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federal signal management discusses q4 2012 results - earnings call transcript

by:QY Precision      2019-10-06
Federal signals (NYSE:FSS)
Etexecuesbraden Waverley-2012 earnings call at 10: 00 a. m. on March 15, 2013
Dennis J, interim chief financial officerMartin -
Chief Executive Officer, independent director and member of executive committee. Sherman -
Chief Executive Officer, Senior Vice President, General Counsel and Secretary analyst Matthew W. McConnell -
Steve Barger, Citigroup Research-
Capanke capital market CO. , Ltd.
Allen Evans, Bradford Institute
Heart zone consultantsNelson J. Obus -
Wayne field Capital
Welcome to the fourth quarter conference call of Federal Signal Corporation.
Today\'s meeting is being recorded.
At this time, I want to hand over the meeting to Sir.
Braden Waverley, interim chief financial officer. You may begin.
Good morning, welcome to the fourth quarter of the Federal Signal Company 2012 conference call.
I\'m Braden Waverley, interim chief financial officer of Federal signals.
I was on the conference call today with President and CEO Dennis Martin;
Jennifer Sherman, general counsel and chief executive officer
We will use some slides in the demo.
Slides can be found by visiting our website federalsignal.
Click on the investor phone icon and select Webcast.
After the call is over, we will also post a slide presentation to our website.
Before we start a business review, I would like to remind you that some of the comments we made today may contain the forwarding --
According to today\'s press release and a statement issued by the Federal Signal to the safe harbor language found in the Securities and Exchange Commission\'s submission.
We have these files on our website.
We would like to submit our Form 10-K today.
Now I want to transfer the phone to Dennis Martin. Dennis J.
Thank you to bradthanks, Braden, and also to those who joined us today.
Jennifer Sherman and I are currently visiting our Vama business in Barcelona, Spain, and we were in Bronto business in Finland earlier this week.
As we host this quarter\'s conference call with Braden in Chicago at different locations, we may pause for a while during the demo and Q & A process, I apologize for the inconvenience
Later, Braden will take you through the details of our financial performance, followed by Jennifer Sherman, our chief executive officer, and--
Jennifer will also be in charge of our public security business and will go through our 2013 business initiatives.
Our fourth quarter performance reflects the continuous improvement of our business performance and the completion of a year when the company fundamentally changes the income statement, balance sheet and its ability to generate cash from operations.
Sales, operating income and cash flow from continued operations were higher in the quarter than in the same period last year.
In the fourth quarter of last year, our operating income and profit margin were much higher than the same period last year.
I would like to highlight some of the important points of our continued operations this quarter.
Compared with last year, revenue in all of our sectors has increased, with the growth rate of 12% for the whole company.
This is our fifth consecutive quarterly double. digit year-over-
Annual revenue growth.
Operating income rose 12% in the fourth quarter and operating profit margin was 6%.
In the fourth quarter, our working capital management continued to improve as we received $30 million in operating cash flow from ongoing operations, compared to only $1.
7 million last year.
Excluding restructuring costs, continued operating earnings per share are $0.
Compared to the 09 quarter, it was $0.
11 last year, consistent with our guidance to achieve a high-end of $0 in the second half of the year. 15 to $0.
20 yuan per share, excluding restructuring and debt settlement fees.
In the second half of 2012, EPS increased by 19% compared with the same period last year.
As we pointed out in our last call, our order level did drop in the fourth quarter, while at the end of 2011 our Vactor business went through a very high new level of business.
In 2011, due to increased demand for our Vactor products, an increase in lead time drove an increase in advanced orders.
Our backlog at the end of the quarter was $0. 318 billion, an increase of $23 million over last year.
I would now like to talk about some of the important issues in our performance throughout the fiscal year.
During the 2012 period, we made meaningful progress in operating profit margins for each segment.
ESG\'s profit margin expanded by 3 percentage points to 9.
8. represents significant progress in its profit target of 10% to 12%.
The SSG profit margin has increased by 2% to 12%, and considerable progress has been made towards the profit margin target of 14% to 16%.
Bronto\'s operating margin has also increased to 6.
6% compared to the target of 10% to 12%.
We are confident in the continued progress of Bronto and all of our departments in 2013 as we continue to benefit from our 80/20 plans and investments in program efficiency.
As we have pointed out in the past, companies can create long-term
The long-term value of shareholders, in addition to the decline in debt levels, also needs to increase operating profit margins.
While we still have work to do, this is what we have achieved in the past two years.
At the end of 2010, we operated at the unsustainable debt level of 11x EBITDA.
In the next two years, our debt level has dropped to 2. 4x EBITDA.
This reduction in leverage, coupled with our expansion in operating margins across all sectors, allows us to further strengthen our balance sheets and continue to create value in 2013.
This reminds me of the debt refinancing we ended earlier this week.
We are pleased that Wells Fargo and GE have led seven partners in our new funding.
We will be speaking in more detail later, but I would like to highlight the following points. This is a long-
Term credit agreement of the company, 5-
Initial interest rate for year term and LIBOR plus 2.
75, significantly lower than the 12% interest on our previous term loan.
Over the past 6 months, we have explored some refinancing alternatives, and in all cases, the company\'s credit has been received as our balance sheet has been strengthened and our business performance has been stronger
Compared to our previous fixed-term loan financing, we expect-
The annualized savings rate is over $10 million.
With a total funding of $0. 225 billion, this new arrangement will provide the company with more liquidity and sufficient capacity to meet our future needs.
The company\'s total debt settlement costs are $8.
7 million in connection with this, the previous financial agreement was withdrawn, about half of which was cash.
After more detail on our financial performance in Braden, I will give you some additional points on our progress and guidance for the first half of 2013, jennifer Sherman will provide more insight into our 2013 strategic initiatives. Braden?
Thanks, Dennis.
I will now review our financial results for this quarter, which are included in today\'s press release.
Please note that our financial results only reflect the continued operation of the company and have been re-adjusted to reflect the situation of FSTech as a discontinued operation.
From our fourth quarter profit and loss, sales of $0. 218 billion increased by 12% over last year.
Money has had less than a percentage point negative impact on our revenue growth this quarter.
Gross profit margin fell to 22.
8%, while our SG & A\'s percentage of sales fell by 1 percentage point to 16 percentage points. 5%.
The decline in gross margin percentage is mainly due to a change in Bronto\'s product portfolio compared to beforeyear period.
The increase in SG & A dollars in the fourth quarter reflects an increase in the company\'s expenses, in particular an increase in incentive pay in 2012, and A decrease in the insurance reserve in 2011.
Operating income increased by $1.
Compared with last year, 4 million, and our operating profit margin is basically unchanged.
Compared with last year, the impact of money on operating income is very small.
The interest fee is $5.
This quarter was $7 million, compared to $4.
Due to the high cost of our current retirement term loans, it was £ 5 million last year.
The company confirmed $2 million in income tax provision during the quarter, mainly with non-U. S. operations.
The increase in income tax reserves was $0.
The impact of 02 per share on earnings compared to previousyear period.
Our actual tax rate this quarter is 29%.
We report earnings per share of continuing operations at $0.
08 compared to $0.
Fourth quarter of 2011.
Slide 6 provides an overview of our expected earnings per share for the last 4 quarters of ongoing operations.
Non-Company
Cash debt settlement costs $0.
03 first and third quarter of 2012 per share.
In the first quarter, the cost of restructuring in our SSG department was $0.
In the fourth quarter, the company\'s per-share impact and additional restructuring costs were also $0.
01 per share impact.
Taking into account the cost of the fourth quarter, the expected earnings per share for the second half of 2012 was $0.
Compared to the same period last year, $19 per share is in line with the guidance, including higher income tax provisions and interest payments.
Earnings per share for ongoing operations are $0.
The entire fiscal year is 35.
In Slide 7, we show the results for the fourth quarter by market segment.
Our Environmental Solutions Group (ESG) is strong in terms of revenue growth and profit expansion.
Revenue grew by 14%.
Operating income increased by 22% and operating profit margin expanded to 7. 7% versus 7.
The previous year was 2%.
Compared with last year, the total number of orders for ESG this quarter has declined.
The decline in orders is mainly due to the decline in vacuum trucks in the United StatesS. market.
This is compared to the unusually high order for dealers of these products in 2011.
In the fourth quarter, orders outside the United States increased slightly, reflecting an increase in the number of orders in Latin America and the Middle East.
ESG\'s backlog at the end of the quarter was $0. 204 billion, an increase of $20 million over the end of 2011.
Bronto\'s orders fell 16% to $24 million compared to the same period last year, mainly due to the continued decline in the average order size of fire elevator products for Asian customers.
The price of the Bronto unit may well exceed $1 million, so any change in order activity between quarters can have a big impact on the results.
For the whole year, Bronto\'s orders remained unchanged at $0. 137 billion, while sales increased by 23% compared to 2011.
Sales rose 7% in the fourth quarter compared with last year, while operating margins exceeded 10%.
Bronto withdrew from the quarter with a $84 million backlog, 5% higher than at the end of 2011.
During the quarter, orders from our Safety and Security Systems Group (SSG) fell by 7% due to continued weakness in demand in Europe and export markets and a decline in the outdoor early warning market, offset by improved US demandS.
Police, fire and industrial markets.
In the fourth quarter of 2011, the outdoor early warning market benefited from a single large single.
Revenue rose 11% to $67 million in the quarter, and operating margins continued to rise to 13.
Compared with the previous year, the quarter grew by 4 percentage points to 7%.
This profit growth is due to the continued recovery of our public security business and the continued strong performance of the industrial market.
SSG\'s backlog in the fourth quarter was $31 million, which was basically the same as the level at the end of 2011.
The cost of the company is $8.
The fourth quarter was $9 million.
6 million last year.
Turn to slide 8.
Cash flows from ongoing operations are $30.
This quarter was 5 million.
By contrast, $1.
7 million before the same-year period.
The company created $49 throughout the fiscal year.
Operating cash flow is 2 million compared to $14.
1 million for the period from 2011.
Net capital expenditure has been relatively stable compared with the same period last year, while free cash flow ---
There was significant growth in the fourth quarter and throughout the year.
As we noted in the third quarter call, we expect our backlog and liquidity levels to decline by the end of the year, resulting in an increase in operating cash flow.
In 2013, working capital management will continue to be an important focus area of the company.
Slide 9 shows the company\'s balance sheet as of the end of 2012 and the comparison with the yearend 2011.
Other current assets at the end of the year amounted to $0. 236 billion, including $0. 12 billion in current stock balances and $97 million in accounts receivable balances.
While the fourth quarter fell by $10 million, inventory levels increased over the course of the year to meet our backlog of orders primarily in ESG and Bronto businesses.
During the year, accounts receivable decreased by $8 million, while our income increased by 17%, reflecting a significant improvement in credit management across the company.
Net debt fell by $86 million in 2012, through the use of proceeds from the sale of FSTech for debt repayment and an increase of $21 million in cash.
Now, I would like to talk in more detail about some of the terms and conditions in our refinancing.
As Dennis mentioned, the total amount of facilities is $0. 225 billion and there are 5-year term.
Credit is structured proportionally, including $75 million in regular loans and $0. 15 billion in cash flow revolvers.
At the end, the company fixed the LIBOR portion of the full 5-year term loan and priced the LIBOR portion at 97 basis points.
While there is no prepayment penalty associated with any part of the credit, the term loan is subject to quarterly instalments.
Our initial pricing for the term loan and revolver will be LIBOR plus 2. 75%.
The pricing of the loan is based on the total leverage ratio of the company, and with the reduction of the ratio, the pricing can be further reduced to the level of LIBOR + 2%.
Under the new credit arrangement, the company will comply with customary financial covenants that will include tests based on fixed fee coverage and the ratio of total debt to EBITDA.
In order to comply with the convention, the company negotiated important Supplementary Provisions
Feedback the terms to EBITDA, including the potential impact of its hearing loss litigation and restructuring costs.
These provisions will provide additional flexibility to the management of the company to ensure long-term compliance with the conventionterm.
According to its level of leverage, the company will be able to make restrictive payments such as future dividends.
As we noted earlier on the phone, the company paid $8 for debt settlement.
7 million as part of refinancing. $4.
Of these, 1 million of the fees are charged in cash in the form of prepaid insurance premiums, and the rest are non-cash
Deducted from deferred financing costs.
These fees will be $0.
Impact of earnings per share in the first quarter of 2013.
The full details of the refinancing can be found in the credit agreement, which will be submitted to our Form 10-K.
Finally, the company will not pay dividends in the fourth quarter.
The company will continue to review the dividend policy every quarter.
This concludes the financial summary.
I will now transfer the call to Jennifer Sherman, who will provide more insight into the company\'s 2013 business plans. Jennifer L.
Thank you, Braden.
This morning, I would like to take this opportunity to share a series of initiatives that we have recently put forward in the fourth quarter strategic planning process that are critical to our long-term strategic planningterm success.
These are businesses.
Broad initiatives that will have an impact on all 3 of our operations teams.
We intend to communicate our progress on these initiatives in future discussions with shareholders.
First of all, this morning and in the past, we have discussed extensively the need to refinance the company\'s balance sheet.
In completing the refinancing, we took advantage of the flexibility in the debt structure strategy that started a year ago.
Complemented by our strong operational performance, this flexibility is open to all potential credit providers throughout the company.
So today, we have a balance sheet and a capital structure that provides us with sufficient investment liquidity and the ability to redirect interest savings towards further debt reduction and meaningful income growth.
The refinancing we have accomplished serves these goals.
Second, the diversity of customer base is at the heart of our long term
Create long-term goals for sustainable organic growth in all areas.
In our domestic market, we have established a lasting relationship with municipal customers and will continue to invest in them for a long time. term success.
We will complement this base by accelerating the acquisition of new customers in industrial and commercial markets.
Over the past year, we have taken this process seriously, especially in terms of the energy and security markets serving new customers.
Third, as part of our long-term investment
Our municipal customer relationship has been successful for a long time and we intend to build a structure to achieve long-term success.
Whether it is the use of 80/20 technology to ensure a portfolio of products of an appropriate size, the long-term profitability of serving these markets, further reduce and break even operating levels in our manufacturing locations or in the context of continuous cost restructuring to reflect market realities, our goal is to ensure that the business cycle of the municipal market we serve remains profitable.
One example of our focus on the municipal market is in the United States. S.
Public security business
In response to the severe market situation, we launched a turnaround plan in 2012, involving multiple aspects of our business, so we saw an improvement in the financial performance of the business in 2012.
We continue this initiative until 2013 and expect to continue to improve the financial performance of PSS over the course of the year.
Fourth, in 2013, we will also re-emphasize the organic growth of profitability.
While we will consider acquisition opportunities to extend our product lines and services to neighboring markets, these will only be considered within our capabilities with existing products, customers and distribution channels.
To put it simply, we think we need to have our rights.
With this in mind, we will continue to build on the established success of bringing our proven brands and products to the new vertical market.
In the past, these included the growth of our Vactor and Jetstream products in the North American oil and gas market, as well as the expansion of new markets such as our on-site safety products and solutions in schools and power plant safety.
In addition to expanding the existing product line, the company will also implement and invest in an innovative program to take advantage of its considerable engineering and product development capabilities.
While federal signals do have some mature businesses with a high market share, it has considerable potential market opportunities in addition to its current customer base.
This initiative will help to realize this potential.
Fifth, we must continue our health.
Focus on improving manufacturing efficiency for a long timeterm.
It is worth noting that while the company has had a difficult financial period, it continues to invest in production automation and process improvement at the appropriate level.
These investments include precision laser cutting machinery, high-yield paint systems, upgraded CNC machine tools and other forms of production automation.
As a result, the company has no capital deficit in manufacturing capacity and is expected to continue to reap returns from investments over the past two years.
However, with the continuous change of production technology and process, we see opportunities for further improvement and efficiency.
Leveraging 80/20 of our expertise will be at the heart of our efforts to ensure that our product lines are appropriate in size and scope and are able to deliver profitable services to our customers.
The results of this plan will include further reduction of our unit\'s production break-even level and shorter production lead time.
These will not only support our progress towards achieving our established profit targets, but will also improve our management of working capital.
Like my previous comments on our need to provide profitable services to municipal customers, our continuous investment in processes and capital to improve these efficiencies is designed to ensure the profitability of the company throughout the business cycle
At this point, I will transfer the call to Dennis and Dennis will provide you with our outlook for the first half of 2013 and some additional views on our market. Dennis J.
Thanks, Jennifer.
While macroeconomic uncertainty will continue in some of the markets we serve during 2013, we expect the first half to be one of the markets for continued profitability and revenue growth.
Excluding the impact of financing costs incurred in the first quarter, our estimate of earnings per share for the first half of the year is $0. 20 to $0. 25.
There are many factors that affect this guidance, including the following points.
First of all, due to our refinancing, our interest savings will be very large, but the full benefits of these savings will start from the beginning, and have a more important positive impact on our guidance and results in the second half of the year.
We believe again, annualized. -
Compared to our previous financing arrangements, interest annualized decreased by more than $10 million.
Second, as we have pointed out in the past, our hearing loss litigation defense costs pose financial risks that may affect our income.
Although we have won the last month of every trial, including the last 12 years in Cheshire in December 20, the court of our pending case is in Philadelphia, Illinois.
According to the trial schedule, defense costs may have an impact on any quarter of the year.
Third, while our health backlog in the group supports our revenue and profit targets, the timing of these shipments and the associated product portfolio will have some impact on revenue, this is mainly in our Bronto and ESG businesses.
Finally, the market environment in which we operate is often uncertain, which requires us to incorporate a wider range of potential demand scenarios in our guidance.
Although our backlog has saved us from some risks in the near future
In the long run, there was some potential impact in the first half of the year, mainly in places where our backlog was smaller.
Now I want to detail what we see in the United States. S.
Our European market and other export markets.
Although there is no evidence yet.
Long term positive trends in the US municipal market, we see some encouraging signs
Demand recovery.
Signs of communication from our channel partners and us at the trade show also supported these observations, and at the end of the fourth quarter we had some improvements in domestic municipal order rates.
Most of the available data also indicate a gradual recovery in public finance and an increase in taxes in some areas.
We are encouraged by these signs and believe that our well-known brands and channels are good --
Any chance of recovery can be taken advantage.
However, we also recognize that we are at a very early and fragile stage of this process to the extent of recovery. In the U. S.
On the industrial market side, we continue to see some growth opportunities, especially those related to the security and energy sectors, but there is still a high degree of uncertainty in the broader context.
Nevertheless, we plan to expand the number and portfolio of industrial customers in the long termterm.
Our Jetstream, Vactor, and industrial systems businesses have leading products and services that, in the long run, can seize opportunities in the security and energy and other commercial vertical markets.
Especially in the municipal market, the outlook for our European market remains uncertain and weak.
As we pointed out on our last call
Known challenges in Europe will continue to impact our performance in 2013, particularly for our Vama and Bronto businesses.
While both businesses have performed well in terms of diversified customer base, at this point in the current fiscal year, we believe that the outlook for Europe has not changed significantly.
Our other export markets, particularly in Asia and Latin America, continue to provide long-term
Long-term growth opportunities for the company.
We continue to see that our Bronto business and SSG departments are well positioned to take advantage of these long-standing advantages
Long-term trends in 2013 and beyond.
Bronto continues to diversify its revenue base beyond Europe, a trend that continued with the new order campaign in 2013.
Within SSG, the level of our public security business activities in Latin America has improved.
In the field of industrial security and securities, opportunities in various fields continue to grow globally.
In our last discussion at the end of our third-quarter conference call, I indicated that we are moving cautiously into 2013.
While our decision-making today still requires caution, there have been some important developments.
In the fourth quarter of 2012 and most of the time, restructuring and refinancing of our business is a feature.
Through this process and the performance of our business, we have also created a framework for disciplined growth.
We have successfully completed our debt financing strategy in a way that creates maximum value for shareholders.
The company\'s fifth consecutive quarterly double
The digital growth in revenue and complemented this performance with strong operating cash flow.
Continue to make progress in improving the operating margin of each group, and finally, we maintain a healthy backlog across the country ---the company.
Therefore, although market demand conditions will run through its cycle, our team is still focused on serving our customers, creating and saving cash through 80/20 for operational excellence and ultimately creating value for shareholders.
We are proud of our performance in 2012 and I would like to take this opportunity to thank our shareholders, our customers, and of course our valued staff and many important partners who have helped us.
Thank you for your support and we will continue to work hard for you.
Thank you for your time this morning.
At this time, I want to open the telephone line of the problem. Question-and-
[Answer]
Operation instructions]
Let\'s hear from McConnell and Citi first. Matthew W. McConnell -
Citigroup research, can we start with an update on the long-term profit target?
Maybe Dennis, since you\'re already in Europe, we can start with Bronto, where there\'s probably the biggest room for improvement each year, but in this quarter, you\'re on top of that. term target.
So, how much productivity has increased in Finnish factories, and what is the way to achieve the goals of each department? Dennis J.
Martin Matt, this is a good question.
The performance we saw in the fourth quarter more typically reflects our expectations for this year.
By the end of February, we still had some $90 million in revenue from our backlog.
The process changes we make in the plan, including the new assembly line, the new automation, the processing of the assembly products and the continuation of-
Lining should continue to drive these profits.
I think they might be up and down in 25. to-
As each of these machines sells for far more than $1 million, shipments sometimes fall from one quarter to the next.
But overall, the company\'s performance should be maintained at these levels this year. The --
We are ready to carry out another reorganization of Pori\'s prosperous factory to achieve further 80-
20 simplified improvements.
Therefore, we believe that it is sustainable at the level of goals we propose. Matthew W. McConnell -
Citigroup, Research Department, very good.
So you think in 2013. . Dennis J.
Matini believes that, of course, we will be within the scope of 2013.
At this point, it\'s too early to say whether it\'s high or not. end or --
But I think it should be able to stay in range. Matthew W. McConnell -
Citigroup, Research Department, very good. That\'s helpful.
Then I guess one of the advantages of reporting this time of the quarter is that you may have a pretty good idea of the start of the first quarter.
So you made an order this year. over-
There are years in each segment in the fourth quarter, but regarding the progress in the first quarter, is there any market update? Dennis J.
Martini thinks we\'re still in the same state.
We have not seen a sharp decline or a sharp increase.
The level we set in 2011 and 2012 is indeed driven by the increased demand for our Vactor business.
So we arranged the order line in advance.
So we believe that we are at a sustainable level in order to achieve the plan that we are considering for a quarterly revenue of about $0. 2 billion. Matthew W. McConnell -
Citigroup research.
Finally, regarding the debt to EBITDA, the deed in the new agreement, you have--
Where are you standing relative to 2?
Where did you finish this quarter?
In connection with this, debt relief remains the top priority for capital allocation this year, and perhaps the only priority? Dennis J.
Mardini will ask Braden to answer questions about this ratio, but for us, debt reduction is certainly an important goal.
Cash flow, cash management, inventory reduction, cash generation and further reduction are a key, but we will weigh this with the decision to invest in the capital equipment we need, and investing in new products in these high-end products.
Margin business.
So it\'s not a single one.
But of course we don\'t want to go in the wrong direction and Braden can talk about that percentage.
Matt, Braden Weaver.
Your question is only about the price--
What is the ratio of our debt to EBITDA? Matthew W. McConnell -
Citigroup, Research Department-
Yes, where did the deed and 2 come to its climax.
2012 where did you finish it?
What is the threshold?
Braden WaverleySure, yes, when we get the debt level of the company and the ratio of debt to EBITDA is less than 2, our pricing will be LIBOR plus 2%.
So, from the point of view of the maximum interest savings, when you see these EBITDA levels reach this point, you will see these numbers shake in this way from the point of view of interest rates. The. . . Dennis J.
MartinBraden, I think, is at the top of the contractual issue he is asking.
Braden WaverleyYes, which also helps the downside, but if debt to EBITDA also increases, will interest rates rise?
If our debt levels rise, our interest rates will rise as well. Dennis J.
Martin, what are the brackets above?
When we go-
When we are over 3. 5 --
When our debt level rises above Level 3, we see a rise in the price of our LIBOR plus level 3. Operator[
Operation instructions]
Next, we will hear from Steve Barger of KeyBanc Capital Markets. Steve Barger -
Capanke capital market CO. , Ltd.
The first question of the Research Department, under the guidance of the first half of the year, in the past few years, there is usually a considerable step --
As far as EPS is concerned, it rises from 1Q to 2Q.
Do you expect this to be the model for the first half of 13 years, or $0. 20 to $0.
25 levels loaded? Dennis J. MartinBraden?
Braden WaverleyYes, I think we really need to take a full look at the first half based on the backlog we entered the first half.
Steve, our tendency at this point is to say it\'s higher.
Just based on the fact that we have not experienced a significant increase in sales in the fourth quarter, we have given our lead time, which is an increase over the past.
We saw a lot of such orders in the second quarter.
So from the side, we would say that more levels were loaded, but we would--
Really, for the purposes of your model, you are encouraged to look at the first half in a comprehensive way. Steve Barger -
Capanke capital market CO. , Ltd.
The research department found you.
Free cash flow from ongoing operations appears to be around $36 million in 2012. You indicated --
Can you tell us where the capital expenditure will fall in 2013? Do you expect operating cash flow to increase to a level sufficient to have free cash flow, even better than what you proposed in 2012? Dennis J. MartinBraden?
Braden WaverleySure.
Obviously, we want to start with the revenue effect of \"11\" to \"12\" and improved working capital management, a large part of our cash flow enhancement is to benefit from performance, of course, in the process of the fourth quarter.
Steve, so we will continue to target these opportunities in the 13 th fiscal year with a focus on inventory improvement.
But from the point of view of capital expenditure, we think this fiscal year will be very high. -
In terms of capital expenditures, $13 million to $15 million ranged in order to consider free cash flow figures for 2013. Steve Barger -
Capanke capital market CO. , Ltd.
The research department found you.
Therefore, in a broad sense, the continuous increase in profit margins, some reduction in inventory, so from the perspective of the work ceiling, may be positive, and then 13 to 15 Capital expenditures?
Am I right?
I encourage you to consider our inventory performance.
The inventory balance did increase,--
I think we also talked about this on the third quarter conference call, Steve.
We really need to consider the total working capital from the perspective of revenue performance, as we pointed out in the conference call, which is very, very important for our accounts receivable balance, from the inventory point of view, the situation has improved, but the inventory has indeed increased.
So I think that really needs to be done in the context of the performance of the income. Steve Barger -
Capanke capital market CO. , Ltd.
I understand the research department. Dennis J.
And Martin and the backlog. Steve Barger -
Capanke capital market CO. , Ltd.
Research Department, this is a good question about the backlog.
Very healthy, especially in ESG.
Can you talk about the backlog mix between the company and ESG?
In terms of the machine or-is it better than the hybrid product you just shipped-and pricing? Dennis J.
MartinBraden, do you want that?
Braden WaverleyYes, we have a good combination and quantity in Vactor and Elgin\'s businesses that enter fiscal 13.
Even in our Jetstream business, we see some very good profit opportunities, which are smaller than the other two.
But overall, we expect the backlog there to lay the foundation for reflecting this performance and have the potential to improve our performance throughout the 12-year ESG fiscal year.
But overall, the better story is the same, Steve. Steve Barger -
Capanke capital market CO. , Ltd.
Okay, the research department found you.
You said--
In some company goals, accelerate the acquisition of customers in the global market, do you have to hire a lot of people or build a lot of infrastructure to do this, or do you feel that you have established this model and that it is actually just from your existing assets? Dennis J.
Martini, yes--
In fact, Steve\'s focus is on taking advantage of the assets we have.
However, we have added some sales executives strategically in some areas, but overall, this is really a shift in the leadership team and a focus in some markets, so it won\'t cost much cash to do so.
In terms of taking advantage of our operating units, we have the opportunity to take advantage of them without adding too much. Steve Barger -
Capanke capital market CO. , Ltd.
Okay, research.
One last question, I will jump back into the team.
When you see market segment growth rates and profit margin expansion potential, what do you think is a reasonable way for us to think about standardizing revenue growth rates over the next few years, and what you think over time, what is the EBITDA profit margin that business can generate? Dennis J.
Martinwell, I don\'t think we\'re really ready to think about what we think growth will be over time.
It\'s hard to say at this point until we start moving forward.
But when we set the rate for each business unit, we really think that is something that can be achieved.
Some quarters may be hit and some may be missed, but can be achieved in general.
As we continue to expand our new product development process and dig deeper into some of the neighboring markets, we think we should be able to drive revenue growth.
We therefore believe that the business will continue to grow.
We know that growth is probably the most important goal for us. Therefore, we have launched a new innovation plan within the company to ensure that we separate resources, really pursue our new products in these markets.
So, before the economy gets better, I think this year is probably running at $0. 2 billion a quarter. I think it would be very difficult to try to predict this other than that.
We do see a recovery in municipal accounting.
We saw a recovery in some of our businesses last quarter.
Of course we see more police activity, so it\'s hard to predict.
But the European business is an important part of their business.
Just because of the level of activity in Europe, it has pulled out of business in the past few years.
The Fed is back on top of everything else we are doing.
We think we should see growth there.
So we will continue to focus on revenue growth and earnings growth.
We don\'t want to pick up orders just to pick up orders, we will continue to work hard to eliminate the factory, eliminate the wrong words, but improve the efficiency of the factory, so we think the advantage of doing this is then, we can put the proceeds into the investment, or pay off the debt, instead of paying interest as we did last year. Operator[
Operation instructions]
Next we will hear about Brad Evans and the heart.
Alan Evans-Bradford
Heart zone consultants
Let me see, you gave us your thoughts on the profits of this year\'s fire rescue. Can you just --
From the point of view of marginal contribution, where do you think EPG and SSG are shuffling throughout the year? Dennis J.
I think we\'re going to see--
I think we should see the growth of SSG to further achieve their goals.
I think that ESG might be running pretty close in the last year, maybe there would be some benefits, and then, as I said, Bronto should go into the range of 10% to 12%, probably at the low end of that, then run there.
Depending on Bronto\'s portfolio to a large extent, we now have a lot of units that are being produced that should support this level, and the order cycle for bronto is consistent but not expanded.
So I think we should see a good year for the order, and of course the profit target we put forward is still achievable.
Alan Evans-Bradford
Heart zone consultantsOkay.
Where do you think the company\'s annual expenses will fluctuate in one range? Dennis J.
MartinBraden, do you want that?
Braden WaverleyYes.
That\'s what I think. -
Brad, we expect the company\'s spending to remain at a fairly stable level from 2012.
We don\'t expect a lot of sports there.
In fact, we are trying to improve the efficiency of our company\'s functions.
But when you think about 13 years of business, we encourage you to think that the company is relatively flat compared to 12 years.
Alan Evans-Bradford
Heart zone consultants
Excuse me, is that about $25 million or $26 million?
Overall, yes.
Alan Evans-Bradford
Heart zone consultants
Dennis, it sounds like-
I appreciate your caution and it sounds like things may improve as American industrial production growsS.
As you mentioned the muni market, I think the international market may be part of the turmoil overseas, but hopefully there will be a better direction.
So it sounds like you think there\'s one in 3 business areas--
You have a chance to fight to gently develop every market segment and we may be surprised if things are going faster.
Is that the case--
Is this a good way to describe it? Dennis J.
That\'s what I think.
We have been in the market for a while recently.
I am in Europe now and over the past few weeks we have spent some time with some dealers and end users with direct sales in the industry.
I can tell you that everyone is optimistic ---
We kept warning, but the people we talked to felt good about it.
Municipal dealers really think they see the highlights in the street sweeping business, and obviously the orders are coming.
It\'s hard to decide, but they\'re not walking in a pessimistic environment.
They are optimistic.
They\'re focused.
So I think, as we are talking about, the 2013 level of income and the level of orders, I think it would be good.
Alan Evans-Bradford
Heart zone consultantsOkay.
Should you delay the vast majority of your current tax bill, is that correct? Dennis J.
Yes, domestic taxes.
As we saw in the last quarter, our tax rate was higher in the fourth quarter, which was mainly driven by European profits.
So we still have a lot of NOLs in the US. S.
Of course, this will have an impact on the delay in taxation.
Alan Evans-Bradford
Heart zone consultants
So, a rough number, say, would you delay the book tax level of 75%? Dennis J.
MartinBraden, what do you think?
Sorry, could you please repeat this question, Brad?
Alan Evans-Bradford
Heart zone consultants
So you should postpone the book tax of about 75%?
Braden WaverleyYes, that\'s right. We\'re --
Yes, this is a good assumption.
Alan Evans-Bradford
Heart zone consultants
So I can ask you, what is the EBITDA debt level you need to reach, below the level where you have more flexibility to accept stock buybacks or resume dividends? Dennis J.
Martin Braden, do you want to take that or Jennifer?
Yes, Braden WaverleySure.
This is really a function of two things.
I mean, we have to have less than 3 leverage.
This is a condition in terms of leverage ratio.
Another condition is about the fixed charge deed, Brad.
So when we use EBITDA as a function of the restricted payments that we will pay, whether in the form of dividends or other payments, we need to see that number 1.
25 coverage rates.
So this decision will clearly be what we think about the business and its ability to generate cash in the future, as well as other options that we will consider for the growth prospects of internal investment.
But it can be said that, as a function of the new debt agreement, this is indeed a fundamental limitation, actually driven by the financial compact.
Alan Evans-Bradford
Heart zone consultantsOkay.
Well, I think I just want to be in your--
At least, on the basis of the net debt EBITDA, it is not difficult to see ---
When you enter the second half of this year, you will again be the net debt of EBITDA, and you will basically be around 1.
5 laps, even a little better than this. Dennis J.
Martinez, I think at that point in time, Brad, then the board will definitely consider the dividend and all of this stuff ---
What we should consider
Alan Evans-Bradford
Heart zone consultants
Great because it looks-
Well, I guess surprisingly, if the business grows a little faster than working capital, it could be the use of cash, not neutral, or a small source.
So I mean, the free cash flow dynamics are greatly improved here? Dennis J. MartinThey are.
As we make further progress this year and start looking forward rather than backward, we should deal with the issue better.
Opera actors [
Operation instructions]
Next, we will hear from Nelson OBBs from Wayne field Capital. Nelson J. Obus -
Wayne field Capital
As far as the company is concerned, I just--
I am curious about your philosophy of accounting, as you will drive down the company\'s expenses to every area as much as possible.
Is this something you look at regularly?
Or, is this a set of processes that you manage over a period of time?
Where is that standing?
Obviously, because the more you can push down, the clearer our view of our differences will be. Dennis J.
Martin Wright, there are more and more things we are doing, Nelson.
This year, we have introduced more comp to enterprises, namely, comp for workers.
IT, we push the business down.
So we are doing more and more things.
What we continue to have in the company is something like legal costs, which are more of a broad base we have accepted, and of course, other medical expenses associated with the company.
So we are trying to get more flat in order to invest more in our differences.
At this point in time, I indicate that we have no further questions.
I would like to transfer the call to Dennis Martin as a closing note. Dennis J.
MartinWell, of course, I would like to thank you all for your participation and support in our business.
Over the past few years, we have experienced a process of getting back on our feet here, and of course, we are starting to focus on internal companies.
We are very excited about this.
We are looking for growth and we will continue to communicate with you, as we have pointed out in the past, to be transparent and certainly look forward to our next call in the first quarter.
So thanks again.
Have a nice weekend and afternoon in Barcelona. Jennifer L. ShermanGoodbye.
Braden WaverleyGoodbye.
This concludes today\'s meeting, ladies and gentlemen.
Thank you for your participation.
You can disconnect now.
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