Greetings. Welcome to the Federal Signal Corporation First 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. [Operator Instructions] Please note this conference is recorded. I will now turn the conference over to your host, Ian Hudson, Chief Financial Officer. Mr. Hudson, you may begin.

Good morning and welcome to Federal Signal's First Quarter 2019 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 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 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 2019. After our prepared comments, Jennifer and I will address your questions. Our consolidated first quarter financial results are provided in today's earnings release. We had another strong quarter with results reflecting impressive increases in sales and income driven by strong broad-based organic growth. We delivered significant margin expansion and a 30% improvement in adjusted earnings per share. Consolidated net sales were $273.8 million, up $24 million or 10% compared to last year. Consolidated…

Thank you, Ian. I would like to reiterate Ian's comments on the outstanding quarter. Each of our groups reported top-line growth and margin improvement, and on a consolidated basis, our adjusted EBITDA margin was up 150 basis points. We were expecting year-over-year improvement in our first quarter results and our actual results, did not disappoint. Within ESG, we saw stronger aftermarket demand in certain parts of North America with rental activity starting slightly earlier this year, as well as some earlier than expected deliveries. Within SSG, our police business in Europe successfully delivered on a number of projects to satisfy accelerated customer requirements. We also saw some customers in the U.S. place orders for public safety equipment earlier than expected in anticipation of the Ford model year changeover scheduled for the second quarter of 2019. This changeover may cause a temporary delay in the number of Ford police vehicles available beginning in Q2. Collectively, we estimate that these factors resulted in the acceleration of about $0.02 of earnings from the second quarter into Q1. Our first quarter orders were generally in line with our expectations with higher than expected orders for vacuum trucks resulting from continued momentum on our safe digging initiative, being partially offset by slightly lower than expected orders for dump truck bodies and trailers. Orders in the first quarter of this year were our third highest on record surpassed only by the fourth quarter of 2017 and the first quarter of last year, which collectively included an estimated $40 million to $45 million of accelerated orders as customers placed orders earlier as they sought to secure availability of certain product lines like sewer cleaners and vacuum trucks or to manage the procurement of their related chassis. We expect that this order acceleration, which we believe has now…

At this time, we'll be conducting a question-and-answer session. Our first question comes from the line of Chris Moore from CJS Securities. Please proceed with your question.

You touched on it, but maybe we could just talk a little bit about, some of the things that are likely to effect, the revenue and earnings cadence over the next three quarters, there's the Ford model year changeover which looks like you stole little bit of Q2 earnings perhaps and there is, and you talked about the extended lead times on the sewer cleaners and vac trucks some of those orders may not happen in '19 but maybe can you just touch on the key elements that we should be considering?

Sure, absolutely, Chris. First of all, we saw as we mentioned $0.02 move from Q2 to Q1 and that was really driven by strong aftermarket in certain parts of the US, some pre-buyings that occurred in our Public Safety Systems business in advance of the Ford year model changeover, and some acceleration of customer orders and deliveries at our business in Spain. But I think we're really encouraged by even with that $0.02 shift and the Ford model year changeover, we expect Q2 that will do nominally better than we did last year. And you might recall that last year was a really strong quarter for Q2.

And then in terms of the, I guess two part question. So the lead times with the sewer cleaners and vacuum truck is part, why the Streator facility is being expanded, so is there likely much order flow that's going to get recognized this year. And then secondly, after Streator is completed are there any other areas that likely need to be expanded to allow for continued growth?

First of all, last year, we made some investments in our service center in Leeds, Alabama and we should start to see the benefits of that in the second half of the year for our Guzzler product lines, and we will be building more trucks there this year versus last year. As you know, we continue to believe that the growth opportunities for our safe digging are significant. Early in the quarter, we announced up to a $25 million expansion of our Vactor facility, pleased to report that we are on track with that expansion. We purchased the land, we're waiting for some zoning permits and we expect that to be completed at the end of this year. We are looking within our TDI facilities. There is some growth that we will be expanding our Rugby facility up in Rugby, North Dakota and we expect again to have that completed this year. And these expansions, a large part are driven by the success that we're having with respect to introduction of new products.

It's only a small number, the 600,000 acquisition integration related to anything that we should read into that?

Nothing really, Chris, it's really just a standard. We have the JJE earn-out payment that is coming due in the second quarter and a lot of that is really just accreting that liability, it's recorded present value right now and a lot of that is just the accretion as we get closer to payment when we'll actually make the cash payment.

Our next question comes from the line of Greg Burns from Sidoti & Company. Please proceed with your question.

So with the SSG margins, you probably benefited a little bit from the pull-forward from Q2 this quarter, but they have been running at or above the high end of your target range. How should we think about the margin profile of that business? Is this, do you think the margins. This is the new normal, the higher-end more like a 16% to 18% range as opposed to what you've previously targeted. Thanks.

Yes, Greg, I think we've obviously the last couple of quarters we've benefited, I think the margin has exceeded our target range for 15% to 17% range each of the last two quarters. That business, it can be pretty lumpy there can be systems orders that have -- the mix can be a factor in that equation. I think the 15% to 17% range is where we feel comfortable quarter in quarter out, we want to be within that range. I think if you look back to the first quarter of last year, we were lower than that and that was really the function of a soft quarter in our VAMA business in Spain really the residual effect of the [Indiscernible] uncertainty that was in place in that location throughout 2017 that lingered into the first quarter of '18. So that business has recovered very nicely, had a very strong Q1 of this year. So I think as we go forward, we still feel pretty comfortable with that 15% to 17% range.

The other thing I think can add to what Ian said, is that, again we are really seeing the benefits of the increased volume as a result of our new product development initiatives with SSG and continued application of our ETI [Indiscernible].

And Jennifer, you had mentioned orders dump, trucks and body orders were down a little bit, I know that housing data has been a little bit soft over the last couple of months. So what's your outlook for that business? Are you seeing a little bit of a slowdown, given what we're seeing in the housing market. Thanks.

Yes, I guess, I see a couple of things, first of all is both bump trucks and trailers, we saw weather played a factor there because of some of severe weather conditions across North America, the construction work was delayed. We also saw that some of the chassis challenges that there weren't as many stock orders placed at some of our distributors and with that business orders tends to be a less relevant metric than for example Vactor Elgin, because we were going to ship it within the quarter. Looking-forward, we are expecting top-line year-over-year revenue growth for that business, so I continue to be encouraged by, we've got a number of new customers, we are expanding our Rugby facility to accommodate growth, so overall, I am focused on the year-over-year top line growth.

And obviously you mentioned the benefit that you got from some of the pull-forward from the SSG, but you also had some weather-related issues. So what the offset in terms of the weather. How much did that detract from earnings in the quarter?

I think Greg, when we, when we talked at the end of February, we gave our full year outlook and at that time I was right in the midst of some really, certainly in Chicago, some really unfavorable weather, the polar vortex and so at that time we signaled that that was all factored into our outlook that we gave. I think what we found is that in March, the businesses just did a great job overcoming those effects, certain of our facilities were shut down for a couple of days and I think, we recovered the recovery was better than what we expected. So I think Q1, we talked about it being slightly better than expected and I think the, the quicker than expected recovery from those effects were the factor in our strong results in the first quarter.

Our next question comes from the line of Marco Rodriguez from Stonegate Capital Partners. Please proceed with your question.

I was wondering if, maybe you can talk a little bit more about the, your safe digging. If you can maybe help provide any framework in terms of maybe what percentage of revenues is coming from that that new line and then also in the past, you've talked about some regulatory shifts that have helped spur that market. I was wondering if you can maybe talk to that if you've seen any other additional regulatory shifts that are driving demand or business more of just the end markets recognizing the application a little bit more readily.

Couple of things. One is we are continuing to see traction and vacuum truck orders were up just even compared to Q4 and compared to Q1 of last year, even despite the pull forward. So that to me is a really important indicator of the continuing success of that initiative. As I mentioned in my prepared remarks, we launched a separate brand, TRUVAC this quarter for our safe digging products. I was at our dealer meeting a month ago. And there's a lot of energy around this particular product and we'll watch, we are now seeing our dealers invest in rental equipment, which as we previously talked about, demos are so important to introducing in many cases this new technology to end customers. We're much more active in trade shows world. We've been spent a lot of time, Q1 out at utility type trade shows and we are seeing traction there. So overall, we believe with the new brand, TRUVAC and the strong channel, so this will be continuing to be a growth area for us. And as I previously mentioned that was really the driver of the $25 million plant expansion in Vactor. Because ultimately, we believe that our safe digging product line will be as big as sewer cleaners and we're preparing for that. The final thing I'd mention is, we're continuing to invest in new product development and we kicked off of a project in Q1 to enhance our safe digging portfolios of products. So this is a critical area and we're encouraged by what we're seeing.

And given the strength that you're seeing there on the safe digging side, can you talk a little bit about your ability to push prices a little bit higher there?

It depends in terms of what region we are in but it is product that typically we're able to command a premium price because of the quality, and durability of our products.

Yes. I'd also add Marco that the nature of the product, it's a nice play on the rental side as well. So we have a number of safe digging vehicles in our rental fleet. And those are in pretty high demand and we monitor both time utilization and financial utilization and both of those rates have been in excess of our target range for that certainly for the last couple of quarters. And so that's where when you have the demand for the product that you start to see some of that through the rental rates. So it's also a part of the reason that you may have seen that we made some additional investment in the rental fleet during the first quarter certainly in comparison to Q1 of last year. So that's really a function, it's just the continued strength that we see in the safe digging market.

And then in the same line of thinking here. Just on the cash flow from operation aspects that the changes in working capital were relatively significant here in Q1, driving usage. Am I to assume that that's mainly a function of the investments in the rental fleet. Just looking at comparisons to your historical Q1s are they're not normally down, but it has happened in the past. Just trying to get a better feel for that?

Yes, Q1 is typically, we build working capital in the first quarter as we ramp up production. So it's not unusual for us to use cash in the first quarter, as we mentioned, the biggest part of the change year-over-year, it was really the additional rental fleet investment compared to Q1 last year. That was about $10 million. That really is a strategic move really because you want to be adding to the rental fleet prior to the peak season for rental and aftermarket which is typically the Q2 and Q3 when a lot of the activity is taking place. So that was really a shift in timing of the investment. Other than that we had higher tax payments that was there about $3 million higher than they were in Q1 last year and incentive compensation payments in Q1 this year were higher than they were in 2018. So those are the primary drivers. Some of the working capital changes as the timing-related, and I think, we expect our operating cash flow in Q2 to improve and we said on the call, I think that we are targeting the same cash conversion as we had in 2018.

And last quick question, I'll jump back in the queue. Maybe if you guys can talk a little bit more about the M&A landscape, is your pipeline increasing, decreasing. And then if you can maybe talk a bit about the valuations you're seeing out there.

Our pipeline is full. We continue to be active in the M&A market, so we believe that long-term that this is going to be an important part of our growth. I said year and I reiterated in the shareholder letter that we are committed to being disciplined with shareholders' money and paying a fair valuation and that unfortunately during 2018, there were a couple of deals that didn't work out for us, because in our opinion the valuations got too high. But as we sit here right now, we are encouraged by what we're seeing.

[Operator Instruction] Our next question comes from the line of Steve Barger from KeyBanc. Please proceed with your question.

How are you marketing TRUVAC? Is that a corporate function or do the dealers do that?

It's really a combination. Certain of our dealers have the rights to TRUVAC. In other areas, particularly, we have service centers, we've gone direct. And the marketing though has been coordinated out of our ESG group, it's a pretty significant effort.

And do you expect to see more traction for TRUVAC in direct sales or through the rental channel, whether it's dealer-based or your captive fleet?

Again, orders were up for vacuum trucks both from Q1 of last year and Q4. So I think it's going to be a combination. What makes the sale different than anything we've done before is that the sales often contingent upon from a successful demo of the equipment. So why we measure those demos because it's new technology for many people, not all, and we need to show them both the productivity benefits of the equipment and the safety features of the equipment. So we believe that we're in a unique position, because we've got our TRUVAC dealers are making their own investments in rental fleet and the sale of new equipment. We're in a position with our asset solution centers, our aftermarket group to support that direct where we need to and we really can offer the customer either new equipment, rental or used equipment, and then between us and our dealers, we have over 60 service centers in North America to support that equipment.

And can you remind us how you view current market size for safe digging in 2019 and 2020 and any guess what your market share is right now?

Yes. With respect to market share there isn't a lot of good data out there. I do know that in terms of the breadth of our product offering, we've got a small version, ParaDIGm, and medium version the Prodigy and the large version HXX. We have also introduced a lighter version and a quieter version. And as I mentioned, we kicked off another project during Q1 to continue to invest. We have in terms of broad breadth of equipment. With respect to market size, we are still working on it. We talk about $250 million. We think that's very conservative because what makes it challenging here, we are seeing back lift and shovels. And so that's, we're still working through that, but we're really encouraged by the growth that we're seeing and I know the TRUVAC dealers are often encouraged by it.

When you say $250 million, are you talking about potential for 2020 or is that a multi-year target out there?

Really potential for the market ties, potential for 2020.

Can you talk about the gross margin expansion you saw in the quarter?

But I want to be clear to you, I'm talking about market size potential.

But when you look at your product category, I mean you would think, you are the market share leader right now, right?

Although, we don't have any third party data to support that.

But when you go to trade shows or whatever, do you see other really sizable credible competitors out there in the safe digging space?

In niche areas, yes, but nobody with the breadth of our product offerings.

What drove that? And do you have a target for gross margin expansion for the year?

So what drove it, Steve on, with primarily within the SSG business. If you looked at SSG, their gross margin went from 35.8% to 39%. So that was the primary driver of the overall improvement in the margin that was driven in part by the benefits from the pricing actions that we took both last year as well as beginning this year. Some of it's also a mix factor, as I mentioned the VAMA business in Spain had a much better first quarter than it did in Q1 of last year. So it was primarily driven by SSG. We don't specifically have a spirited gross margin target, we really focus on offering within those EBITDA margin ranges obviously of which gross margin is clearly a factor. But there isn't anything that we publish in terms of an external goal that we measure to. We have our internal metrics and that we could factored into the overall EBITDA margin ranges.

Just the other thing, the other thing I would add, Steve, is last year was the first year that we added to all salary employees short term compensation, a metric around EBITDA margins and we really believe that drove some great behavior by our teams.

And just last one for me. Thinking about free cash flow and the $45 million in combined CapEx, just round numbers, if you hit your target, you could have $80 million to $90 million in free cash flow this year, so do you have a debt reduction target beyond saying less than last year and ex-potential M&A, is that your first priority?

I think as Jennifer mentioned, Steve, we're encouraged with what we see on the M&A pipeline, so at the leverage range we are at right now, we are at 1.3x, I think that's a very comfortable range for us. So I think our focus obviously post TBEI acquisition was really to pay down debt and de-lever quickly. I think, we're now at a point where, organic growth, clearly with the Vactor expansion and as Jennifer mentioned. We are looking to expand the Rugby facility as well. Organic would be the number one priority but then number two would be M&A and we are encouraged with what we see there, so we don't have a stated debt reduction target for the year, but very comfortable with the leverage we're at right now.

Our next question comes from line of Walter Liptak from Seaport Global Securities. Please proceed with your question.

Good morning, congratulations on a nice quarter. I wonder, I got on the call little bit late. I want to ask about TRUVAC and I apologize if you went through this already, but, so going forward TRUVAC is the same thing for safe digging?

Correct.

And last year you talked about orders being up $60 million incrementally for TRUVAC. Is that right?

Total vacuum truck orders, Walt, that would primarily be the TRUVAC round, yeah, they were up $60 million year-over-year for 2018.

And then what I heard from one of the answers, was that your orders for TRUVAC trucks, was it, or do you include sewer cleaners in there were up quarter-over-quarter and year-over-year. And so I guess if that's right the question is that you would be expecting that you would have incremental order, you grow orders faster in 2019 for the TRUVAC.

I think what we said, so if you think about Q1 of last year we had some of the effects of the pull forward, which was a combination of both sewer cleaners and vacuum trucks. What we said was despite the effects of that $25 million pull forward in the first quarter, the first quarter orders for vacuum trucks was up even notwithstanding the effects of that portfolio. So sewer cleaner orders were down largely because of the effect of the portfolio in that prior year quarter, but vacuum trucks were up despite those effect. So that's where we continue to be encouraged with what we're seeing on safe digging and we feel so the growth in Q1 and as Jennifer said in comparison to Q4, the orders were up sequentially as well. So we continue to be bullish on safe digging. As Jennifer mentioned, it's the reason, primary reason that we are expanding the Streator facility.

Okay.

I had spent a lot of time in Q1 with TRUVAC dealers, Walt. I was just recently down in Atlanta with our dealer from Atlanta -- from Georgia, Florida. I was there the last month on a meeting of many of our TRUVAC dealers and what I am encouraged to see is the investments that they're making, both in terms of people to support this brand, rental fleets stem out because of the opportunities that they are also seeing, so not only through our direct sales force but through the new TRUVAC dealers, we continue to be encouraged to believe that we're in early innings here.

I think we all realize that. Thanks, Jennifer. I was just trying to triangulate the growth rate though for the vacuum trucks and maybe around TRUVAC. So is it, does this math work if we take the $25 million pull forward and annualize it that you're now looking at vacuum trucks being up incremental $100 million for orders for 2019, is that what you are tracking towards?

Well the $25 million, Walt is a combination of sewer cleaners and vacuum trucks. So probably, the majority of it would have been on the sewer cleaners' side, so I wouldn't necessarily annualize this whole $25 million, as most of that was on the sewer cleaner side.

If you think about industrial trucks excluding truck bodies or TRUVAC, was that weak during the quarter too and I wonder why that's weak. I know you mentioned, weather, it might have been an impact for the truck body but how was the industrial part of the business trending?

The industrial part of the business was good, it was in line with our expectations and I want to also state that our orders were aligned with our expectations, they were the third highest on record and within a couple of million dollars, it was second highest on record. Annual sequential improvement between Q4 and Q1, so we are seeing strong reaction on the industrial markets and the municipal markets, we are continuing to see very stable growth opportunities.

And on a previous question, you said that truck body was down, but it was impacted by weather. So the outlook for the year is that that will firm up starting the second quarter in the second half.

For our TBEI truck body business, we are expecting top line year-over-year revenue growth.

And how about orders?

Orders are a less relevant metric because they are often received and shipped during the same quarter, as we have talked about before with respect to 80 to 20, we expect our first year of acquisition, we are getting the companies compliant to SOX and public company and all that fun stuff. And now we're really working with our TBEI businesses, applying our 8020 principles and focused on improving the bottom line and we're expecting success.

And just thinking about the Streator plants expansion, what I heard you say is that you're on track, but I wonder if we should be concerned at all about weather delays, it has been -- was a really cold winter and [Indiscernible] spring, have you broke ground on the project yet, could weather push back the timing of that project?

Right now, the delay has really been around getting some final permitting, we purchased the land we did talked with the teams last week. And there still believe that we will hit the end of the year target to complete the building and they're moving forward. The teams I was talking. We had a sewer cleaner at our board meeting earlier this year to show some of the new features of their rapid deployment boom and our control panels and the operators that was there was telling us their more exciting time of their career in terms of being in Vactor, so a lot of good growth activities going on and we think we're on time and on, so.

And if the buildings complete by the end of the year, when do you think you could have the first production starting, would it happen in the fourth quarter of first quarter, you would start?

I don't think, we'll see any meaningful benefits from Q4, but we do believe Q1 we should start to see the benefit of that. And I also from -- earlier mentioned that, we did some expansion of our Leeds, Alabama FS Solution Center and we will be producing more Guzzler there this year versus last year and we expect to see that benefit in Q3 and Q4.

And then just one last one for me. Thinking about the operating leverage, which was great and SIFI and I think you called out mix and predominantly, VAMA but was there other mix that was going on there besides just VAMA?

There was also some acceleration well on the domestic police business in anticipation really of that Ford model year changeover that we talked about is scheduled for the second quarter. So there was some incremental benefit there but there was also some benefits that we saw from pricing actions that we took both towards the end of last year and beginning of this year. So the pricing actions really were also a factor in some of that improvement.

We have reached the end of the question and answer session. And I will now turn the call over to Jennifer Sherman for closing remarks.

Before we wrap up, I'd like to call our attention to our annual report video that recaps our key accomplishments in 2018 and our plans for the future growth. We previewed this video at our Annual Meeting of Stockholders earlier this week. It will be posted on our website under the Investors tab shortly. In closing, so we would like to reiterate that we are confident in the long-term prospects of our business and our markets. Our foundation is strong and we are focused on delivering profitable long-term growth through the execution of our strategic initiatives. We'd like to express our thanks to our stockholders, employees, distributors, dealers and customers for their continued support. Thank you for joining us today. We'll talk to you after the second quarter.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.