Greetings and welcome to the Federal Signal Corporation Fourth Quarter Earnings Conference Call. At this time all participants are in listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Felix Boeschen, Vice President, Corporate Strategy and Investor Relations for Federal Signal. Please go ahead.

Good morning, and welcome to Federal Signal's Fourth Quarter 2023 Conference Call. I'm Felix Boeschen, the company's Vice President of Corporate Strategy and Investor Relations. Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer; and Ian Hudson, our Chief Financial Officer. We will refer to some presentation slides today as well as to the earnings release, which we issued this morning. The slides can be followed online by going to our website, federalsignal.com, clicking on the Investor Call icon and signing into the webcast. We've also posted the slide presentation and the earnings release under the Investor tab on our website. Before I turn the call over to Ian, I'd like to remind you that some of our comments made today may contain forward-looking statements that are subject to the safe harbor language found in today's news release and in Federal 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 U.S. generally accepted accounting principles. In our earnings release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-K later today. Ian will start today with more detail on our fourth quarter and full-year financial results. Jennifer will then provide her perspective on our performance and update on our multiyear strategic initiatives and go over our outlook for 2024 before we open the line for any questions. With that, I would now like to turn the call over to Ian.

Thank you, Felix. Our financial results for the fourth quarter and full year of 2023 are provided in today's earnings release. Before I talk about the fourth quarter, let me highlight some of our full-year consolidated results for 2023. Net sales for the year were approximately $1.72 billion, a record high for the company and an increase of $288 million or 20% compared to the prior year. Organic sales growth for the year was $220 million or 15%. Operating income for the year was $224.5 million, an increase of $63.7 million or 40% from the prior year. Adjusted EBITDA for the year was $286 million, up $71 million or 33% compared to the prior year. That translates to an adjusted EBITDA margin of 16.6% this year, up 160 basis points from last year. GAAP earnings for the year equated to $2.56 per share, up $0.59 per share or 30% from the prior year. On an adjusted basis, we reported full year earnings of $2.58 per share, a year-over-year increase of $0.62 per share or 32%. Orders for the year were $1.87 billion, another company record and an increase of $178 million or 11% from the prior year, with a strong momentum in customer demand, consolidated backlog at the end of the year was at an all-time high level of $1.03 billion, an increase of $146 million or 17% from last year. For the rest of my comments, I will focus mostly on comparisons of the fourth quarter of 2023 to the fourth quarter of 2022. Consolidated net sales for the quarter were $448 million, an increase of $57 million or 15%. Organic sales growth for the quarter was $42 million or 11%. Consolidated operating income in Q4 this year was $63.1 million, up $16.5 million or 35% compared to Q4…

Thank you, Ian. Overall, our fourth quarter results represent an exceptional finish to a record year. Outstanding execution by both groups contributed to the strong Q4 results, which included record net sales and adjusted EPS and an all-time high backlog. We are also pleased to report that adjusted EBITDA margins expanded 170 basis points to 17.3% in the quarter and were slightly above the midpoint of our recently raised target margin range of 14% to 20%. Looking ahead, we remain optimistic about further margin expansion opportunities into 2024 and beyond, driven by a combination of internal efficiency initiatives currently underway, our continued focus on organic growth, planned production increases and value-added M&A. Within our Environmental Solutions Group and improving supply chain supported higher production levels and with increased sales volumes contributed -- contributions from our recent acquisitions, robust aftermarket demand and strong price realization, we were able to deliver a 15% year-over-year net sales increase and a 27% increase in adjusted EBITDA compared to last year. Despite continued intermittent supply chain issues, we are encouraged by ongoing production improvements across our business units with fourth quarter production at our two largest ESG facilities, up a combined 11% year-over-year and up 6% compared to Q3. We are particularly pleased about the sequential improvement in production compared to Q3 and continue to believe that our large-scale capacity expansions completed in recent years, including our 40% capacity expansion at our Vactor TRUVAC–Gosler [ph] facility in Streator, Illinois, position us well to absorb incremental volumes as supply chains continue to improve. Our aftermarkets team had another standout quarter, with revenues up 24% over last year with notable strength in used equipment and parts sales. Recall, our acquisition of Joe Johnson Equipment in 2016 marks the onset of a targeted strategy to expand our aftermarket…

Thank you. [Operator Instructions]. Our first question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question.

Good morning, Steve.

Hi, good morning. This is Jacob More on for Steve Barger. Thanks for taking the questions.

Absolutely.

First one, backlog was up again for the 12th straight quarter and is still looking very strong. My question is how much of that backlog is set for delivery in '24? How much additional un-booked capacity do you think you have in '24? And what kind of chassis availability headwinds are you baking into your assumptions, if any?

Yes. So it really depends on the business. As I talked about in my prepared remarks, some of our lead times are longer than we would like, and we have initiatives in place or build more trucks initiatives to reduce those lead times. And we are making progress in some areas, notably safe taking, which is we talked about repeatedly, an important growth area for the company. With respect to chassis availability, we are in pretty good shape for Class 8 chassis, which support the vast majority of our businesses. We do have some pockets of areas. For example, the Class 7 chassis for our street sweeper business. We're continuing to monitor that. And with respect to Class 5 chassis for a very small percentage of our dump truck business, they're flat year-over-year. And we -- as we move forward, we are hopeful that the second half of the year, we will see more of those Class 5 and Class 7 chassis. But overall, we're in pretty good shape. And then I would conclude with the capacity expansions that we've invested in, particularly at Vactor and some of our dump truck businesses, we're very well positioned with improving supply chain conditions to be able to leverage those investments.

Understood. That's helpful. Thank you. And my second question is how much of your 2023 growth would you attribute to price versus volume? And what sort of expectations are embedded in your roughly 10% growth guidance for '24?

Yes. So as we think about the guide for '24, I think we're implying 7% to 10% growth. Pretty much all of that is on the organic. And I would say, price is about 2.5%, 3% of that. In '23, it was between 3% and 4% was the price impact on the top line.

Got it. Thank you very much.

Thanks, Jacob.

Thank you.

Thank you. Our next question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Good morning, guys. Congrats on two great years. All right. So we've asked this kind of multiple ways. But clearly, Jennifer, you said that you still don't expect much in the way of -- in '24 from some of the infrastructure bills. But I'm trying to look at it from a three years to five year perspective, is it reasonable to think that could -- these bills could add a couple of points to annual revenue growth over that time frame? Just curious kind of how you guys look at that?

Yes, absolutely. You are correct that we're not expecting a lot in '24. I think Transportation Secretary, Buttigieg had a pretty good quote about it. He said one way to think about it is the first year was about passing the money in '22. The second year was about the programs launching in '23 and '24 is about the money moving so we can get the dirt flying. As we move forward, we think there's opportunities for almost all of our products, and we expect that to continue over a five year period. So in terms of quantification of it, I think we -- I started with the Buttigieg quote because we got to really understand what those products projects are. But again, we saw some early examples that we talked about in the prepared remarks, specifically around street sweepers and safe digging. And we're pretty energized about this five year plus tailwind.

Got it. That's very helpful. You had talked in prepared remarks about plant production increases. And I just wanted to maybe understand where we're focused on there?

Sure. So if we look at backlogs for certain products, and we look at those associated lead times, we're very focused on reducing those lead times, and we've made some progress with respect to some of our safe digging projects -- products. And we're focused on reducing lead times for other product lines at our facility in Streator and for our street sweepers in Elgin, Illinois. So those are the two primary areas. And the teams have goals in 2024. The Federal Signal operating systems that we talked about is going to be an important part of that initiative. And we're continuing to see sequential improvement, which is encouraging.

Got it. That's helpful. And I think after Q3, you talked about lead times for sewer cleaners and street sweepers being in the eight months to nine month range versus typical 4% to 5%. Are they a little bit improved off of Q3 or still in that range or?

It depends on which product line you're talking about in terms of the lead times, certain street sweeper product lines are extended. I always talk about this is a high-class problem to have because our orders continue to remain strong, while our production rates are increasing and our aftermarket business continues to remain strong, which is an important driver of use of those particular products.

Got it. I appreciate it, guys. We'll leave it there. Thank you very much.

Thank you very much, Chris.

Thank you. Our next question comes from the line of Walt Liptak with Seaport Research. Please proceed with your question.

Good morning, Walt.

Hey, good morning, guys. Congratulations, great into the year. I guess my first question is to Ian. Just thinking about the way that you're looking at the guidance for 2024, and you made a comment that you're going to be at the upper end of the EBITDA range. And so I guess the question is what determines where you are within that range? Is it the amount of revenue that ship and leverage? Or is it some of these productivity programs or capacity coming online? What helps you either plus or minus in the range?

Yes. I think firstly, well, I think just to correct what we said in the prepared comments is that we expect to be in the upper half of the new target range, so not necessarily at the upper end of that range. So just wanted to clarify that...

That's important.

Yes. Yes. But in terms of what helps us get that margin improvement, I think -- we think about what the expansion at the Vactor facility and being able to actually tap into that expansion from in the sense of increasing the build production rates of that facility that has some pretty attractive drop-through. So as we think about ramping up production in that facility, that should have some margin benefits there. The other thing that would be a consideration is just the continued growth in our aftermarket business. We've seen some nice growth there again this year. I think we were up north of 20% year-over-year in terms of our aftermarket business. So that should be margin accretive. I think the other things would be some of the acquisitions we've completed in recent years, some of the value-added M&A we've done that can have some margin benefits. And then finally, Jennifer touched on it would be the Federal Signal Operating System and just our ability to execute and to drive some efficiencies in our production processes. So those would be the main drivers from a margin standpoint.

Okay. Great. Okay. Thanks for that. In the prepared comments, you guys called out warning systems as having a good quarter. And if memory serves, warning systems have been -- might have been lagging for some time. I know that's not the biggest part of the business, but if it's picking up, does it tell you something about some of the larger municipal projects?

Yes. So what I spoke about is that the Warning Systems was up year-over-year. And we have seen -- that's an area where we have seen the benefits from the FEMA funds. And again, we live in a very uncertain world and the need for redundant warning is critical. And so we've seen applications of that equipment. The use cases continue to proliferate. And I'd be remiss if I didn't add there that one of the encouraging things that occurred in '23. And as we move into 2024, we just saw broad-based strength across all of our SSG brands.

Okay. Great. Okay. And kind of along those lines in SSG, you're putting in the third production line. Can you tell us if this is because of market growth? Or is it market share gains? I know you were going after some international markets for some of the police lights and others?

Yes. The good news is that it's in. And so the teams have done a really nice job in terms of the installation. It's a major project. It's a combination to support organic growth initiatives. We're also bringing back. We previously, our supply chain was in Asia. And so we're on-shoring some of that work, and it supports also approach that we have in terms of being the total supplier for certain pieces of equipment. So it was a hole in our product portfolio that we sourced from a third party. And now as the teams move strategically to supply more-and-more of that equipment, this fills one of those product holes, but overall, a very successful initiative.

Okay. Great. And then the last one for me is, you talked about the phased rollout of the operational excellence program that you talked about last year. What inning are we in? Obviously, SSG has done a great job with the lights, but are there other businesses that you could tell us that you're going to be working on or are working on in M&A, it sounds like Trackless is doing great. Do they get operational excellence first, or do you let them grow?

Yes, great question. So as we talked about last year, we added resources to our 80:20 and lean initiative program. So we had a number of wins last year with our Ox Bodies [ph] Group, in particular, is a great example in Alabama. And as we roll out this particular system, we are focused, for example, Elgin, teams are out there already started in 2024, and that's an area because we're very focused on reducing lead times for that particular product line and increasing -- obviously, increasing throughput. But Mark Weber and the teams have identified a number of different opportunities. Typically, with the acquisitions, we wait until kind of year 2 for that type of work. But put it this way, there's more demand right now for the resources, which is fantastic. And we're looking at how do we kind of increase demand in order to respond to what we think is meaningful opportunity going forward.

Okay, great. All right. Thank you.

Thank you.

Thank you. [Operator Instructions]. Our next question comes from the line of Dave Storms with Stonegate Capital Markets. Please proceed with your question.

Good morning.

Good morning, Dave.

Hi, Dave.

So it looks like there was a slight divergence in sequential order patterns for ESG and SSG with SSG just seeing orders down slightly since last quarter. Is that just a blip from orders being inherently lumpy? Or is there more to that story that we should be thinking about?

Yes. There's some lumpiness in terms of large fleet orders. And I think we talked about a large fleet order that we got in the first half of the year for the SSG business. We also, I think, on the last call, made reference to Ford was having a model year changeover for its -- some of its police vehicles. So that had some impact it probably was less of an impact than we originally anticipating in Q4, but that could have had some impact, and that's primarily timing. People wouldn't place deals in Q4, but then they'll place them in Q1. So I wouldn't necessarily say within SSG, there's anything that we weren't expecting. Probably the opposite that the orders probably came in certainly higher than we had expected with that model year changeover.

Understood. Very helpful. And then just a quick one on your cash deployment priorities. I know you touched on it, but it seems like you did everything in 2023 from buybacks, dividend raises CapEx and M&A, if you had to prioritize them for 2024, what would that look like?

Sure. Number one, investment in organic growth initiatives; number two, M&A; number three, competitive dividend yield, number four, opportunistic share buybacks.

That's very helpful. Thanks for taking my questions.

Thank you.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Sherman for any final comments.

Thank you. We would like to express our sincere thanks to our stockholders, employees, distributors, dealers and customers for their continued support. Thank you for joining us today, and we'll talk to you soon.

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