Greetings. Welcome to the Federal Signal Corporation Second Quarter Earnings Conference Call. [Operator instructions] Please note that this conference is being recorded.At this time I would like to turn the conference over to Ian Hudson, Chief Financial Officer. Mr. Hudson, you may now begin.

Good morning and welcome to Federal Signal’s second quarter 2019 conference call. I am 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 start today by providing some detail on our second quarter results before turning the call over to Jennifer to provide her perspective on our performance and our outlook for the remainder of 2019.After our prepared comments, Jennifer and I will address your questions. Before discussing our results for the quarter, you may have read in this morning’s news release that we have executed a new five-year, $500 million revolving credit facility. In addition to increasing capacity by $100 million, the new arrangement contains improved pricing and more favorable terms than our previous facility. It also provides us with flexibility to borrow up to an additional $250 million for…

Thank you, Ian. I would like to reiterate Ian’s comments on the outstanding quarter, while we were anticipating a strong second quarter in what is typically a seasonally strong period for many of our businesses our actual performance surpassed those expectations. In short, our second quarter results were the best in the company’s history.We reported double-digit organic growth in both net sales and orders and our operating income was up 22% year over year. Each of our groups delivered margin performance in excess of our target ranges translating to a consolidated adjusted EBITDA margin of 17.6% and quarterly earnings per share that were a record for the company. Within ESG, we benefited from operational efficiencies relating to increased production, seasonally strong performance from TBEI, increased aftermarket demand in certain parts of North America, as well as some earlier than expected deliveries particularly in Canada, where our Joe Johnson Equipment business delivered an outstanding quarter.The second quarter saw the third anniversary of the JJE acquisition. It also marked the completion of the performance period for the contingent consideration that was included in the agreement. The fact that we are preparing to pay the earn-out in full is a testament to the team’s successful execution against the strategic objectives in support of the acquisition. We are also thrilled that the JJE’s talented management team has agreed to stay on with Federal Signal following the completion of the earn-out period, with a number taking elevated roles within the organization. These new roles include broader responsibilities over key strategic initiatives like the continued growth of ESG’s aftermarket business, where we saw 14% year-over-year revenue growth in Q2. JJE is also a great example of the successful application of our ETI principles to acquisitions.Prior to the acquisition, JJE’s EBITDA margin was in the high single…

[Operator instructions] Our first question is coming from the line of Walter Liptak with Seaport Global. Please proceed with your questions.

Congratulations on the nice quarter.

Thank you.

I wanted to start out with the SSG business and just thinking about the order rates and just what’s going on in the market. I think we understand the Ford issue, but I think you made a comment about systems and I wonder if you could give us a little view on what’s going on in those markets and what the back half might look like.

Sure. Yes first of all, as we mentioned we had talked about the Ford model year changeover, and we expected that to impact orders during Q2. We’re -- really applaud the teams, as they did a super job in terms of additional orders outside of North America. We saw some good international business. And I would remind you that orders of backlog tend to be a less relevant measure because they typically ship within a quarter within eight to 12 weeks. Where we saw strength in Q2 was in our signaling business. We have a new leader that’s been running that business for the last year. He has a number of organic growth initiatives, very focused in terms of increasing our market share and we’re really starting to see the benefits in the first half of this year particularly in Q2 and we expect that to continue in the second half of the year.

Okay, great. And with the rise in long-term targets for SSG, do you feel like this business is now going to be able to operate at kind of the first half operating margins going forward or is there something that will change regarding mix that could make that profit margin volatile?

Yes, I think as we mentioned, we raised the target to 15% to 18% for SSG and it was really a result of the continuing application of our ETI principles. The teams have really embraced that. We’re going to have our third formal training session just this year and the response is so encouraging to see kind of how that training applies to businesses. We’re also seeing the benefit of our efforts on the new product development side, not only in our signaling businesses but also in our public safety system businesses so we’re encouraged by what we’re seeing. We saw consistent performance and that’s what really drove the decision to increase those EBITDA margin targets for SSG.

Okay, sounds great. And I’ll just switch gears to the trends going on in orders for the ESG division. And in the prepared remarks, you guys called out vacuum trucks, sewer cleaners, dump trucks, aftermarket for the reason you had the double-digit order growth. Is that in order of growth rates? Were some product groups growing faster than others? And I wonder if you can give us some color around that.

Yes, well it’s really in kind of the order of magnitude of the dollar increase as opposed to the percentage increase. But particularly, I think we’ve talked in the past about the traction that we’re seeing on safe-digging and Jennifer made in her comments, she talked about the growth that we’ve seen in the orders for the vacuum trucks. I think they’re up -- year to date for the first half of the year they’re up 17% year over year so we really continue to be encouraged with the growth that we’re seeing for the safe-digging equipment.

Okay, great.

I guess I’d add there, one of the other things I’m encouraged about is we’re continuing to invest in new product development in that area. I mentioned in the last call we kicked off a project in the first quarter, looking at kind of our mid-level vacuum trucks and we’re continuing to work on that so it’s an area of focus for the company. We believe that we have best products in the market and we’ve identified some strong distribution partners and we continue to be encouraged by what we saw in the first half of this year.

Okay, great sounds good. And then the last one from me, the TBEI continues to be pretty strong; I wonder if you could just provide us with some thoughts on why TBEI is still growing, what does the growth rate look like and any changes that might be in front of us with slowing in the industrial environment?

Yes, I mean, there’s a portion of that business that is correlated with construction and housing starts so we’ve been monitoring that closely up to this point, we haven’t seen any impact in the orders and I think in fact that we talked about the dump truck orders that we saw in Q2 were up $8 million year over year, we’ve seen very strong growth in that particular business in Q2. I would remind you that Q2 and Q3 for that business are typically the strongest because of the -- a lot of the construction work is taking place during the summer months, so it tends to be a little softer in the fourth quarter, but we’re -- it was a much improved second quarter for that business and the teams did an outstanding job so we’re very encouraged.

Okay, sounds good. Thank you.[Operator instructions] The next question is coming from the line of Chris Moore with CJS Securities. Please proceed with your questions.

Great quarters. Let me just -- bigger picture, maybe we can look at kind of the second half of 2019 versus the second half of 2018, you started to do this but remind us things that we should be keeping in mind positive or negative when kind of looking at the relative performance of second half of 2019 versus 2018. Steel, it sounds like there were some digging new orders that got pulled forward into Q2, things like that that would be impacting 2019 versus 2018.

Yes, a couple things. One is we’re expecting earnings growth in the second half of this year and if you look at our revised guidance, it implies strong margin performance for the company in the upper half of the range. Typically a couple things to consider is that Q2 and Q3 are typically stronger quarters for our aftermarkets business and for TBEI just due to the types of equipment that they provide. MRL, their quarters typically would be the second and third quarter. Q4 tends to be a softer quarter for them. We’re continuing to see traction on our safe-digging and we’re encouraged right now as we spend time with customers, end users, dealers; we’re encouraged to -- our markets continue to be strong. So that was really part of the drivers of our revised guidance for the second half of the year.

I know you had talked previously about locking in the steel pricing earlier in the year. Are you seeing -- looking at that as a -- from where you sit today, as a slight tailwind for the second half of 2019?

I think Chris when you compare to the second half of last year that was where we saw some effects of the increase in the material costs. Those have somewhat normalized now, so we’ve also seen some of the benefits from the pricing actions that we took. So we saw some of those benefits in Q2. We will continue to expect that we’ll be favorable from a price cost standpoint in the second half of the year and that’s all been factored into the updated outlook that we’ve given.

Got it, thank you. And just on SSG, Jennifer you talked about expanding into new global markets. Is it new products or just new markets that you’re talking about? Maybe can you just give a little bit of color in terms of some of the things coming on the SSG front?

Sure, absolutely. So it’s really a combination of both. We have on the signaling side of the business, we have some new distributors in Europe and we’re starting to see traction on that initiative. Our VAMA business continues as one of our most aggressive businesses with respect to new product development and they’ve seen success on that side and we’ve also seen some activity in South America so it is a true combination of both increased distribution and new product development.

Got it. And last question is on the SSG side, we haven’t heard much on the kind of hearing loss lawsuits over the last few quarters. Is anything even worth discussing at this point in time on that front?

We have a very lengthy description in our 10-Q which I encourage you to take a look at. But overall, where we are right now is, we are in an outstanding position. The plaintiff’s lawyers have basically walked away from the litigation and we’re pursuing nominal settlements.

Got it. I appreciate guys. Thank you.

The next question is from the line of Steve Barger with KeyBanc. Please proceed with your question.

So really good revenue performance in the first half $600 million, when you consider all the factors around backlog and capacity, do you expect second half revenue comes in above that or below, or just kind of how do you think about that cadence?

I think -- I mean, we don’t typically guide to the revenue Steve. But I think what we would say is with the outlook that we’ve given Jennifer talked about the margin improvement that we would be expecting, top line growth in each of Q3 and Q4 so I think that’s how we would respond to that.

Yes, top line, okay. I’m just trying to get to the margin kind of conversation because if I just go to the midpoint of your guide it looks like you expect consolidated margin to be flat or maybe just slightly down in the back half versus the first. Am I thinking about that correctly?

I think right now we’re expecting the teams to continue to perform and we expect the margin performance for the company to be towards the higher end of the range.

Okay. You talked about some ongoing and I think some new investments. Can you update us on how you see operating cash flow and CapEx this year?

Yes, so operating cash flows, Steve I think we’ve talked about. Sorry, on CapEx I think we talked about on the call, we’re expecting that to be up to $35 million this year with the expansions that we have at both the Streator and Rugby facilities so CapEx will be higher than it would typically be in a usual year just with those investments going on.Operating cash flow rate would be similar cash conversion we would be expecting to what we saw last year. The one nuance that there may be and this is more of a technical accounting point, is that when we pay the Joe Johnson earn-out in deferred payments, there is going to be a portion of that, that will likely be reflected within our operating cash flows so there may be a drag on our operating cash flows of about somewhere between $3 million and $4 million. So that’s something that we would need to factor in.

Okay. And I think the acquisition strategy has obviously been very successful over the last few years. I’m just curious, now that you’re paying the final earn-out for JJE, if you account for that, how has return on capital been for that acquisition?

It’s been an outstanding acquisition and it’s been successful on many levels and the earn-out was tied to four strategic objectives and I think as Jennifer mentioned, that the fact that we’re paying it out in full is really a testament to the team and the traction that they’ve seen on hitting all of those objectives so it’s been a tremendous acquisition for us.

Yes and I think you said that it had been operating at the higher end of the EBITDA range for the various business units; was that correct?

Correct.

Is that true on a free cash flow basis as well? Is it accretive to free cash flow versus the other business units?

Yes, it is. I mean, the rental is a factor in that, in terms of the cash flow. All of the cash flows associated with the rental fleet are reflected in operating cash flows. We don’t really look at it as standalone business because it’s part of the overall Federal Signal rental fleet. So it was a standalone acquisition, but since then we’ve worked on integrating it across the ESG business. So we don’t really necessarily look at it on a standalone basis.

Okay, thanks for the time.

The next question is a follow-up from the line of Walter Liptak with Seaport Global. Please proceed with your questions.

Thanks. I just wanted to do a quick follow-up on Steve’s question just on the cash outflows in the second half. And I wonder if we could talk a little bit about corporate expenses and given some of these incremental cash flow items, are any of those flowing through the corporate expense? I guess the question is what are you expecting for corporate expenses in the back half?

They won’t really impact corporate expenses a lot. So the investments that we’re making at Vactor that’s largely in PP&E. And so those investments would be a cash outflow that would be depreciated over a number of years, so that wouldn’t really hit corporate expenses. The earn-out also doesn’t really hit corporate expenses either, so I don’t think any of these significant cash outflows that we’ve spoken about would impact corporate expenses, with the one exception probably being that there will be some acquisition related expenses, transaction related expenses associated with MRL. We saw some of that in the second quarter and there may be more in Q3, but those are not expected to be overly significant.

Okay, what do you expect in corporate expenses for the year?

It’s a little difficult to predict. I mean because corporate expenses also include a number of variable components based on -- it has incentive compensation costs and adds stock compensation costs, so it really is dependent on the performance of the company. But overall, we’re not expecting it as a percentage of sales to be very different to what we saw in 2018. I think we range in the low twos in terms of percentage of sales. We won’t expect a significant diversion from that.

Okay, thank you.

Thank you. At this time, I will turn the floor back to Jennifer Sherman for closing remarks.

In closing, I would like to reiterate that we are confident in the long-term prospect for our businesses and our markets. We would like to express our sincere thanks to our stockholders, employees, distributors, dealers and customers for their continued support in achieving a record quarter for the company. Thank you for joining us today and we’ll talk to you next quarter.