Federal Signal Corporation

Greetings and welcome to Federal Signal Corporation First 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Mr. Ian Hudson, Chief Financial Officer. Thank you, sir. You may begin.

Good morning, and welcome to Federal Signal's first quarter 2021 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 will refer to some presentation slides today, as well as to the earnings news 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 signal 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-Q for later today. I'm going to begin today by providing some detail on our first quarter results before turning the call over to Jennifer to provide her perspective on current market conditions, our progress against strategic initiatives, and our outlook for the remainder of the year. After our prepared comments, Jennifer and I will address your questions. Our consolidated first quarter financial results are provided in today's earnings release. In summary, we delivered another strong quarter with record orders and operating results exceeding our expectations, despite ongoing pandemic-related disruptions. We also had to navigate through the February ice storms in the south, which caused us to temporarily close our facilities in Texas, Alabama, and Mississippi. Fortunately, we did not experience any significant damage, but we did lose several days of production. Despite these challenges, the teams recovered well, with both groups delivering adjusted EBITDA margins at or above levels achieved in the first quarter of last year. That feat is even more impressive given the strength of the prior quarter, which included record production at our largest facility and minimal impact from the pandemic. Turning now to the numbers where consolidated net sales for the quarter were $279 million compared to $286 million last year. Consolidated operating income for the quarter was $27.8 million compared to $32.3 million last year. Consolidated adjusted EBITDA for the quarter was $41.2 million compared to $43.9 million last year. That translates to a margin of 14.8% in Q1 this year, compared to 15.3% last year. Net income for the quarter was $22.2 million, compared to $23.4 million last year. That equates the gap EPS for the quarter of $0.36 per share, compared to $0.38 per share last year. On an adjusted basis, EPS for the quarter was $0.38 per share, compared to $0.39 per share last year. Order intake for the quarter was outstanding, with orders of $384 million representing our highest quarterly orders on record and an increase of $80 million, or 26%, compared to Q1 last year. Consolidated backlog at the end of the quarter also set a new company record at $410 million. That represents an increase of $9 million compared to Q1 last year, and an increase of $106 million or 35% from the end of 2020. In terms of our group results, ESG's net sales for the quarter were $228 million compared to $233 million last year. ESG's operating income for the quarter was $27.1 million compared to $29.4 million last year. ESG's adjusted EBITDA for the quarter was $39.3 million compared to $40 million in the prior year. That translates to an adjusted EBITDA margin of 17.2% in line with last year. ESG reported orders of $324 million in Q1 this year, an improvement of $87 million, or 37%, compared to last year. SSG's net sales for the quarter were $51 million this year, compared to $53 million last year. Operating income for the quarter was $7.2 million compared to $7.4 million last year. SSG's adjusted EBITDA for the quarter was consistent with the prior year at around $8.2 million, while its adjusted EBITDA margin for the quarter improved to 16.2% of 80 basis points from Q1 last year. SSG's orders for the quarter were $60 million compared to $66 million last year. Corporate operating expenses for the quarter was $6.5 million, up from $4.5 million last year. The increase was primarily due to an unfavorable year-over-year variance of $2.6 million associated with changes in mark-to-market adjustments of post-retirement reserves. These market-based adjustments benefited our earnings in Q1 last year by approximately $0.02 per share, but were unfavorable in Q1 this year. Turning now to the consolidated income statement, where the decrease in sales contributed to a $6 million reduction in gross profit. Consolidated gross margin for the quarter was 24.7% compared to 26.1% last year. As a percentage of sales, our selling, engineering, general, and administrative expenses for the quarter were down 20 basis points from Q1 last year, despite the unfavorable mark-to-mark variance I just mentioned. Other items affecting the quarterly results include a $700,000 increase in other income and a $400,000 decrease in interest expense. Tax expense for the quarter was down $2.2 million, largely due to lower pre-tax income levels and higher excess tax benefits from stock compensation activity. Our effective tax rate for the quarter was 18.4% compared to 23.5% last year, The lower tax rate in Q1 this year was in line with our expectations after we had included an estimate of excess tax benefits. At this time, we continue to expect our full-year effective tax rate to be approximately 24%. On an overall gap basis, we therefore earned $0.36 per share in Q1 this year compared with $0.38 per share in Q1 last year. To facilitate earnings comparisons, we typically adjust our gap earnings per share for unusual items recorded in the current or prior year quarters. In the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition-related expenses, coronavirus-related expenses, and purchase counting expense effects. On this basis, our adjusted earnings for the quarter were $0.38 per share compared with $0.39 per share last year. Looking now at cash flow, where we generated $26 million of cash from operations during the quarter, an improvement of $21 million over Q1 last year. We ended the quarter with $168 million of net debt and availability under our credit facility of $270 million. Our current net debt leverage ratio remains low, even after funding the acquisition of OSW during the quarter for approximately $53 million. Our strong financial position allows us to continue to invest in organic growth initiatives and pursue strategic acquisitions like OSW. At the same time, we remain committed to pursuing strategic acquisitions and returning cash to stockholders through dividends and opportunistic share repurchases. On that note, we paid dividends of $5.5 million during the quarter, reflecting an increased dividend of $0.09 per share, and we recently announced a similar dividend for the second quarter. That concludes my comments, and I would now like to turn the call over to Jennifer.

Thank you, Ian. It's been over a year now since the pandemic began, and while there have been many challenges along the way, I remain in awe of how our teams have responded, modifying our work practices to keep employees safe, exercising flexibility in handling uncertain market conditions, and finding new ways to serve our customers. Our facilities continue to experience some ongoing COVID-related disruptions, but conditions are improving. Our company-wide efforts to raise awareness about vaccines, assist eligible employees in gaining access to vaccines, and encourage participation levels are paying off. And we are pleased to report that our domestic employee vaccination rates are ahead of the national average. In fact, in Illinois, where we have three of our largest facilities and the corporate office, over 60% of our employees are now fully vaccinated. With that, we've seen an uptick in our sales resources traveling, reinforcing our customer-centric value proposition, and contributing to greater order intake. As in the last two quarters, we again saw improved demand for our products, with our first quarter order intake setting a new record for the company, surpassing the previous high by over $50 million. Our first quarter orders reflect strength in most of our end markets, and growing confidence in a post-pandemic recovery, which seems to be further solidified by recent economic stimulus. That sentiment seems to be shared widely by our dealer partners and customers across most of our businesses. Demand for sewer cleaners remains strong, with first quarter orders up 30% year over year and almost double the amount recorded last quarter. Safe digging is also continuing to gain acceptance. Over the last couple of years, approximately 70% of our sewer cleaner orders have included an optional safe digging package, which allows a sewer cleaner to also be used for hydro or vacuum excavation purposes. We saw similar trends this quarter with customer appreciation for the safety and efficiency benefits of safe digging gaining momentum. At MRL, our road marking and line removal business, first quarter orders were the highest quarterly level since we acquired the business in 2019. And with its planned expansion now complete, we are well positioned to benefit from potential infrastructure investment. Our road marking services business, Highmark, also won an $8 million striping contract during the quarter. Since the fourth quarter of last year, we've also seen an uptick in our industrial end markets with improved orders for our guzzler and jet stream products heading into the spring cleaning season. In addition, our dump body and trailer businesses reported strong organic order growth of 28% across their end markets, achieving record backlogs. While our backlog is at a record high, there are a few factors that may limit us from realizing the full benefits from the operating leverage that we typically experience with backlogs at these levels. The first factor that many of you will be aware of is the impact of the global semiconductor shortage on Chiasi availability. We started to see some supply tightness late last year, and our teams were proactive in securing additional chassis and recommending to our customers and dealer partners that they do the same for those orders where they supply the chassis. As a reminder, that is about 50% of the time for ESG businesses, excluding TBEI, where the customer almost always supplies the chassis. We were recently notified by one of our chassis suppliers that they are temporarily suspending production of certain chassis for up to 90 days in light of the semiconductor shortage. The issue primarily impacts our sewer cleaners, safe digging trucks, and certain street sweeper models. The situation remains fluid, and the teams have been working hard to mitigate the impact of this short-term disruption. Based on the data we have received, we expect the situation will be resolved during the third quarter, with production expected to ramp back quickly thereafter. Because we do not rely on any one single chassis manufacturer, and with the proactive actions we took, we have been able to pivot quickly to minimize the financial impact. For example, at Elgin, our team was able to adjust production schedules so that we built a higher concentration of the three-wheel Pelican sweepers during the period of the expected impact. As a reminder, for that product line, we actually manufacture the chassis ourselves. At our Streeter facility, where we make sewer cleaners and safe digging trucks, we have had an ongoing effort to secure additional chassis from other manufacturers. However, because of lead times, On certain chassis, there's a period of approximately two weeks where we have a shortage at factor. With the goal of optimizing efficiency, the teams have worked diligently to manage the schedule so that this brief pause will occur over the July 4th holiday. With the additional chassis supply that we have secured, we are expecting a ramp-up in production thereafter. Like most companies, we are also experiencing rising commodity costs. As our teams have done in the past, we took proactive measures such as locking in pricing and securing availability of steel based on forecasted needs. Our teams are working diligently to mitigate the impacts of rising commodity costs by implementing price increases and surcharges where possible. As it relates to labor availability, Our ongoing commitment to environmental, social, and governance continues to benefit our company. Investment in our employees differentiates us and our ability to attract labor at the majority of our facilities. I now want to take a few minutes to provide an update on our strategic growth initiative. We remain bullish about safe digging prospects, and with noted industrial end market recoveries and infrastructure spend optimism throughout the channel, We are confident safe digging trends will continue to improve. Our TruVac safe digging product line portfolio includes a complete range of truck-mounted safe digging equipment with applications across a number of end markets. We were pleased to see that TruVac product demonstrations for the quarter were up 70% from last year. As I just mentioned, these education efforts are also having a positive impact on sewer cleaner demand with the inclusion of the optional safe digging package turning our sewer cleaners into a multipurpose vehicle. We also continue to make progress with our aftermarkets initiative with aftermarkets revenue for the quarter improving by 6% and representing a higher share of ESG's revenues for the quarter at around 27%. We continue to closely monitor rental fleet utilization and remain disciplined in making decisions about the size and composition of our fleet. As part of that process, we have seen healthy used equipment sales in recent months and an uptick in rentals. We are monitoring the current COVID situation in Canada with Ontario and many other provinces being subject to some of the most extreme stay-at-home measures since the start of the pandemic. While we have not experienced any significant financial impact to date, we may see some impact in our Canadian markets over the next few months, which is typically a seasonally strong period for equipment rentals and part sales. On the organic growth front, we have several new product launches in the pipeline, a few of which I'll touch on today. Within ESG, street sweeper electrification remains a key area of investment. We have previously talked about our first orders for our hybrid electric BroomBear Street Sweeper, which are currently expected to ship later this year. This hybrid model uses both battery energy and either CNG or diesel power for sweeping, with performance designed to meet or exceed current sweeper performance. The hybrid BroomBear is now being demonstrated by our dealer channel, primarily on the west coast and then moving to the southeast, and the feedback to date has been encouraging. In addition, development of a hybrid version of our most popular line of street sweepers, the Pelican, is underway. The plug-in hybrid electric Pelican sweeper is assembled and undergoing testing. The product demonstrations plan for the second half of this year. Within our dump body and trailer product portfolios, we are also realizing benefits from new product introductions. During the quarter, products launched over the last year equated to organic growth of about 4%. Within SSG, based on the nature of its product portfolio, our innovation pipeline typically includes a higher volume of new product introductions and enhancements that, while individually may not have a significant financial impact, collectively aggregate to meaningful organic growth. For example, we launched production of our MicroPulse line during the quarter. The MicroPulse is a low-profile, high-performance LED lighting product for both first responders and work truck vehicles. The line includes production of both new product models and those that were previously outsourced. Insourcing this line, which leverages automated laser technology, is estimated to improve the related margins and drive annual savings of over a million dollars. In addition, we are currently on track to launch a low-cost light bar in the second quarter. In addition to these organic growth initiatives, M&A will continue to contribute meaningfully to our future growth. During the quarter, we completed the acquisition of OSW, a leading manufacturer of dump bodies and a customer upfitter of truck equipment and trailers. The acquisition provides considerable opportunity for long-term value creation through the application of our 80-20 improvement principles, organic growth initiatives, and additional bolt-on acquisitions. Last week, we held an initial 80-20 improvement training session at OSW, which was well received by the teams. Integration is well underway, and while it is still early days, OSW was off to a solid start in the first quarter. Our M&A pipeline has been active, to say the least, and it's been exciting to be back on the road visiting potential targets. As Ian noted in his comments, our financial position and liquidity are strong, enabling us to pursue strategic acquisitions, and there are a number of M&A opportunities that our teams are currently reviewing. We have also continued to make significant investments in our existing plans to add capacity, to support our long-term growth, and to gain operational efficiencies through automation. As we continue to optimize our manufacturing footprint, we are evaluating our long-term strategy with respect to our Elgin and University Park production facilities in Illinois. Both properties are currently leased at above market rates with lease terms ending in 2023. We are currently looking at opportunities and alternative facilities in the surrounding areas as we proactively plan for a potential move. The American Rescue Plan COVID relief package includes approximately $1.9 trillion of economic stimulus with approximately $350 billion going to state, local, and territorial governments with the goal of keeping frontline workers employed, distributing the vaccine, increasing testing, reopening schools, and maintaining essential services. We are actively educating our dealer channel about the stimulus program and have distributed the latest estimate allocation of the $350 billion of state and local government support by jurisdiction to our dealer channel to share with its customer base. As a provider of equipment used for essential services like sewer cleaning and street sweeping, Federal Signal stands to benefit meaningly from additional aid that may be provided to state and local sources for these purposes. As was evident with our first quarter order intake, our dealer partners remain optimistic about market conditions in 2021, noting that both corporate and sales tech collections appear to have held up better than originally anticipated, which should add stability to their revenue sources. We expect that a long-term infrastructure bill will provide visibility for project planning and could see capital equipment demand increases in areas such as roads, bridges, broadband, clean energy, and public transportation buildup. We anticipate that this would provide benefits for the majority of our product offerings, including equipment sales and rentals of dump trucks and trailers, safe digging trucks, road marking equipment, sewer cleaners, and street sweepers. We have positioned Federal Signal in a manner in which we fully participate in the post-pandemic recovery by increasing capacity and within our facilities, reducing lead times to a level where we can better respond to customer needs, investing in new product development, and gaining market share. Turning now to our outlook for the rest of the year, orders thus far this year have exceeded our expectations, fueled by a combination of new product launches, ongoing execution against our strategic initiatives, and strong recovery in our end markets. With certain chassis manufacturers temporarily impacted by the global semiconductor shortage, we are currently encountering some short-term production challenges at our largest facility. Our teams are working diligently to navigate through this disruption, as they have in the past when faced with similar situations. After factoring in the impact expected over the next couple months, At this time, we are maintaining our adjusted EPS outlook for the year of $1.73 to $1.85. With our recently completed capacity expansion at several facilities, we are well positioned once the current chassis uncertainty eases. Demand for our products is at an all-time high with the recent federal stimulus and the possibility of infrastructure investment offering potential for further momentum, which we have not factored into our current outlook. At this time, I think we're ready for questions.

Operator? Thank you. At this time, we will conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in a question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for our first question. Our first question comes from Steve Barger with KeyBank. Please proceed with your question.

Hey, good morning, everybody. This is Ken Newman on for Steve.

Good morning, Ken.

Morning. So I guess the first question here will be on the chassis production. And obviously, you know, I think we all understand that supply chains are tight pretty much across all of industrials, especially with the chip shortages going around. Can you just kind of help us quantify the impact of chassis production on guidance, of the maintained guidance? So one, you know, how do we think about the lead times for those supply-constrained chassis? I think you said 90 days for certain types, but how do we translate that into whether it's a revenue or a margin impact relative to the four-year guidance?

Yeah, I think there's a couple things to keep in mind. You know, one of the things that Mark did with our teams that has really benefited us is, you know, beginning late last year, early this year, we started to order additional chassis. And one, again, we're chassis agnostic, so we've got a lot of different options to choose from. We were recently notified that one of our chassis suppliers is shutting down for up to 90 days, and although that was disappointing to hear, we're in a pretty good position because of the work that we had done late last year and beginning of this year in terms of ordering additional chassis. Our teams responded by, when we got this news, we were able to go out and leverage both our dealer partners and the relationships that we have with various chassis dealers to order additional chassis. So in terms of the impact, it's really a short-term situation factor. And, you know, typically we have a shutdown between the Christmas and New Year's holiday. They've moved that shutdown forward. We're doing our physical inventory during that time period. But there will be a brief pause over the Fourth of July week that we will be shut down. You know, our goal is to optimize our efficiency. And then we feel like we're in a really good position once we come out of that 4th of July holiday that we'll be able to ramp up pretty quickly. Ian?

Yeah, again, Ken, in terms of I think it will have both a revenue impact, as you said, as well as, you know, the earnings impact that flows through. But I think, as Jennifer mentioned, it's fairly limited at this point, you know, to that two-week period, I mean, late second quarter and early third quarter. So, We've done a great job in securing chassis for the balance of the year. It really has limited that one location we talked about because the teams have done a nice job in our sweeper facility, pivoting to change the schedule so that we're producing more of the three-wheel Pelican lines, and that's the one where we actually produce the chassis. I think it's really just a testament to the flexibility of the teams that we've been able to really minimize the financial impact.

Yeah, I guess the other thing I'd add is you might have read that a lot of the chassis OEMs are sold out for the year. I think we're in a good competitive position because of the work that we did late last year and early this year. And we have our orders in so we can secure those chassis that we need for 2021 and ramp production back up. Although it was a challenging set of facts, we're in a better position at most than to respond to them.

So is it fair to assume that the entire backlog as of the end of first quarter is expected to deliver in 2021? None of those are for 2022 delivery?

It really depends on the product line. You know, the dump trucks and trailers would be delivered in 2021. You know, it depends on some of the sewer cleaners could extend into 2022. And there's a continuum depending on the product line.

Right. And for my follow-up, you know, it seems like you had really solid orders in the quarter. You know, obviously, I think everybody's trying to kind of navigate their way around the tough supply chain tightness. Do you have any sense of whether or not your customers are pulling forward orders in order to get ahead of some of those supply chain issues? Would you expect or maybe just give a little bit of commentary in terms of what order inquiries are like quarter to date?

Sure. A couple things. You know, we're always looking at kind of order pull forward. We didn't see that here. So the answer to your question is no. Another encouraging fact, is that our April orders remain strong.

Yeah, I think when we see pull forward, Ken, it's typically somewhat limited to certain product lines. The strength in the orders that we've seen really was almost in all of our end markets for the majority of our product lines. So it wasn't limited to any one single product line. It was strength almost across the board.

We've seen some really nice traction that I talked about in my prepared remarks. on some of our organic growth initiatives, particularly in our dump truck and trailer business.

Right. Yep. One more, if I could squeeze it in. You know, just regarding your M&A pipeline, I know you're talking about the pipeline remaining active. It seems like you've got a lot of dry powder here in terms of availability and liquidity. Can you just talk about, you know, the opportunities in terms of deal sizes and multiples and, you know, Again, just kind of remind us on how you're thinking about the best returns relative to potential targets across the portfolio.

Yeah, a couple things. You know, our pipeline is about as full as it's ever been, so that's encouraging, particularly because we have a very detailed roadmap in terms of what we're interested in buying, and we work those relationships together. And, you know, we're starting to see as we come out of this pandemic that, you know, that hard work has benefited us. In terms of deal size, everything from a small product line acquisition to, you know, transformational type deals, we're always looking at a number of different opportunities. On multiples, we've seen, as everybody has, that there's multiples are going up. And again, you know, we believe that given the position we're in, there are a lot of synergy opportunities for us to fill out our product portfolio. We talked about in the first quarter, you know, OSW, closed-end transaction. We've done some training already on ETI. And we're very encouraged by what we've seen thus far. And again, we will continue to be disciplined acquirers. And we need, you know, obviously we look at a number of different factors, but we need to make sure that we always talk about, you know, does this make sense and how does this bring value to Federal Signal shareholders? So we're very encouraged and energized by what's in our pipeline.

Great, thanks. I'll jump back in queue. Thanks, Ken.

Our next question comes from Mike Chalisky with Collier Securities. Please proceed with the question.

Good morning, Mike. Good morning, everyone. Hey, how are you doing? Great. Okay, I wanted to quickly follow up on one of the other questions just asked about the possible pull forward of orders. It sounded like chat supply was not a reason for folks to order more during the quarter. and try to get ahead of the curve. But was there any order pulled forward from people concerned about getting their prices increased on them? Or was that not much of an issue either?

We didn't hear a lot of that back from our sales channel. And our price increase, because of the rising commodity costs, the price increases have taken somewhat of an irregular pattern this year. compared to a more kind of stable commodity market. So we haven't received a lot of that feedback. The feedback has really been around a couple things. One is, as we've talked about before, our salespeople have been out for, you know, starting, you know, during the pandemic last year when it was safe, they started to get back out. And we believe that we're able to capture some additional market share as a result of that. Number two is just talking to our dealers, the confidence is pretty high, particularly around some of the stimulus funds that have been available. Number three is we've seen kind of our used equipment sales increase and our rental utilization numbers continue to uptick. So it's really been across the board. And, you know, I would be remiss if I didn't talk about new product development and the impact that that's had on some of our businesses. you know, particularly our TBI dump truck and trailer business.

Got it. And maybe not to keep focusing on cash supply, but I want to ask this one as well. How open are your customers or your end users to changing brands if there's going to be one brand that's not available for potentially a couple of months here? Do you get the sense that some of the RFPs are for a certain model or if you can just switch whenever you feel like it?

On the municipal side, it's more challenging to change the chassis brand because it's gone through, in many times, a bid process. On the industrial side, there's more flexibility. But another fact that differentiates Federal Signal vis-à-vis some of our competitors is our rental fleet. First thing is that particular chassis and the Canadian market chassis has not been impacted thus far. So we've got quite a bit of flexibility there in terms of production scheduling where we can sub in some of those units. So in a nutshell, much more flexibility on the industrial side than on the municipal side. But given our rental fleet and, you know, the strong presence we have in Canada, we've got a lot of different levers to pull in response to this.

Got it. If I could just throw one more in there here. I really wanted to dig a little deeper on the safety security business. In the quarter, you improved your margins even though sales were down. I know that's sometimes par for the course, which is great work there, but I'm curious if you could give us a little more color. I'm kind of curious as to how you were able to make that happen this particular time.

Yeah, Mike, it's, you know, there's that business, you know, mix can be a factor from time to time because you have, you know, some of the larger systems businesses, they can have a different margin profile than some of the public safety equipment, for example. But I think one of the things we've done a really nice job there is on 8020 down at that location. It is, you know, the cost structure of that facility is that the more you can drive through the top line, it has more pull-through effect because the overhead is just limited to one primary location for the most part. I think one of the other things that we talked about was the insourcing work that we've done. Jennifer talked about the micropulse, which is a particular product line that we launched during the first quarter. And that's a product that we typically outsourced in the past, and we moved that in-house and really had some nice margin improvement resulting from that. In the quarter, and I think as we move forward, that's one of the other areas that we expect. From an 80-20 standpoint, we always go through the processes. Does it make more sense for us to produce it versus sourcing it externally? So that's one area that teams have just done a nice job on.

Excellent. Thanks so much. I'll hop back in queue. Thanks, Mike.

Thank you. Our next question comes from Feed Expulsion with Raymond James. Please proceed with the question.

Morning.

Hey, good morning, everyone. Morning. Hey, I was curious if we could talk about the dump trailer business or dump truck business a little bit more. Just first to start, I think you mentioned orders were up 28% in the quarter. I just wanted to double check. Does that include the acquisition of OSW or is that kind of an organic apples to apples number we should be thinking about?

Yeah, that's taking out the impact of OSW, Felix. So obviously in our orders this year, that includes the OSW numbers, but the rate that Jennifer quoted, that carves it out. So that's really the organic growth rate.

Okay, awesome. And then if you could broadly talk about what you're hearing from end customers in that business. And then similarly, I know we've talked about supply chain issues quite a bit on this call. But curious if you could touch on the overall lead time specifically in that book of the business right now.

Yeah, so a couple things. One is, as you know, we acquired that business in mid-2017. One of the first things the teams did is took a look at, you know, how do we implement kind of some of the best practices that Federal Signal had developed on new product development. And it's really just a fantastic management team. And so we took some of the best that Federal Signal developed and that particular management team and really started to look at accelerating new product development. And we gave some examples on my prepared remarks that's starting to benefit us and will continue to do so going forward. The second issue is capacity. So we've made some pretty significant capacity investments in the dump truck businesses at our Lake Crystal facility, at our Rugby facility. We also opened an upfitting center in High Point, North Carolina. And now we're looking at our OSW facility and how do we leverage that facility in the group of businesses in addition to our upfitting facility It was just opened in Tempe, Arizona. So, you know, again, it gives the teams an opportunity to optimize production at those various facilities, and we've got more capacity now. So, you know, it's always exciting when you sit and there's a theory and then you execute, and the performance has really surpassed my expectations in terms of what they've been able to do. With respect to lead times, they have extended, but given the capacity expansions that we've made and the automation investments that we've made under our ownership, you know, right now we're at a point where we still believe that we're very competitive in marketplace.

Okay. And then I guess my bigger picture question as it relates to TBI and OSW is, Can you help us unpack the margin profile a little bit? So I always thought of TBI as being a very high margin business. Understand this year you have a slew of supply chain headwinds going on and obviously commodity cost pressures. But knowing that it is maybe a quicker lead time business, does it feel like you're able to pass on price adequately there? And then overall, I know OSW is coming off depressed 2020 COVID levels. But help us understand what this acceleration and the dump trailer business could mean to overall ESG margins, I guess is my bigger picture question.

Yeah, I think, Felix, obviously, with our businesses within ESG, we talk about that EBITDA margin target of the 15% to 18%, which we think for a specialty vehicle company, that's a pretty attractive margin profile. We have also talked about taking those up once we get through this pandemic. I would say within the portfolio of TBI businesses we have, the margin profile probably varies. I mean, we're talking a little bit about different sizes of dump trucks across the portfolio. As we've talked about, I think, on our year-end call, OSW right now is not currently operating within that range, but one of the filters that we apply when we look at acquisitions is asking ourselves, even if they're not currently operating within those ranges, do they have the ability to get within that range once we apply our 80-20 principles and explore some of the synergy opportunities there. So OSW isn't there right now, but I think we feel like over the course of the next two to three years, there's opportunity to get there. And I think that will then be the area where, as we look at TBI as a platform for growth, looking at some of these companies sharing best practices across the businesses, sharing buying practices and things of that nature. We think that's where there's going to be some potential for margin improvement, which will be one of the factors we take into account when we come up with our revised margin target.

I'd add within that TBI group, as Ian mentioned, there's a range depending on both mix fleet orders and otherwise, but we've got some very high-performing EBITDA margin businesses within that product portfolio.

Got it. Very helpful. I'll leave it there.

Our next question comes from Walter Liptak with Seaport Global. Please proceed with your question.

Good morning, Walt. Hi, guys. Hey, congratulations on a nice quarter. So I think the big question here has been covered, which is the question about pent-up demand. And it doesn't sound like there was. So I guess my question first is, you know, if you had to pin the order growth on, you know, one or two things, is it, you know, just the selling and the opening? Or was it some sort of, you know, it doesn't sound like it was a pre-buy. You know, but, you know, do you think that this is sustainable or do you think that this is something where we saw a big slug of orders that were pent up and then, you know, now we're going to see things taper off?

Yeah, we've been encouraged because the strong order trend has continued in April. You know, it has been kind of across the board, too, is something else that's encouraging. we've seen some nice traction on NPD. But, you know, there's always seasonality in our businesses. It can vary quarter to quarter. But, you know, I think, you know, what I noticed and tried to address this again in my prepared remarks is that, you know, we did not slow down on our NPD investments during 2020 in the pandemic. And I think we're really seeing some of the benefits of that as we you know, work our way through 2021.

I think the other thing, while I would add, and Jennifer mentioned it, with safe digging, we gave some statistics about the percentage of our sewer cleaners that now include, you know, include the hydro or vacuum excavation package. That's where we've been out doing demonstrations and demos. We're up 70% year over year. That is having some nice pull through, if you will, on the sewer cleaners in that about 70% of our sewer cleaners over the course of the last two years have been sold with this hydro excavation package. So not only do we have our TrueVac line of products where you can use those purely for the safe digging, we also have sewer cleaners now that have the optionality to perform that function as well. So the continued strength in our sewer cleaner demand is encouraging, really, and is kind of tangential to the efforts that we're having on the state digging side.

Yeah, that's great. Yeah, it's good to see the TrueVac orders picking up again, because I think those were hit pretty hard during the pandemic. You know, I... I guess another question would be going back to the chassis shortages and your inventory or your own pre-buy of chassis. Are you seeing a competitive advantage? I know you guys are good at that, anticipating demand and getting your chassis slots. Do you think you beat out the competitors with your chassis availability?

Yes.

Yeah, I think while we were very proactive, I would say certainly towards the end of last year, we saw some of this and we started taking actions at that point. We've worked with our dealers and kind of shared our knowledge with them to say, you know, we're going out and trying to secure additional supply, encouraging them to do the same. I think we had a question earlier about do we work with customers to see if they would be agreeable to switching out the chassis, and we certainly, the teams are all over that. So I think, yeah, I would echo Jennifer's statement that it does give us a competitive advantage because I think to be here today and knowing kind of the efforts of the team and how they've mitigated the potential impact, I think they've just done an outstanding job.

As the economy opens back up and these infrastructure projects move forward, I was speaking to one of our dealers yesterday, and she was explaining to me how important it is to have equipment available, both for rentals, used equipment, and new sales. And we've been able to respond to that demand.

I think, well, the other thing from a competitive standpoint that we have, we also have a rental fleet that can be – a temporary solution that we can offer to our customers in the event that they're unable to get the chassis. So having the range of product offerings we have has helped us during this time.

Okay, that's great. Yeah, there was another question I had about that rental fleet. And it sounds like you didn't take up guidance despite the strong orders because of concern about deliveries in the back half of the year. But is it possible that the rental fleet could offset all or most of any sort of chassis-related production slowdowns?

Yeah, well, just to be clear on the first part of your comment, I think our concern from the chassis supply situation is really limited to late second quarter, early third quarter, around that July 4th holiday. We're expecting production to ramp back up. As we go forward, you know, with the chassis that we have been able to secure and what we're being told by the chassis OEMs about how they're going to reopen again. So I just wanted to make that point clear. On the rental side of the equation, you know, we have seen an uptick in rental demand in April. And one of the things we mentioned we're monitoring is just the situation up in Canada with the shutdown in Ontario in particular, because that is typically a strong market for us from an aftermarket standpoint, from a rental standpoint. So that's one area where we're monitoring. But as you said, during that timeframe, could we offer rentals or used equipment sales? Could they benefit? Potentially, yes.

Maybe the other thing to note, though, is that we also, one of the advantages we have is between us and our dealer rental partners, we have the ability to redeploy that equipment and candidates to other regions if we need to.

Okay. Okay. Good point. All right. And then, Jennifer, you mentioned in the discussion about M&A that there could be something transformational. And I wonder if you could tell us a little bit about what transformational means. Is that transformational because of size, or is it transformational because of the type of product that you could be acquiring in an M&A deal?

Yeah, just I want to make sure I'm clear here. The question I was responding to is what types of acquisitions are in the pipeline. And at any one point in time, we're always looking at a number of different opportunities, everything from $10 million type product line acquisitions to large transformational type deals. So that's something that's an ongoing exercise at the company rather than anything specific. So that's really how I was responding to that particular question. The vast majority of our acquisitions I think will fall into that $50 to $100 million type range similar to MRL and OSW. Transformational could be something like the TBEI type deal where we make a meaningful investment into a new product category. So that's a good example of something that we're very proud of the work that's been done. And we've seen the results for federal signal shareholders.

Okay, got it. All right, thank you.

Our next question comes from Chris Moore with CJS Securities. Please proceed.

Good morning, Chris. Good morning. Just on the record orders, 26% year over year, can you talk a little bit about the mix between price and volume on that?

Yeah, it's Mostly volume, Chris. I mean, we have in that number, we have the OSW is in that number, so there's about 25 million of orders from the acquisition. Price, you know, can range anywhere from in a typical year, can be anywhere from 1% to 4% across depending on the business. But most of this is really volume-driven, and as I said earlier, it really is. across the board as we go through the different product lines. Dump trucks are up, as Jennifer mentioned, in excess of 20%. Sewer cleaners are up 30%. Aftermarket demand is up in excess of 20%. It isn't any one single product line. It really is across the board.

Got it. That's helpful. Thinking about steel, obviously rapid increase. It sounds like It was more of a headache than anything for you guys in the first quarter. You talked about some unsteady price increases. So just trying to get a sense in terms of how you view the balance now between kind of raising prices to protect margin and the current demand.

Yeah, I think the teams have pretty good visibility with respect to steel. As you know, we do about $45 million of direct steel purchases, and so we lock in pricing, and so the teams can react, particularly the TBI team can react pretty quickly. I think the other issue right now for us and for many companies is it's critical that you secure availability. So we have secured the necessary steel to produce the backlogs. And that's been a significant effort.

Got it. Most of my others were answered. I will leave it there. I appreciate it, guys.

Thank you. Our next question comes from Greg Burns with Sedodian Company. Please proceed.

Morning, Greg. In terms of the safe digging opportunity, it sounds like you're getting more market acceptance, so there's more traction in the market. So can you just talk about – What you're hearing from customers, the demand you're seeing, is it picking up because there's more understanding of what it is? Is it government mandates? What's driving the demand there?

Yeah, I think it's really been a grassroots effort to educate customers about both the safety benefits and the efficiency benefits. One of the reasons that we give you the data on demonstrations is because we found that that is an important kind of leading indicator if somebody's interested in that. Again, where we are in Chicago last night, the western suburbs, a good portion of them didn't have any type of internet access, which is even more critical today than it might have been a couple years ago because the construction crew cut a fiber line. So that type of incident in many situations will lead customers to want to better understand what the alternatives are. We also believe as we move forward with the infrastructure investments that are being made by the government right now, particularly in some of the broadband work, that will also benefit sales of safe-taking products. We continue to monitor legislation And legislation right now, it's at a best practice stage, but that is something that increases awareness among our customer base.

Okay. When you talked about the upfitting of the sewer cleaners with the safe digging package, what would that do to the, like, typically to, like, the MSRP of a sewer cleaner, adding that package?

You know, I asked that very question to the other day so I could better understand it. And there's so much features and functionality that you can, it cannot be anything from, it varies pretty significantly. So there's small things that you can do that are in the, you know, 10 to 20,000 range. And then there's much larger types of packages that tend to be closer to, you know, 70 to $100,000 range. So it really depends on the type of package that you order.

Okay, and that 70% attach rate, do you think that's sustainable? Do you foresee selling that much saving equipment into the sewer cleaner market?

Yeah, it's been at that level, Greg. We went back about the last couple of years, it's been at that level, and it was similar in Q1. Okay.

Okay. And then just lastly, I might have missed it, but on the TBI side of this where the customers are bringing their chassis, has there been any issues there with the customers having availability, chassis availability?

To date, it's been pretty minimal.

Yeah. Okay. Thank you.

Our next question comes from Marco Rodriguez with StoneGate Capital. Please proceed.

Good morning, everybody. Thank you. Good morning. Thank you for taking my questions. Most have actually been asked and answered, but just one real quick one here for you. I know it's still a little bit early, and you made some positive comments on the OSW acquisition, closing it, and results look to be pretty good. But can you kind of just give us a little bit of an update on the integration efforts there?

Sure. A couple things. One is, you know, as we evaluate acquisitions, one of the things that's key to us is to have an experienced management team. And Jay DeNoma, who leads that business, is, you know, we're very pleased that he's part of the Federal Signal family. Bob Fines, who runs our TBI business, is very much involved in the integration of the business. He's been out there a couple times. Ian, Mark, myself have all been out there. We've, you know, I feel like we're developing a pretty good playbook. We've done a number of successful acquisitions over the last five years. And like anything, you get better at each one you do. And so we understand the importance of 80-20. And Bob and Jay and the team had a working session last week with very positive feedback. So we're putting in the building blocks during 2021 to capture the – to improve the EBITDA margin performance and capture the synergies that we talked about when we did the deal. please it's early days but we're pleased and we're off to a strong start i didn't understood and last one for me i just wanted to make sure i heard this correctly just kind of the impact of the winter storms on results for the quarter it sounded like it was minimal um if anything one result well we lost production for a couple days so um i think what we're trying to indicate is although there is no structural damage You know, our results reflected the fact, which were very strong, reflected the fact that we lost production in several of our southern facilities for days and one situation for almost a week. So it was a despite that type comment.

I see. So is there a way that you can quantify the impact to the quarters resorts?

I think if you look at the gross margin, it's a factor in the lower gross margin. Of course, there's a couple of other things. Obviously, in Q1 last year, we had record production at our largest facility and minimal impact from the pandemic. When you look at gross margin, we have obviously some unfavorable absorption impact because we weren't producing for that period of time. So that's probably where you see a little bit. It wasn't material in any sense, but it was a headwind to our gross margin for the quarter.

Got it. Thanks a lot, guys. I really appreciate the time.

Thank you. Our next question is a follow-up from Steve Barger with KeyBank. Please proceed.

Hey, thank you. This is Ken Newman again. Thanks. Just one quick follow-up here. I wanted to touch back on the rental comments that you had made You know, obviously, I think I totally get the whole idea around COVID impacts in Canada, but I would think that a tighter supply chain is probably a net tailwind for fleet dynamics, right? So for improving rental rates or fleet utilization, as well as for used equipment prices that you sell out of the fleet. So can you just give us a little bit of color in terms of how you're thinking about forward moves and rental rates utilization and What's being sold out of the fleet this year versus being built for fleet growth?

Yeah, it's something, Ken, we monitor very closely. We look at both on a product line basis and also geographically. We look at time and financial utilization, and then we use that process. It's a monthly process where we make decisions about how much to add to the fleet and whether we accelerate sales out of the fleet. So that's been an ongoing process. What we have seen, I would say, over the course of the last couple of quarters, we've seen an increase in the sales of used equipment in the sense of the age of the equipment. They're really assets that we're probably north of three to four years old, I would say. So we've been selling more of the older units out of the fleet. predominantly safe digging equipment we've been selling out of the fleet. And some of that might be just to gain access to customers because of the price dynamics we wouldn't have had access to in the past. So I think the strategy is working in having the aftermarket businesses giving us access to customers we wouldn't have had in the past. So I think that process that we've implemented has been really beneficial. So used equipment sales were up in the quarter. Parts were up in the quarter. Aftermarket revenues in total grew, I think, to about 27% of ESG's revenues for the quarter. That was up from 24% last year. So we are seeing that traction continue. And so, as you say, it is nice to have alternate product offerings that we can give to our customers in the event that there is some supply chain tightness?

Yeah, a couple other facts I think that are important is one is we have the ability, obviously, to move that fleet as needed to respond to demand. But number two is the chassis that is preferred in that fleet, the Western Star chassis, has not been impacted to date by the semiconductor shortage. So, again, that gives us the ability, flexibility with respect to the production scheduling and and also the ability to respond because we have those chassis available.

Yep. If I think about just longer term, the ability to grow that part of the business, right, does that require a significant amount of capex? Or how do you think about growing fleet versus growing branches to kind of improve your geographic footprint longer term to help improve the – the adoption of rental across all your businesses?

You know, we're fortunate because we have a number of strong rental partners through our TruVac dealer network. So we work with those partners to make sure that we've got geographic coverage where we need it. And that's something that we'll continue to do so. We'll also continue in those areas where we don't have a strong TruVac partner. We will grow our fleet as necessary to respond to customer demand. So I think we're in a pretty good position because of the strength of those partnerships and also our ability to grow where there could be unmet customer demand.

Understood.

Thanks for the time. Thank you. We have another follow-up from Walter Liptack with Speedport Global. Please proceed.

Hi, thanks. Hey, thanks for taking this one. So on the follow-on to the last one, talking about rental and kind of alluding to how you use other rental partners potentially for some of your products, are you selling yet any of the safe digging machines or any other machines to the large rental companies?

No, and we have no intention – I'm doing so. Right now, we have a number of great rental partners, and this is a highly specialized piece of equipment, and they're responding very well to rental demand.

Okay, got it.

All right, thank you.

At this time, I would like to turn the call back over to Ms. Jennifer Sherman for closing comments.

Thank you. In closing, I would like to reiterate that we are confident in the long-term prospects for our businesses and our markets. Our foundation is strong, and we are focused on delivering profitable long-term growth through the execution of our strategic initiatives. We would like to express our thanks to our shareholders, employees, distributors, dealers, and customers for their continued support. Thank you for joining us today, and we'll talk to you soon.

Thank you. You may disconnect your lines at this time, and thank you for your participation, and have a great day.