E-One's future debated: Company At Risk Of Being Sold

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Why does it seem that some fire apparatus manufacturers can't stay in business?? Brands that are pretty succesful, like Ward LaFrance, the original American LaFrance, Ahrens Fox, Mack, etc etc.

E-One's future debated

Expert: Company at risk of being sold

BY RICK CUNDIFF

STAR-BANNER

OCALA - With red ink flowing and sales down, could an eventual sale of firetruck manufacturer E-One by its corporate owner be possible?

At least one industry expert and an investor say yes.

E-One, once the industry leader, has fallen to third place in recent years, with market share continuing to slip. Robert Welding, president and CEO of E-One parent Federal Signal Corp., told analysts and investors during an Oct. 25 conference call that the division that includes E-One will lose $9 million to $12 million by the end of the year.

A representative of a mutual fund that holds Federal Signal stock has raised the prospect that the Oak Brook, Ill. conglomerate will have to sell E-One to satisfy investors.

Brad Evans, portfolio manager of Heartland Value Fund, said during the investor conference call that another year of poor financial performance at E-One would be "unacceptable."

On Oct. 29, in a Webcast on thestreet.com, Evans said a sale might be possible.

"It's well-documented their firetruck business is not performing," he said. "The elephant in the room for these guys is their E-One truck subsidiary. It's only 20 percent of their business. It's losing roughly $15 million to $20 million . . . They either sell it or they turn it to profitability. Frankly we think that there could be some pressure on management to act quickly to turn this division around."

Fire industry consultant Bob Barraclough, who was vice president of sales and marketing for E-One in the mid-1980s, agreed a sale was a possibility.

"It's obvious that Federal Signal doesn't know how to fix it," Barraclough said. "You close it or you sell it."

Federal Signal has given no indication of an intent to sell. David Janek, Federal Signal vice president for investor relations, said the company wouldn't comment on rumors. Spokesman John Segvich said in an e-mail last week that Federal Signal "remains committed to E-ONE's long-term success."

Walter Liptak, a Chicago-based analyst who covers Federal Signal said recently he didn't believe the company would sell E-One. The firetruck maker has long been part of Federal Signal's core businesses, he said.

E-One's troubles come in a tough market for firetruck makers. Welding said in the Oct. 25 call that the market overall was down about 20 percent. Another manufacturer, Elite Fire Apparatus, ran into financial problems that forced Montgomery County, Md. to cancel an order for 37 trucks last week after Elite delivered only one.

Yet days after Federal Signal's earnings report, Oshkosh Truck, parent company of Pierce Manufacturing, the nation's largest firetruck producer, reported gains in both sales and market share for its Fire and Emergency division.

What's Pierce doing right that E-One's doing wrong?

It's not the product. Dealers and industry experts say the machines coming out of the Ocala plant can compete with the best on the market.

The C.W. Williams Company, based in North Carolina, was an E-One dealer in the mid-Atlantic states for 16 years, selling more than 1,000 trucks. The dealership was E-One's dealer of the year in 1999 and 2001.

Dean Allred, the dealership's vice president of sales and marketing said E-One's products were second to none.

"A lot of the success of the C.W. Williams Company success was built on what (E-One) was able to produce," he said. "I'm confident the product they are building today is still an outstanding product."

With new management in 2005, E-One started to limit ways a buyer could customize each truck, Allred said.

"Our challenge was what they were willing to build and what we had to go through to get them to build it," he said.

C.W. Williams invested heavily in service to repeat customers. After 2004, E-One wasn't interested in that, Allred said.

In 2006, the dealership dropped E-One and switched to a competitor, Rosenbauer.

"It was very apparent to us they were very flexible," Allred said. "We found just the opposite of what we were dealing with (at) E-One."

E-One has lost several dealers in key areas over the past few years, including dealerships in western Canada, Ohio and Texas. The company recently appointed Ocala-based Hall-Mark Fire Apparatus as its new dealer in Texas.

"The dealer erosion problem is the most difficult problem to resolve," said C. Peter Jorgensen, editor and publisher of Fire Apparatus and Emergency Equipment Magazine. "It takes a long time for a dealer to build up relationships and trust with a customer ... The loyalty is ... between the local chiefs and the municipality and the dealer."

E-One's restrictions on customized products is hurting the company, Barraclough said.

"You're going to have to rethink, from Oak Brook management on down, what are you going to do? Are you going to be a custom truck builder or are you going to be a Ford or Chevrolet of the firetruck world? There's not room in the industry for E-One to be a Ford or a Chevrolet."

By comparison, Pierce excels in listening to customers, Barraclough said.

"They seem to be listening to their customers a lot more than E-One or American LaFrance," he said. "They have the best sales force in the business."

Management changes and the question of a new E-One plant that ended this spring when Federal Signal decided not to accept a $26.7 million incentive package to build a new plant in Ocala also have negatively affected the company, Jorgensen said.

"The confusion and turmoil over the ... new plant, and the replacement of Marc Gustafson ... that has been very controversial and had a negative impact and genuinely sent a shock wave through the industry," he said. "With the employee changes at management level, and E-One making the decision not to build the new plant, the question of what the long-term future of E-One will be is somewhat open."

http://www.ocala.com/article/20071103/NEWS/211030353/1025

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Why does it seem that some fire apparatus manufacturers can't stay in business?? Brands that are pretty succesful, like Ward LaFrance, the original American LaFrance, Ahrens Fox, Mack, etc etc.

Here's my take on this matter.

Some industries, despite being neccessary and sustainable, simply don't have the potential investment returns or predicted growth that the present generation of "show me the money" investors are looking for. The big attraction for many investors is growth. They want to put their money into immerging markets and reap the short term dividends. In mature, niche markets (like fire apparatus manufacturing) there isn't a lot of room to grow. The customer base is limited to the number of fire suppression agencies out there, and the anticipated life-cycle is 15 - 20 years or longer. It's not like LCD- HDTV's where everyone on the block is running out to get two or three and upgrade four more inches every six months. investors realize this, and therefore they view E-one as a big deadweight in their portfolio. Thus, there is an effective investment capital limit. Fire apparatus manfacturing will never be a flashy industry (ironic considering all the LED's and strobes) - It won't dominate the trade journals, spawn an entire Cable TV niche, and generate headlines. It's like water testing (a field I know a bit about) or making paperclips - it's got to be done, but nobody's going to get rich doing it - so it doesn't attract investors to the portfolio. A lot of investors are too busy chasing the excitement and cutting edge - like the latest bubble (DOT.COMs, Biotech, Real Estate)- to put their money into a less attactive, but mature industry. So, it's no wonder to me that the executives at Federal Signal want to make it go away. That it's losing money makes it all the more obvious.

But in E-one's case, it's the chicken and the egg dilema... what happened first? Did lower quality (or the perception of lower quality) reduce sales, or did reduced sales induce reduced quanitity (or promote the perception of reduced quality). Did quality slip because costs were cut, or did cost cutting lead to quality slip? Or did E-one make a fantastically deadly marketing blunder. That's my theory.

I don't think E-one makes a bad product - however there is a perception that their product is "off the shelf" and "low bid". And in marketing, perception is EVERYTHING. I think the big issue was that E-one was missing the customers.

I blame Federal Signal's cookie-cutter - every business is the same - attitude. FS came into the game with no understanding of the Fire Apparatus market. They probably assumed that this industry would work like most other big-ticket commodity industries; just streamline production, leverage economies of scale, find cheaper labor, focus the product line to a few basics, and hype the intangibles (like "value"). Thus, the limited customizability - reliance on the "off the shelf" models and a very direct marketing for "value" - Concentrating on large orders - and attempting to "lead the market" by perpetuating the "less is more hoax". Whereas Pierce, Seagrave, KME, etc. were out telling you how they could build what you wanted - sky's the limit - just make your budget match your dreams - E-one was more interested in handing customers a menu and saying, "Just pick one of these, and spend the rest of your time running bingo nite or cooking dinner - no need to trouble yourself with ideas and your needs. We're THE BIG GUYS and we KNOW what you want." Whereas other manufacturers were turning out head-turning (laugh inducing) demo units, bold (maybe ugly) designs, and state of the art (impractical) technology, E-one kept creating flatter, plainer boxes with less and less expensive bells and whistles. I hate to say it, in a traditional field like this, the bells and whistles are par the course.

This situation proves, once again, how the U.S. fire service bucks a lot of the "tried and true" tactics most businesses use to cut costs. The fire service is tradition driven and that extends to how we purchase. If you look at any other nation in the world, their fire equipment is almost standard. You could drop a Tokyo Fire Engine in Dusseldorf and the local Fuherweher would just get to work without a second thought. Why has 90% of the world been using Bronto's and Metz aerials for 60 years and you can still count the number of them in the U.S. on both hands. The rear-mount aerial tower with a permanent bucket is unheard of outside the U.S. and Canada. Unfortunately, I suspect the Federal Signal management at E-one was listening to the global market - not the U.S. market. They made the unfortunate assumption that the majority of apparatus purchasers in this country were looking for the $15.00 Wal-Mart toaster on wheels in red.

The problem is, to most investors and business types, fire apparatus manufacturing gets lumped in with building cement mixers, dump trucks and street cleaners - it's perceived by the non-fire service that "a fire truck is a fire truck" - It's just another type of work truck. The financial performance of fire apparatus manufacturers is intuitively lumped into that. This flies into the face of the real apparatus market. There is no clear, by-the-books financial justification, that keeps FDNY buying Seagraves. Sure, it's there, but it requires digging and an understanding of why a fire engine is not a garbage truck - and most executives and fund managers don't have time to figure it out. The closing of Saulsbury was early proof that this mentality was guiding E-one. They took a highly respected, moderately profitable custom apparatus builder that probably would have run steadily (but not grown appreciably) for decades to come just on repeat customers, and obliterated it to make an almost unappreciable gain in market share, which they then lost to Marion and PL Custom (Rescue 1). Lost because the persuit of growth on the annual report took precidence over the market reality -that nobody wants to be thought of as having purchased a cheap fire truck. That's my take on it.

[SageVigiles 1,194]

Kudos to Doc for an extremely well thought out post, you have a degree in business or something?

Anyway, the problem with E-One for my department was that they were unable to build what we wanted in the size that we wanted. I believe E-One was one of the lowest bidders, but they didn't design a rig that fit our specs, which is to say, would fit in the building. In this industry, customization is key. MANY departments are have size restrictions for their apparatus, due to building size, street size/width, terrain, etc. If a manufacturer can't accommidate that, they are doomed to failure.

[Reliance 29]

Kudos to Doc for an extremely well thought out post, you have a degree in business or something?

Anyway, the problem with E-One for my department was that they were unable to build what we wanted in the size that we wanted. I believe E-One was one of the lowest bidders, but they didn't design a rig that fit our specs, which is to say, would fit in the building. In this industry, customization is key. MANY departments are have size restrictions for their apparatus, due to building size, street size/width, terrain, etc. If a manufacturer can't accommidate that, they are doomed to failure.

Also, if you remember, E-One bought out Superior Emergency Apparatus, in Red Deer, Alberta Canada and renamed it E-One Canada and then moved it to Florida as well.

At the time Superior pretty well had the market in Canada next to Hub (ALF at the time), Fort Garry, Pierce as well as regional manufacturers Metalfab & Allain in New Brunswick, Canada.

They also had two dealers that switched to Rosenbauer from E-One a couple years ago.

[Guest]

So i guess that they are E-Done?

[exmrvfc 0]

Unfortunately, E-one's problems have been well chronicled over the last couple of years. Here is an article from Fire Apparatus and Equipment magazine detailing how E-One shelved plans to build a new plant. That was done when the Florida was giving them $26 million in incentives to build a $50 million plant. Here is an article from May

May 2007 Columns

Fire Industry Today

by C. Peter Jørgensen

E-ONE’s introduction of four new models at FDIC in April was overshadowed just one week later when the company shelved plans to build a $50 million state-of-the-art production plant in Ocala, Fla.

In doing so, E-ONE’s parent company, Federal Signal Corporation of Chicago, rejected a $26.7 million cash, land, construction and utilities package put up by the State of Florida, Marion County and the City of Ocala to retain the company’s 1,200 area jobs.

Since last July, E-ONE President Marc Gustafson waged a tough battle in winning approvals from three government levels. Then, within days of local newspaper headlines announcing that the deal was set, Federal Signal pulled the rug out from under him.

Federal Signal’s press release said the company “is making investments in our distribution/dealer channels and product development activities which support our commitment of returning E-One to the lead position in the North American fire apparatus industry.”

That is a nonsequitur of the highest magnitude.

All of E-ONE management, the employees and the nationwide network of dealers are stunned.

Nothing would have gone further toward building the dealer network to its former level than promise of a 21st-century production facility.

Gustafson has also been struggling to retain his dealers, seeing some jump to represent other manufacturers since E-ONE had not introduced a truly new product model in over five years. From second place behind Pierce, E-One has dropped to third with less than 800 orders last year, well behind Rosenbauer.

The week should have been one of celebration at E-ONE with the great reception the new product line got at the FDIC show. The Quest model is completely new with several highly competitive advantages.

The Urban Pumper, with its 60-inch high hosebed for LDH, is lower than the average hosebed on apparatus of 50 years ago. It represents a welcome innovation, adding to the ease of reloading supply hose quickly.

But these unique new products won’t be built in a new modern plant, at least for the immediate future.

The state and regional government share did not come easily. The proposal was sold in public meetings as the centerpiece of a new industrial park near the Ocala airport, thereby gaining support from local elected officials. But detractors called it “corporate welfare.” Still nobody wanted to see 1,200 jobs disappear in Ocala.

The project’s political backers said it would be a shot in the arm to the local economy.

Wrong. Federal Signal instead shot itself in the foot. Some might call it one more misstep in an unending march to nowhere.

E-ONE is the corporation’s largest division and the one with the highest potential, but the dealers, employees and management team that’s held the company together during tough times the last few years gets no respect — and no support for a modern plant.

Gustafson, in a little over two years at the helm, has taken E-ONE a long way toward turning the company back to its former status among high-volume apparatus manufacturers. Personally, he must be crushed with this direction reversal by the Federal board.

E-ONE has been contributing about 40 percent of Federal’s overall revenues, but that doesn’t seem to matter. That percentage will rise dramatically since Federal just sold off its $100 million-plus per year Tool Division because it didn’t fit with the current corporatethink.

Federal’s leadership in Chicago is more concerned about how the next quarterly report will be read on Wall Street than keeping the E-ONE plant competitive and rebuilding the company for the long run.

E-ONE has not met profit goals in the last several years under four different presidents. But Federal should realize no management team can turn such a large company around without the parent corporation’s fully committed support.

While the local community was pleased to hear that jobs won’t be lost in the area, the whole affair wasn’t just a minor news item on the business pages. The E-ONE news made headlines in the daily Ocala Star-Banner for several days in April, generating two staff-written editorials as well.

The first editorial, entitled Delay by E-ONE is bad form, said: “As if there wasn’t enough public distaste and disagreement over the $26 million incentive package being offered to Emergency One, inexplicable foot-dragging by the company’s parent, Federal Signal Corp., in deciding whether the deal is worth staying for has amped up a supercharged atmosphere even more.”

After Federal Signal President Robert Welding issued this statement: “This investment proposal for a new E-ONE site is not currently our foremost priority due to the magnitude and complexity,” the newspaper characterized the decision as follows:

It is “a bittersweet conclusion to a long and contentious community conversation that, in the end, as in the beginning, was driven by business realities alone.”

The newspaper’s editors said, “The idea of the city of Ocala, the county and the state joining forces to offer E-One $26 million in cash, land and construction and infrastructure grants was widely criticized in the community as being corporate welfare by the government on one hand and corporate extortion on the other.”

The newspaper added that the success of retaining local jobs had to be tempered by recognizing it represented a “significant setback” to the industrial park project.

And, rubbing salt in the wounds the next day, Welding, speaking to financial analysts during a publicly broadcast phone call, was more candid. He told the people on Wall Street, where Federal Signal is traded on the New York Stock Exchange, “We felt the project was too expensive and too risky given our other priorities.”

Clearly, Welding has little experience in financing commercial real estate. Today, most huge office buildings and manufacturing centers are owned by real estate investment groups operating as REITs. These Real Estate Investment Trusts are exempt from federal taxes and operate somewhat like mutual funds that hold stocks. Owners do not pay tax until they cash out, meanwhile the trusts pump earnings back into the economy by investing in more commercial real estate.

With a $26.7 million government incentive package and competing REIT corporations looking for investment opportunities, it is unlikely Federal would have had to put any of its own money at risk.

So, what vision drives Federal Signal is hard to fathom. The people who write press releases aren’t the real insiders, and the insiders like Bob Welding are either naïve or holding back on stating the real strategy and objectives.

At the same time Federal Signal was canceling construction plans and withholding support for E-ONE, the apparatus manufacturer’s growing rival — American LaFrance (ALF) — was readying a brand new 460,000-square-foot manufacturing facility outside Charleston, S.C., for earlier-than-planned occupancy in June.

Like most commercial real estate undertakings these days, a Real Estate Investment Trust made up of investors who haven’t a clue about building custom fire trucks will own the bricks and mortar.

American LaFrance will occupy the building under a long-term lease. ALF, being deftly run by former Wall Street insider Lynn Tilton, chairman of Patriarch Partners, will have a facility specifically built to turn out fire apparatus quickly and profitably.

Bob Welding: the comparison doesn’t make Federal Signal look all that good. Is there something you are not telling us? Why will E-ONE now continue to struggle in a series of cobbled-together buildings dating back to the company’s founding in the 1970s while your competitors Pierce, Ferrara, KME, Spartan Chassis and Seagrave all recently opened modern manufacturing plant additions?

And soon American LaFrance will move into the largest and most modern fire apparatus manufacturing plant in the world — more than 10.5 acres under one roof. And adjacent to this plant ALF will open another 60,000-square-foot office, engineering, research and development building combined with a customer planning and delivery center.

That’s 520,000 square feet — just about 12 acres for both buildings — on a single site overlooking Interstate 26, gateway to Charleston, S. C., and the South’s most historic city, in the year American LaFrance celebrates its 175th anniversary.

[Note to Federal Signal Board Members: contact Fire Apparatus magazine directly before July 15 for covert press passes to ALF’s grand opening in August.]

Give credit to E-ONE’s employees. After a few rough years when delivery times ran high and quality slipped, both are back on the track. Despite the outmoded facilities, E-ONE builds a good product with its 75-foot single axle quint the standard for the industry. And its new models are the best sign of things to come from that company in several years.

E-ONE’s four all-new models on the FDIC floor were conceived and developed during the political debates over state, county and municipal subsidies while day-to-day deliveries continued.

Overall sales levels may have been stagnant in the last three months, but just how much can be expected of a management team struggling to maintain dealers being recruited by competitors offering modern manufacturing plants and faster deliveries?

Building fire apparatus is a straight nuts and bolts business. It’s not rocket science. The bolts have to be inserted the way the customer specifies and then the nuts go on and are tighten up real well.

Custom fire trucks are built one at a time, to individual drawings for each truck. And when completed they have to be reliable.

But because of this Federal Signal decision to cancel the new plant, the contrast with the other top fire apparatus manufacturers couldn’t be more stark.

[Guest]

I live in Ocala, and see firsthand what is going on. Everyone where I live is scared that E-One is going to close or move, because next to the horse industry, it is one of the largest economic supporters in the Ocala area.

Basically, from what I can see, Federal Signal did like what most other large parent companies do: trim the bottom line to try to run more efficiently. The problem is that in doing so, they failed to do their homework and realize that there are certain things you must do to remain competetive. They make a great product, but are unwilling to customize to the level that many departments require.

A department like mine has no problem ordering 20 "cookie-cutter" engines, because we are a career department, and most of our budget goes towards salaries. So, they have to get a "cookie-cutter" fire engine that will be the same in all 45 of our firehouses, so any of our drivers can drive any of the engines.

One benefit of a volunteer fire department is that there aren't any salaries to worry about, so more money can be invested in the apparatus. E-One doesn't realize that most of their money is going to come from the volunteer departments, where they are willing to pay the extra money to get a truck that is EXACTLY what they are looking for, and are not going to settle for anything less. They thought that the big department contracts (like my department's) is what is going to get them through ... but remember ... 73% of all firefighters in the US are volunteer. What does that say about how many volunteer or combination departments there are out there that are looking for an extremely customized piece of equipment, for which they are willing to pay a good price? If E-One isn't going to provide that level of customization, then they will go somewhere else ... like Pierce.

Lt. Craig