Thank you for standing by. This is the conference operator. Welcome to the Federal Signal Corporation Third Quarter 2021 Earnings Conference Call. As a reminder all participants are in listen-only mode. And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Ian Hudson, Chief Financial Officer. Please go ahead.

Good morning, and welcome to Federal Signal’s third quarter 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’ll 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 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 third quarter results before turning the call over to Jennifer to provide an update on our performance, current market conditions, recent acquisition activity, and our outlook for the remainder of the year. After our prepared comments, Jennifer and I will address your questions. Our consolidated third quarter financial results are provided in today’s earnings release. In summary, our businesses were able to deliver meaningful year-over-year improvement in net sales and earnings and an adjusted EBTIDA margin at the high end of our target range, despite the effects of higher material costs and widespread supply chain disruption. Consolidated net sales for the quarter…

Thank you, Ian. Our teams again delivered growth in both the top and bottom line while achieving adjusted EBITDA margin towards the high end of our target range, despite well-documented widespread supply chain disruption, and a very challenging commodity cost environment. We entered the quarter with delivery commitment dates from our chassis suppliers that positioned us well to satisfy our sales and delivery expectations for the second half of the year. Thanks mainly to the proactive efforts of our purchasing and engineering teams and the temporary shutdown of our production facility in Streator, Illinois for a two week period around the 4th of July holiday, following the suspension of chassis production at one of our suppliers, we had not experienced any significant chassis supply constraints through the end of July. However, as the quarter progressed, we began to experience significant delays in delivery dates from most of our chassis OEM partners with deliveries pushed out weeks or months with little notice. In many circumstances, we received a week’s notice of the delay. Beyond chassis, we are experiencing some other supply chain tightness ranging from pumps to electronic components, but for the most part, we have to date been able to navigate through the difficulty, it remains a challenging situation. Chassis delivery delays are significantly disrupting our production schedules and hampering our ability to maximize production efficiencies and deliver products to our customers. The team has worked tirelessly to mitigate the impact of this short term disruption by continuously adjusting production schedules and an effort to satisfy record customer demand. But we are not operating at our usual level of efficiency. While the teams have performed admirably, we estimate the delays in chassis deliveries and various other parts shortages. Along with the constant production schedule adjustments caused an adverse top-line impact…

[Operator Instructions] The first question is from Steve Barger of KeyBanc Capital Markets. Please go ahead.

Good morning, Steve.

Hi, Steve.

I’m going to start with the near term outlook, if I just look back at the last few years revenues, generally similar plus or minus in 4Q relative to 3Q, will that be the same this year or just help me balance the record backlog versus the reduced guidance around the supply chain issues?

Yes. I think Steve, the trends that we typically see in the fourth quarter relative to Q3 aftermarkets is typically stronger in Q3, with the weather related factors that that can slow down a little bit in Q4. As we look at kind of revenue in Q4 on a year-over-year basis, I think, we are expecting some improvement over the last year. But the wildcard is the chassis delivery dates. And we believe we’re in a good position with respect to the commitment dates we’ve got from the suppliers. So it that’s the one variable that we can’t really control.

If we’ve learned anything through Q3 it’s that, until we have the chassis on hand those dates are fluid at that.

Yes. No, totally understandable. So, we probably shouldn’t, Ian, you said year-over-year improvement, but we probably shouldn’t be thinking a big sequential improvement just based on the current environment?

I think that’s fast, Steve.

Okay. And just same question on EBIT, will that be down sequentially or can you drive some improvement in this environment or are the input costs and just kind of just general inefficiency is going to make that tough.

I think the environment makes it tough to get sequential improvement. I think, the one area where we are seeing some signs of improvement is on price cost headwind. We had a headwind of about $5 million in Q3. We’re expecting that GAAP to narrow in the fourth quarter, as we kind of, we’ve taken a number of actions on the pricing of a backlog and as more of that ships out, that’s when we start to realize more price. So, we’ll start to see that improve in Q4, albeit with, we were still expecting a headwind of, in the range of $2 million to $3 million in Q4 before that starts to really normalize as we enter 2022. That would, and then there’s just the general inefficiencies as Jennifer described some of the shortages in not only chassis, but some of the other components make running a production facility and production schedules with the constant changes. It makes it fairly inefficient.

Yes. Well, I guess on a happier note is, with a record backlog, is that all slated to be delivered next year? Assuming you can get all the parts that you need?

Yes.

And 2Q was your best revenue quarter ever with all the capacity additions and now the M&A, what do you think quarterly revenue can run at efficiently? Can you be over $350 million, $360 million on a sustainable basis per quarter.

I think, we obviously have the seasonality aspects of the business, Steve with Q2 and Q3, typically the strongest at, with respect to the aftermarket side of the business. We also have the two acquisitions that that will factor in. So, I think all of that taken into consideration, I think the answer would be yes. Yes, we would expect that.

Great. I have more questions, but I’ll jump in line. Let someone else go.

Okay, thanks Steve.

Thank you.

The next question comes from Chris Moore with the CJS Securities. Please go ahead.

Hey, good morning guys. Thanks for taking the couple of questions.

Good morning.

Good morning. And maybe we go back to a source subject. So chassis shortage, can we maybe talk a little bit about the root cause there, I mean, is the chassis manufacturers just in the same position as other industrials where their supply chain is backed up? Is there something more structural there, or just trying to understand a little bit better.

It really comes down to the microchip issue? And it is, they’re waiting on certain ships. We are encouraged by the public statements that the various supply chain, various OEM chassis manufacturers have made in connection with their earnings call, and that they believe that the worst is behind them. We have yet to see that, but, as we go into 2022 we’re hopeful that the public statements they’ve made, we will benefit from because we clearly have the demand, what comes down to it is, basically supply chain. And I would say the vast majority of it has been chassis. The teams have done an excellent job in terms of working through other issues. There have been other issues, but we’ve worked through the majority of them, but we need to get this supply – we need to get this chassis situation stabilized in order to kind of build the record backlog that we have.

Got it. And do the chassis manufacturers, do they give you, kind of a 2022 outlook that they’re looking at this point in time, or how much visibility do they have behind beyond this quarter that they’ll even talk to?

They give us information regarding 2022. And what we’ve been able to do is take that information. And as we’ve encouraged our dealers to also procure chassis and in some situations, the end customers to procure chassis and we’re optimistic about that initiative, because if our dealers are successful and end customers are successful and particularly municipalities usually have pretty good cloud with the local chassis manufacturers to get those chassis, we’re anticipating that we’ll be in a better position in 2022.

Yes. And I think Chris, the other thing that gives us comfort is that we are not exclusive 2021 chassis supplier. We use many different types of chassis. We can build on any really, any chat type of chassis. And so we are not reliant on any one sole provider, so I think that is helpful. And also, absent the TBI business, where the customer always provides the chassis. We are about a 50/50 split in terms of when we provide the chassis or when the customer provides the chassis. So in terms of how we look forward and procure, sufficient chassis to ship the backlog, we’re working, as Jennifer said with our dealers, with our customers and with our own suppliers to try and maximize the availability for next year.

The team has also done a really nice job qualifying new chassis that historically we haven’t used to help supplement the amount of chassis that we’ll have available in 2022.

Got it. Just last one for me, any sense that there is much, I know orders have been great, any sense, there’s much order acceleration by customers. They factor in the long hours now.

No, we’ve taken a look at that. And our sense is no. Because a couple of things, one is the number of named units. Number two is many times, particularly on the municipal side of our business. It goes through a public bid process. We are starting, as I mentioned in my comments to see the benefits of the initial stimulus package, and we expect the infrastructure legislation, once signed by the President to provide a meaningful long-term stimulant for orders over the next several years.

Got it. I appreciate it. I will jump back in line.

The next question comes from Felix Boeschen with Raymond James. Please go ahead.

Good morning.

Hey, good morning Jennifer and Ian.

Good morning.

Hey, I was hoping to go back to a capacity question. As we think about maybe the next couple of years, you obviously talked about stimulus package flowing. We now got infrastructure bill. It doesn’t seem like demand is the problem. And I know you guys have expanded your physical footprint quite a bit over the last couple of years. Are there any projects on the horizon or do we think we need to expand capacity more to kind of stay up with demand? I’m just trying to kind of think about the next two, three, maybe four years holistically, Jennifer?

Yes. Great question. So just to kind of remind everybody, we completed this year, it was delayed in part because of the pandemic the ability to increase capacity 40% at our largest facility that manufactures sewer cleaners and hydro excavators in Streator, Illinois. In addition to that, we’ve done capacity expansions that are road marking business at two of our dump truck businesses one in Lake Crystal, Minnesota, and one in Rugby, North Dakota. In addition to that, we’ve significantly expanded capacity at one of our service centers. So, as we move forward, we believe that, we’re in very good shape to support this increased demand. The other thing, I have to do a shout out to the teams. If you look at our access to labor understanding, it can be a challenge from time to time at certain companies, but overall we’re doing pretty well and we’ve just got a great team. And I think that our local management teams do a super job working with our hourly teams, and I believe we’re really well positioned to support the additional order that we expect to see in part due to the infrastructure bill.

Okay. That’s helpful. And then Ian, I appreciate the comments on the $5 million price cost headwinds that going to Q3 and 4Q, how should we think about early 1H 2022 from that perspective? And I just wanted to understand is the vast majority of that headwind in the dump truck book?

Yes. That’s correct, listen most of that is in the dump truck really with the impact of the increase in the cost of steel. So that’s, it’s mainly been out in the dump truck side of things. As we enter kind of the first quarter of next year, we’ll expect, I think what we’re expecting is it to be somewhat neutral and then maybe even start to turn a little bit as we go forward.

Okay. Got it. And then just my last one, aftermarket has obviously been super strong this year. And specifically rental looks like it’s firing on all cylinders. I’m curious if you could comment maybe on your expectations for 2022 from a fleet addition perspective. Do you feel you have enough capacity or should we think about that ramping up? I’m just trying to kind of understand how much that business can grow into 2022 looking at your balance sheet?

Yes. I think that’s exactly right, Felix, as we look forward with the prospects from the infrastructure bill and the economic stimulus package, we continue to expect rental to be a really important tool. Not only for us, but also again, we have a number of strong rental partners. So, we expect to see some good activity with those rental upon is, we’ve had some pretty good strong used equipment sales out of the fleet this year, just with some of the long lead times and the chassis constraints. We’ve seen some really nice demand for used equipment. I think year-to-date, we’re up about $10 million, about 38% year-over-year on the use side. So, there is a need to replenish that fleet and then and then grow it. And we factored that into a plan for 2022.

We also be adding some new products that haven’t been traditionally in the fleet, particularly our road marking equipment. So, we’re excited about that initiative.

Okay. Got it. I appreciate it. I’ll stop there.

Thank you.

The next question comes from Michael Shlisky with D.A. Davidson. Please go ahead.

Good morning.

Hi there. Good morning. This is David on for Mike this morning. I have a question about have any customers express concern about their budgets for new equipment giving the higher prices for fuel, labor costs and other costs?

It’s a question that we ask frequently and the answer is generally no. We have, I mean, nobody likes higher prices, but we’ve been very successful in terms of doing a number of price increases across the vast majority of our businesses. Some of our businesses have had multiple price increases this year and people understand the dynamics of the economy that we’re living in right now in very little cancellations.

That’s very helpful. And then my last question, I – a question on the Deist acquisition, is this a regional company with the business mostly near the Pennsylvania area, or is it already a coast to coast business? And how do you envision expanding the dealer footprint for their products?

Yes. Thank you for asking that question. We’re really excited about this acquisition their product, the Switch-N-Go products can think about it as a system that allows you to use one chassis and multiple different types of bodies on that one chassis. They’ve been growing regionally, primarily east coast right now. And we believe one, we have capacity at other locations to build this product. In addition to that we believe that our relationship with our distribution partners we can also grow product. It’s a very exciting opportunity. Our team is headed out there this afternoon to meet our new employees, and we think this is going to be an important growth engine going forward.

Awesome. Thank you very much.

The next question comes from Greg Burns with Sidoti & Company. Please go ahead

Good morning Greg.

Good morning. Just had a question about the oil and gas market? I know you’ve diversified a lot since the last time oil was at these levels, but can you just remind us maybe how big oil and gas is in terms of revenue currently and maybe what was at the peak in 2007, 2008?

Yes, sure. It was $90 million-ish at the peak. It dropped down to $30 million, the products that we have that target that end market, our hydro excavation equipment or Jetstream equipment. And we have certain of our SSG equipment that targets that market. Again, it is upside for us and we look at it that we’ve got to channel into that market. So as oil prices increase, we think it creates opportunity for the company.

Yes. And I think Greg, for the most part, we have the rental activity, some of that is that equipment is used in the oil industry. With the growth that we’ve seen in rental and also used equipment sales on the aftermarket side, some of that is likely being used in the oil patches. We’ve also seen, as Jennifer mentioned in her comments on the industrial side orders for both our safe digging trucks, as well as the industrial vacuum loaders, they are up year-to-date in excessive 80%. So really good demand for those products, they can be used in many different industrial applications, but they would include oil and gas as well.

Okay. And then since you mentioned a safe dig, I know you’ve invested a lot in that initiative and there’s been a lot of kind of customer education going on in terms of the benefits of that. And I would assume with the infrastructure build is going to be a lot of potential applications for safety and equipment. So, do you have any specific initiatives to target those opportunities leverage kind of the market education you’ve been doing over the last couple of years to stimulate demand for those products?

Yes, absolutely. We continue to rely very heavily on demos, and we found that participation regional trade shows is important, and we continue to develop our utility channel, which is critical. And we believe that the investment that the government is making in broadband internet will be an important catalyst for growth for that product line. The other thing I would add is, as we go into 2022, I’m excited about some of the new product development initiatives that we’ll be announcing relating to our safe digging line of products more to come.

Okay, great. Thank you.

The next question comes from Marco Rodriguez with Stonegate Capital Markets. Please go ahead.

Good morning.

Good morning. Thanks for taking my questions. I kind of wanted to follow up on part of the last question, but just kind of broad perspective of marketing and the infrastructure bill that’s obviously going to be a positive tailwind for you guys. I’m just kind of wondering if you have any sort of new marketing initiatives or activities that you might be launching or helping your distribution partners launch to kind of gather or grab more share of that infrastructure spend is coming, or do you believe that perhaps your brand awareness is there a pretty good point right now?

Well, first of all, there’s always opportunity for improvement. But last year we talked about our reclaiming Tomorrow Together initiative. And as part of that initiative, we invested in acceleration of our digital marketing efforts. And the teams have done a really nice job with that. Both in terms of the amount of material that’s available, the accessibility of that material and the ability to train our end customers easier. We put, for example, beginning this year, there are QR codes on every sewer cleaner that we produce that provide training opportunities at various points on the product. So, we believe that, that initiative is going to be critical in terms of reaching and customers and educating them about the values of our product. We also believe that we’re in a unique position, because we have between us and our dealer partners, we have a complete portfolio of product offering what meaning, whether you want new, used, rental, we’re able to satisfy that customer demand, which is often mixed. And again, we’re also working in terms of developing products that don’t require a CDL license, which is important particularly with some of the marijuana laws that have been passed. And we think we’re incredibly well positioned. We’ve got the products. We’ve got the capacity. And we’ve got the talented people to build the product. So a lot of opportunity for us going forward.

Excellent. Very helpful. And maybe this question is a little bit early, but on the Deist acquisition you mentioned double-digit EBITDA margin. So she has a fair for me to assume that that’s below perhaps your target ranges. And then if you can maybe talk about how you kind of see some of those synergies you mentioned unfolding over the next 12 months to 18 months?

Yes, I think Marco it’s, that’s too currently on a TTM if it’s below our target range, but we think there’s enough room for improvement. So, we can get it within our target range. It’s similar to some of the other acquisitions that we’ve done in the last couple of years. We do believe there are a number of synergies, particularly as Jennifer mentioned about pushing the product through the channel and expanding production into some of our other facilities. So, we think there is – that’s room for improvement of the margin, but also gaining some benefits on the synergy side.

And again, what I’d add there too is, a real credit to our teams and the reputation that they’ve developed in the industry. This is the second example this year of a proprietary deal. And we’re really pleased to welcome the Deist team members to Federal Signal.

Excellent. And then last good question for me, corporate expenses had kind of a meaningful decline sequentially in year-over-year. Were there any sort of one-time items that drove that? Or can you talk about what was going on in that quarter?

Yes nothing, I mean, in terms of the year-over-year change, it was almost as if it’s a timing, real impact of some changes in stock comp and incentive based comp, but on a full year, if you look at the year-to-date, I think it was fairly even about $18.6 million. I think we were down maybe a $200,000 year-over-year. So it was a bigger change in the quarter than it was on a year-to-date basis.

Thank you guys. I appreciate your time.

Thanks, Marco.

The next question comes from Walt Liptak with Seaport. Please go ahead.

Hi, good morning guys.

Good morning Walt.

Hi, I wanted to ask one for Ian, he gave us that $5 million price cost headwind number. And I think you said in your prepared remarks, there were $30 million of revenue that shifted out. And there was also supply chain disruptions to the factory is near people. Can you take a stab at kind of quantifying what the inefficiencies were during the quarter for the timing of shipments and other supply chain problems?

Yes, I mean, well, the $30 million was really, as we, as Jennifer mentioned entering the quarter we had those from commitment dates from the suppliers and those delays, we believe caused an adverse impact on the top-line of about $30 million of what we did ship. The $5 million price costs went was the impact of what was shipped. So that’s – there’s no real overlap with the $30 million there. As it relates to inefficiencies, that’s a bit harder for us to actually quantify it will be – it was, it’s obviously it’s embedded within the gross margin decline that we saw. So, it’s hard to put up an exact pinpoint number on just the general inefficiency because it’s safe to say that we are certainly not offering a normal level of efficiency. I mean, when we have backlogs at this level, we can produce the equipment efficiently, but when you constantly adjusting the production schedule it has an adverse impact.

Okay, great. Yes. And recognizing how difficult it is to get in chassis, how – what are you telling your customers, like what’s the lead times at this point on getting a truck delivered, and, understanding that there’s a lot of different trucks that you make. I wonder if there’s like a ballpark of it used to be three months, now it’s six months, something like that.

Yes. Some of it depends on whether the customer can obtain the chassis, in some situations the customer is able to obtain a chassis and get it to us, and then we can ship it relatively quickly. For many of our businesses, we’re not even taking orders if they don’t have an identified chassis. So in other situations it can vary from, a couple months to six months. But we are a critical part of our strategy in 2022 is to educate our dealer network and our somewhat – in some situations our end customers about the need for them to procure chassis directly. And we think that will mitigate some of the chassis disruption that we’ve experienced in Q3 and we’ll experience in Q4.

Okay, great. And do you – when you look at this chassis situation, you’re keeping up with your cost – with the competitors, are the lead times any difference between yours and competitive products?

That’s not something we’ve heard. In many situations, ours are better, but in general we believe that we’re at least equal and in many situations better.

Okay, great. And it’s great to see the M&A deals happening. Congratulations on that. With the supply chain issues, how are you factoring that in when you’re doing valuations? Because, I guess we don’t really know when this is going to come to an end, so that creates volatility around your own EBITDA, but also around the companies that you’re acquiring, how are you working that into the price?

Yes, I mean, there’s a conservable earn out here. So that’s part of how we’re addressing that issue. We’re also looking as part of the diligence very carefully at steel and what their assumptions are. But again, if you look at the performance of Deist over the last 12 months they’ve grown and their EBITDA margin has been, as we talked about kind of low single digits. And we paid a reasonable multiple compared to kind of what’s going on in the market right now. And we believe that there’s opportunity for improvement going forward. Particularly if you think about, it’s a pretty cool product to Switch-N-Go product, and we believe through our dealer and other distribution channels, there’s an opportunity to grow it across both the U.S. and Canada.

Yes. It looks very innovative. Okay. How is the dealer pipeline looking at this point? Are you comfortable doing more acquisitions?

Yes. In the dealer pipeline is full – acquisitions will continue to be a meaningful part of our growth going forward.

Okay, great. Thank you.

The next question is a follow-up from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Thanks.

Hi, Steve.

You know, you’ve, as you advertise, you’ve been acquisitive and niche businesses over the past few years. Nice diversifier, but naturally it makes modeling tougher for us on the outside. Are you thinking about increasing guidance, transparency for revenue, just to give investors a better benchmark to think about plans versus outcomes?

Yes, we’re thinking about it.

Okay. How long do you think that process will be?

We understand, what you’re saying. It’s an issue is, every time we buy something, it changes though.

Right. Yep.

But I will say we’re very excited about the acquisitions, the multiples we paid and the opportunity that they present for Federal Signal.

I agree. I think it’s a great strategy. I just think it, it has the potential to introduce a lot of volatility to consensus numbers, just because of our inability to really triangulate on what this increasingly diverse portfolio is going to do.

Fair point.

If I look back over maybe five years, your free cash flow margin is running around 7% with you getting more acquisitive, can you talk about CapEx intensity for the three deals you’ve done this deal? What free cash flow looks like for those companies? Are they additive to free cash flow margin? Or will it take awhile for them to get there to where the portfolio is?

I think, Steve yes, when we looked at the Ground Force would be kind of in line with our free cash flow profile Deist, it’s just maybe a tick below, but we expect with some of the improvements and as we push this product through the channel and expand it. We think there’ll be somewhat in line, but I don’t think there’s a huge disparity between the profiles of the two businesses and offering the free cash flow profile.

The CapEx requirements – CapEx requirements are relatively low.

So, we shouldn’t expect to see a big step up in CapEx next year or anything just based on whatever M&A activity you’re undertaking?

Not relating to these businesses. The one item on the CapEx side of things that’s – is on our radar screen is some facilities, we have leases that are expiring at certain facilities. So, we’re looking at some of those in terms of whether a kind of a lease versus buy decision, plus a couple of those locations. That may CapEx to be slightly abnormal for that eventuality.

Understood. And then, you’re – you’ve been taking these discrete tax actions or strategies, which has moved the tax rate around this year. Is that permanently changing the tax rate? Or how should we model that for 2022 and 2023? Just broadly speaking.

Yes, it’s not necessarily a permanent change, it does allow it. So if the benefit was more in terms of just we’re now believe we’re going to be able to use some of the tax assets that previously we didn’t. So it was almost like the release of an allowance for doubtful accounts sites, things. So it’s an asset that we now believe we will be able to use. As we go forward, we would expect the tax rate to be absent any changes in the corporate tax rate. I think our typical run rate is in the 25% range. That’s what we expected entering that’s kind of our normal ebbs in any of these discrete items and assuming no features.

Will these discrete items run into next year or should we just think 25% is the right way to do?

I would say twice. So this would be a kind of, as we look at next year, it would be a headwind with the reset of tax rate so about 25% rate.

Got it. Okay. Thanks.

Thank you.

This concludes the question-and-answer session. I would like to turn the conference back over to Jennifer Sherman for any closing remarks.

Thank you. In closing, I’d like to reiterate that we are confident in the long-term opportunities for our businesses and the prospects for our recent acquisitions. Our portfolio of businesses includes many market leading brands with solid fundamentals. Our foundation is strong and we are focused on delivering profitable long-term growth through the execution of our strategic initiatives. I would like to give a public thank you to all of our employees for their commitment, creativity, and dedication addressing this challenging supply chain environment. I would also like to express our thanks to our stockholders, distributors, dealers, and customers for their continued support. Thank you for joining us today. We’ll talk to you soon.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating. And have a pleasant day.