Federal Signal Corporation

Greetings and welcome to the Federal Signal Corporation fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Felix Beauchamp, Vice President, Corporate Strategy and Investor Relations for Federal Signal. Please go ahead.

Good morning, and welcome to Federal Signal's fourth quarter 2023 conference call. I'm Felix Boshun, the company's vice president of corporate strategy and investor relations. Also with me on the call today is Jennifer Sherman, our president and chief executive officer, and Ian Hudson, our chief financial officer. We will refer to some presentation slides today, as well as to the earnings release, which we issued this morning. The slides can be followed online by going to our website, federalsignal.com, clicking on the investor call icon and signing into the webcast. We've also posted the slide presentation and the earnings release under the investor tab on our website. Before I turn the call over to Ian, I'd like to remind you that some of our comments made today may contain forward-looking statements that are subject to the Safe Harbor language found in today's news release and in Federal Signals filings with the Securities and Exchange Commission. These documents are available on our website. Our presentation also contains some measures that are not in accordance with U.S. generally accepted accounting principles. In our earnings release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-K later today. Ian will start today with more detail on our fourth quarter and four-year financial results. Jennifer will then provide her perspective on our performance and update on our multi-year strategic initiatives and go over our outlook for 2024 before we open the line for any questions. With that, I would now like to turn the call over to Ian.

Thank you, Felix. Our financial results for the fourth quarter and full year of 2023 are provided in today's earnings release. Before I talk about the fourth quarter, let me highlight some of our full year consolidated results for 2023. Net sales for the year were approximately $1.72 billion, a record high for the company, and an increase of $288 million or 20% compared to the prior year. Organic sales growth for the year was $220 million or 15%. Operating income for the year was $224.5 million, an increase of $63.7 million or 40% from the prior year. Adjusted EBITDA for the year was $286 million up $71 million or 33% compared to the prior year. That translates to an adjusted EBITDA margin of 16.6% this year, up 160 basis points from last year. Gap earnings for the year equated to $2.56 per share, up 59 cents per share, or 30% from the prior year. On an adjusted basis, we reported full year earnings of $2.58 per share, a year-over-year increase of 62 cents per share or 32%. Orders for the year were $1.87 billion, another company record, and an increase of $178 million or 11% from the prior year. With a strong momentum in customer demand, consolidated backlog at the end of the year was at an all-time high level of $1.03 billion, an increase of $146 million or 17% from last year. For the rest of my comments, I will focus mostly on comparisons of the fourth quarter of 2023 to the fourth quarter of 2022. Consolidated net sales for the quarter were $448 million, an increase of $57 million, or 15%. Organic sales growth for the quarter was $42 million, or 11%. Consolidated operating income in Q4 this year was $63.1 million, up $16.5 million, or 35%, compared to Q4 last year. Consolidated adjusted EBITDA for the quarter was $77.5 million, an increase of $16.4 million, or 27%. That translates to a margin of 17.3%, an increase of 170 basis points from Q4 last year. Gap EPS for the quarter was $0.75 per share, up $0.18 per share, or 32% from Q4 last year. On an adjusted basis, EPS for Q4 this year was $0.74 per share, a year-over-year increase of $0.17 per share, or 30%. Orders in Q4 this year were $465 million, up $21 million, or 5%. In terms of our fourth quarter group results, ESG sales were $373 million, an increase of $48 million, or 15%, compared to Q4 last year. ESG's adjusted EBITDA for the quarter was $73.3 million, up $15.7 million, or 27%. That translates to an adjusted EBITDA margin of 19.6% in Q4 this year, up 190 basis points from Q4 last year. SSG's fourth quarter sales were $75 million this year, up $9 million, or 14%. SSG's adjusted EBITDA for the quarter was $16 million, up $2.8 million, or 21% from Q4 last year. SSG's adjusted EBITDA margin for the quarter was 21.2%, above the high end of its target range and up 130 basis points from Q4 last year. Corporate operating expenses in Q4 this year were $10 million compared to $10.2 million in Q4 last year. Turning now to the consolidated statement of operations where the increase in sales contributed to a $22.8 million improvement in gross profit. Consolidated gross margin for the quarter was 26.6% of 190 basis points compared to Q4 last year. As a percentage of sales, our selling, engineering, general, and administrative expenses for the quarter were up 30 basis points from Q4 last year. During the fourth quarter of this year, we recognized a $1.6 million benefit from acquisition-related activities compared to $500,000 of expense in Q4 last year, with the majority of the year-over-year change driven by a change in the fair value of contingent consideration associated with acquisitions. Other items affecting the quarterly results include a $500,000 increase in amortization expense, a $100,000 increase in other expense, and a $100,000 reduction in interest expense. Income tax expense for the quarter was $12.1 million, an increase of $4.7 million from Q4 last year, with a year-over-year change largely due to higher pre-tax income levels, and a $700,000 reduction in discrete tax benefits recognized in the current year quarter in comparison to the prior quarter. Including discrete tax benefits, our effective tax rate for full year 2023 was 22.5%. For 2024, we currently expect a tax rate of between 25% and 26%, excluding any discrete tax benefits. On an overall gap basis, we therefore earned 75 cents per share in Q4 this year, compared with 57 cents per share in Q4 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 benefits and purchase accounting expense effects. On this basis, our adjusted earnings in Q4 this year were 74 cents per share, compared with 57 cents per share in Q4 last year. Looking now at cash flow, where we generated $103 million of cash from operations during the quarter, an increase of $64 million, or 162% from Q4 last year, with the increase primarily due to working capital improvements and higher net income. For the full year, our operating cash generations totaled $194 million, an increase of $123 million, or 171% compared to last year. With the improved cash flow, we paid down approximately $70 million of debt during the quarter, ending the year with $238 million of net debt and availability under our credit facility of $493 million. Our current net debt leverage ratio remains low. 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 $6.1 million during the quarter, reflecting a dividend of $0.10 per share, and we recently announced that we are increasing the dividend by 20% to $0.12 per share in the first quarter of 2024. We also funded $1.2 million of share repurchases during the quarter. That concludes my comments, and I would like to turn the call over to Jennifer.