bronto business and as announced morning we executed an agreement to acquire Joe Johnson Equipment. For a number of years we have considered whether the Bronto Skylift 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 were able to redeploy the sale proceeds to fund strategic acquisitions like Joe Johnson and position the company for growth.

All of the changes are built on the foundation we've been laying for several years. This foundation positions us to pursue profitable growth and to remain healthy, while we weather economic headwinds in 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 targets, our capital priorities, our acquisition approach and our strategic initiatives.

Next, we have steadfastly pursued operating efficiencies through our 80/20 efforts and we have nurtured our flexible manufacturing model that is we have managed capacity needs and costs by flexing what we sourced internally and externally by shifting production among our facilities and by building a strong core of dedicated employees.

On the capital structure part, we are now debt free. We've leveraged our assets and steadily increased our return on capital employed. We've reinstituted and grown our dividends. We've refinanced our debt agreements, so that we can continue to invest for the future.

With respect to investments, we've built a solid organization and we continue to add capabilities and debt. This concludes additional sales resources, M&A capabilities and a focused innovation efforts that is helping us move forward with market phased, faster new product development initiatives.

I was just at an industry tradeshow for our Environmental Solutions Group where we introduced four brand new products. These include a water recycling option for sewer cleaning equipment and a purpose built hydro excavator truck for the utility market. Of course, we are well-positioned to invest in acquisition opportunities, more about that later.

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

Thank you, Jennifer. Our consolidated fourth quarter and full year financial results are provided in today's earnings new release.

The historical and current year information presented in the release excludes the results of the fire rescue group, which was discontinued in connection with the sale of the Bronto Skylift business, that was completed in January of 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. In spite this 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 just mostly on the comparison of the fourth quarter of 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 quarter. Operating income was $24.3 million down 6% versus last year and fourth quarter consolidated operating margin was 13% up from 12.3% a year ago.

Income from continuing operations was $17.4 million in the quarter, compared to $19.9 million in the prior year. After adjusting for certain special tax items in both the current prior year periods, adjusted fourth quarter earnings were $0.25 per share which is unchanged from last year. Orders continued to be soft and were 15% 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 or 13% versus last year.

Largely due to reduced sales of domestic sewer cleaners and vacuum trucks, including hydro excavation product. Despite the lower sales, ESG operating income was up slightly, translating to an operating margin of 17.9% up from 15.5% last year.

Orders were down 19% per ESG, when compared to high-level 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 advanced 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 level.

From a consolidated perspective, we reported a gross margin of 29.7% for the quarter, up from 27.5% last year. Selling, engineering, 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 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 a year ago. The effective tax rate for Q4 of 2015 was low at 28.4%, largely due to the inclusion of $1.4 million net benefit from special tax items.

This included $4.2 million of benefit associated with tax planning strategies, upset by a $2.4 million adjustment of deferred taxes and $400,000 of expense associated with a change in the U.K. income tax rate.

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 tax deferred tax assets as well as, a $400,000 benefit from a change in the inactive tax rate in Spain.

I would also note that our effective tax rate in 2015 for the full year excluding special 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 that we estimated in 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 with $0.31 per share last year. To facilitate earnings comparisons we typically adjust our GAAP earnings per share for any unusual items reported in the current or prior year quarter.

In the fourth quarter we made adjustments to GAAP earnings per share in each of the reported periods, as we 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 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 impact with our robust cash flow and proceeds from the sale of Bronto and continues improving.

Operating cash flow was $91 million for the year, up 12% from last year. On a 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. Federal debt was $44 million down from $50 million a year ago.

Cash on hand at the end of the 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 billion in 2015, up $10 million versus 2014.

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'd like to turn the call back to the Jennifer..

Thank you, Brian. Before we talk about the acquisition of Joe Johnson Equipment, I'd like to briefly provide some color on the performance in our group. At SSG, we continue to see healthy performance from our public safety systems operation, which are focused on police lights, sirens and related businesses. The end markets in the U.S.

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 Environment 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 overall revenue, adjacent markets are absorbing the 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 for historical levels such that renting may be more active than buying new equipment.

We've also seen the sharp decline in demand for industrial vacuum trucks, particularly our hydro excavation project, which tend to have higher margins. In addition projects on the FSG side have 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 downstream.

However, we've also taken advantage of our expanded capacity in shorter lead times to capture additional sales opportunities, including our pursuit of opportunities in adjacent markets, such as utility.

The two individuals that we recently promoted to lead our Environmental Solutions and Safety and Security Group 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 Europe.

With municipal demand partly offset the 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 [indiscernible] products dedicated at these markets, will position us to capitalize on this growth. We are committed to investing in excavator designs to target broader markets.

Within SSG, we've also introduced internationally certified safety products to expand our global reach. As we enter into 2016 we are continuing to work the strategies and initiatives that just help us sustain our profitable growth. We've talked about these initiatives previously. I want to briefly revisit them.

Our first initiative is discipline growth, as I just mentioned we have a variety of new product development initiatives and investments that we are 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 in evaluating acquisition opportunities in the market.

We are also continued to focus on leveraging our invested capital and improving our manufacturing efficiencies and costs. 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 market. Municipalities will continue to be important customers in our leadership and municipal and government markets remains the strength of our company.

At the same time, our organic and acquisition growth initiatives general focused on expanding our industrial customer base. Although near-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 stare 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% with targeted and average growth of earnings per share at a rate in the low to mid teens. As part of our commitment to growth, we have 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 equipments 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 Jetstream. It also offers equipment rental options; parts, service and ancillary equipment. It's headquartered 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 2000 fiscal year.

We estimate that in 2016 the Joe Johnson acquisition will be modestly accretive to Non-GAAP adjusted earnings per share which excludes acquisition-related and purchase accounting effect. The acquisition is likely to result in changes in the timing of revenue and profit recognitions, it should normalize over a period of three years.

We therefore expect, Joe Johnson Equipment to be about $0.10 to $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 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 remains 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 impact 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've also benefited from a low level of hearing loss trial activity.

Consistent with our past practice, the company will vigorously defend itself and such actions, but we may see a rise in hearing loss depends upon in 2015 if the number of trials increase. So considering the headwinds that we are facing and the ongoing uncertainty in industrial markets, we tempering our expectations for 2016.

Assuming no further significant duration [ph] 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 JEE.

As we move forward, we are 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's sale products be [ph] a new credit agreement give us 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'd like to open the line for questions.

Operator?.

[Operator Instructions] And we'll take our first question from Walter Liptak with Seaport Global..

Hey good morning guys. I guess, let me ask about the revenue that's assumed in your 2016 guidance.

Specifically for ESG, what kind of a revenue decline you’re expecting for this year?.

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

We're seeing reduced sales of our hydro excavation products, a little bit of a 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 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 kind of 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 that I would have expected.

So I'm 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's leading to your guidance for this year?.

Walter, I think you're insight there is correct. It's not purely a revenue impact. We are getting some negative leverage effects on our operations from the lower volumes. We're 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're looking at 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 a very strategic, so I wonder if you could just provide a little bit more color on the strategy behind the acquisition and maybe what valuation and metrics that you're looking at? And then I'll go back into queue..

Sure, absolutely. We’re 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 the 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, and grow our business in Canada.

We also have an initiative on our public safety systems side to introduce product through that same distribution channel. In addition, it gives an option with respect to rental. Joe Johnson currently has a program in place, was partnered with four of our current dealers and 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. We have a parts and service platform that we think is attractive and over time had high growth and attractive margin opportunities..

And in terms of valuation metrics, Walt, I don't 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're spending about $126 million at the upside in Canadian dollars or about $93 million U.S. on this transaction.

Then we expect it to have a return in excess of our cost of capital..

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

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

And one of the things that we love about Joe Johnson is they have relationships with their customers, so that does I think provides stability going forward..

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

Thank you. Our next question comes from Steve Barger with KeyBanc Capital Markets..

So I'm going to go back to ESG for a minute. If we assume that oil prices isn't, they won't coming back any time soon.

What is the right long-term growth rate for ESG that you think about?.

We believe that we're committed to our long-term ESG 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, particular our recycling product and our jetter products, those also provide growth opportunities. So long term we think we feel really good about this business.

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

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

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

We're thinking we have the opportunity for high single digit growth without acquisition..

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

Understand, right, I know that's ….

But we're not counting on oil and gasoline back in 2016..

Right. And ESG orders averaged 112 million per quarter in 2015 versus 139 million per quarter in 2014 and I'd say that 2015 levels 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's a pretty good estimate for that a run rate [ph]..

Yeah, I think part of what you're seeing Steve is second half of 2015 oil have gone done, so the pressure on the markets got worse.

Then in addition to that you have the inventory effective, 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 that competes with our new equipment. So there has been a headwind..

And those numbers tends 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 raw Ralf's data [ph] 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 options and sales and ….

And rentals..

And rentals and rental rates have dropped significantly in the monthly rates and so it's really not as --.

Is there a business that tracks those rentals rates or is there anecdotal from that to dealers and the channel?.

Primarily dealing with our dealers and the channel..

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 '15, did you over-earn relative to longer-term trends? Or do you view - [indiscernible] 2016 will be unusually low?.

What we attribute the call 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.

So we still believe in run rate percentages that we've put out there as margin target..

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

I think you also have to look at the mix issue. The municipal margins are typically less than the industrial margins. We're focused on both from an acquisition perspective and organic growth perception 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 unusually low year and we're encouraged by where we're investing and we think we're well positioned to grow. Also, depending on what happens in oil and gas in '17 and '18, we think we're very well-positioned to supply and 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 for quarter with the exit of Bronto and JJE coming in, is that fair?.

That sounds about right, Steve..

Okay.

CapEx for 2016 and D&A?.

We expected this generally run between $10 million and $15 million. We expect 2016 to be in a similar range..

And --.

And D&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?.

Yeah, the first thing I want to talk about, this is not a distribution rollup strategy. We believe that the acquisition of Joe Johnson, in fact, helps us enhance our current municipal dealers.

We've had an opportunity this morning, I have talked to three so far of our major dealers and they've really embraced the idea that they're 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..

So whenever we make a Steve in the market like this, there is 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 of things when you look at acquiring a dealer they have by geography and certainly other municipal side that's more contained..

Right.

Brian, I hear you started it's not a distribution rollup 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 said are already in North America or are you well covered to provide that dealer number?.

Yeah, 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. So we're 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?.

Yeah, there's a couple of answers to that question. One, 80/20 works everywhere and I think they're excited about investigating how 80/20 could help with their business model. We also know we can learn awful lot from them and we can bring that to how we go-to-market serving the municipal user markets.

We'll learn a lot more about products and services that the end municipal customers demand or need. Also, so 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 JJE eased EBIT margin as now and how much they have in D&A?.

JJE, you operate within a division of ESG and we typically don't talk about the division result of rate --.

Okay.

Well, I guess can you give us a relative number associated with the $0.10 or $0.15 in 2018, just at least help us think about what the return profile is of the acquired company?.

Well, Steve, they had revenues last year of 150 million for Canadians or 112 million or so U.S., we'll have some offset to that and we sell to them. So you don't get to count that twice and then we expect them to grow at a pretty healthy pace, especially similar of their service business and their municipal businesses remain strong..

So pretty healthy as you're seeing above the high single digit rate that you think about ESG with?.

In the high single digit, yeah. I think that's a fair assumption at this point..

All right, I'll hop back in line and see if anybody else has any..

Thank you..

Thank you..

[Operator Instructions] We’ll go for a follow-up with Walter Liptak..

So the follow-up to the last question, just you discussed the new products, or maybe how much of 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?.

Yeah, I mean, for 2016 we've assumed a modest adoption rate, so there is upside there. We remain very committed to our new parts development that requires R&D investments. And just to give you some color our R&D spend in 2015 was about $14 million, which was up 7% versus '14.

We have the innovation team that is continuing throughout and study markets and identify new product opportunities, we 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 third quarter and the initial interest have been extremely high.

We've also introduced the jetter product to our distribution network and again the interest is high. Then we think the patents recycling products that we're offering for our vacuum truck, presents significant growth opportunity. We're not going to stop and [indiscernible] new product development and 2016 reflects that..

Okay.

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

Yeah, some of the contractors that utilize this equipment also use them for the construction market..

Okay, sounds good.

The corporate expense, what number are you using for 2016?.

We’re assuming it's been only flat if you - 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 see foresee at this point in time..

Okay, all right. Thank you..

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

[Operator Instructions] And we'll go to Alexander Yaggy with Cortina Asset Management..

I wanted to follow-up on the revisions - the guidance that you gave for the year. I want to try to understand what's actually going underneath the surface here. I mean, I understand that oil and gas has come down quite a bit.

But 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 because it's such a big decremental as one of the questions was referring to it's obviously surprising to investors.

So can you help for a little color on that?.

Sure. We've entered the year with a low backlog. We've talked about the mix and the mix it 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 in 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's 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 off their equipment that are getting out of the oil and gas exploration, really is moving it - has moved into the industrial.

So it's really, as we said before, there's no direct way to gauge the percentage, we think it's moving through, we're hopeful that over the next 12 months it's all through, so it's hard to gauge because there's just no way to record that amount of equipment that's coming into the market..

Right.

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

Well, we're tried to estimate this in our forecast and brought down our number. But --.

Right.

But can you put a revenue number roughly?.

It's hard to know factually what are those..

I mean basically we don't know how long it will take for the overhand to work it way through. So we're anticipating in the second half that that has not really occurred yet to the extent that it does - we'll feel better about it. But at this point in time we just don't have good visibility because its second half..

Okay, thank you..

Thanks, Alex..

Thank you. And we have a follow-up from Steve Barger..

Hi, thanks.

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

There is seasonality in the business. They are primarily south municipalities and government entities, so a lot of it depends on their buying cycle..

And 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 up, Dennis, what percentage of revenue is U.S.

versus Canada? And can you give us an idea of how the Canadian side is growing right now?.

You're talking about for Joe Johnson?.

Yeah..

It's about 75/25 split between Canada and U.S..

And they've been growing in both markets..

At the same rate or plus or minus?.

Pretty much. Yeah..

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? 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 that..

Smaller but growing..

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?.

Well, I'd say, their mix of products is different, Steve, while we're the largest categories with Vactor and Elgin products. They also have number of other products related to the winter snow removal refuge and other things. So they're mix is different, so it won't be impacted the same way..

And it's primarily municipal..

About over 80% of their business right now is municipal market. So they have very limited exposure to oil and gas..

Yeah, 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 market..

I see. And just for 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 hasn't been in the past, the rental business if it grows will be more capital-intensive to certain extent. It also has some cyclicality to it, they tend to build up on working capital and their inventory, sort of through the winter months and then bring it down as they have higher sales in the summer periods..

I guess, yeah, when you think about growth that rental opportunity for the other dealers.

Is that something that you'll use your balance sheet for or is there any way that you would start to finance deals or things like that or would that all be from third party?.

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

So right now we believe they currently have a rental fleet of 50 million. We think that's generally sufficient to meet the current market needs. We do plan on supplementing their rental fleet with some industrial products, particularly our Guzzler, our Jetstream and our Westech brand.

So we estimate that to be somewhere between $15 million and $20 million in 2016, its impact, you know the market [indiscernible]..

Okay. And you should have pretty good free cash flow in the primary business this year, I would think even with the declining guidance. And you've said this is not a distribution rollup strategy.

What is the other, what's the next avenue that you'll 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, the new geographies, within the margin targets that we expect. And we have a right now - we've been working diligently on that.

We have a good pipeline of opportunities that we continue to pursue in a disciplined way..

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

Thank you..

Thank you. And we'll go back to Walter Liptak for a final question..

Okay, so final one for me.

The balance sheet is in great shape, how much net cash do you expect to take in this question from Bronto?.

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

Okay, it sounds like a minor cash adjustment..

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

So with the net cash coming in, with the company cash growing well, the balance sheet debt free.

Can you talk to us about the appetite for your strategic acquisition versus your own share repurchase?.

Did you say, we did or you want us to?.

Yeah, with your stock down this much, maybe you could refresh us on just how much is left on the repurchase program and --.

We've got 69 million remaining on the authorization and our board would be flexible on that, so I view that as capital limit or anything. But we will look at that and the Joe Johnson acquisition is a good return on our money. Our stock would be a good return on our money right now I think, so..

Okay, yeah, I agree. Okay, thank you..

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

In closing I want to thank Dennis for a significant contribution to the company over the last five years. I'm fortunate to have him both as a mentor and a friend. We look forward to working together on our new role. 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 the relationship with customers. Thank you, we may 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. And ladies and gentlemen, once again, that does conclude today's conference. Thank you all..