Federal Signal Corporation

Thank you for standing by. This is the conference operator. Welcome to the Federal Signal Corporation first quarter 2022 earnings conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Ian Hudson, Chief Financial Officer. Please go ahead.

Good morning, and welcome to Federal Signal's first quarter 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 were referred from 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 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-Q 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 our performance, market conditions, 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 solid financial results for the quarter with 18% top line growth and EBITDA margin performance within our target range despite a slow start to the year. Consolidated net sales for the quarter were $330 million up $51 million or 18% compared to last year. Consolidated operating income for the quarter was $28.5 million, up $700,000 or 3% compared to last year. Consolidated adjusted EBITDA for the quarter was $42.2 million, up $1 million or 2% compared to last year. That translates to a margin of 12.8% in Q1 this year compared to 14.8% last year. Gap EPS for the quarter was 33 cents per share, compared to 36 cents per share last year. On an adjusted basis, EPS for the quarter was 34 cents per share, compared to 38 cents per share last year. Order intake for the quarter was again outstanding, and we again reported record orders in the first quarter, surpassing the previous high which we set in Q4 last year. In total, orders in Q1 this year were $453 million, an increase of $69 million or 18% compared to Q1 last year. Backlog at the end of the quarter was $751 million, another all-time high for the company, and an increase of $342 million or 83% compared to Q1 last year. In terms of our group results, ESG's net sales for the quarter were $274 million up $46 million or 20% compared to last year. ESG's operating income for the quarter was $26.8 million compared to $27.1 million last year. ESG's adjusted EBITDA for the quarter was $39.3 million in line with the prior year. That translates to an adjusted EBITDA margin for the quarter of 14.3% compared to 17.2% last year. ESG reported total orders of $388 million in Q1 this year, an improvement of $63 million, or 20%, compared to last year. SSG's net sales for the quarter were $56 million, up $5 million, or 10% from last year. SSG's operating income for the quarter was $7.9 million, up $700,000, or 10% compared to last year. SSG's adjusted EBITDA for the quarter was $8.9 million, $100,000, or 9%. That translates to an adjusted EBITDA margin for the quarter of 15.9% compared to 16.2% last year. SSG's orders for the quarter was $65 million, up $5 million, or 9% compared to last year. Corporate operating expenses for the quarter was $6.2 million, down $300,000 or 5% compared to last year. The reduction was largely due to favorable mark-to-market adjustments of post-retirement reserves. Turning now to the consolidated income statement, where the increase in sales contributed to a $6.9 million improvement in gross profit, including the effects of production inefficiencies that we encountered in the early part of the year, consolidated gross margin for the quarter was 22.9%, compared to 24.7% last year. On a year-over-year basis, our pricing actions largely covered our cost increases in Q1 in absolute dollars. As we had anticipated, this cost inflation did create some margin pressure in Q1, but with the actions we have taken, we are expecting more price realization and margin improvement as we move forward. As a percentage of sales, our selling, engineering, general, and administrative expenses for the quarter were down 50 basis points from Q1 last year. Other items affecting the quarterly results include a $700,000 increase in amortization expense and a $200,000 increase in interest expense. Tax expense for the quarter was up $2.1 million, largely due to the recognition of $1.9 million fewer excess tax benefits from stock compensation activity as compared to last year. As a result, our effective tax rate for the quarter was 25.7% compared to 18.4% last year. At this time, we continue to expect our full-year effective tax rate to be approximately 25%. On an overall gap basis, we therefore earned 33 cents per share in Q1 this year compared with 36 cents 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 quarters. In the current year quarter, we made adjustments to gap earnings per share to exclude acquisition-related expenses. On this basis, our adjusted earnings for the quarter were $0.34 per share compared with $0.38 per share last year. Looking now at cash flow, where we generated $7 million of cash from operations during the quarter, we ended the quarter with $291 million of net debt. and availability under our credit facility of $162 million. Our current net debt leverage remains low, even after the funding of the purchase of our University Park facility during the quarter for approximately $28 million. With our financial position remaining strong, we have significant flexibility to invest in organic growth initiatives, pursue strategic acquisitions, and return cash to stockholders through dividends and opportunistic share repurchases. On that note, we paid dividends of $5.5 million during the quarter, reflecting a dividend of 9 cents per share, and we recently announced a similar dividend for the second quarter. We also funded $13.6 million of share repurchases during the quarter. That concludes my comments, and I would now like to turn the call over to Jennifer.

Thank you, Ian. During the quarter, our businesses worked diligently to mitigate the impact of ongoing supply chain volatility and increased coronavirus-related disruption that we experienced at many of our facilities in January. As we mentioned on our last earnings call, we were hit particularly hard by an escalation of COVID-related absences in January at essentially all of our facilities. Overall, we estimate that we lost approximately 20,000 direct labor hours across our facilities in January alone. Thankfully, we saw a dramatic reduction in cases in February, which continued into March. After a slow start, we also noted improvement in chassis deliveries within our dump truck business in March. These factors contributed to a meaningful improvement in production levels and customer deliveries as the quarter progressed. Overall, our top line increased by over $50 million year-over-year, with both of our groups reporting double-digit revenue growth, including benefits from pricing actions and contributions from recent acquisitions. Within our environmental solutions group, the 20% year-over-year sales increase was partially driven by higher sales of safe digging trucks, dump bodies, metal extraction support equipment, and trailers. Our strategy to diversify our revenue streams by broadening our aftermarket offerings also continued to provide benefits in the first quarter. With tightness in the supply chain and extended lead times for new equipment deliveries, we again saw increased demand for rentals, parts, and used equipment sales. Overall, aftermarket revenues for the quarter were up 20% compared to last year, representing approximately 12 million of ESG's year-over-year revenue growth. We continue to be encouraged by the resilience and growth opportunities of our aftermarkets group. Within our safety and security systems group, the 10% sales improvement was primarily due to higher sales of public safety equipment. With our efforts to expand our supply base and execution of our ETI principles to in-source production of certain materials, component availability for these products has improved in recent months, which resulted in an increase in shipments compared to last year. Despite the challenges we faced during the quarter, our teams were successful in delivering a consolidated EBITDA margin within our target range. Consistent performance within our target range is a key focus of ours, and we continue to believe this level of sustained operational excellence differentiates Federal Signal from many of our specialty vehicle peers. Demand for our products and our aftermarket offerings remains at unprecedented levels. The momentum has been across the board with orders from both municipal and industrial customers up around 25% year over year. Within our municipal markets, we are seeing the benefits from the American Rescue Plan Act, which in 2021 earmarked $350 billion for state, local, and territorial governments for a variety of purposes, including the maintenance of essential infrastructure such as sewer systems and streets. The first $170 billion tranche started to be distributed last year, and we are seeing that translate to new business, with our first quarter orders for sewer cleaners and street sweepers both up by more than 40% compared to last year. With the second $175 billion tranche expected to be distributed this year, including multi-year appropriation and spending deadlines, we expect to see a prolonged, meaningful tailwind from these stimulus packages. This positive sentiment was widely shared by our customers and dealer partners in recent market planning meetings. Within our public safety end markets, demand remains strong. Our order backlog for public safety equipment at the end of the quarter was more than double that of the same time last year. We are actively working to try to reduce the current lead times and backlog. On the industrial side, with the recent increase in oil prices, we have seen higher demand for many of our ESG products, including vacuum loaders, water blasting equipment, and safe digging products. In fact, Our first quarter orders for safe digging trucks were up 90% compared to the prior year. Rental interest from industrial contractors was also high, and our Jetstream business reported record revenues for its water blasting equipment rentals in the first quarter. Within SSG, we've also seen a significant uptick in quoting activity for industrial signaling equipment and warning systems. With the increased demand causing lead times for certain products to become extended, and with the need for certain customers to secure a chassis, we again saw some dealers placing advanced orders during the quarter, which could cause some distortion in the comparability of our orders as we move through the year. Now turning to supply chain, where for the majority of our vehicle-based businesses within ESG, chassis deliveries from the various suppliers that we utilize have largely remained on schedule with committed delivery dates. Within our dump truck businesses, where the customer always provides the chassis, we expect the flow of chassis may be volatile for the next several quarters. However, we were encouraged with the volume of chassis deliveries that we saw in March. Shortages of hydraulics, pumps, and certain electrical components continue to make production challenging, but our teams continue to be creative and nimble in adapting and identifying solutions to these supply chain challenges. For example, our teams have secured alternative suppliers, purchased certain buffer inventory, sought to in-source or re-engineer products where possible, and modified production schedules based on component availability. As we look ahead, we are closely monitoring the recent coronavirus-related lockdowns in China. While a direct exposure to sourcing from China is insignificant, the indirect impact it may have on our supply base is currently uncertain. On the geopolitical front, we have no operations in Ukraine, Russia, or Belarus, and we do not have any direct supply chain or customer exposure. In response to the unprecedented inflationary environment, our teams continue to take proactive measures such as locking in pricing and securing availability of steel based on forecasted needs and implementing price increases and surcharges. To date, we have not experienced significant order cancellations on the announcement of our pricing actions. Our access to labor remains strong and our teams have built a great culture, which has helped us to differentiate ourselves in our ability to attract and retain talented and dedicated employees at the majority of our facilities. As an example, At our largest manufacturing facility in Streeter, Illinois, over many years, the team has worked extensively with the local community to build awareness around job opportunities. These efforts have included partnering with local high schools and colleges to host career fairs, open shop nights, scholarship programs, weld and fabricator programs, and even high school signing days where students can declare they are joining the Vactor team. As a result of the team's continued efforts, the team has been successful in filling 40 positions to support increased volumes since the beginning of the year. During April, we also successfully renegotiated our union contract, which covers about half of our employees at our University Park, Illinois facility, which is home to our domestic SSG operations. Access to a strong talent base was a key factor in our decision to purchase this facility during the first quarter. Simply stated, our access to labor is generally good and is not currently a constraint. We have a number of ESG-related initiatives that focus on diversity, equity, and inclusion. For example, we are pleased to report that 60% of our current executive officers are gender diverse, placing federal CIGNA well above the average of our industry and peer groups. We also have an ongoing focus on the environment and process improvement. For example, at our manufacturing facility in Tishomingo, Mississippi, we have recently embarked on a foam reclamation project aimed at dramatically reducing the purchase of new foam, thus reducing landfill content. I now wanted to take a few minutes to provide an update on a couple of our growth initiatives. We remain bullish about our long-term prospects with respect to safe digging and continue to identify new applications for this technology. For example, Increased demand and spend on broadband infrastructure is generating additional interest in our broad range of product offerings that can vacuum excavate and or convey materials in a safe and efficient manner. Our equipment is designed to meet the production capacity and maneuverability needs to complement the multiple horizontal drilling and trenching methods used to install this infrastructure below the surface. With the infrastructure bill's $65 billion allocation towards broadband infrastructure, we anticipate continued demand for all of our equipment that is integral to the process of improving and expanding the infrastructure. During the quarter, we introduced the Truvac Track Trailer, the newest product offering in our expanding safe digging portfolio. With strong order activity in the first quarter, we've already filled the majority of production slots for the year. Electrification also remains a key area of investment. We have launched our plug-in hybrid electric broombear sweeper and begun demonstrations of our hybrid three-wheel Pelican sweeper. Demand for demonstrations of these products within our dealer network remains high. In collaboration with multiple chassis manufacturers, our teams plan to begin field testing an all-electric truck-mounted sweeper later this year. Working with a number of different partners, our research and development teams continue to explore other ways to fully integrate electrification into our suite of products. As an example, within our dump truck business, our rugby team successfully incorporated our new Vera Class Body platform into a fully electric Class 7 chassis in March at the 2022 Work Truck Show. We expect this to be the first of several collaborations with chassis manufacturers who are seeking to demonstrate dump truck bodies or platforms on their electric chassis. Our aftermarket business has grown to represent approximately 30% of ESG revenues, and we see additional opportunities to grow that business by expanding into new geographies we believe to be underserved. On the acquisition front, we are making good progress integrating our recent acquisitions, Ground Force and Dice, and we were pleased with their performance in the first quarter. Our deal pipeline remains very active, and we continue to expect M&A to be an important part of our future growth. Turning now to our outlook for the rest of the year, we remain encouraged by conditions in our end markets, the ongoing execution against our strategic initiatives and the order trends that we've seen over the last few quarters. Although we expect the volatile supply chain environment to continue, we are encouraged with how our teams have navigated through these challenges so far this year. With our first quarter performance, our record backlog, and current expectations of component availability, We are raising the low end of our full-year adjusted EPS outlook range by 4 cents, establishing a new range of $1.80 to $2. We are also increasing the low end of our full-year net sales outlook range by $30 million, establishing a new range of $1.38 billion to $1.45 billion. With our talented workforce and capacity expansions, at several facilities, our businesses are well positioned for long-term sustainable continued growth once the supply chain environment normalizes. Demand for our products is at an all-time high with federal stimulus and infrastructure legislation offering potential for further multi-year momentum. At this time, I think we are ready for questions.