Good day, and welcome to the Federal Signal Corporation Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ian Hudson, Chief Financial Officer. Please go ahead.

Good morning, and welcome to Federal Signal's second 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 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 being, 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 am going to begin today by providing some detail on our second 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 2023. After our prepared comments, Jennifer and I will address your questions. Our consolidated second quarter financial results are provided in today's earnings release. In summary, we delivered record financial results for the quarter with double-digit year-over-year net sales and earnings growth, gross margin expansion, improved cash generation, a 120 basis point improvement in EBITDA margin, and new records in orders and backlog. Consolidated net sales for the quarter were $442 million, a new…

Thank you, Ian. Impressive execution by both of our groups contributed to a record-setting quarter on many metrics. Within our Environmental Solutions Group, an improving supply chain supported higher production levels and with increased sales volumes, contributions from recent acquisitions, robust aftermarket demand and strong price realization, we were able to deliver a 22% year-over-year net sales increase and a 220 basis point improvement in adjusted EBITDA margin. During Q2, we were again able to increase production levels at our largest manufacturing facility achieving the third successive quarter of production growth as the overall supply chain environment continues to improve. This strong execution contributed to a 35% year-over-year increase in [Technical Difficulty]. And what is typically a seasonally strong quarter, our aftermarket revenues were also up 18% over last year, with particular strength in parts sales. In addition to strong organic growth, our recent acquisitions also contributed with Trackless, our most recent acquisition completed early in the quarter off to a strong start. Collectively, the acquisitions added approximately $22 million to our top line during the quarter. While we are encouraged by the improving supply chain environment, we are still not out of the woods and there continue to be pockets of supply-related disruptions for certain components, like hydraulics and pumps. Given that, we are not yet maximizing our production capacity and continue to experience some inefficiencies. Chassis availability also continues to be a constraining factor within our dump body businesses, particularly for our businesses that build on Class 5 chassis. Our Safety and Security Systems Group again delivered impressive results during the quarter, with record net sales and adjusted EBITDA. SSG's second quarter results included 15% top-line growth and an adjusted EBITDA margin of 21.9%, a 300 basis point improvement compared to last year and above its target range,…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Good morning, Steve.

Hi, Steve.

Good morning. This is actually Christian Zyla on for Steve Barger. Thank you, guys, for taking my questions.

Hi, Chris.

Good morning.

Good morning. My first question is on ESG. If we just take the average of your two best quarters in ESG, I get about $350 million in quarterly sales. Is it reasonable to think you guys can run at that rate or even above for an extended period of time as long as you can get chassis and other components with minimal disruptions? And then…

Yes.

I know you mentioned you're still not maximizing your production capabilities but what needs to happen in the supply chain to get you to that point, and when do you think that happens?

First answer to your question is, yes. The second part is a couple of things. One is we need consistency, so what we're seeing now is episodic-type issues. It is improving supply chain, but we'll have -- we talked about in the prepared remarks, we will have a problem with a particular component, and then we'll have to pull products off the line, until that component becomes available. The good news is, now we are typically talking about weeks not months. So, we're able to solve the problem that contributes to inefficiencies because we often have to retest the vehicles. And we're not running them down the line, but instead, we're bay building. The area that we need to see improvement is chassis availability for our TBI businesses. There still constraints in that, particularly in that Class 5 chassis, which impacted a couple of our businesses. We have the chassis we need for our non-TBI businesses for 2023, but we're continuing to look at opportunities to increase production in our TBI businesses and that's contingent upon chassis availability particularly classified.

Great, thank you. And my second question. I know, M&A deals are kind of far and few between right now. But what types of businesses are you guys interested in? And is your priority still to enhance some of those underperforming dealers and maybe bring them in, from your conversations are higher rates causing more family-owned businesses to maybe consider monetizing at a faster pace to semi-colorful, commentary on that landscape? Thank you.

Sure. As we talked about in the call, we continue to evaluate opportunities. Our pipeline is full. We're looking at a number of different types of opportunities at a number of different sizes. So, we continue to look at specialty vehicle type opportunities. We're looking as you referenced opportunities to continue to grow our aftermarket, and we worked very closely with our dealer partners, particularly when they might be interested, you referenced in some type of liquidity event. So, we're pretty encouraged by the opportunities we're seeing, and we've seen multiples come down. So M&A will continue to play a meaningful part of the growth story of Federal Signal.

Great. And if I could just squeeze one last one.

Sure.

Could you just compare and contrast your visibility for your municipal verse industrial customers? What is the visibility look like for each and within regards to your growing an elevated historic backlogs. Could you kind of parse out, does that skew more one way or another, is that kind of split in terms of the backlogs and orders out there? Thank you so much.

Yes. It's a fairly evenly separate question. We've seen -- With the growth that we've seen in orders, it's been almost across the board, both municipal and industrial. On the one hand, on the municipal side, we've seen some benefits from the American Rescue Plan Act as Jennifer mentioned demand. On the industrial side, that's where the infrastructure bill would typically see some benefits there. So, when we look at the backlog, it's really a nice mix of municipal and then a variety of industrial applications. We talked about the variety of applications for our safe digging products. So it's not necessarily any one particular industrial end market. It's really a variety of them. But there a nice, but there's also some international business in there with the growth that we've seen within SSG on that side of the business too. So yes, a nice healthy mix.

Great, thanks so much.

Thank you.

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

Good morning, Chris.

Hey. Good morning, guys. Good morning and congrats on another incredible quarter.

We would agree.

That's right. Recognizing that much of the infrastructure funding has long tails, I'm just trying to figure out a way to get a sense of how much these bills, the American Rescue Plan Infrastructure Jobs Act, how much have they provided to this point in time versus what you think is going to happen over the next few years. If you gotten 20% of what you think you're kind of get, or is there any way to kind of guesstimate that.

Yes. This pretty good data on the White House website. So I would refer you to that. To date, we really haven't seen a lot of orders from the infrastructure bill. And according to the website, really they're kind of step three of the process where they decided the types. They have awarded the particular programs. And right now, the recipient agencies are kind of agreeing to the conditions of the award. And then after that, they will put those out for bid. And our customers, our contractors will start to respond to those bids, and we're getting a lot of inquiries about look, a particular customer might be aware of a project in their area that's been announced. And they know that they're going to bid on that project. So, they're starting to line up their equipment asking us about availability equipment. But it is something we believe that we haven't seen a lot of the orders, and it's yet to come. So that's one of the reasons we're very encouraged. But, pretty good data on the White House website about where they are in the process. And according to that data, they're still in the negotiation of the award.

Got it, very helpful. When you look at the backlog today little better than $1 billion. Maybe just talk in terms of kind of how you're viewing the pricing of the backlog today versus six months ago, nine months ago.

Yes. As I think, it's -- we're in a good position with the various pricing actions that we've taken. We've also seen some moderation, I'd say in some of the inflation. So, I think we're in a good position as we move forward from a kind of a year-over-year comparison. We started to see some benefits from the pricing actions we took in the second-half of the year, so kind of the year-over-year impact might not be as significant as it was in the first-half.

But we saw a very good strong price realization in the quarter.

Got it. That makes sense. All right, I'll leave it there. Thanks, guys.

Thanks, Chris.

Our next question comes from Mike Shlisky with D.A. Davidson. Please go ahead.

Good morning and thanks for taking my question. You kind of -- yes, hi. Are you kind of beating me too it on the California comments about wanting to variable on the parallel and other infrastructure? Maybe I'll turn to lead pipes, that appears like a starting out very early, but looks like -- it's [Indiscernible] always buried lead pipes around the country, pitching into the soil. Just starting to hit the news headlines for last couple of months or so? I guess, do you see Federal Signal playing a big role and your products and help me to dig up all of those lead pipes safely and get them replaced or am I thinking of this the wrong way as to how they're going to have to remediate all that in the soil?

When I saw the Wall Street Journal article, I circulated it to our teams. There's a -- it's a great perfect application for our safe-digging trucks. And we think, we're in a good position to assist those contractors with those multi-year projects.

Outstanding. I also wanted to just get a quick question on SSG and your EBITDA range. I mean, I think you put up the -- that guidance range up a little higher a few months ago. At this point, you already exceeded it. I'm curious if you feel like maybe you may have undershot things already out of the gate here, maybe it actually is a little bit higher than you had thought just a few months back on a more long-term basis. Are -- were there any temporary items here in this particular quarter unusually supportive of margins due to other price cost to unusual contracts that the kind of one-time in nature. Any kind of commentary on the SSG…

Yes. We had a -- I think we mentioned on our last call, we had a pretty significant fleet order from a customer in Mexico in the first quarter. And some of that spilled over into Q2 in terms of the shipments. So that was kind of an unusually large contract, I would say. That was in the first-half of the year that we'd not necessarily expecting that to repeat in the second-half. We also are aware of, I think, Jennifer mentioned in her prepared comments that Ford is planning to do a model year changeover. So, please vehicle production will be down in Q4 to allow for that changeover. So, that will be a factor in the second-half of the year in terms of the order trends within SSG. So, I think, we're obviously thrilled with the performance of SSG, since we raised the targets. And I think long term we still believe that those targets are appropriate. It can vary quarter-to-quarter. And I think the other thing I've mentioned in Q4, we typically see historically we have seen some unexpected orders as municipalities get towards the end of the year, mainly on the system side. We can tend to see some larger systems orders in Q4. So, that might be something that causes some variability in the margin profile.

But longer term, as I talked about earlier, we're making a number of investments that SSG, with respect to automation in sourcing, and we are very excited about the long-term impact that those investments will have on the margin performance of the business.

Okay. And just a follow-up there. Going into the ESG. It sounds like because you're still facing some supply chain issue is not ready to change that outlook yet. But I'm curious, there are still some challenges in supply chain for that group is probably never been perfect even pre-pandemic has always been. There's always something. How far off are you from pre-pandemic monitor challenges as opposed to anything major currently?

I'll be really blank. We need to see improvement in chassis availability for our TBI business. And we need to see consistency on supply chain, not perfection. But we can't be in positions where we're pulling multiple trucks offline for weeks. But the encouraging news with respect to the supply chain issues. We're getting better, and it's improving. But I would say, we're also looking at waiting for the chassis allocations for 2024 and that's critical as our teams are very focused on building more trucks on BMT and increasing production levels. I'm encouraged by the progress made today. But those factors that I cited are the factors that we're monitoring, but I'll conclude with. We are committed to raising those ESG margin targets and the overall margin targets of the company.

All right, I'll leave it there. Thank you.

Thanks, Mike.

Our next question comes from Walter Liptak with Seaport Research. Please go ahead.

Hey, good morning, guys and congratulations. Great quarter.

Thank you. Good morning, Walt.

Wanted to ask a couple of follow-ups here. On SSG, I think some of the comments are positive and then some moderation at the same time. But then I mean, you've got the third production line coming on and you just mentioned that that's going to have some profit benefits. But then I think when Ian was talking about fleet orders, he was talking about international fleet orders and that something might not repeat. So, I wonder and you talked about the orders coming down in SSG. So I guess the question is, are we going to expect SSG orders to come down? Can you give us some more detail about that and what do you think profitability in SSG looks like in the third quarter with the production ramp, are these profit levels sustainable?

Yes, I think, well the order -- rest in the fleet order that was what we told back in Q1, that was about $111 million order from Mexico. So that was -- It was basically they ordered enough for the full year, so that won't necessarily repeat again in queue -- in the second-half of the year. So that would be a consideration. And then on top of that is the changeover within the fleet business in Q4. So, the second-half orders within SSG probably won't be at the same level as they were in the first-half, but we still expecting healthy order intake as we've made some great strides with some of our new products. On the margin profile, I think we still believe the 17% to 21% range that we gave at the beginning of the year. We still think that's appropriate, and we would expect to be within that range in the second-half of the year.

Okay, great.

I'll add one longer-term. Our teams are very active in international markets. So longer term, there are several major orders that they're working on right now. That over time, we'll continue to see. And then after the forward model changeover which is something that's been planned for a while, we would -- there'll be some catch-up work to as we move through '24.

Okay, great. And I wanted to ask about the outfitting project. How are things going in SSG for the offsetting -- is that a profitable business?

Absolutely. I've been at -- I was in pain during Q2 and the teams, we have two facilities. Now that are focused on offsetting. And what's really exciting is we've been able to secure orders that we wouldn't have otherwise received as a result of that strategic initiative to our teams have done just an excellent job in Europe, in the States were earlier on that journey. But they've had some wins, and we're encouraged by what we're seeing.

Okay, great. And then maybe just the last one. It's nice to see the safe-digging orders. I wonder if you could provide some insight into what kind of customer orders are these? Are you starting to see some of the larger utility fleet orders or any of the service providers or these mostly municipal orders?

Yes, well. The municipal orders would come through as we've talked about on the call, that approximately 75% of our sewer cleaners orders include a safe-digging package. The other -- the orders we were talking about being up year-over-year really on the industrial side of things, and we haven't seen yet the large kind of fleet orders that we're expecting from utility contractors and industrial contractors resulting from the infrastructure funds. So that is more good to come.

Okay, great. Okay, thank you.

Our next question comes from Greg Burns with Sidoti & Co. Please go ahead.

Good morning.

Good morning, Greg.

I just wanted to touch on maybe some of the cross-selling opportunities you have with some of the new acquisitions, more recent acquisitions you've done. Yes, I think you mentioned some opportunities with Trackless to use your distribution to bring that to the U.S. But what maybe some of the opportunities to maybe accelerate growth of some of these brands that you've bought across your footprint? Thanks.

Sure, great question. So, let's start with our Ground Force acquisition. We last year acquired TowHaul and the integration is going very well, and the team our both sales teams are working closely in terms of cross-selling opportunities. We have really strong leadership team out there and we're encouraged by some of those opportunities to-date. With respect to Trackless, we close the transaction this quarter. The integration is going well. We're very focused on. They do an excellent job with respect to winter attachments. They've got a number of great summer attachments. So, we're looking at working with our dealer partners to grow that particular business. But they are off to a strong start. And then in terms of purchasing synergies, our purchasing teams for ESG were closely with our new acquisitions and are identifying opportunities there. And then I'd be remiss if I didn't talk about our efforts in Colorado, Montana and Wyoming. And we're approaching that as it carries our Vector, our Elgin, our TRUVAC brands. Ultimately we'll have TBI brands, our JetStream brand will join that group in September. So there'll be a number of cross-selling opportunities. And then finally, our Blasters acquisition, the teams are working very closely with our MRL Group and our JetStream teams and those integrations are going well. And again, yet another opportunity to pursue cross-selling.

Great, thank you.

Our next question comes from Dave Storms with Stonegate. Please go ahead.

Good morning.

Good morning, Dave.

Good morning.

Just a quick question around pacing. I know there was a lot of optimism last quarter around Q3. Was any of the strengths seen in the second quarter a pull-forward from 3Q or should we think about them separately?

Probably, think about them separately, Dave. I think, we had a strong finish to the quarter. But I still think we're expecting Q3 to be a strong quarter, again it's a seasonally strong period from an aftermarket standpoint and with the levels that we're seeing demand for rental, demand for used equipment, demand for parts. So, pretty strong. We'd expect Q3 to be a strong quarter as well.

That's very helpful. Thank you.

That concludes our question-and-answer session for today. I would now like to turn the conference back over to Jennifer Sherman, Chief Executive Officer for any closing remarks.

Thank you very much. In closing, I would like to reiterate that we are confident in the long-term prospects for our businesses and our markets. Our foundation is strong, and we are focused on delivering profitable long-term growth through the execution of our strategic initiatives. Our employees are working hard to deliver. We would like to express our thanks to our stockholders, our employees, distributors dealers and customers for their continued support. Thank you for joining us today, and we'll talk to you soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.