Federal Signal Corporation

Greetings and welcome to the Federal Signal Corporation Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Ian Hudson, Chief Financial Officer. Thank you. You may begin.

Good morning, and welcome to Federal Signal's fourth quarter of 2020 conference call. I'm Ian Hudson, the company's Chief Financial Officer. Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer. We'll refer to some presentation slides today, as well as to the earnings release 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 earnings release 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 Signals 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 earnings release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-K later today. Jennifer is going to start today with her perspective on our performance, and then I will provide some more detail on our fourth quarter and full-year financial results. Jennifer will then go over our outlook for 2021 before we open the line up for any questions. With that, I would now like to turn the call over to Jennifer.

Thank you, Ian. I'd like to start by giving my profound thanks to each of our employees and our business partners for their ongoing commitment. I'm immensely proud of how our teams have managed through these challenging times. It's hard to believe that it's been a little over a year since the first COVID-19 patient was reported in the U.S. Since the outbreak of the pandemic, the health and safety of our employees has been our highest priority, and we worked quickly to implement a host of measures to establish a safe work environment for our employees. These steps have included adjusting our office spaces and production processes at our facilities to comply with safe distancing guidelines. During 2020, we invested in temperature screening capabilities at most of our facilities, issued a mandatory face mask policy, provided our employees with additional paid time off, and made at-home test kits available for free to our employees and their family members. As the national COVID-19 vaccine distribution has gotten underway, it is clear to me that vaccinating our workforce is the single most effective tool at our disposal to protect our employees and customers and keep our businesses operating efficiently. In a nutshell, putting this pandemic behind us is critical to our long-term success. So with that in mind, we recently kicked off a company-wide effort to raise awareness about COVID-19 vaccines, assist eligible employees in gaining access to available vaccines, and encourage participation levels. Through the pandemic, our businesses have worked closely with local health departments. In Illinois, where we have three of our largest manufacturing facilities, many of our employees are now eligible to receive vaccine as essential workers. In partnership with the local health department, we have organized an onsite vaccination event in March for all eligible employees at that site. I'm extremely appreciative to everyone that helped make this happen and hope that we can host similar events at our facilities in other states when our employees become eligible. In addition to protecting our employees, one of our objectives in launching this initiative is to provide comfort to the customers and suppliers with whom we frequently interact in person that a high percentage of our customer-facing employees have received a vaccine. We also want to provide a mechanism to encourage eligible employees to feel more comfortable traveling to support our customers. Sharing the same sentiment as others, we are anxious to move beyond COVID. During the fourth quarter, with the resurgence in cases across much of the country, many of our businesses experienced COVID-related disruptions. The fact that we were able to navigate through these issues and deliver strong results was a real testament to our teams. Thankfully, those trends are now improving. There is no doubt that these remain tumultuous and uncertain times. However, this experience has confirmed my strong belief that our workforce is unparalleled in its passion, commitment, and grit. And while we may have some challenging days or periods, I am confident that we will band together and work through these challenges together. as we have many others. Overall, our performance in the fourth quarter represented a strong finish to 2020, a year in which we delivered the second highest adjusted EPS in the company's history, surpassed only by the $1.79 per share reported in 2019. Despite the impact of the pandemic on our top line, I was pleased with how our team responded quickly, taking actions to control costs which not only preserved our EBITDA margin, but improved it by 40 basis points on a year-over-year basis. In fact, both of our groups exceeded the upper end of their current target EBITDA margin ranges in 2020. While many companies conserved capital in 2020, we were proactive in taking a number of actions to position the company well for 2021 and beyond as we continue to focus on our long-term growth objectives by funding strategic investments to support the future growth of the company in three critical areas. First, we have made significant investments in our existing plants to add additional capacity to support our long-term growth and to gain operational efficiencies through the use of newer machinery and equipment. We recently completed our plant expansion and are making progress on the expansions of our manufacturing facilities in Rugby, North Dakota and Lake Crystal, Minnesota. Earlier in the year, we also completed the expansion of our ML facility in Billings, Montana. Second, we continue to invest in new product development. And we are seeing the benefits from these efforts with an estimated $200 million of revenue in 2020 being generated from the sales of products introduced in the last three years. Among those products was the 2100i full-size sewer cleaner, which we launched in 2018. The 2100i sewer cleaner introduced intelligent controls on the truck and was entirely designed around our customers' needs for ease of use and operability. Two years following the launch, we continue to see strong results from that product line and positive customer feedback on the design. During 2020, and on the back of our success with the 2100i, we launched a smaller sewer cleaner and a truck jetter machine that incorporates the same intelligent controls as the 2100i. The initial response to these products has been very positive. TBEI, our dump bodies business, was also successful in bringing several new products to market in 2020, addressing specific customer needs or improving our competitive positioning. A few examples I would note are the launch of the J-Craft Apex Dump Body, which features smooth sides with no seams in a tough dump body that results in a significantly better flow of materials for the end user, and the DuraTuff, which is a heavy-duty abrasion-resistant dump body with a simplified design that allows us to manufacture and fulfill the needs of our customers within a lead time of approximately six weeks, which is much shorter than manufacturers of competitor products. Overall, revenues from these new products accounted for nearly 10% of TBI's overall revenues during a year in which TBI delivered the highest EBITDA margin under our ownership. Within SSG, we've increased our recurring revenue streams through Commander One, a product that leverages our existing install base of outdoor warning sirens and provides a unique differentiator for federal signal siren control equipment. Of our total R&D spend in 2020, approximately 20% was invested in electrification projects. and we are pleased to report that during the fourth quarter, we received our first orders for our hybrid electric street sweeper. Electrification will continue to be an important initiative for the company moving forward. Third, we reacted quickly to introduce several new digital marketing tools to enhance the customer experience of our customers under Reclaiming Tomorrow Together initiative. These tools, which include virtual equipment demonstrations, and digital training academies allow us to reach our customers in a new way. We also launched our e-commerce site in the fourth quarter, which initially focuses on certain product lines within our safety and security systems group. Our strong cash flow generation supports not only these organic growth initiatives, but also ongoing debt repayment, cash returns to shareholders, and acquisitions. In June of 2020, we completed the acquisition of BWE. And last week, we completed the acquisition of OSW Equipment and Repair. In October of 2020, we issued our inaugural long-form sustainability report. I'm incredibly proud of the progress we've made on our environmental, social, and governance initiatives and thrilled to share our many accomplishments through the issuance of this report. With our commitment to continuous innovation, strong governance, and reduced resource consumption, we continue to build and deliver equipment that has beneficial impacts to both the environment and human safety. We are proud to be a company whose products have inherent environmental and social importance, and we hope that our pride is evident upon reading the report. Let me now spend a minute on our recent acquisition, OSW. OSW is a leading manufacturer of dump truck bodies and a custom upfitter of truck equipment and trailers and is headquartered in Snohomish, Washington, with an upfitting location in Tempe, Arizona, and a service center in Edmonton, Alberta. Since acquiring TBEI in 2017, the geographic expansion of our existing platform of market-leading dump bodies and trailers has been an important strategic initiative. The acquisition of OSW represents a highly strategic transaction, adding three premier brands that serve attractive infrastructure, construction, and other industrial end markets on the West Coast, Arizona, and in parts of Canada. We have previously noted that our dump truck businesses have a general correlation with new housing starts. The region in which OSW operates along the West Coast, have been the fastest growing areas in the country in the last five years. To capitalize on that growth potential and expand its reach, OSW completed two acquisitions in recent years and represents a good anchor tenant for future growth on the West Coast. With its main operations located in Washington State, where the coronavirus pandemic first hit the U.S., OSW's financial performance was adversely impacted in 2020. However, it is a company with strong brands, several long-term contracts with municipalities, and a reputation for making quality products. The acquisition will also extend our current product offerings by filling in several gaps in the TBI's existing trailer portfolio. Although we expect this acquisition to be neutral to our 2021 earnings, the acquisition provides considerable opportunity for long-term value creation to the application of of our 80-20 improvement principles, organic growth initiatives, and additional bolt-on acquisitions. I will now turn the call back to Ian to go over the numbers.