Good day, everyone, and welcome to the Federal Signal Corporation Third Quarter Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Jennifer Sherman, Chief Executive Officer. Please go ahead.

Good morning and welcome to Federal Signal's third quarter 2017 conference call. I'm Jennifer Sherman, the company's President and Chief Executive Officer. Also with me on the call today is Ian Hudson. As you may have seen, we recently announced that Ian has been promoted to the position of Chief Financial Officer. Ian has served in that role in an interim capacity since March, and we are thrilled to have successfully transitioned the leadership of our financial function to a professional of his expertise and caliber. A collaborative leader, he brings deep accounting and financial expertise, extensive knowledge of our company and pragmatic problem solving to the position. Ian is known to our internal and external stakeholders, including the investor community, as an outstanding financial executive who has played a key role in our recent strategies. With that I'd like to turn the call over to Ian.

Thank you, Jennifer. I'm glad to be starting my new role talking about another strong quarter. Before we begin, there are a couple of housekeeping matters to address. Firstly, we will refer to some presentations slides on today's call, 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 a slide presentation and the news release under the Investors tab on our website. I'd also 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 the measures that are not in accordance with U.S. Generally Accepted Accounting Principles. In our news release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-Q later today. I'm going to start today by addressing our third quarter financial results. Jennifer will then provide her perspective on our performance, our outlook for the remainder of this year and her thoughts on market conditions as we enter into 2018. After our prepared comments, Jennifer and I will address your questions. Our consolidated third quarter financial results are provided in today's earnings news release. As a reminder, the third quarter of this year includes the operating results of Truck Bodies and Equipment International, or TBEI, which we acquired on June 2nd this year. The results of TBEI have been included within our Environmental Solutions Group for the quarter. Overall, our third quarter results exceeded expectations. Consolidated net sales…

Thank you, Ian. We are pleased to report another outstanding quarter with significant year-over-year growth in orders, sales and earnings. The 7% organic order growth was particularly encouraging. We also benefited from some earlier-than-expected shipments associated with changes in customer delivering requirements, which accelerated the recognition of about $0.01 of earnings from the fourth quarter into the third quarter. Our strong third quarter performance was largely driven by continued momentum within our Environmental Solutions Group, which reported a $42 million year-over-year improvement in order. As we mentioned back in August, we were not expecting the growth in orders from customers replenishing rental fleets to continue with the same pace in the second half of the year as in the first half. Despite this, continued strength in municipal demand for store cleaners in the third quarter as well as continued progress with our initiative to expand into the utility market contributed to organic growth of approximately $11 million compared to the prior-year quarter. On the utility initiative, our year-to-date sales have increased by almost 60%. We now have a dedicated sales team in place and are also exploring potential channel partnerships to accelerate our progress. In addition, we are seeing high levels of utilization of our equipment in our rental fleet, which have been steadily increasing throughout the year. As a result, rental income during the third quarter of this year was up almost 40% compared to the prior year quarter. Given the high levels of utilization within our rental fleet and the higher demand for used equipment, we might consider making additional net investment of up to $20 million over the next couple of quarters. Such investment will represent a combination of fleet replenishment as we sell units out of the fleet and an increase in the number of Federal…

[Operator Instructions] Our first question is from Chris Moore from CJS Securities.

Just on a relative basis, looking at the industrial versus municipal market, it sounds like the vacuum trucks and sewer cleaners has done extremely well. From a momentum standpoint, I mean, is the industrial looking stronger than muni at this point in time and any reason to think that will shift at any point?

Right now, we're seeing strong growth in the industrial markets, particularly on the utility business. We've been encouraged by the pull-through that we've seen with respect to our ParaDIGm product, which is has included both our prodigy, our HXX product, and marginal recovering or demand for hydro. We've talked previously about -- we've launched some new products into that market, particularly our Wolf product out of our Westech acquisition, which has been performing in line with our expectations. We've also experienced kind of a positive pick-up on water blasting. On the municipal side, we talked a lot this quarter about the strong demand for sewer cleaners, but that's been offset by some deferrals that have affected our police business in the U.S. We don't believe that we've lost those orders, and we expect to pick up them either later this year or into next year.

Just in terms of, again -- a little bit bigger picture there. Looking at the gross margins for ESG versus SSG, over the next year or two, where is it going to be easier to get some some incremental margin?

Yes, Chris, I think I would probably -- when we look at the gross margin, one of the things that we benefited from probably a couple years ago was just the leverage from the high volumes we had when oil and gas markets were really blowing and going. In terms of the two, ESG or SSG, I think the margin improvement could result from kind of the incremental volumes that we've seen this year. So that would be one factor. I think within SSG, we've seen, as Jennifer mentioned in a comment, the 210 basis point improvement in our gross margin year-to-date. That's really a function of some of the material and labor cost reduction initiatives that we've put in place in the last couple of periods, really applying our 80/20 principle. And so that's an important part of the story too in the margin improvement and those 80/20 principles, we're going to continue to apply those to try and squeeze some more margin improvements from both the business.

One thing Jennifer had mentioned at the end was that it would require probably some improvement on the oil and gas side in order to meet target EBITDA margins. Are you seeing anything, much significant improvement there?

We talked about the improvement in utilization with respect to our rental fleet, and we think some of that is coming from oil and gas. We're starting to see, I think, internally green shoots with respective recovery, but we think that any kind of meaningful recovery in oil and gas to positively impact us, because we expect there to be some kind of lag of where we would actually benefit from the improvement.

Our next question comes from Ken Newman from KeyBanc Capital Markets.

Just wanted to go back to the ESG orders. I'm curious, are you seeing big multi-unit orders for ESG, are those higher volume of small orders or is this different from you've seen in the past motorcycles?

It really varies year-to-year and during 2017, we haven't seen large fleet orders like we've typically seen in the past with the exception of the Vactor Caltran order, which was a large fleet order. We've also talked about the Middle East, which again typically are the large fleet orders. And although we haven't lost those opportunities, they've been moved out of 2017. So the answer is in general, no, it's been smaller orders that's been driving the increases.

And I guess as a follow-up to that, can you maybe talk about what you have in backlog that is set for delivery in 2018, anything beyond 2018 within backlog?

Yes, I probably would say that because of the recent strength of the sewer cleaner orders, we have a pretty strong backlog right now for sewer cleaners as well as vacuum trucks. Just because of some of the momentum in the orders, those will likely extend into the first half of 2018, those deliveries. In terms of backlog, it's probably strongest for sewer cleaners and vacuum trucks.

And then just one more from and then I'll get back in queue. In terms of the acquisitions, can you maybe just talk a little bit about the number of deals you're looking at that might be considered realistic and maybe a little color on the revenue range of what you're seeing?

Yes, although we don't provide specifics, our M&A pipeline continues to be robust. As we sit here right now, we are likely to take a brief pause as we focus on delevering. But we still believe in M&A, will continue to be a significant driver of growth in 2018, and I'm pleased that we have a strong team in place to help us achieve those objectives.

If you kind of look at that pipeline, it geared more towards ESG versus the muni side?

I think that, right now, the opportunities, as you know, really vary. Right now, as we sit here, they probably gear more towards the ESG side.

We have a question from Walter Liptak from Seaport Global.

I wanted to ask about, it sounds like the acquisitions of TBEI and JJE are going well. And I want to ask if you can just refresh your memories on the accretion that you're expecting in 2018 from TBEI? And if I recall, JJE was a little bit of -- because of the rental fleet, it became more accretive as time goes on, even into 2019. But if you could just refresh on what the accretion will be for 2018 or is expected to be?

Yes, the first thing I'll probably point out as we closed both the TBEI transaction and JJE transaction in June of 2016 and June of 2017, and the way we presented the accretion information was on the anniversary of the closing date. So what we said for JJE is with respect to year three, third year anniversary will be $0.10 to $0.15. And at TBEI, the second anniversary would be between $0.07 and $0.12, and we still feel very comfortable with those accretion estimates.

Just kind of round two, the middle round, it sounds like maybe $0.10 for each one accretion in 2018. So working off of a base of $0.80, it looks like you're going to have a nice ramp in earnings from these acquisition and accretion in 2018?

Yes, what I would caution you is again the $0.07 to $0.12 is really from June of 18 through June of 19 and will be in year three beginning in June of '18 for JJE with start of year three. We have to take that six months into account.

Fair enough. I want to just switch gears and ask about TBEI and just how that's doing? Some of the truck data that you referenced, it looks like it's picking up for truck orders and the economy is strong for housing, as you pointed out. How would their orders grow year-over-year at TBEI?

With respect to the third quarter we talked about, there was $47 million of revenue in the third quarter and $3 million of operating income. The orders for TBEI were $41 million. It gets real noisy trying to do a year-over-year comparison because they acquired Travis during the third quarter of last year. So we're encouraged by where we are. I guess the other thing I would notice, we've talked previously about the $3 million to $4 million of synergies that we'll deliver by year three, and we're on track to deliver those synergies. I talked in the call about we've taken two our high potential employees from our legacy ESG businesses and now they're in key management roles at TBEI. Today, we're encouraged by where we are.

So it sounds like is TBEI is growing?

Yes. We would expect through the cycle that TBEI would have GDP plus growth rate.

And then maybe if I could ask one more, just on material costs have been coming up and I wonder what your pricing strategies have been, have you implemented a price increase during the quarter and what do you -- have you announced anything for next year?

Yes, well, we typically have a price increase at the beginning of the year. So in most of our ESG businesses, the price increase will go into effect in January 1, 2018.

Moving on, we have a question from Marco Rodriguez from Stonegate Capital Markets.

I kind of wanted to follow-up some of the prior questions here. Just first kind of talking a little bit about the end-market demand. It seems like if I understood you correctly, the muni is kind of pretty stable, but some good growth in the sewer side of the utility side, and the industrial seems to be picking back up. Can you maybe parcel those areas a little bit more and kind of talk a little bit about where the strength is coming from as far as -- especially in the industrial side, what sort of end markets?

Yes, Marco. If we look at just Q3 kind of quarter-over-quarter, industrial is up pretty, $47 million in order, 97%. Some of that's the addition of TBEI, as Jennifer mentioned, that added $41 million of orders to the quarter. But outside of that, as we think about kind of the organic improvement, where we're seeing strength, in particular, is on vacuum trucks. That would include hydro products as well as the ParaDIGm in the utility market. As we talked about previously, we launched the ParaDIGm product in Q3 of last year. Sales of that product are up year-to-date 60%. So we're seeing some real momentum in that market as we execute on our strategic initiatives to expand, which is as we thought about it, it is a new market for us. So we're really encouraged by that.

And so the strength that you've seen in the utility market, I mean, I know you guys have talked about in the last few quarters where you have seen some positive movement there, but it kind of seems like it's picked up here in this last quarter where you've now called out a dedicated sales team. Is that just -- the groundwork you've put in over the last year or so has finally started to kind of take shape or where there any other sort of circumstances that kind of drove that strength there?

Yes, as we previously talked about three years ago, we started the work with respect to entering the utility market because we wanted a suite of products. ParaDIGm, we have launched last July. Sales force was not completed until the beginning of this year. In addition to that, we've been encouraged is not only with respect to sales of the ParaDIGm, but the pull-through of some of our other hydro products, particularly the Prodigy and our larger HXX. So it's a really a combination of all of those things, and we're starting to see the momentum. And as we move forward, we continue to look for additional channel partners. So we think there's more opportunities we go into 2018.

And your movement to looking for these additional channel partners. I mean, how should we be thinking about that from a timing perspective?

It's ongoing right now. It won't be one partner, it will be a series of partners as we move forward.

And you had mentioned in your prepared remarks that you guys had some, I guess, some orders that pulled through in Q3 that I guess you're expecting for Q4. Were they in a particular segment or industry?

Yes, on our SSG side of the business, we had a customer demand that pulled forward series of orders. From Q4 to Q3, it represented about $0.01 of earnings.

And keeping on the ESG side, you mentioned adding or at least thinking about adding an additional $20 million in investments to the rental fleet size. Can you maybe talk a little bit about the timing of that potential investment?

Yes, I think we say over the kind of next couple of quarters. One other thing, obviously, it's not for adding units to the fleet, it's predicated on selling units out of the fleet. We've see some pretty strong demand for used equipment out of the fleet as we sell that equipment. So it's going to somewhat be based on how we sell the units out of the fleet, the replenishment. So it's not going to be -- in terms of the cash flow impact, it's not going to be one big slug of $20 million, it's going to be gradually paced over the next couple of quarters depending on when we sell the units out of the fleet.

And last quick question, just kind of a housekeeping item. On your gross margins, I don't think I caught the gross margins by segment, but it looks like aggregate-wise, you got about 100 basis point improvement if you add back in the inventory step up. Can you maybe talk a little bit about that as far as the buckets that helped improve that?

Yes, sure, Marco. So the gross margins, they'll be in the Q, you will be able to see them in the Q, but just to give you some idea of the improvement, ESG improved 22% versus 19% last quarter and SSG was up 39% this quarter versus 37% last year. I talked a little bit about the benefits that we're seeing on the SSG side from the material and labor reduction actions we took in the prior year. And then on the ESG side, it's really kind of a mix and a volume impact that we're seeing that's helping drive that improvement in the margin on ESG side.

[Operator Instructions] We'll take a follow-up question from Walter Liptak from Seaport Global.

Just a couple of quick follow-ups on SSG, the timing of the public safety orders. Are you expecting those in fourth quarter or is that something where it would come through in 2018?

A couple of orders from a large U.S. municipal customers have been differed. Right now, it's unclear whether it'll be Q4 or early next year. And then the other thing I would add, as I mentioned on the call, although a small part of our business, as you know, our Vama businesses located in Catalonia, and typically the fourth quarter is one of their strongest quarters, and we're currently monitoring the political situation to understand what impact, if any, it might have on the fourth quarter and going into 2018.

Vama, did you see some disruption with Vama this quarter?

We haven't seen a lot of disruption yet, but we're continuing to monitor it going forward.

And then I wanted to ask about the body video camera that you are referencing, it looks like you're making some investment into. I wonder if you could talk about just the timing of commercialization, how do you do that? What's the market opportunity could be for this product?

We're still in early days. We've partnered with a company in Europe, Edesix, who is a leading provider of body camera equipment in UK We just got our channel in place in July of this year. We think three years out, this could be a $15 million to $25 million opportunity, but we're still in early days. And this is typically a pretty long sales cycle. So it's something that we're encouraged by the product that we have, it's differentiated from our competitors. But we'll keep you updated as we go forward.

[Operator Instructions] It appears there are no further questions at this time. Ms. Sherman, I'll turn the conference back to you for additional or closing remarks.

Sure. Thank you. In closing, I'd like to reiterate that we are confident in the long-term prospects for our business in our markets. I'd like to express our thanks to our stockholders, employees, distributors, dealers and customers for their continued support, not only of the company, but during the recent Hurricane Harvey. Thank you for joining us today, and we will talk to you next quarter.

And that does conclude our conference today. Thank you for your participation. You may now disconnect.