Good day everyone, and welcome to the Federal Signal Corporation's Second Quarter Earnings Conference. Today's conference is being recorded. And now it's my pleasure to turn the conference over to Ian Hudson, Chief Financial Officer. Please go ahead, sir.

Good morning, and welcome to Federal Signal's second quarter 2018 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 Web site federalsignal.com, clicking on the Investor Call icon and signing in to the webcast. We've also posted the slide presentation and the earnings release under the investor tab on our Web site. 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 Web site. 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 second 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 2018. After our prepared comments, Jennifer and I will address your questions. Our consolidated second quarter financial results are provided in today's earnings release. As a reminder, the second quarter of last year included one month of operating results of Truck Bodies and Equipment International, or TBEI, which we acquired in June of 2017. With the schedule for deliveries within our backlog entering the quarter, and the effects of the extended…

Thank you, Ian. I would like to begin my comments by talking about some of the items that contributed to the exceptional quarter with both of our groups delivering excellent results. The outstanding second quarter helped us to cross a significant milestone for the company with our tailing 12-month revenues exceeding $1 billion. We had previously set 2020 as the target date by which to achieve this goal, we are pleased to have met the target 18 months early. We will be updating our longer-term goals later this year. Within SSG, we are starting to see the benefit of some of the investments we've made in recent years to add sales resources as well as expanding our engineering team to support the development of new products. Over the first fast of the year, SSG's orders and sales were both up organically by 11%, largely driven by improved demand for public safety equipments, both domestically and within Europe. With a number of new products added to our suite of offerings, we won a number of new conquest accounts in both geographies. As expected, SSG's adjusted second quarter EBITDA margin improved from a softer first quarter. In addition, the increase in the top line in the second quarter contributed to 250 basis points year-over-year improvement in SSG's adjusted EBITDA margin. Overall, I'm encouraged with the trajectory that SSG is on. Within ESG, our 34% sales growth included the effects of continued momentum on the strategic initiatives we have implemented in recent years, like our expansion into the utility market with our safety in vehicles, exceptional rental demand and higher parts and services revenue. In addition, in a full quarter of activity, TBEI added almost $60 million of sales in Q2, which is typically its strongest quarter. On the safe digging front, sales…

Thank you. [Operator Instructions] And we will go first to Chris Moore at CJS Securities.

Hey, good morning guys.

Good morning, Chris.

Good morning.

Yes. Yes, maybe start off big picture, kind of from a -- kind of infrastructure standpoint, the ability to continue to grow rapidly like you are, is that at some point going to require new plants or can you kind of talk about your capacity there?

As we look for the reminder of 2018 and into 2019, we feel very comfortable with the flexible manufacturing model that we have in place. So we will be able to support the anticipated growth. I talked before about our FS solution centers, three of those centers can build truck, and we are able to move production to those centers as needed. We also have the ability to flex manufacturing between facilities both at our TBEI businesses and within our legacy ESG businesses. So we don't anticipate any major additions of plants over the next couple of years. There could be a situation where we might do nominal plant expansion at one of our facilities, but they're less than $5 million.

Got you, that's helpful. Steel side, there was the good discussion, just to make sure I understand, so in terms of the second-half, first of all, I mean the turnaround in TBEI pricing is quick, so that's less of an issue there on the steel side, is that correct?

Either they are able to put price increases, or they are -- through relatively quickly, you know, we do have some extended backlog for a couple of our product lines. So there is a delay there. But overall, they're able to get the price realization. We expect though in the second-half as I mentioned in my comments that overall increased material costs could be up to 3% headwind and we have that put that into our guidance.

Right, got it, got it. Obviously you guys are really cooking at this point in time, always kind of looking at the other side, can you maybe -- we've had discussion a little bit, but talk a little bit about how you are positioned now in terms of what Federal Signal looks like versus the last downturn and why things might be -- the outlook might be a little bit brighter even when the media market et cetera starts to turn a little bit?

We've got a couple of things that we should think about. First of all, since the last out term we have diversified our revenue streams. The company now is about 50% industry and 50% municipal. And as we do modeling, they don't overlap, particularly given the nature of the products in many situations that we manufacture. Number two, we have done a lot of work in terms of reducing our breakeven levels at our plants. We've always put this first for manufacturing model and price which helps us on the upside and helps us on the downside. So, for example, we have a plant with the TBEI businesses that does a lot of overflow work that we can reduce if we need to, and we also have the ability to move production from our solution centers back into our main facility. So we've got a lot of levers that we pull, and it's something that we have spent a lot of time on in terms of understanding what we can do in downturn.

Chris, I think one of the things I would add, Jennifer talked about kind of the diversification of our end markets on the revenue side. The other thing to think about is prior to the acquisition of JJE, Federal Signal typically just sold new equipment, and one of the strategic initiatives behind the acquisition was that we now have a more diverse revenue streams and that we have provide new equipment, we rent, we sell parts and service, and we sell used equipment out of the fleet as well. So I think in addition to the diversification of our end markets, we have also diversified our revenue streams as well.

Got it. I'll jump back in queue, but great job again guys.

Thank you.

We will go next to Greg Burns at Sidoti.

Good morning, Greg.

Good morning. In terms of the strong utilization you are seeing in the rental fleet, can you just talk about maybe your plans on investing further in your equipment on that side of the business as well as can you maybe just talk how you are managing that fleet to meet the demand? Thanks.

Sure. As we think about rentals, we think not only about our rental fleet, but we also look at our rental partners. And we have several strong rental partners. So, the first thing is that when we brought JJE the rental fleet was about $80 million. We talked about incremental investments of up to $20 million of additional equipment. So, depending on the demand and sale of used equipment, that will fluctuate within that $80 million to $100 million from quarter-to-quarter. But we continued to see strong demand from our rental partners, and that's what has driven some of the organic order growth improvement during the first-half of this year.

Okay, great. Thanks. And you mentioned the end market versus industrial and you know, not being roughly evenly split, but can you just talk about the growth rates within those markets, has the strong performance been levered to one over the other?

We have seen -- so far this year we have seen a strong growth in both markets. And a lot of that's really been driven we believe by the new products that we have introduced into the marketplace, particularly on the vacuum excavation side and some of the new features on our sewer cleaning products, and then as I started my portions of the comments today, our SSG teams have really done a super job in the public safety system space in terms of new product introduction, and we're starting to see the benefits right now. So overall, the growth has been strong.

Okay, great. And looking at the full-year guidance, obviously brought it here, but it seems like most of that is related to the upside we saw on the second quarter. I mean, is the second-half, is it mostly market headwinds that are impacting your view of the second-half as opposed to maybe slower top line growth? Thanks.

Yes. I think we talked, Greg, about -- in the second quarter we talked about that is typically TBEI's strongest quarter. So that's a consideration. That's also the seasonal aspect in the summer months of rentals and some of the aftermarket work. We are still in the second quarter, we actually saw the spring cleanup season because of the weather issues in much of North America that actually got pushed into the second quarter. And we are hearing that spring cleanup's dashed season hasn't really been extended. It's more been compressed into the summer months really. So we talked about the headwinds or the commodity costs, but I think even with that the second-half of the year we are looking at improvement of between 21% and 33% for second-half of the year over last year. So we still feel that's good growth in the second-half of the year.

Okay, great.

I also would point you kind of the strength of our backlog too, which will contribute to that growth.

Okay. One last one, on the backlog, how much of that is organic growth versus inorganic?

The growth it's all respectively all organic at this point. I mean TBEI's backlog is essentially the same as what it was when we acquired them. So it's potentially all organic growth.

Okay, great. Thank you.

And we will go next to Walter Liptak at Seaport Global.

Hi, guys, Steve Friedberg filling in for Walt today.

Hi, Steve.

Hi, Steve.

Hi. Only to touch up on orders, a few of them are up organically at 3%, I guess the pull forward. I was hoping you guys can kind of parse out what product categories are up, street sweepers up, or any color around that?

Yes. Probably the biggest driver of the growth, Steve, I would say is on the vacuum truck side. We're seeing improved demand both on our traction with the utility initiative. But other end markets we are reinforcing the safety and the efficiency aspects of our safe digging technology. And so we are seeing good traction on that both on utility side as well as in the other industry end market. The other thing is I would point to is probably on the SSG side, we have seen some nice growth in the orders both domestically and within European public safety business. That had a slightly down year I would say last year with some of the political uncertainty in Catalonia, which is now stabilizing. Since then we are seeing some nice growth in the order flow both in that business and domestically with some of the new product introductions we have seen.

Okay, thanks. And then, as we look towards the second-half of 2018, and if I looked it correctly, Q4 is going to be a tougher comp. How should we expect the growth rate moving into Q3 and Q4?

Yes, Steve, we typically see a nice pick up in orders in the fourth quarter because in usual situations we have our annual price increase that goes into effect the first of the year. And so, that's part of the reason we see a pick up in orders in the fourth quarter. We did see that pull forward because of the extended lead times of sewer cleaners. We saw that in the fourth quarter of last year. We estimate 15 million to 20 million of the orders were pull forward. And so that's a factor which as you say the fourth quarter orders last year were exceptionally strong, but I think if you exclude those effects that I just referenced, I think that would be -- we would look to normalize the orders to a level that's where we would expect them to be.

Okay, great. Thanks. And then if I could just squeeze in one more, it looks like margins in SSG were up significantly, I guess what is the -- what inning are you guys in margin improvement and you know, where do you think the segment can get to?

Yes, I think we put a margin target ranges to that business as 15% to 18%. I think year-to-date we are still a little shy of the low-end of that range. So I'm still hoping there is room for improvement. The one thing I would say is with that business it -- the top line is very important, and I think we saw some of that with growing the top line, a lot of flows through to the bottom line just the way that -- our cost structure is that. And so, that really benefited us in the second quarter where we were operating within our target ranges. That was on the back of ourselves in the first quarter that we expected. And so, by the end of the year, we would expect I think to be operating within those ranges.

All right, great, thanks.

We will move next to Steve Barger at KeyBanc Capital Markets.

Hi, good morning.

Good morning, Steve.

Good morning, Steve.

So I will try the orders from different direction, the last six quarters you have averaged 270 million per quarter, I know you had that acceleration that drove level above 300 million in 4Q and 1Q, but with that behind you now and as you think about current muni and industrial markets, do you think that the environment supports order rates in the low to mid 200 million per quarter level going into next year? Or how do you think about that?

We haven't seen any slowing down right now, and it's something that we monitor closely. Our end markets continue to be strong, there's seasonality that we try to talk about on the call, that we have seen those last year and this year in the second quarter, that's been -- with the acquisitions of TBEI and JJE, because of the rental demand and the nature of the TBEI equipment, TBEI second quarter is typically its strongest quarter. So I think you have to factor that into it. But overall, we feel pretty comfortable as we can look out the next couple of quarters, and we look at the pipeline, the things are very good.

The ESG orders that have gone into backlog over the past few quarters, can you talk about mix in pricing relative to what you delivered in 2Q?

Yes, I think Steve, mix-wise it's heavy sewer cleaners, there is a good portion of the ESG backlog which is sewer cleaners, and we talked about there is about 40 million of our backlog that is unlikely to be delivered this year, that will likely slip into 2019. From a pricing standpoint, with those product lines that had the extended lead times, some of those orders were taken in 2017, prior to the price increase that went into effect. Further heading into Q3 and Q4, the more price, we will realize on those orders, because they will have the price increase that is reflected in those.

Yes, I guess I would say, I think the teams have done an excellent job in terms of addressing the material cost increases. As we mentioned, it was 3% benefit in the first-half of the year. And if you look at the position we are in, we versus other companies right now, we've done a nice job of securing availability of critical materials, and locking in prices for the second-half of the year. And although it could be up to $0.03 headwind, we are in a pretty good shape.

Yes. Well, and just from an overall mix standpoint, you would rather be delivering sewer cleaners than street sweepers, right, just from a margin profile standpoint? Is that correct?

It depends on who they're going to.

So when you say you have more street sweepers, are those industrial street sweepers in the backlog or muni?

No, we have more…

I'm sorry, sewer trucks?

No other cleaners, not street sweepers, but our street sweeper business, they have done an excellent job in terms of improving the margin performance of that business.

But just to be clear, the sewer cleaners that you have in backlog are more focused on industrial customers or more on muni?

This is slightly weighted to industrial, but that's still decent municipal sewer cleaners in the backlog, but it's probably slightly weighted on the industrial side.

Thanks. You talked about the brainstorming session for new products. Can you just talk broadly about what kind of ideas you are coming up with?

Sure. Since we talked about this at the end of our first quarter earnings call, we've had meetings with six of our businesses. And it's interesting, because the ideas, most of them are less than $10 million ideas, but what I'm really encouraged by is the quality of the ideas next and the number of ideas. So the next stage of this process would bring in marketing resources to understand both from the need of this product in the marketplace and we are understanding channel, which is always a critical question. So, as we set the stage for kind of long-term growth, I always talk about if we could take 50 of these ideas and -- not all 50 are going to hit, but if a proportion of them hit in the long-term, that puts us in a very good position as we try to diversify our revenue stream.

Are these primarily physical products or do you have any service-based revenue ideas?

Both.

Anything that you could bring to market that could be a revenue contributor in 2019, or is this all so early stage that it's really more further out?

I think that it would be second-half of 2019. But most of it is longer-term.

Yes, and Steve, this is a separate from our kind of routine regular new product development process. This is intended to be more of a longer-term growth initiative, like that's still ongoing new product development, and some of those will impact 2019.

Got it.

Yes, just the other thing I would add is it's a number of relatively smaller ideas that we're incubating within the businesses. And it's a mix of product and services.

Okay. And just shifting gears to the market opportunity for rental, what percentage of share do you have versus how big you think that business can get for you? Have you tried to boil it down to an addressable market opportunity, and where you think this goes?

I don't know if we have gotten that fast, Steve. One of the things that we do track is the number of turndowns. That's a metric we look at. And so by turndowns we mean the opportunities when customers come to our solution centers looking for rental, how many opportunities we're turning down or -- and so that's something that we look at. As Jennifer told about, we also have very strong rental partners, some of our dealers have very good size rental fleets, and they're outstanding partners that we have. So, some of our new equipment fails, we are obviously selling into those rental fleet to replenish fleets as those customers are able to sell out with that fleet. So we monitor a couple of things in terms of tracking the size of our fleet. It's really on the utilization side, and then the number of turndowns.

Have you -- I don't think you have disclosed what your utilization rate is, have you?

Not in total, but we target on a time equalization side, we target 70%, and then we also have financial utilization metrics that we target as well. We don't -- I mean we are tracking ahead of those of those targets this year, and the metric we talked about is on hydro side, which we are seeing particular strength in rentals of the hydro side in our fleet. That's been 90% plus level for about the last six months now.

And I think the other important point to consider is it's not just the rentals, it's the rentals, it's the scale of used equipment out of the rental fleet, which is a strong demand for -- and then it's the associated parts and service business that goes with that.

Right. And so, when you think about rental growth over the longer-term, or even from the medium-term, how much of this is coming from taking share from existing competitors versus extending your footprint areas that really just aren't served by these rental products right now?

Yes, I think some of it, Steve, might be just particularly with hydro we are seeing strong utilization and customer serving oil and gas markets. And what we are seeing is something of a try before you buy type approach, where they're renting for a period of time before they are buying, and the buying is a new piece of equipment or purchasing the used piece of equipment. So we have seen something of a shift from certain customers serving those markets as well.

And last question…

I also believe that -- we also believe that we work closely with our rental partners, but we believe there is number of situations, where collectively either between us or rental partners where we are taking market share, or we're introducing a product that historically Federal Signal has not had. Before we just sold new equipment, now you are able to either buy new equipment, buy used equipment, or rent from us, and then we can also when appropriate service that rental equipment.

Right. Now, it sounds like it's progressing well. For the equipment that's going to the oil field, is most of that still going north to where it's frozen in the winter, or are you getting more traction in southern basins?

Yes, right now there is a lot of good activity in kind of the southern parts of the U.S. Texas in particular is a strong market for us right now. So it's not exclusively in North America, Canada, they're obviously -- we have got businesses in Canada and the United States, and we have a rental fleet that is in both geographies. And so, the U.S. rental fleet is very strong in Texas, and then there is also the Canadian rental fleet. It's particularly strong in Ontario.

Perfect. Thanks for the time.

Thank you.

You are welcome.

We will go next to Marco Rodriguez at Stonegate Capital Markets.

Good morning, Marco.

Good morning. Thank you for taking my questions. I'm just wondering if you could talk a little bit about working capital usage for you guys, and just kind of walk us through perhaps your expectations for the second-half of '18.

Yes, I think one of the things we have mentioned, Marco, is just with some of the extended lead times, we have made some strategic decisions to pre-buy some chassis. And we have also built some what we call, stock units, really just to try and take advantage of some short-term demand. So given some of the market conditions we have made that decision. Our second quarter benefited from some pretty strong sales of stock units. We will likely continue to try and build some of those stock units in the second-half of the year. So that might be a drag on working capital for the second-half of the year. We have also talked about potentially adding some munis to the rental fleet as well. But I think if you look at kind of working capital as a percentage of sales, year-over-year I think you will see some meaningful improvement, and that's really helping our cash flow and we have talked about kind of the paying down debt faster than we expected. And I think the working capital management has been a big piece of that.

Got it. And then in terms of the debt pay down, as you mentioned, you guys kind of accelerated, and you really had a plan in terms of where you wanted your leverage to be. Can you give any insight as far as the second-half of the year into '19, do you expect to continue to accelerate paying down debt or do you kind of normalize the level you are at right now in terms of your leverage ratios?

Yes, I think it really depends. I mean we talked about acquisitions and deal pipeline right now, which is pretty active. I think it really depends on the opportunity that comes up I think in the absence of an acquisition. We will likely continue to pay down debt in the short-term.

Got you. And then in terms of the acquisition landscape for you guys, it's active and I heard those comments, but can you provide any sort of qualitative information in terms of -- the number of targets, are they accelerating or their numbers increasing, and then if you could also maybe talk a little about what you are seeing in terms of the valuations out there?

Yes. So the acquisition pipeline is full from us, and there is a wide variety of sizes of acquisition, and right now, you know, again we have talked about being kind of a disciplined acquirer of assets. And in some cases, the valuations have gotten high. And we won't be pursuing the acquisition opportunities -- it isn't acceptable return for Federal Signal. Again, we talked about the opportunity, where those acquisitions advance our strategic initiative, will they operate within the target EPS ranges, is there an opportunity for us to apply 8020 or ETI principles to those acquisitions to improve its business performance. So we have got a number of opportunities, but I'm committing to we will be a disciplined acquirer of assets as we move forward.

Understood. And just in terms of the acquisition targets that are out there, any potential that might come up here, just given the fact that you are a year over or year past the TBEI acquisition, I'm assuming your capacity take on another side of the acquisition is pretty easy?

I always talk about financial bandwidth and management bandwidth. With the $61 million that we paid up in debt, we think our financial bandwidth is -- we have a number of different options there and we believe we finished most of the integration activities of TBEI. So, we believe we have the management bandwidth also. So we are in a good position, but again, it's got to have the right returns for Federal Signal.

Got it. Thanks a lot, guys. I appreciate your time.

I appreciate it.

[Operator Instructions]

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

And once again, that does conclude today's conference. Again I would like to thank everyone for joining us.