Good day, and welcome to the Federal Signal Corporation Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ian Hudson, Interim Chief Financial Officer, please go ahead, sir.

Good morning, and welcome to Federal Signal second quarter 2017 conference call. I'm Ian Hudson, the company's Interim 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've also posted a slide presentation and the news 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's 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 US Generally Accepted Accounting Principles. In our news 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 start today by addressing our second quarter financial results. Jennifer will then provide her perspective on our performance, current market conditions, and our outlook for the remainder of 2017. After our prepared comments, Jennifer and I will address your questions. Our consolidated second quarter financial results are provided in today's earnings news release. The second quarter results in Q1 month of operation of Truck Bodies and Equipment International or TBEI, which we acquired on June 2nd this year. The results of TBEI have been included within our Environmental Solutions Group for the quarter. Please also note that the second quarter of last year included one month of operating…

Thank you, Ian. It was an outstanding quarter. We are pleased to report significant year-over-year growth in orders, sales, earnings and operating cash flow. The improvement resulted from a combination of organic growth and M&A activity. The continued momentum within ESG was particularly encouraging. As I mentioned, back in February, we started to see an uptick in organic orders, particularly on the industrial side towards the end of last year and this trend has continued through the first half of 2017. In Q2, our organic orders were up $27 million or 19%, whereas for the first half of 2017, they were up $56 million or 20%. The improvement was largely driven by ESG, where we've seen a significant increase in demand for sewer cleaners and vacuum trucks in comparison to last year. We continue to be pleased with the progress we've made in our strategic initiative to expand into the utility market with the launch of the ParaDIGm. On the industrial side, one of the metrics we monitor is the number of used equipment units available to auction. The most recent data indicates that the number of used sewer cleaners and vacuum trucks is now less than 50, which is more typical level than in recent years where there's been more than 300 units available. With signs that levels of used equipment in our end markets may be returning to more normal levels, we have seen strong interest from customers replenishing their rental fleet and that has driven much of the recent order improvement. We are also encouraged by utilization levels within our rental fleet, particularly relating to products serving industrial markets, like vacuum trucks, hydro-excavators and water blasting equipment. On the municipal side, our markets remain steady overall. So far in 2017, we have seen strong demand for sewer…

[Operator Instructions] Our first question comes from Christopher Moore with CJS capital, I'm sorry, Securities.

Good morning guys. So maybe we can start on the muni side. Are there any products that you view as kind of leading indicators of demand on the municipal side. Just trying to get a sense, I know it's always difficult to look at the maybe market peers out, but trying to get a sense as to how you look at there, and are there any specific products that kind of drive that?

Across our portfolio, the SSG side, we talked about some deferrals that we've seen with respect to some large orders both in the U.S. and in Europe. On the ESG side, on the municipal side, we've seen very strong orders for our sewer cleaner. Our Elgin orders are actually up the first half of the year, 10% over the first half of last year. We have seen some delay in international orders that we think might push into next year. But overall, as we've talked about the demand has been particularly on the ESG side strong.

Got you. Obviously, you talk about the sewer cleaner and vacuum trucks. So the rental numbers are way -- much lower, give you a good sense there. Any more feel in terms of kind of where that demand is coming from? Was it just pent-up demand or just the number of availability on the rental side wasn't there, so there was more active -- more purchases, just trying to get a feel for kind of how far out you see that strength going?

As I talked about, we monitor the used equipment auctions and we've seen a dramatic decline in our equipment available in the auction houses. We've seen the first half of this year, we saw a strong demand for replenishment of our rental partners' equipment -- our equipment that's in our rental partners' fleet. So that was encouraging. In addition to that, our rental utilization rates are up and we have seen increase in terms of the parts and service work. But that used equipment overhang, we expect to continue through 2017 and into '18, and it will impact sales of our new equipment.

Got you. Just the last question. You talked about the -- your replenishment on the rental fleet side. You don't expect to remain as strong in the second half. Just can you talk about that a little bit further?

It's been unusually strong in the first half of this year. There is some seasonality in the second half of the year. This in the North American business that we have seen in the past where in some situations it drops off some in the fourth quarter.

And our next question comes from Steve Barger with KeyBanc Capital Markets. Your line is open.

Hey. Good morning. You just said the used equipment overhang could continue to the back half, were you monitoring auction volume before the oil and gas slow down? Or how many pieces of equipment do think are out there in kind of a structural level just as normal transactions?

We've been -- we monitored it for a while, Steve. I think Jennifer mentioned that if you go back couple of years, the number of vacuum trucks and sewer cleaners that were available at auction was in excess of 300 units. Right now it's less than 50, it's probably more in the 40 range. And so, that's what gives us some encouragement in terms of the -- as that used equipment passes through the system, we're expecting to see some uptick in rental demand. I think that's was we've seen with our customers replenishing their fleets because now there've been able to sell their rental fleets at relatively competitive prices, where previously the influx of the used equipment in the market was just dragging down the prices. So when those customers were trying to sell the rental piece of equipment, they were competing with that used equipment. So as that flushes through, we see our customers wanting to replenish their fleet.

I totally understand. I guess, the 300 units was a function of the slowdown in oil and gas or what? Was that an abnormally high number of units and you're getting to a normal level at 40?

Yes. Steve, we think we -- there were a couple of competitors that may have resulted in bankruptcies, certainly up in Canada and so there was some influx of the used equipment from competitors that didn't survive the downturn in oil and gas. So we think it was a pretty abnormally high level. We think where it is right now it's probably more of a normal level.

Right, okay. So less competition from the rental channel now? Or, sorry, from the auction channel now?

Correct.

Correct.

Given the order and inquiry rates and your -- the comments just on the lower used equipment levels. How should we think about organic growth for legacy ESG products in the back half?

We think of the organic growth on the municipal side at GDP type rates. On the industrial side, it's a little bit higher, as we've talked about. And then some of the new market's initiatives like utility were still in early days, but we're hopeful as we get traction at that initiative will even be higher.

Right, okay. And you would think, based on -- I know it's early to talk about 2018, but the trends that you're seeing, you would expect those general order trends to persist into the out year as well?

We're still at -- the composition of the company has changed pretty dramatically and we're still in early days with respect to TBEI, it's encouraging. But I think we'll have more color commentary in the third quarter call.

Okay. I guess to that point, can you tell us what the year-over-year change for TBEI orders were? Did it see the same kind of growth rate that maybe legacy ESG saw?

When we talk about year-over-year, it's a little difficult to see because they also entered an acquisition in September of last year. So it's a little bit clouded by their Q3 acquisition of Travis. We, sorry, I think it's probably premature to comment on that.

Okay. Well, I guess just then can you talk about what you're hearing from the distribution channel and your sales team and what the back half looks like for TBEI? Is it, you had a, your due diligence I guess, is it, how does it look relative to what you had expected a few months ago?

It's consistent with the due diligence as I mentioned on the call, Steve, June is typically one of their highest months. The last 2 of the 3 prior years, June was the strongest and that continued this year and the fourth quarter due to seasonality is typically the lowest. We're learning about the Travis business that they acquired in the fourth quarter of last year. But today, they are on track with where we expected them to be.

[Operator Instructions]. Our next question comes from Walter Liptak with Seaport Global.

I wanted to ask about, just the, just directly with O&G market. Are you seeing a pickup in, I mean how, can you talk a little bit about like quote activity for anything oil and gas related? And it seems a little bit early to be getting a pick up here, but maybe you're starting to see that?

Yes, I mean it's what we want as we previously talked about, is really the auction date is very important. We continue to believe that overhang of used equipment will mute demand for our new equipment for some time period in oil and gas. However, what's encouraging and we're still, these are early days as the rental utilization for our equipment in oil and gas type markets is up and we have seen some encouraging signs in the parts and services business, where we see some of the signs of that used equipment being taken out of mothball and put back into work. But with respect to new equipment sales, we expect that used equipment overhang to continue into, through '17 and into early '18.

Okay. So no orders yet?

Nothing meaningful.

Okay. And you mentioned the utility markets and that we're, I think you commented that we're in the early days. I wonder if you could provide a little bit more data about, or color on the utility market is this product in testing with fleets? How many fleets are there? And as the utility truck market really starts to get commercialized, do you envision it being kind of an event where you get a lot of orders or is it going to be kind of a slower build in orders in utility trucks?

Yes, we're still in early days, as you know we meaningfully entered this market last July with the launch of our ParaDIGm product. We've been really focused on developing channel and the customer relationships. We're on track in terms of where we thought we'd be, which is encouraging. The other data point that I think is encouraging is in addition to selling our ParaDIGm product there's been upselling opportunities for our prodigy and our larger HXX to some of these utility customers, But I go back to, we're in early days and we consider this type -- this opportunities to really be a slow build as we develop the channel within this market.

Okay, sounds good. And then just a couple of more for me. You talked about that municipal sector order deferral in the U.S. and international and think you called out Europe. Do you know why you're seeing the deferral, is there anything that you can pinpoint that would provide us with some idea of when the timing of orders would pick up?

In the Street Sweeper side of the business, it's really some of the larger Middle East orders that have been then pushed back. And then on our Public Safety Systems business, again, it's the larger fleet orders both in the U.S. and Europe that has been moved out a couple quarters. We believe these are just deferrals that will get this business. It's really just a matter of timing.

Okay, right. Just shifting from 1 quarter to the next?

Correct.

Okay. And then on your EBITDA margin targets, any thought on the timeframe for when you would see margins in any kind of self-help programs that would help you to get those to those target margins?

Yes. As I mentioned on the call, we really -- the 80/20 principle that we started on that journey about 5 years ago are really part of our culture here. And we continue to employ those principles. So as we move forward, with the addition of David Martin, in the Chief Operating role, we're very focused on continuous improvement. And as I talked about on the call, hitting the higher end of that range will also require some favorable market conditions. But it's something that we believe that we can achieve. And I would also note, as we benchmark ourselves versus specialty vehicle company peers, these margin targets really put us in the top tier of that group.

Okay, alright that’s great. Alright, thank you.

Thank you Wal.

Our next question comes from Steve Barger with KeyBanc Capital Markets. Your line is open.

Thanks. I have some questions about the hydro-excavator market. Do you have an estimate for how big your installed base is, in terms of units and what your market share is for that product line?

There's a -- we look at it really based on the individual end users, so our hydro-excavation equipment, as you know, there is municipal applications, there is oil and gas applications, there's industrial applications and then we also have a new market in terms of utility applications, that we really look at it on segmented basis. So I have -- we can have a longer conversation about that. We talk about, for example, on the utility side of the market, we talk about safe digging as $200 million. So we can walk you through each of those particular opportunities offline.

Okay. So I guess just if you think about -- if you have the growth rates for those kind of four buckets or anything handy, how do you think utility should grow? And I guess just broadly speaking, the market share question too if you have a guess?

Yes. We believe that on the municipal side, it's typically GDP type growth, although this year with respect to sewer cleaners, we've seen much stronger than that on the industrial side, it's 4% to 5%. We're still in very early days with respect to our utility initiatives, so it will be something that we're establishing this as a relatively new product with some new opportunities in that market. So it'll be a much -- an opportunity that will gain momentum over time.

Understood. Okay, I'll take the rest of that offline. And on the SSG side, you talked about some investments for new product development, what are you working on, when should we start to see some revenue growth from those new products if you have a estimate?

Sure. We previously talked about the G-series, which is a product that we launched late in 2015, early 2016. We're starting -- we're doing some expansions to that particular product line. We're looking at IT enabling some of our safety and security products. We're looking again at working with some of our large customers, the interplay of our various products. So really encouraged in terms of the products that are in the pipeline. We've talked previously about our body-worn video partnership with Edesix. And we're still in early days on that. There's also that I would note a pretty significant investment on the sale side as we introduce these new products.

Just in terms of building out your own sales force you mean and getting …

Correct.

… more exposure to the market that way? Are the new product developments coming from -- is that a customer pull situation? Or is it a Federal Signal push trying to develop different applications around existing products?

I think it's really a mixture. But as a company, we started in terms of an overhaul of our innovation processes about three years ago and focused on this market-based approach, both on the SSG and the ESG side and we're through the ParaDIGm, through the G-series and we're really starting to see the benefits of that. So the short answer is the mixture. But compared to where we were five years ago, pretty significant difference in terms of how do we look at new product development.

Great. And last question from me. Obviously, nice operating cash flow, first half of this year. How should we think about the full year, can we annualize at this rate? Or is there something that will effect from a working cap standpoint in the back half?

Yes, with the JJE in the equation, Steve, now it's a -- cash flow can be a little probably more volatile. It depends on kind of their inventory levels; with it being a distribution business if it has a large order that is spilling that can require more finished goods on hand. And we saw a little bit of that at the end of last year. And so coming into 2017, our working capital levels were probably a little higher than we would've liked. A lot of that was due to the fact that there was a lot of inventory filling, a large Q1 order for JJE. So it's probably, it's going to be annualizing, it might be a little rich because we did have some run, we hit the ground running, if you will, in Q1 just from a working capital standpoint. So just a straight annualization of the $45 million is probably a little on a high side but it should be, we would still expect significant improvement year-over-year.

Got it. And sorry, if I missed this, did you say what the CapEx expectation is for the year?

Yes. We think right now we're at, we think it's probably going to be around $10 million if not slightly less. And that includes TBEI as well, Steve, which is pretty low CapEx requirement.

[Operator Instructions]. Our next question comes from Walter Liptak with Seaport Global.

Just a couple of follow-ups. Jennifer, you mentioned, chassis, the potential for chassis shortages. I wonder if you brought that up just as a kind of an ongoing thing or is there something we should be concerned about in the back half of the year?

I think at this point in time, we wanted to educate you all as we're getting educated with respect to TBEI, that particularly on the class 6 to class 8 chassis, it's something that we are monitoring availability. It hasn't had an impact thus far, but we're in early days, and we'll continue to monitor it going forward.

Okay that sounds great. And price cost, we haven't talked about that at all on this call, but some material cost have gone up. I wonder if you can just talk about your pricing strategies and your ability to pass through some rising metal costs?

Yes. So while we typically, we're fairly well locked in for about 6 months out in terms of our raw material pricing even with the addition to TBEI, which has a pretty high steel buy. So we're pretty well locked down for at least the next couple of quarters. And in terms of passing it along to our customers, we typically are able to do that relatively well, but I think as we evaluate a number of things in our pricing strategy, and we typically, we have a price increase every year. And that's factored into the equation. But we've not really had any meaningful increases as the result of raw materials in the last 6 months.

I think the only thing I'd add is if you look at our cost of goods sold across Federal Signal, steel only accounts for about 10%. So it's a type of thing, as Ian mentioned, that we can lock for a period of time, we monitored closely and we believe with our 80/20 initiative and pricing that we can address.

That concludes the Q&A portion for today's call. I would now turn the call back to Jennifer Sherman, for closing remarks.

Thank you, very much. In closing, I'd like to reiterate that we are confident in the long-term prospects for our businesses and our markets. We would like to express our sincere thanks to our employees, our stockholders, distributors, dealers and customers for their continued support. Thank you for joining us today. And we'll talk to you next quarter.

That concludes today's conference. Thank you, for your participation. You may now disconnect.