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Edited Transcript of FSS earnings conference call or presentation 27-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Federal Signal Corp Earnings Call

OAK BROOK Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Federal Signal Corp earnings conference call or presentation Thursday, April 27, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ian A. Hudson

Federal Signal Corporation - Interim CFO, Corporate Controller and VP

* Jennifer L. Sherman

Federal Signal Corporation - CEO, President and Director

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Conference Call Participants

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* Christopher Paul Moore

CJS Securities, Inc. - Research Analyst

* Marco Andres Rodriguez

Stonegate Capital Markets, Inc., Research Division - Director of Research and Senior Research Analyst

* Robert Stephen Barger

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Walter Scott Liptak

Seaport Global Securities LLC, Research Division - MD of Diversified Industrials and Senior Industrials Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Federal Signal Corporation first quarter earnings conference. Today's call is being recorded. At this time, I would like to turn it over to Ian Hudson. Please go ahead, sir.

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Ian A. Hudson, Federal Signal Corporation - Interim CFO, Corporate Controller and VP [2]

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Good morning, and welcome to Federal Signal's First Quarter 2017 Conference Call. I'm Ian Hudson, the company's Interim 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 the earnings news release that 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 news 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 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 first quarter financial results. Jennifer will then provide an update on our markets and some of our strategic initiatives including a review of our acquisition criteria before wrapping up with our thoughts on our outlook for the remainder of 2017. After our prepared comments, Jennifer and I will address your questions. Our consolidated first quarter financial results are provided in today's earnings news release.

Overall, our first quarter results exceeded expectations. Consolidated net sales for the quarter were $178 million, up 3% compared to the prior-year period. Operating income of $11.3 million was down from $16.1 million last year. The first quarter of last year was atypical in that it was the strongest quarter of the year, and we benefited from entering the year with a backlog that contained higher-margin orders for products in oil and gas markets. The reduced operating income in Q1 this year includes the impact of a $2.7 million increase in depreciation and amortization expense, largely resulting from the depreciation of the rental equipment acquired in the prior-year Joe Johnson Equipment transaction.

Operating income in Q1 this year also included $0.5 million of acquisition-related expenses, $0.5 million of purchase accounting expense effects and $1 million of combined restructuring and executive severance costs. In Q1 last year, we incurred $0.5 million of acquisition-related expenses and $1.2 million of restructuring charges. Excluding these costs, consolidated operating margin was 7.5% compared to 10.3% a year ago. Given the changes in our mix of businesses over the last year, we believe that referring to comparisons to EBITDA is becoming a more relevant measure of our underlying operating performance. On that basis, consolidated adjusted EBITDA in Q1 this year was $18.9 million compared to $20.8 million a year ago. That translates to a consolidated adjusted EBITDA margin of 10.6% in Q1 this year compared to 12% a year ago.

Income from continuing operations was $7.2 million in Q1 this year, compared to $10.4 million last year. That translates to GAAP EPS of $0.12 per share, which compares to $0.17 per share last year. On an adjusted basis, EPS for Q1 this year was $0.14 per share, which compares to $0.19 per share last year.

Total orders for the quarter were $215 million, up $79 million or 58% compared to the prior-year quarter. In addition, the company reported sequential order improvement in Q1 this year, with total orders up $49 million or 30% compared to the fourth quarter of 2016. Jennifer will talk about some of the contributing market factors in her remarks.

Consolidated backlog at the end of the quarter was $174 million, up $37 million or 27% from the end of 2016 and up a similar amount in comparison to the prior-year quarter.

First quarter sales at ESG were $128 million, up $12 million or 11% primarily due to $23 million of incremental net sales resulting from the Joe Johnson acquisition. This improvement was partially offset by lower shipments of sewer cleaners and street sweepers in the U.S. Despite the sales improvement, ESG's reported operating income of $10.3 million was down from $16.5 million in the prior-year quarter. The reduction in ESG's operating income includes the recognition of the increased depreciation and purchase accounting expense that I just mentioned as well as negative operating leverage and unfavorable changes in sales mix.

ESG's adjusted EBITDA in Q1 this year was $15.5 million, compared to $18.3 million a year ago. That translates to an adjusted EBITDA margin of 12.1% in Q1 this year, which compares to 15.9% last year.

ESG's first quarter orders of $167 million were more than double its reported orders in Q1 of last year and were up $46 million compared to the fourth quarter of 2016.

SSG reported a $1.5 million improvement in operating income in Q1 this year, despite a $7.4 million decrease in sales which was largely due to lower sales of public safety products and outdoor warning systems. The increased operating income reflects benefits associated with material and labor cost reductions, resulting from initiatives implemented last year as well as lower restructuring charges. SSG's adjusted EBITDA for Q1 this year was $7.7 million and its adjusted EBITDA margin was 15.4%. Both improved in relation to Q1 last year when SSG's adjusted EBITDA was $7.2 million and its adjusted EBITDA margin was 12.5%. Orders at ESG were down $4.5 million, primary due to lower orders for public safety products and outdoor warning systems. As we noted previously, most of SSG's business normally operates with relatively low backlog. Corporate operating expenses of $4.5 million were relatively flat compared to last year.

Turning now to the income statement. We reported a 3% net sales increase in Q1 of this year, yet gross profit was lower in comparison to a relatively strong Q1 last year. Consolidated gross margin was 24.5% for the quarter, down from 27.4% last year, largely due to the same factors that impacted the comparisons of group operating margins that I just alluded to. Selling, engineering, general and administrative expenses of $31.5 million were up 6% compared to the prior-year quarter, primary due to the addition of expenses associated with the Joe Johnson Equipment, which was acquired in June last year.

As I just mentioned in Q1 this year, we incurred $0.5 million of acquisition-related expenses, which was unchanged from the amount recognized in the prior-year quarter. In addition, we recognized lower restructuring charges at SSG. All of these factors roll into the company's $11.3 million of first quarter operating income. Other items affecting the quarterly results included $200,000 increase in interest expense associated with higher average debt levels and a $400,000 reduction in other income. These were partially offset by the absence of $300,000 of debt settlement charges incurred last year in connection with the company's debt refinancing.

Tax expense for the quarter was down as a result of our lower income, with an effective tax rate for the quarter of 34.5%, which was slightly lower than the rate in Q1 last year. Our full year effective tax rate for 2017 is currently expected to be between 34% and 35%, assuming no change in U.S. corporate tax rates. From a cash perspective, we are projecting a cash tax rate of approximately 20%. The difference between our effective tax rate and our cash tax rate relates to the use of deferred tax assets to reduce our tax payments.

On an overall GAAP basis, we've therefore earned $0.12 per share from continuing operations in Q1, compared with $0.17 per share in Q1 last year. To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior quarters. In the current-year quarter, we made adjustments to GAAP earnings per share to exclude restructuring charges, executive severance costs, acquisition-related expenses and purchase accounting expense effects. On this basis, our adjusted earnings from continuing operations for the first quarter were $0.14 per share, compared with $0.19 per share in Q1 last year.

Looking now at cash flow, we generated $13.7 million of operating cash flow in Q1 this year, up $20.4 million compared to Q1 of last year. The first quarter is typically a period in which our business add working capital. We began 2017 with higher working capital levels than when entering the prior-year. Partly due to the acquisition of Joe Johnson Equipment, whose inventory levels at any point in time can fluctuate based on demand given its distribution model. In addition, the first quarter of 2017 included improved accounts receivable collections and extension of accounts payable, which were largely timing related. As a result of these factors, operating cash flow in Q1 this year benefited from a lower increase in working capital than in comparison to Q1 last year. The improved cash flow generation helped increase our cash position, and we ended the quarter with $57 million of cash, a $6 million increase from the end of last year.

Total debt at the end of the quarter was $65 million and our debt leverage remained low. We also had $243 million of liquidity available under our credit facility. We continue to be in an extremely strong financial position. At this point, we have significant flexibility to invest in organic growth, pursue acquisition opportunities and return value to stockholders. On that note, we paid a dividend of $0.07 per share during the first quarter, amounting to $4.2 million, and we recently announced a similar dividend for the second quarter. That concludes my comments, and I'd now like to turn the call over to Jennifer.

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [3]

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Thank you, Ian. I'd like to start by providing some color on the first quarter. As Ian mentioned, we entered 2017 with a smaller backlog that carried a reduced margin than in prior year, due to lower industrial demand that persisted throughout most of 2016 and a higher concentration of orders for products manufactured by other OEMs. As such, we were expecting a soft first quarter, but we're pleased to report results that exceeded both revenue and earnings expectations.

During Q1, our Safety and Security Systems Group saw similar operating margin benefits to those experienced in Q4 of last year, resulting from actions taken last year to rightsize the business and reduce material costs. We are also pleased to report significant increases in orders, both sequentially and in comparison to the first quarter of last year. In fact, our first quarter orders were the highest reported orders for our current group in any quarter for at least the last 10 years. The year-over-year order improvement was largely driven by increased orders within the Environmental Solutions Group, which reported orders of $167 million in the first quarter of 2017, more than double its reported orders in the prior-year quarter. This improvement was largely driven by organic order growth in excess of $30 million as well as the effects of the prior-year Joe Johnson Equipment acquisition.

The sequential order improvement was primarily driven by a $46 million increase in orders within the Environmental Solutions Group, largely represented by improved industrial demand for sewer cleaners and vacuum trucks, higher municipal orders for street sweepers and increased orders for the distribution of refuse trucks. Our municipal markets, which had historically represented about 60% of our revenues, remained steady overall. In Q1, strong municipal demand for Street sweepers and sewer cleaners within ESG has been partially offset by some recent softness in orders for products of our Public Safety Systems business. These are part of our Safety and Security Group that provides lightbars, sirens and related products to municipal customers and the police/fire and heavy-duty market.

On the industrial side, we are starting to see some signs of encouragement in our end markets, and we noted solid improvement in U.S. industrial orders during the first quarter. We also saw strong demand for our new Wolf hydro-excavator, a recent new product introduced by the Westech business that we acquired last year.

We have previously talked about the hangover effects from the downturn of oil and gas markets in recent years and the impact within the Environmental Solutions Group of an influx of used equipment at drastically reduced prices from entities that are experiencing financial difficulty. In this respect, one of the key data points that we monitor is the amount of used equipment that is available at auction houses. The latest available data indicated there were less than 80 vacuum trucks and hydro-excavators currently available at auction, which is a meaningful reduction compared to the same time last year. In addition, we are pleased with the progress we have made to date on our strategic initiative to diversify our end markets by expanding into the utility market. We have a dedicated team focused on increasing in sales of the paraDIGm, the purpose-built vacuum truck specifically designed for that market, which was first launched from our revamped innovation initiative.

Our team has been busy demonstrating the product features to potential new customers, conducting over 40 demos per month. We've also been encouraged by the team's efforts to build brand awareness, and their ability to generate orders for the paraDIGm. We expect sales of the paraDIGm in 2017 to be more than double last year's levels. We have also noted increased upselling opportunities, with multiple instances noted in the first quarter, where the demonstration of paraDIGm has translated to the sale of either a Prodigy or a full-size hydro-excavator unit to new customers. In the first quarter of 2017, we sold the same number Prodigy hydro-excavators as we did in all of 2016.

Our financial position is stronger than ever, which helps us continue to fund investments in organic growth initiatives, pursue strategic acquisitions and return value to shareholder. Earlier this year, we introduced a goal to exceed $1 billion in revenues by 2020. We expect that strategic acquisitions will be a meaningful part of that growth. In anticipation, over the last 2 years, we've added a number of people to our team with extensive M&A and integration experience. Earlier this month, we welcomed David Martin, our new Chief Operating Officer who has a strong operations, M&A and integration background. We intend to continue to apply a disciplined approach in evaluating potential future acquisitions, and we expect acquisitions will play a meaningful part of our growth in 2017 and beyond.

With that, I'd like to take this opportunity to review the business and financial criteria that we consider in evaluating potential acquisitions. First and foremost, we look for opportunities that will accelerate our strategic initiatives or provide a platform for growth in adjacent markets or new geographies. We look for companies that have leadership position in niche markets and demonstrate sustainable competitive advantages, similar to our current portfolio of businesses. Ideally, we would also be able to identify synergies, including leveraging the collective distribution channels, our expertise in manufacturing and benefiting from the implementation of our established 80/20 principle. Outside of product-line acquisition, we also place significant emphasis on the importance of a strong management team, particularly if the business operates in a new or adjacent market.

We had previously spoken about our goal to diversify the mix of our revenues from a 60% municipal, 40% industrial split to a more balanced mix. And therefore, we tend to have a bias towards industrial-focused opportunity.

Of the financial characteristics. We target companies with solid growth potential, long-term margins that are comparable to or better than our established operating margin targets, healthy cash flow and a return on invested capital in excess of our cost of capital. If we find the right acquisition, we are committed to staying disciplined in terms of valuations. These are the same principles we applied last year in successfully completing the acquisition of Joe Johnson Equipment and Westech.

I would like to move on to our earnings outlook. We were encouraged by the significant sequential and year-over-year increase in orders, particularly within our legacy businesses. We also saw a sequential increase in orders for the distribution of new product lines acquired in connection with the Joe Johnson Equipment transaction. We are starting to see some signs of momentum on the industrial side and are making good progress with our initiative to expand into the utility market. At the same time, our municipal markets continue to be steady overall.

When we issued our 2017 outlook in February, we indicated that our quarterly earnings in Q1 would be the softest of the year. We also noted the recent uptick in orders, including the increase in U.S. industrial orders since December of last year. These trends continued through the end of the first quarter. While it is still early days, the first quarter order improvement gives us confidence in our full year outlook. At this time, we are reaffirming our full year 2017 adjusted EPS outlook of $0.70 to $0.78.

Before we move to questions, I would like to call your attention to our annual report video that recaps our key accomplishments in 2016 and plans for future growth. We previewed this video at our annual meeting of shareholders last week and it's posted on our website under the Investor tab. With that, I think we're ready to open the line for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Chris Moore from CJS Securities.

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Christopher Paul Moore, CJS Securities, Inc. - Research Analyst [2]

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Yes, so just, you had talked about previously the first quarter being -- earnings being 14% to 16% of the year's. Is that number -- just trying to understand how to look at that -- is that number adjusted up a little bit, given that the results were a little bit better than you were looking for? Or -- because obviously that implies a higher kind of guidance range for '17.

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Ian A. Hudson, Federal Signal Corporation - Interim CFO, Corporate Controller and VP [3]

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Yes, I think, Chris, that the 14% to 16% was kind of, probably more of a point-in-time number that we when we gave our outlook range at the end of February. Q1 did end up a little better than we were expecting. There were some benefits on the margins at SSG that probably weren't factored in when we gave the Q1 -- the Q1 14% range -- sorry, 14% to 16% range. So we continue to believe that at this point in time the outlook range we gave in February is appropriate.

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Christopher Paul Moore, CJS Securities, Inc. - Research Analyst [4]

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Got you. Okay. Sounds like you had a good quarter for the Prodigy excavators. The margins on those are at the high end of what you guys sell or ...

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Ian A. Hudson, Federal Signal Corporation - Interim CFO, Corporate Controller and VP [5]

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They're good margin products. They're not as good as the hydro-excavators come in 3 sizes. The ParaDIGm, which is a smaller size, the Prodigy which is a midsize and then the full-size hydro. The full-size hydros are the really strong margin products. The Prodigy margins are very good, and what we've seen is we -- we've seen some pull-through from our utility initiatives on the ParaDIGms, where we're now seeing some up-selling of the Prodigys. They're still a good-margin product.

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Christopher Paul Moore, CJS Securities, Inc. - Research Analyst [6]

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Got you. And in terms of the operating margins on the ESG, I know it's a little bit -- you need to add back in some of the adjustments and things like that. But, moving forward in '17, is the number -- the 8.1% for Q1, is that something that can be bettered in the balance of the year? I know it was lots of things that you talked about, operating leverage, et cetera, but can we get back to double digits on that?

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Ian A. Hudson, Federal Signal Corporation - Interim CFO, Corporate Controller and VP [7]

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I think, Chris, one of the things that we made reference to on the call was just the impact of the depreciation expense on that rental fleet, and as we move forward, one of the things that we are going to also start probably referring to is EBITDA margin, just in reference to that. So we'll be putting out, as we do with the long-term operating margin targets, we'll be putting out some long-term EBITDA margin targets as well. And those should be -- those -- I think on an EBITDA basis, when you strip out the depreciation effects, you'll certainly see the double-digit margins for ESG.

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [8]

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We talked about last year the impact that volume has on those margin targets. And as we move forward through the year, that's something that we'll continue to monitor closely. And we expect to see some upside.

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Christopher Paul Moore, CJS Securities, Inc. - Research Analyst [9]

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Got it. And last question, just in terms of -- sounds like your M&A pipeline is getting pretty full. Is there, from an initial leverage standpoint, is there, kind of a level that you're comfortable at? Initially, if you see something that's a little bit bigger than what you might have thought initially?

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [10]

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We've talked about a 3x leverage, if there's a clear path to delever.

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Operator [11]

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And our next question comes from Steve Barger from KeyBanc Capital Markets.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [12]

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Yes, I'll go back to the nice uptick in orders. I -- sorry if I missed this, but is any of that activity for stocking orders for dealer or rental or are those all for end users?

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [13]

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They're primarily for end users.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [14]

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And -- so all those orders ship in the next quarter or 2?

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [15]

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Correct.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [16]

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And so as you look, I know it's fairly early, only a month into 2Q, but are you trending to a book-to-bill above 1 in 2Q in ESG as well?

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Ian A. Hudson, Federal Signal Corporation - Interim CFO, Corporate Controller and VP [17]

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We certainly did in Q1. I think we are encouraged by the orders that we saw in ESG in Q1. I think it's still early days, there's still some uncertainty in the industrial markets. We were encouraged, obviously, with the uptick in industrial. But there's still some hesitation about capital outlays. We also had -- entered the year with a pretty low backlog, so there were some of that -- is building our backlog back to kind of a more sustainable level. But we'll -- I think we'll probably have more visibility -- we haven't finished April yet, so we want to see the orders for April. And then we'll come back probably at the end of the second quarter when we have more information.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [18]

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Okay. Well, I guess to that point, you saw signs of momentum in industrial. What are you seeing that makes you think things are turning?

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [19]

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There are a couple of things that we look at. We're encouraged by the progress, although we're in early days, on our utility initiative. We expect this year to double the sales of our ParaDIGm product line, and we've also seen pull-through to some of our hydro product line. With respect to oil and gas, we haven't factored any meaningful improvement in those markets in 2017. We have seen -- the amount of used equipment at the third-party auctions reduced. In addition to that, the service work for that type of equipment, we monitor that also closely, and we've seen that increase.

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Ian A. Hudson, Federal Signal Corporation - Interim CFO, Corporate Controller and VP [20]

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One other thing, Steve, that we have seen that -- that's an encouraging sign, is we've seen some pretty good utilization rates from our rental fleet on the hydro-excavation equipment. What that might suggest is that, that while the rental utilization is good, it might suggest the people are opposing in terms of purchasing the equipment outright but that's one of the benefits the rental fleet has for us.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [21]

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Right. Well, I guess on hydrovac specifically, given some of the new product introduction, is it your view that, that business is up year-over-year in 2017 versus last year?

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [22]

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Yes.

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Ian A. Hudson, Federal Signal Corporation - Interim CFO, Corporate Controller and VP [23]

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Yes.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [24]

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And if I heard right, the ParaDIGm and the midsized trucks are grower faster than the big ones. Is that a function of weight-restriction regulations at all in certain geographies? Or what's driving that mix?

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [25]

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No, it's really -- it's a purpose-built product for the utility market. And this is a new initiative for us. Historically, we haven't done a lot of business in the utility market. We now have a portfolio of product and a dedicated channel. We're starting to see the benefits of that initiative.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [26]

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So true success in the marketplace with the new product introduction?

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [27]

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Correct. And I would add there that we are also encouraged by in the introduction of our Wolf product line from the Westech business that we acquired last year. We introduced the product at our large trade show in February. We're in very days, but it's off to a strong start.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [28]

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All right. Now I'll just ask one more and get back in line. Can you talk about lead times for the big purchased items right now whether it's chassis or anything else. Are you seeing those stretch to you, or is everything still flowing pretty smoothly?

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [29]

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Everything is flowing pretty smoothly.

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Operator [30]

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(Operator Instructions) Our next question comes from Walter Liptak with Seaport Global.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD of Diversified Industrials and Senior Industrials Analyst [31]

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I wanted to go back to that first question about guidance. You were thinking about the orders and the way that the first quarter trended. I wondered if we could just revisit why you didn't pick up your guidance for the full year?

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [32]

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Now in February, we talked -- when we set the guidance, we had talked about the order trends that we were seeing in December, January and February, which were improving, and we factored that into the guidance. We also noted that the first quarter was going to be our softest quarter, so there was going to be meaningful improvement in quarters 2, 3 and 4. So the increased order trend gave us confidence that -- in the full year guidance, and we'll be able to achieve that improvement in quarters 2, 3 and 4.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD of Diversified Industrials and Senior Industrials Analyst [33]

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Okay. Let me ask you a little bit about the orders. I wonder if you could -- maybe the best way to look at it is sequentially, the orders that you took in this quarter around the vehicle part of the business. Can you break out for us, what kind of products is this for. Was it largely the sweepers and sewer cleaners, and how much of it is -- I think those refuse would be a pass-through through the rental -- or through the -- through Joe Johnson. I was wondering if you could just parse out us what kind of products they are that work out -- that were ordered?

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Ian A. Hudson, Federal Signal Corporation - Interim CFO, Corporate Controller and VP [34]

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So well, well, of the -- sequentially our orders were up almost $50 million from Q4 last year. Of that, $46 million came from Environmental Solutions Group. About half of that improvement was the organic improvement in our legacy business and about half of that was from Joe Johnson, from the acquisition. And then within -- of that improvement at Joe Johnson, about half of it was for products that somebody else manufactured and half of it was for our products. So it's kind of a mixed bag. There is -- on the products that we manufacture, the improvements were really from industrial markets, for sewer cleaners and vacuum trucks, and then we also saw higher demand -- from municipal orders of street sweepers.

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [35]

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What's most encouraging was, is -- the improvement is not just driven by one particular business. It's really our Vactor, Elgin and Joe Johnson businesses.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD of Diversified Industrials and Senior Industrials Analyst [36]

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Okay, great, yes. I wondered if you could tell us a little bit about selling prices. We've seen raw materials and I think chassis prices have been up recently as well. How are you -- how are we doing on price and price cost?

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [37]

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We operate in competitive markets as you know. But we manufacture premium products, and we've been able -- we have several programs in place regarding pricing discipline, and we've been able to increase our prices this year, and we're confident in our ability to continue to do so.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD of Diversified Industrials and Senior Industrials Analyst [38]

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Okay. Great. In the -- you talked a little bit more about M&A, and you've got some fairly large targets out there for acquisitions -- the aspirations for acquiring businesses. What does the pipeline look like this year? Do you think you'll be able to get one?

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [39]

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Yes, it's always difficult to know until you sign the deal. But our pipeline is active, and we're looking at a number of different opportunities. And we tried to lay out for you guys on the call in terms of criteria that we're looking at.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD of Diversified Industrials and Senior Industrials Analyst [40]

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Okay. You've done share repurchases in the past. You repurchased stock this quarter? And what's your feeling on share repurchase?

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Ian A. Hudson, Federal Signal Corporation - Interim CFO, Corporate Controller and VP [41]

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We didn't do any share repurchases in Q1. Well, in terms of our priorities, we tend to prefer investing in organic growth first, then we look at acquisitions, then we pay dividends. We paid a dividend of $4.2 million in Q1, and did a similar -- just announced a similar one for Q2. And then we look at opportunistic share repurchases and we'll continue to do that through the rest of the year.

In terms of remaining authorization, we still have about $31 million left under our authorization for share repurchases.

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Operator [42]

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And our next question comes from Marco Rodriguez from Stonegate Capital Markets.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research and Senior Research Analyst [43]

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Just a real quick housekeeping item, do you by chance have the gross margins per segment?

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Ian A. Hudson, Federal Signal Corporation - Interim CFO, Corporate Controller and VP [44]

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We do. We do, Marco. Those are going to be disclosed in the Q when we file that. I don't have them handy right now, but when the Q is filed shortly you'll see them in those materials.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research and Senior Research Analyst [45]

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Got you, okay. Just kind of coming back and circling around the ESG group. Obviously, operating margins are somewhat depressed here, partially because of the D&A, but then also you've got the negative operating leverage that you guys have pointed out fairly consistently. Just wondering if you have done anything in terms of the cost structure to kind of help alleviate that negative operating leverage, and if so, is there a new revenue run rate where you kind of start to break even on that operating leverage, and then you kind of get the positive effect going forward?

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Ian A. Hudson, Federal Signal Corporation - Interim CFO, Corporate Controller and VP [46]

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Yes, we've taken some of the SG&A cost out the ESG business and it's probably not clear in the comparability of the numbers because of the addition of the acquisitions. But if you take into account the acquisition and normalize it, then we've taken some fixed costs out of ESG. We've continue to look at the cost of our materials. In terms of leverage, obviously, Q1 of this year, we had some pretty low sales volumes. What gives us encouragement going forward is any uptick in orders -- well it will hopefully help our volumes moving forward and that should help us on the -- as we can get more equipment through our factory, and we should get the benefits from that operating leverage.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research and Senior Research Analyst [47]

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Got you. And just to clarify, if I heard you correctly on the order uptick you guys saw here in Q1 for ESG and I guess the company in general, what -- was it fairly spread between industrial and municipal? Did I get that correctly?

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [48]

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Yes.

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Ian A. Hudson, Federal Signal Corporation - Interim CFO, Corporate Controller and VP [49]

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Yes, of the $50 million sequential improvement, I said $46 million was ESG, and then of that amount, it was a fairly even split between our legacy businesses and then Joe Johnson. Within the legacy businesses, we saw both higher municipal orders for street sweepers as well as higher industry demand for sewer cleaners and vacuum trucks. So as Jennifer said, it was really across the board, it was a -- we saw some nice improvement.

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [50]

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And it's this broad-based improvement that gives us encouragement.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research and Senior Research Analyst [51]

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Got you, got you, okay. And to follow-up some of the questions here in the M&A pipeline. Could you maybe kind of put a little bit more color in terms of, do you have more opportunities now compared to, let's say, the same time last year? And are the valuation numbers that you're looking at, are they somewhat attractive, a little stretched? Any additional information there?

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [52]

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As you know, we bought 2 companies last year and I would say, our acquisition pipeline, as we previously reported, is an important part of our growth story. So we're active in the market, and then we'll continue to do. So with respect to valuations, we will be disciplined. And regardless of what's in the marketplace, we've walked away from a number of acquisitions because of valuations that didn't make sense for Federal Signal, and we will continue to employ that disciplined approach going forward.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research and Senior Research Analyst [53]

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Got you. And last quick question, I'll I jump back in queue. Working capital here during the quarter was obviously very helpful to your cash flow, and you did note some timing issues with the payables. Is there anything in there that is, I guess, kind of sustainable, that you should see more of an addition to cash flow from working capital? Or is it just kind of an aberration, everything kind of hit at once here for Q1?

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Ian A. Hudson, Federal Signal Corporation - Interim CFO, Corporate Controller and VP [54]

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I think, Marco, the thing is difficult to predict sometimes is with the inventory levels at JJE. I mean, they saw some strong orders in Q1. Those -- to fill those orders, you need a lot of inventory. So some of the timing effects of carrying the inventory with JJE's distribution model can cause some swings in working capital and can result in our cash flow being a bit more -- a little bit more volatile than maybe it historically has. There's a number of initiatives we have in place to improve the working capital in terms of collections, in terms of improving terms and then things like that. So we'd expect it be difficult to predict, but I think in terms of the legacy businesses, as we have some improvements that we're planning on implementing.

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Operator [55]

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We have a follow-up question from Steve Barger with KeyBanc Capital Markets.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [56]

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Sorry, I was muted. So question about your new COO, if he's in the room. I think you said that he'll be helping out with the acquisition focus. But is there a priority list for his initial kind of actions internally?

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [57]

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Yes, he is in the room. We're thrilled that he's joined the company. Initially, we have a lot of different projects going on. Both on our SSG and our ESG businesses report directly to Dave. So he's working, I would say, the majority of the time, with those businesses. But he will be integrally involved in any acquisition with respect to both the evaluation of the acquisitions and the integration of the acquisitions. So we're very fortunate to have his skillset, and we think they really are perfect with respect to the types of growth that we anticipate for Federal Signal going forward.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [58]

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Understood. And you did have some acquisition-related charges in the quarter. Was any of that related to due diligence for potential deals, or was that all for prior activity?

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Ian A. Hudson, Federal Signal Corporation - Interim CFO, Corporate Controller and VP [59]

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So the piece of that, Steve, relates to every quarter, at least for the next couple of years, we have to remeasure the fair value of the earnout for Joe Johnson. That flows through that line. So about half of that charge related to -- basically, just the accretion of the discount we took just to record our present value. There were some nominal expense relating to some exploratory due diligence that we conducted.

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Operator [60]

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(Operator Instructions)

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Jennifer L. Sherman, Federal Signal Corporation - CEO, President and Director [61]

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In closing, I'd like to reiterate that we are confident in the long-term prospects for our businesses and our markets. We would like to express our thanks to our stockholders, employees, distributors, dealers and customers for their continued support. Thank you for joining us today.

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Operator [62]

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That concludes today's conference. Thank you for your participation. You may now disconnect.