Federal Signal Corporation

Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. 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 2023 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 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 10Q 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 strong financial results for the quarter with double-digit year-over-year net sales and earnings growth, gross margin expansion, a 130 basis point improvement in adjusted EBITDA margin, and new records in orders and backlogs. Consolidated net sales for the quarter were $386 million, up $55 million or 17% compared to last year. Organic sales growth for the quarter was $44 million or 13%. Consolidated operating income for the quarter was $39.5 million, up $11 million or 39% compared to last year. Consolidated adjusted EBITDA for the quarter was $54.5 million, of $12.3 million, or 29% compared to last year. That translates to a margin of 14.1% in Q1 this year, up from 12.8% last year. Gap EPS for the quarter was $0.45 per share, up $0.12 per share, or 36% from last year. On an adjusted basis, EPS for the quarter was $0.46 per share, up $0.12 per share, or 35% from last year. Order intake for the quarter was outstanding, and we again reported record orders, surpassing the previous high which we set in Q1 last year. In total, orders in Q1 this year were $475 million, an increase of $22 million, or 5% compared to Q1 last year. Backlog at the end of the quarter was $968 million, another all-time high for the company, and an increase of $216 million, or 29% compared to Q1 last year. In terms of our group results, ESG's net sales for the quarter were $319 million of $45 million, or 16% compared to last year. ESG's operating income for the quarter was $37.6 million, up $10.8 million, or 40% compared to last year. ESG's adjusted EBITDA for the quarter was $51.2 million, up $11.9 million, or 30% compared to last year. That translates to an adjusted EBITDA margin for the quarter of 16.1%, an improvement of 180 basis points compared to last year, despite higher chassis revenues, which represented a year-over-year headwind of approximately 40 basis points. ESG reported total orders of $396 million in Q1 this year, an improvement of $8 million, or 2%, compared to last year. SSG's net sales for the quarter were $67 million, up $11 million, or 19% from last year. SSG's operating income for the quarter was $12.1 million, up $4.2 million, or 53% compared to last year. SSG's adjusted EBITDA for the quarter was $13.2 million, up $4.3 million, or 48%. That translates to an adjusted EBITDA margin for the quarter of 19.8% towards the upper end of SSG's new target range and up 390 basis points compared to last year. SSG's orders for the quarter were $79 million, up $14 million, or 21%, compared to last year, with much of the increase resulting from the receipt of a large fleet order for public safety equipment from a customer in Mexico. Corporate operating expenses for the quarter were $10.2 million compared to $6.2 million last year, with about half of the increase resulting from unfavorable changes in fair value adjustments of post-retirement reserves. Turning now to the consolidated income statement, where the increase in sales contributed to a $20.1 million improvement in gross profit. Consolidated gross margin for the quarter was 24.9%, a 200 basis point increase over last year. As a percentage of sales, our selling, engineering, general, and administrative expenses for the quarter were up 30 basis points from Q1 last year. Other items affecting the quarterly results include a $300,000 increase in amortization expense, a $400,000 increase in acquisition related expenses, a $500,000 reduction in other income, and a $3.4 million increase in interest expense. Tax expense for the quarter was $7.3 million of $200,000 from the prior year. Our effective tax rate for the quarter was 21% compared to 25.7% last year, with the reduction primarily due to a $900,000 increase in excess tax benefits associated with stock-based compensation activity and the recognition of a $500,000 benefit associated with changes in tax reserves. At this time, we expect our full-year effective tax rate to be between 24% and 25%, excluding any additional discrete tax benefits. On an overall gap basis, we therefore earned 45 cents per share in Q1 this year, compared with 33 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 $0.46 per share, compared with $0.34 per share last year. Looking now at cash flow, we generated $7 million of cash from operations during the quarter, which was about the same level as Q1 last year, despite a meaningful increase in rental fleet investment during the quarter to support anticipated strength in rental and used equipment demand. We ended the quarter with $337 million of net debt, an availability under our credit facility of $415 million. Our current net debt leverage ratio remains low, even after funding the acquisitions of Blasters and Fractless. 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 $0.09 a share, and we recently announced that we are increasing the dividend by 11% to $0.10 a share in the second quarter. That concludes my comments, and I would now like to turn the call over to Jennifer.

Thank you, Ivan. Over the last several years, we have put several building blocks in place to fuel the long-term growth of the company. This has included making significant investments in plant expansions, new product development, and strategic acquisitions that have expanded our product offerings and geographic footprint. With those pillars in place, we announced on our year-end earnings call that we are expecting 2023 to be another record year for Federal Signal. We are off to a strong start with our Q1 net sales and EPS at the highest level in the company's history for the first quarter of the year. Within our environmental solutions group, an improving supply chain supported higher production levels with increased sales volumes, contributions from recent acquisitions, robust aftermarket demand, and strong price realization, we were able to deliver a 16% year-over-year net sales increase and 180 basis point improvement in adjusted EBITDA margin. During Q1, production at two of our largest manufacturing facilities within ESG improved by 17% compared to the fourth quarter of 2022. This represents the second consecutive quarter of double-digit production growth, and the teams achieved their highest average daily build rates since Q1 of 2020. This strong execution contributed to a 27% year-over-year increase in street sweeper sales and double-digit increases in sales of both sewer cleaners and safe digging trucks. Our aftermarkets team also had another strong quarter, with overall aftermarket revenues in Q1 this year up 22% over last year with particularly strong parts sales. To meet growing demand, our FS Depot parts business has successfully increased its workforce and during the first quarter had a significant focus on reducing backlog and improving lead times in order to deliver essential parts to our dealers and minimize equipment downtime for our end customers. In addition to strong organic growth, We were pleased with the contributions from M&A during the first quarter. Ground Force and Toho continued to perform in line with our expectations. We also completed the acquisition of blasters in January, and the team is off to a strong start. While we are encouraged by the improving supply chain environment, we are still not out of the woods, and there continue to be pockets of supply-related disruptions for certain components, specifically hydraulics and pumps. Given that, we are not yet maximizing our production capacity. Chassis availability also continues to be a constraining factor within our dump body businesses, particularly for our businesses that build on Class V chassis. Our safety and security systems group also delivered impressive results during the quarter, including 19% top-line growth and an adjusted EBITDA margin of 19.8%, a 390 basis point improvement compared to last year, and towards the high end of the new target range announced on our last earnings call of 18 to 21%. As Ian mentioned, during the quarter, SSG was awarded a large international fleet order for public safety equipment, and the team was able to promptly deliver about a third of the equipment during Q1. This order was another success story for the team in penetrating new geographic markets with new product introductions such as the Allegiant and Reliant value line of light bars. In addition, we continue to grow domestic market share and recently secured fleet orders with several new state and local municipality police departments. Overall, sales of public safety equipment in Q1 this year were up 4.5 million or 12% compared to Q1 of last year. With supply chains continuing to ease, we also saw a 35% year-over-year increase in sales of industrial signaling equipment. Demand remains strong, and the team is focused on increasing throughput to reduce lead times. Over the last several years, we have made meaningful investments in organic growth within our SSG business, including purchasing the University Park facility and insourcing production of several key components in order to reduce our reliance on overseas suppliers. For example, during the first quarter of 2022, we launched the in-house production of our Micropulse line, which leverages automated laser technology. The Micropulse is a low-profile, high-performing LED lighting product for both first responder and work truck vehicles. The line includes production of both new product models and those that were previously outsourced. With the incremental revenues from new product models and lower cost production of previously outsourced models, the Microsoft Pulse production line has improved product margins and generated incremental operating income of approximately $1.5 million in 22 with further growth projected in 2023. In addition, we have recently invested in a third printed circuit board manufacturing line at University Park to increase production volumes of public safety equipment, achieve cost savings, and reduce reliance on our suppliers, which have been unable to meet our current demand. The new production line is expected to be operational in the third quarter of 2023. We expect the broad action taken to mitigate component shortages, including investments to in-source production and bring additional suppliers online, will provide meaningful long-term benefits to Federal signal. Demand for our products and our aftermarket offerings remains at unprecedented levels with both our orders and backlog this quarter again setting new company records. There are several macroeconomic tailwinds contributing to the strong demand, and I'll highlight a few of the key market trends today. Within our municipal markets, we are continuing to see 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. In the first quarter, municipal orders were up 11% compared to last year, primarily driven by significant street sweeper demand. We also continue to expect meaningful multi-year tailwinds arising from the $1.2 trillion Infrastructure Act, which has $550 billion earmarked for new investments in roads, bridges, power, water, and broadband infrastructure, public transportation, and airports. For example, increased demand and spend on broadband infrastructure is generating additional interest in our broad range of safe digging products that can vacuum excavate and or convey materials in a safe and efficient manner. While we typically discuss this public funding source in the context of our ESG product offerings, we are also seeing the benefits within SSG, in particular with with higher demand for warning systems. The Infrastructure Act earmarked $6.8 billion for the Federal Emergency Management Agency, or FEMA, to invest in disaster mitigation programs. This includes $500 million over five years to provide hazard mitigation assistance to local governments through the Storm Act. Typically, FEMA allocates around $50 million annually for tornado, flood, and fire warning projects, but under the Act, funding to FEMA is a to increase by 50% annually over the five-year period. To date, we have received hundreds of proposals for communities across the country that are seeking government grants from this funding source to update or expand warning systems and are currently working with two counties that have been awarding grants totaling several million dollars to expand their tornado warning systems. As part of our warning systems offering, We also provide ongoing maintenance and subscription alerting services, which following the initial sale of the warning equipment, provide for a longer-term recurring revenue stream. With higher frequencies of national disasters, such as wildfires, hurricanes, tornadoes, and floods, we are proud that our products play a role in helping to keep communities safe. Electrification remains a key area of investment for the company, and during the quarter, we showcased our newest vehicle electrification offerings at large trade shows. Vehicle electrification and other green initiatives are expected to drive demand not only for our EV product offerings, but also from the corresponding increase in long-term demand for lithium batteries. With the acquisitions of Ground Force and Toho, we have created a platform of specialty vehicles that support the extraction of metals and minerals, including lithium. With expectations that global demand for lithium ion batteries in many end markets will grow at a kegger of approximately 30% over the next 10 years or so, we are energized about the positive growth trajectory in this end market. I now wanted to take a few minutes to provide an update on a couple of our internal initiatives. Our focus on 80-20 improvement is deeply ingrained in our culture. and has played and will continue to play a key role in driving our organic growth and industry leading margins. As an example, we recently completed a product line simplification at E20 initiative for our ox bodies line of dump trucks where the team was able to analyze the sales history to identify two leading product lines that comprise approximately 90% of its revenue. The team then identified the most commonly ordered dump body specifications for these product lines and through this product line simplification process was able to reduce its standard offerings from over 4,200 body combinations to less than 400, achieving a 90% reduction in SKUs. This 80-20 improvement initiative is expected to result in annual savings of $650,000 at this plan. We recently hired a dedicated resource on the corporate tasked with driving additional throughput improvement projects across many of our businesses. In addition, this resource will play a key role in implementing and publishing our federal signal enterprise operating system. With our continued growth through M&A, this playbook will also support long-term value creation as we continue to standardize and implement lean manufacturing solutions at acquired businesses. Moving on to aftermarkets. which represented approximately 27% of ESG's revenues during the quarter, mainly due to the strength in parts sales that I noted earlier. After Markets remains a key strategic initiative of ours, and we see additional opportunities to grow that business by expanding into new geographies that we believe to be underserved. During Q1, our new facility in Colorado was opened, and we have already regained a large street sweeper fleet order with a major municipality in the region. This facility will support sales of many of our product lines in the region, including Elgin, Vactor, TruVac, and Jetstream. In addition, as Ian noted, we have made meaningful investments in Q1 to replenish our rental fleet and support the anticipated continuation in high demand for rentals and used equipment. On the M&A front, we are pleased to announce the closing of the trackless acquisition in April. Trackless is a leading Canadian manufacturer of multi-purpose off-road municipal tractors and a variety of attachments which provide year-round value to its customers. The Trackless integration is well underway, and we are excited about the opportunity to leverage our distribution channel in the U.S. to expand the geographic reach of Trackless products and accelerate the growth trajectory of this business. Our continued growth through disciplined M&A differentiates Federal Signal as an accumulator of leading brands of specialty vehicles and supporting aftermarket offerings. 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. Demand for our products and our aftermarket offerings remains at unprecedented levels with both our orders and backlog this quarter again setting new company records. With our first quarter performance, Our record backlog and improving supply chain conditions, we are raising our full year adjusted EPS outlook to a new range of $2.21 to $2.43 from the prior range of $2.15 to $2.40. We are also increasing the low end of our full year net sales outlook range by $40 million, establishing a new range of $1.62 billion to $1.72 billion. At this time, I think we're ready for questions. Operator?