Q1 2020 Earnings Call

Greetings and welcome to the Federal Signal Corp, first quarter 2020 earnings conference call. At this time, all participants are any listen only mode.

Question answer session will follow the formal presentation. It's been once you require operate assistance during the conference. Please press Star then well on your telephone keypad.

As a reminder, this contract being recorded.

I'd now like to turn the conference over to your host Mr. Hudson Chief Financial Officer. Please proceed sir.

Good morning, welcome to Federal Signal's first quarter 2020 conference call I mean, Hudson, the company's Chief Financial Officer.

Also with me on the call today, as Jennifer Sherman, <unk>, President and Chief Executive Officer.

We were supposed to some presentation slides today as well as to the earnings news release, which we issued this morning.

Slides can be followed online by going through our website federal signal dotcom clicking on the investor call icon and signing into the webcast.

We've also posted a slide presentation and the earnings release under the Investor tab on our website.

Before I called it to turn the call I'd like to Jennifer like to remind you that sounds all comments made today may contain forward looking statements that are subject to safe Harbor language found in today's news release and in federal signal filings with the Securities and Exchange Commission.

These documents are available on <unk> website.

A presentation also contains some measures that are not in accordance with U.S. generally accepted accounting principles.

<unk> earnings release on filings, we reconcile these non-GAAP measures to GAAP measures.

In addition, we will file form 10-Q later today.

Jennifer is going to kick things off today with some introductory comments I will then give some more details on <unk> first quarter financial result, before turning the call back to Jennifer to discuss the impact of the Corona virus pandemic on current current operations and its effect on our outlook for the rest of the.

After that we will open the line for any questions with that I would now like to turn the call I would to Genesis. Thank you and.

These are not normal times and I'm going to start this call non traditional matter with the conclusion.

The conclusion is federal signal is well positioned to weather the storm and we will continue to grow and thrive in the long one.

Our portfolio of businesses include many market, leading brands was solid fundamentals.

We have a strong financial position a history of robust cash flow generation, a culture of winning a clearly defined strategy and an experienced team with a proven track record of anticipating issues and proactively implementing responses.

The Corona virus has not changed any of these factors.

We had a great first quarter, we expect the second quarter will be tough and at this time the rest of year remains uncertain.

We have record backlogs that will allow us to both adjust and optimize our production schedules to serve our customers.

We have also created several new offensive strategies with our reclaiming tomorrow together initiative that will create opportunities for new products and potential for acquisitions, we have outstanding people ample liquidity quality businesses and we have acted swiftly and.

Decisively to keep our employees say.

I'd like to start by giving my profound thanks, each of our employees for their commitment over the past several weeks.

The Corona virus pandemic has impacted almost every aspect of our daily lives one of the stark realities of this pandemic is that virtually all participants in our highly integrated economy, including our employees our customers our dealers our suppliers that are in fosters are facing economic challenges and personal uncertainty.

Is there not have their own making and over which they have limited control. Despite these unprecedented didnt challenges I've been so proud of the positive attitude and add up <unk> ability that I've seen from our employees.

As a company our mission statement has never been more relevant our products move material clean infrastructure and protect the communities, where we work in live.

Our businesses are considered to be essential and supporting critical infrastructure needs in public safety.

During this global pandemic, the prospect of clogs sewer lines potentially containing the virus. The causes cobot 19 are worth a backup in sewage waste into our environment. It's something we need to avoid the various stay at home orders issued around the country are placing dramatically higher demand on community waste water sewer and storm.

Water systems, and we play an essential role and providing parts service and equipment to support our municipalities governments and utilities in their efforts cleaning the central function of many of our products has never been more essential.

We also provide first responders with critical equipment and outfitting services, both domestically and throughout the world.

Wow certain of our operations have been affected by temporary facility closures either due to government issue mandates or other cobot 19 related issues. Our facilities have so far remained substantially operational during the pandemic.

The outstanding results that we were able to deliver an exceptionally difficult circumstances during the first quarter, where a testament to the quality of our businesses the commitment of our employees and the agility of our teams on a consolidated basis, our net sales were up 4% compared to last year and our operating income improved by.

25%, our adjusted EBITDA margin for the first quarter was 15.3% towards the higher end of our target range and up 220 basis points from last year.

We also reported a 2% improvement in orders contributing to a record backlog at the end of the quarter. Our first quarter performance was even more notable given that we started to see some of the negative impacts from the krona virus pandemic had been March.

Since the outbreak of the pandemic a critical area of focus has been the health and safety of our employees and I'd like to take a minute to talk about some things that we've been doing with that in mind.

Towards the end of February when the first cases were reported in the U.S., we began proactively securing cleaning supplies and developing plans to protect the safety wellbeing of employees at each of our facilities.

We also formed an internal Kobin task force led by our Chief operating Officer, Mark Weber and established centralized protocols for addressing corona virus related issues.

We were proactive in implementing enhanced health and safety measures across the organization, establishing remote working arrangements, where possible and increasing the frequency of communications to reinforce health and safety guidelines.

We have a daily five o'clock pulse call with our executive leadership team to discuss ongoing developments and share best practices on how we can continuously improve our supportive employees suppliers dealers and customers. During this pandemic, we and each call with one team member presenting their positive thought for the day.

Candidly some days have been easier than others honest accurate and frequent communication is one of the guiding principles, we continue to operate under.

We have implemented many new business practices, including split shifts in certain locations, providing protective mass for employees and modifying our production processes in ways that allowed us to adhere to social distancing guidelines, we put controls in place to limit the number of visitors to our facilities and consequently, we put our backed or expansion project.

On hold in March.

With additional measures in place we have recently restarted some of the construction at Vactor on a reduce schedule, but the completion of this project is expected to be delayed another quarter.

We've also modified or employee tenants policies and provided employees with additional paid time off in order to encourage those were sick.

Had health concerns or work or otherwise adversely impacted by the pandemic to remain at home.

And while we recognize that there's an element of good fortune. We strongly believe that the actions. We have taken have helped protect our workforce with only a handful of employees having contracted the virus thankfully all those individuals have since recovered and currently no. One is hospitalized to me. This is the.

But in fact that I will share on this call today going forward, the health and safety of our employees will remain a key priority of our teams.

It is also extremely important to all of us that federal signal that we do our part in the communities in which we work in live to assist in the overall cobot response efforts and these uncertain times protecting the safety and well being of the public seems more important than ever on that note. We recently launched a website dedicated to cleaning.

And sanitizing efforts in response to the Crown a virus outbreak.

In watching this website, where reminding new and existing customers dealers that end users that the installed base of products manufactured by our environmental solutions group can be used <unk> efforts to clean and sanitized outdoor public areas such as recreational spaces Parks and museum. In addition, these.

Products can be used to sanitized other vehicles like bosses are railcars as well as plenty bridges train stations and any other outdoor area.

We've already seen our equipment used in ways that we had not imagined before the outbreak of the pandemic. For example, our sewer cleaners are now being modified to use heating and disinfecting solutions to sanitize shopping carts and grocery stores and to clean outdoor areas that homeless people frequent in Los Angeles.

Talented team members at our University Park facility also pivoted quickly to design and manufacture protective phase shields for our first responder customers and our and our own employees to use. This team has ramped up production to build approximately 800 units per day. The first shipments were recently developed delivered to the city of Chicago Police Department.

Followed by deliveries to each of our manufacturing facilities for our employees to use we expect to assemble approximately 5000 units initially with the ability to increase that is needed.

As many of you know demand for food assistance is unfortunately rising at an extra ordinary rate the combination of need scarcity in exciting surrounding food is unprecedented due to this increase in demand a $1.4 billion shortfall is predicted in the next six months alone help is greatly needed at federal signal we are doing her.

Part by supporting local food banks, we're also identifying other ways in which we can support those in need I'm extremely proud of the part that we are playing in responding to this pandemic I'll now turn the call back over to end to go over the number.

Thank you Jennifer.

Consolidated first quarter financial results that provided in todays earnings release in summary, we got off to a strong start to the and the teams did an excellent job navigating through a variety of unprecedented challenges, which became more impactful towards the end of the quota.

First quarter results reflect impressive increases in sales and income a 220 basis points expansion in adjusted EBITDA margin and a 30% improvement in adjusted earnings per share.

Consolidated net sales for the quarter with $296 million up $12 million or 4% compared to last year.

Consolidated operating income in Q1, this year was $32.3 million up $6.5 million or 25% from last year.

On an adjusted basis consolidated operating margin was 11.6% up from 9.7% in Q1 last year.

Consolidated adjusted EBITDA for the quarter was $43.9 million up $8 million or 22% from Q1 last year.

That translates to a margin of 15.3% in Q1 this year up from 13.1% last year.

Net income in Q1, this year was $23.4 million compared to $17.5 million last year.

That equates to GAAP EPS of 38 cents per share up from 29 cents to share last year.

On an adjusted basis EPS for Q1. This year was 39 cents to share, which compares to 30 cents per share last year.

Order intake in the first quarter continued to be strong with orders, a $304 million up $5 million or 2% compared to last year.

So they said backlog at the ended the quarter again set a new company record at $401 million.

Represents an increase of $37 million or 10% compared to last year.

On an increase of $14 million or 4% from the end of December.

In terms of off first quarter group results yesterday's first quarter sales were $233 million up $14 million or 6% compared to last year.

Yes, she's operating income for the quarter was $29.4 million up $3.7 million or 14% from Q1 last year.

Yes, she's adjusted EBITDA for the quarter was $14 million, an improvement of $5.3 million well, 15% from a year ago.

That translates to an adjusted EBITDA margin of 17.2% in Q1, this year, which is up 140 basis points compared to 15.8% last year.

Yes, GE reported total orders of $238 million in Q1, this year down 3% from last year.

SSG sales in Q1, this year with $53 million compared to $54 million last year. The slight decrease in sales was primarily due to lower sales of public safety products in Europe, where our business in Barcelona, Spain started to be impacted by the Corona virus outbreak earlier than some of the U.S. based businesses.

SSG is operating income for the quarter was $7.4 million compared to $8.7 million in Q1 last year.

Adjusted EBITDA for the quarter was $8.2 million compared to $9.6 million a year ago NSS G.'s adjusted EBITDA margin in Q1, this year was 15.4% compared to 17.7% last year.

SSG orders in Q1. This year was strong at $66 million, an increase of $11 million or 20% from last year. The improvement was largely due to higher global orders for public safety equipment.

Corporate operating expenses in Q1, this year with $4.5 million down from $8.6 million last year with approximately $2.6 million of the year over year decrease resulting from changes in fair value adjustments to certain reserves. These market based adjustments benefits a dollar earnings in Q1 this year by approximately two.

Two cents per share, but were unfavorable in Q1 last year.

Corporate expenses in Q1. This year also include lower expenses associated with stock and incentive based compensation.

Turning now to the consolidated income statement, where the increase in sales contributed to a full point 5 million dollar improvement in gross profit.

Consolidated gross margin improved to 26.1% for the quarter up from 25.7% last year.

As a percentage of sales selling engineering general and administrative expenses for the quarter were down 120 basis points from Q1 last year.

Other items affecting the quarterly results include a 300000 dollar decrease in acquisition related expenses, a 200000 dollar reduction in other expense and a 500000 dollar decrease in interest expense associated with lower average debt levels and interest rates in comparison to the prior quarter.

Tax expense the quarter was up $1.3 million largely due to the higher pretax income levels, partially offset by a 700000 dollar excess tax benefit relating to stock compensation activity.

Including the effects of this benefit our effective tax rate for the quarter was 23.5 cents lower than expected and down from 25.2% in Q1 last year.

At this time, we continue to expect a full year effective tax rate to be within a range of 25 and 26%.

On an overall GAAP basis, we therefore on 38 cents per share in Q1 up 31% compared with 29 cents per share in Q1 last year.

To facilitate earnings comparisons, we typically adjusted GAAP earnings to chef unusual items recorded in the current or prior quarters in the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition related expenses Corona virus related expenses and purchase accounting expenses.

On this basis, our adjusted earnings for the first quarter was 39 cents per share up 30% compared with 30 cents per share in Q1 last year.

Looking now at cash flow well, we generated $5 million of cash from operations in Q1 this year.

That represents an improvement of $14 million over last year.

While our operating cash flow it was much improved in the first quarter. There was more uncertainty over the next few quarters given the pandemic, we're responding accordingly by taking actions to reduce our costs and prudently manage our liquidity.

During the quarter, we borrowed approximately $64 million against our revolving credit facility, primarily to bolster our cash position in the short term and maintain flexibility.

As a reminder, we executed a new five year 500 million dollar credit facility last July.

We can increase our borrowing capacity by an additional $250 million for acquisitions.

We ended the quarter with $210 million of net debt and availability under our credit facility of $211 million.

Our net debt leverage ratio remains at a comfortable level and is essentially unchanged from year end.

Cash flow so far in April has met expectations with no material changes in customer delinquencies or bad debt.

In fact as of today on net debt is lower than it was at the end of 2019.

We have implemented measures to manage our working capital and reduced discretionary capital expenditure without a far exceed deferring certain key ongoing initiatives like of active facility expansion.

We're also planning to defer certain tax payments and retirement plan contributions in accordance with the provisions of the cash that we.

We have no debt maturities until July of 2024, and with our strong financial position, we are well positioned to navigate through these difficult times and we remain steadfast in our commitment to add long term value to our stockholders.

On that note, we paid a dividend of eight cents to shed during the first quarter amounting to $4.8 million and we recently announced a similar dividends for the second quarter.

Our board also recently approved a 75 million dollar increase in our stock repurchase authorization and during the quarter, we spent $13.5 million buying back of almost half a million shares.

We had about $91 million of authorization remaining under our stock repurchase programs at the end of the quarter, but at this time, we have suspended any additional share repurchases until further notice in order to preserve financial flexibility.

That concludes my comments and I would now like turn the call back to Jennifer.

Thank you mean, our first quarter represented a strong start to the year, but like many other companies. We expect that the next few quarters, maybe challenging in light of the current uncertainty relating to the co bid pandemic at the end just referenced our first quarter orders were strong contributing to a record backlog at the end of the quarter. However.

Ever order intake at certain businesses. So far in April has been slow.

In the first quarter TB, he apply our business, which manufactures dump truck bodies and trailers reported its highest quarterly order intake under our ownership with Q1 orders up 13.4 million for 25% year over year.

During Q1, we saw traction on many of the strategic initiatives, we've put in place.

While the strong first quarter order intake provided a healthy backlog entering the second quarter, we've seen a significant drop off in orders so far in April.

This decrease in orders is driven in part by the lack of available customer supply chassis.

As a reminder, unlike many of our other vehicle based businesses I TB ATI the customer almost always provides the chassis.

With many chassis Oems shut down during April some customers are not placing orders because they are unable to obtain a chassis or they are closed we have started to see that will walk a little over the last week at some of the Oems have started to open back up.

We've also seen some softness and utilization levels of our rental fleet with rental income in the first quarter down about 8% compared to last year. In addition to factors related to the krona virus. The lower utilization is also linked to reduced rental activity with customers serving oil and gas markets.

While our exposure to oil and gas is a fraction of what it was in 2015 and 16. The recent depression and oil prices has contributed to lower utilization of the safety equipment in our rental fleet. It has also resulted in lower demand for replenishment units from some of our rental partners we may.

Monitor utilization levels closely and when we started to see the impact on our utilization levels. We started to scale black planned additions to our rental fleet our equipment retains its value well and we're also taking actions to refurbish to extend the useful lives of our fleet, which currently has a weighted average.

Age of approximately two years.

We continue to believe rentals are a highly strategic offering we can provide to our customers and as many of our customers look forward to returning to work. After the stay at home orders are lifted and suspended project start back up we anticipate rental utilizations will start to improve again, however, we are expecting rental.

Come in the second quarter to be down in comparison to the very strong performance. We saw on Q2 last year as a reminder, the second and third quarters are typically the strongest periods for our aftermarket business.

We are staying in close contact with our municipal dealers as they worked for the challenges associated with the current situation from our one on one conversations the feedback that we here is that municipality still want and need the products that we make to support critical infrastructure needs and that current parts and service.

And as high as many end users are continuing to provide essential services like sewer cleaning.

During the first quarter Iasci recorded total part sales of 33 million, which was a 7% improvement on a year over year basis.

We continue to expect solid demand for replacement parts.

We also expect our municipal and customers to benefit from the expanded funding that full two municipalities that was recently announced.

The current structure of our business is very different compared to the company that we were during previous downturns.

We have a very different and wider variety of product offerings than we had during those time for example, and our U.S. based public safety systems business. Our main focus previously was on the higher end products for larger municipality.

We have significantly expanded the range and breadth of our products to include offerings in the good better and boss categories. We also now up to police vehicles, which is proving to be an effective strategy.

As a provider of essential services to support first responders, our U.S. based public safety systems business had a strong first quarter and continues to perform well.

With the acquisition and divestiture activities over the last several years and our revamped new product development process, we very much more diverse company today, the composition of our businesses and the portfolio of products that we currently offer has allowed us to expand into new end markets as the cornerstone of our.

Operational philosophy are 80 20 for each HDI principles have become a key part of our culture.

Additionally, in the last period of economic uncertainty the vast majority of our news were generated from the sale of new equipment at that time, we generate a small percentage of our right to from parts sales, but we did not actively participate in rental activity or used equipment sales.

The acquisition of Joe Johnson equipment in 2016, except redid the growth of what we now referred to as our aftermarket business. The acquisition also doubled the number service centers that we operate in strategic location across North America from which we can sell parts and used equipment perform service work and rent equipment.

With that growth our aggregate aftermarket revenues now represent about 24% of ESG revenues.

In 2015 in 2016, we were heavily reliant on sales of new equipment into oil and gas markets. Since that time, we have diversified away from a reliance on any particular single and market through the combination of M&A and organic growth initiatives like our expansion in the into.

The utility market through new product introduction.

Hi, morale and high Mark the road, marking in line removal business that we acquired last year actually grew during the last economic downturn and their order intake. So far in 2020 has been in line with our expectation.

Yet even with these changes the remains a high amount of uncertainty surrounding the potential business impacts from cobot 19, and we are unfortunately, not immune to the effects of the pandemic.

As Ian mentioned earlier, our backlog at the end of Q1 was at a record level.

However, the timing of production and realization of our backlog may be delayed or otherwise negatively impacted by a number of operational challenges. We are currently experiencing during this pandemic.

The first challenge relates to the availability of labor with the combination of the additional paid time off that we provided to employ to encourage sick and poised to remain home and the enactment of the cares Act in recent weeks, we have experienced a decrease in the availability of labor at several of our facilities for.

For example, we currently have between 50 and 60% of our hourly workforce working at our Vactor facility.

The second relates to supply chain disruptions in delivery challenges certain of our suppliers have temporarily shut down either because of government orders or other co bid related issues, including the availability of their employees. In addition, certain customers are unable to take delivery of our equipment given the limited personnel at the current.

We have available.

The third item relates to the measures we have taken to ensure a safe work environment for our employees. These types of included adjusting our production process at our facilities to comply with safe distancing guidelines in order to protect the safety of our employee.

Each of these factors are having an impact on overall productivity.

Although they had a limited impact on our first quarter results, we're expecting a more significant impact in the second quarter as we adjust our production schedules accordingly, and we anticipate these factors may result in our productivity levels for certain of our businesses in the second quarter being down between 20 and 40% Inc.

Person to prior year levels.

We are approaching the uncertainty and challenges in the second quarter and the rest of 2020 with resolve and from a position of strength given our current financial position, we are balancing the need to reduce our costs in the short term, but not at the expense of our longer term growth at the same time, we're maintaining our focus on our.

80, 20 improvement initiatives at certain businesses, we've taken steps to manage through these times.

Polluting implementing our contingency playbooks and other measures to reduce cost and manage our capital prudently.

Across the organization, we have significantly reduced discretionary spending and temporarily furloughed hundreds of employees, many of whom volunteered to take a temporary leave of absence.

One of my proudest accomplishments since becoming CEO at the beginning of 2016 is the culture that we've been able to build that federal signal, we our team and we experience a successes along with our trials together with that in mind, our extended management team is taking salary reductions ranging from 20% to 25% each of our director.

Others have also agreed to similar reductions in cash compensation.

The overall magnitude of the impact of the pandemic on our operating and financial results remains uncertain will largely depend on the duration the pandemic and the measures implemented response as well as the effect on our customers. Given these factors we are unable to reliably forecast the effect. The a pandemic will have on our financial results.

As such we are withdrawn our previously communicated adjusted EPS outlook for 2020, our intent is to reinstate guidance for the remainder of the year with our second quarter earnings announcement.

As we start to look ahead with our reclaiming tomorrow together initiative, we're thinking of the future in three phases with the first phase being the current situation the socket being the time when the various stay at home orders are lifted with restrictions and the third phase being the new normal in a post vaccine world.

We expect to be well position to accelerate our growth as we emerge for them pandemic and with that and mine. We've held a series of brainstorming sessions with the teams and ways that we can create identify new business opportunities.

As part of this initiative, we are working on four primary areas. The first area of focus is on ways to differentiate ourselves by improving the digital experience of our customers employees. We have made investments in technology and establish a team dedicated to support these initiatives, which include the launch of a revamped use.

Equipment marketplace, and the development of an E commerce platform.

The second area is to generate ideas and how we can make our products and the ways in which we conduct our business safer for our employees customers and end users of our equipment.

Third is our focus on how we and our customers can use our equipment to clean and sanitized outdoor spaces. Our teams responded very quickly to this need for those of you have not yet done. So I would encourage you to visit so I'd think response dotcom, which was launched in mid March to see the ways that are equipped.

And can help in the cleanup effort, we're generating a lot of traffic to this web site and this week the number of page views hit the 40000, Mark which was more than doubled the views last week and finally, we are aiming to identify opportunities to gain market share in the current environment and many of the markets in which we operate we tend to be the market leader in may.

Any of our competitor smaller less capitalized operations.

The provision of the SBA loans that were included as part of the Cares Act also contains a buy American preference in both cases, we believed that these represent opportunities for our businesses to gain market share.

We're also monitoring developments relating to a potential infrastructure bill if infrastructure legislation where to path with our various businesses, which support maintenance it infrastructure markets Federal signal would stand to benefit we will continue to monitor any additional development.

Our financial position is strong and will help us to navigate to the challenges we face today at the same time remain committed to our long term capital allocation priorities of investing inorganic nor growth initiatives and funding cash returns to shareholders. We also want to be in a position to participate in an M&A environment with me.

Much more reasonable valuation expectations that existed in the pre covered world at this time I think we're ready for questions operator.

Thank you we will be conducting a question answer session. If you would like to ask a question. Please press star one when your telephone keypad.

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Once again that star one to ask a question at this time, one moment, while we pulled walkers question.

Our first question comes from Walter Liptak with Seaport Global. Please proceed with your question.

Good morning, Thanks, Im wondering good morning, thanks for the the detailed presentation.

What is first about the the comments about the April orders.

So it sounds like key TB I had a great quarter April slowed I Wonder if you could.

Quantify.

A little bit and then also.

The other products some of the seats diggers and sewer cleaners, how are those trending in April.

Sure. So the first thing I guess I'd say, it's pretty limited sample size and the data has been pretty erotic changes day to day. So it's very difficult to look at trends.

There have been you know pros and cons overall as we said April orders have been slower.

But let me try to give you some color commentary. The first thing is our SSG orders are holding up pretty well, we have seen as I talked about in my prepared remarks, some softness in TV eyes.

So to put that in contacts TV eyes orders in April look like they may be down on a year over year basis somewhere in the range of $8 million to $10 million.

But in the first quarter their orders were up $13 million or 25% and they had the highest quarterly orders under our ownership. So it's a bit of a mixed bag.

A lot of the softness that we've seen is tied to customers not being able to secure chassis as with many of the Oems.

With respect to our other U.S.G. vehicle based businesses.

It has been mixed we're seeing some slower orders.

But we've also had some fleet order wins last week or Elgin team had a nice win.

I think what are the things that you need to remember.

Is with respect to safe digging demos are really important there.

And we've been limited our ability to demos sell her customers have been closed or have other priorities.

And that has been challenging for us during the quarter.

Finally, you know we talk about 50% of our employees are located in Illinois.

And as you know Walt Illinois had one of the first stay at home orders and one of the most restrictive stay at home orders. So that's created some additional challenges in terms of visitation with customers.

Over the quarter.

We believe that are reclaiming together reclaiming tomorrow together initiative over the long Ron will be important as we educate customers on how we can use our equipment to sanitize outdoor spaces.

We're also looking at some other types of products that are assessed GE business.

So the not shall is it's a very mixed bag, but orders are down.

Okay got it.

What was the switch gears and just ask about M&A, there's a drop in M&A expenses.

I Wonder if we can talk about that and what the pipeline.

Permanent it looks like.

Well I'll take the first one well the drop in the M&A expenses is really a function we have.

The other now we have a we accrete that liability.

So it it wasn't it wasn't there last quarter and last year, because we didn't own MRL. So this quarter, it's down because of the level of activity in Q1 of last year, we were working.

Pretty pretty much full speed on the morale acquisition and this year because as various travel restricts frictions M&A activity. It down so that's the year over year variance.

But Jan can talk more about kind of that what we're seeing in the M&A space sure. So you know we continue to believe that M&A will be a critical part of the growth for future.

I had spent a good portion of January and February in active dialogue.

With many M&A candidates are we put that on pause now a we believe that there could be opportunities for us going forward at valuation levels that are more reasonable than they were perhaps pre pandemic.

But we continue to be encouraged by the quality of targets and the strategic fit of the opportunities are available and eyes continued as many other members on our team have an active dialogue.

With those company.

Okay, great. Thank you.

Our next question comes from Chris Moore with CJS Securities. Please proceed with your question Hey, Good morning, guys and good morning. Good morning, So maybe can talk a little bit about the more about the supply chain challenges. Other then you know kind of it chassis related issues you talked about.

Are there other specific areas of concern and you know.

How much visibility do you have in terms of things are improving a little bit.

Yeah. So the chassis challenges have really been at our TB I businesses.

With respect to our.

I'll just business for example, our largest product line is how can we build our own chassis there.

Our Baxter business on it's about half the time, we acquire the chassis another half the time to customer acquires the chassis. So given the longer lead times. The Baxter business. We're in pretty good shape, there with respect to Chelsea's opt for supply chain issues have ban we've got a couple issues on it.

Mexico, We had an issue out of Italy with some transfer cases, you know what I've been impressed with is the ingenuity of the teams in terms of and dropping at.

So for example, we had a harness issue out of Mexico, and our teams figured how to redeploy field technicians to make these wiring harnesses at home.

And went through our quality testing and the teams did a super jobs.

The other challenges ban in some situations just transportation to get you know this applies to our various facility.

So that is that an impact on productivity.

But our productivity issues, our broader than just supply chain and maybe I can give you. An example that would be helpful is at Vactor, which you know as our largest plant.

We have an initiative that I've talked about several times with all of you called PMT build more trucks.

And I'm pleased to report that in February we hit a record on that initiative in terms of productivity.

Unfortunately, we started to see the impact of the pandemic in March and productivity from the February high.

Reduced 10%.

And then in April we saw more meaningful impact and it reduced 40%.

And so why a couple of things one as Vactor, we're doing a $25 million sand plant expansion both to support future growth, but also to give us more room to operate so we worked with the local management team.

And we.

Put together a productivity plan that was significantly less than February to accommodate labor availability need for safety is seeing supply chain challenges and we laid off a number of people.

Our current expectation is that those people return at the end of June.

But those productivity challenges that are related to not only supply chain, but also to labor availability willingness of customers to take delivery is impacting productivity pretty significantly.

God Oh extremely helpful. I'll jump back in line. Thanks, guys.

Our next question comes from Ken Newman with Keybanc. Please proceed with your question.

We're in can you get more.

Hey, Good morning, guys Hope you all are well unhealthy.

We are thank you.

Yep does just wanted to touch back on the production ranges that you gave for QQ do you have any color on how much finished product you have in the backlog today or I guess another way of asking is do you expect revenues to be down less than production.

Yeah, I think in terms of the second part of the question can I think it's at the time, it's just too uncertain to kind of predict that with any reasonable degree of accuracy.

We're in.

The first month as the quarter and we've we've given some stats on kind of what we've seen from a production standpoint.

You know, it's down anywhere between 20 and 40% as some of our businesses.

So I I think I think it's different in terms of finished goods. You know we did have slightly higher finished goods at the end of March really as Jennifer mentioned there are certain customers that were just unable to take delivery of the of the equipment just given the fact that they didnt have.

Employees available to take delivery so.

Finished good balance at the end of at the end of the the quarter was a little higher was about 90 $394 million. So it's up about seven $7 million from where it was at year end.

We'd expect those units to ship at some point during the second quarter.

But again you know we are seeing some delays in terms of deliveries just with the limited number of employees that our customers have.

Got it that's a that's helpful.

And switching over to the margins I know the demand uncertainty trying to pitch in the middle of a couple of expansion.

Initiatives.

Just given all the variables just around volumes and fixed costs.

Anyway, you can give us a framework for how you're thinking about operating leverage or decremental margins into the quarter for the year. Yeah. It's it it's really it's difficult Ken as you can probably imagine I mean, the decremental margins can vary for us from business the business and it can vary widely based on the assumption of the volume deterioration or kind of the mix of the products that stuff.

Good just a couple of data points I can give you as if you go back to 2008 2009 between those dates.

Decremental margin was about 20% between 15 and 16, it was a little higher than that.

But again, we were a very very different company to to what we will back then because its diversification or end markets or revenue stream. So I think those data points, a datapoints, but they may not be.

Tremendously accurate so I think with so much uncertainty I don't think we're in a position to really size it that much but.

We have target EBITDA ranges for each of our businesses.

Those are intended to be through the cycle margin targets at this time, we not really sure if were in what we would call. It typical cycle I think it's fair to say, we didnt necessarily consider a global pandemic, let me set those targets, but but our goal is to continue to operate within those ranges and and as we talked about some of the <unk>.

Auction initiatives that we took it in a in the early part of the second quarter those would designed with.

The goal of offering within those target ranges, yeah, I think I'll add to that you know I think that's really important is that we acted pretty swiftly as we started to adjust production levels and they gave the example, we you know we've taken over $10 million the cost out in the second quarter and we're going to continue to monitor.

That and we will adjust accordingly, and its with those target EBITDA ranges in mine and the but I'll add is though in said is you know these are highly unusual circumstances.

Yeah, no I totally understand that I used just as a follow on to that.

Obviously, the corporate expense me yesterday margins were.

Lower this quarter than we had expected and held in pretty quickly are pretty well.

I just curious.

Barring obviously the uncertainty from Kobin, just how sustainable are margins at this level. If we were to go back to like a normalized.

Cycle type type of environment.

For back in a normalized cycle, yes for sustainable.

Got it okay. Thank you that's a that's very helpful.

Once again, ladies and gentlemen to ask a question. Please press star one on your telephone keypad. Our next question comes from Marco Rodriguez with Stonegate. Please proceed with your question.

Hi, Good morning, Ryan Martins.

Okay. Thank you. Thank you for taking my question.

Oh I was wondering if maybe you could talk a little bit.

About your thoughts on recoveries, if you will I mean, I know, it's very difficult and.

I'm, assuming your crystal ball going better than anyone else it but I'm, assuming you guys are blowing through a lot of different scenario analyses on on potential outcomes for your business grew fiscal 20, maybe if you can kind of share a little bit of color around what your base case nearer kind of looks like what your expectations are as far as recoveries are concerned.

Yes. So you know Q2, where it is gonna be talk [laughter] beyond Q2, you know its we'll update you at the end of Q2, either we have we started really early on the off funds.

You know we you know if you think about our reclaiming tomorrow together initiative that has four apart.

We adjusted pretty quickly we.

We have four parts to that initiative in terms of our digital market share part of that initiative, our outdoor sanitation.

Cleaning outdoor spaces initiative, you think about that we launched that mid March.

And you know, it's still needs to be proven out, but you know we're gaining traction. So I think some of those initiatives are gonna be important to recovery. You know we're also in a position where we have.

Record backlogs, our backlog is over $400 million and you know it allows us the luxury of being able to.

Optimize production, which sounds like strange words in very difficult time periods.

And we can work with our customers to make sure they get the equipment they need when they need the equipment.

I've been really impressed with some how the new product ideas that people are going to need and this new world and you know we're working diligently on that I think we've proven in the past that our new product development machine is a much different machine than it was during previous downturns.

And so a lot of what you ask is going to depend on traction.

On some of these initiatives.

And you know the overall impact on our customers. We still have customers that are important customers that are closed.

There are very encouraging when we talk to them. They appreciate our partnership and as soon as they open. There you know we think we're going to be in a great position to serve it serve them, but there's still a lot of unknown.

Okay. That's helpful and then kind of switching here towards.

The municipal market you provided some great color here in terms of how you guys are positioning yourself cost wise.

Really.

Dr and increased market share there I was wondering if maybe you could share if you have any any early indications.

Demand increases or lack thereof, some municipal and government customers.

Yeah, I think a couple of things are important as you know historically municipal government customers don't cancel orders and they haven't canceled any orders and any kind of meaningful way. That's the first thing that's important to understand the second thing is yeah, you know frankly.

In some situations I don't believe delivery of our product has been you know a top priority for example for some of the larger municipalities, they're dealing with the challenges the pandemic.

But what I would I think it's really important to remember is that we.

Many of our products are essential products.

And we're working to make them more essential the whole purpose of reclaiming Tim <unk> reclaiming tomorrow to gather initiative is a in terms of helping the company going forward, but also helping our customers. We believe that there are opportunities to reap purposes I said.

Rental equipment to assist in outdoor cleaning and that will benefit both our customers and federal signal in the long run.

Got it and last quick question, just kind of a clarification I believe you guys had mentioned on productivity levels, you saw about 20% to 40% decline our year over year is is that specific to any particular areas of your business or was that sort of a general comment across all your business you will know it.

It really varies mako across each business I think we talked about you know SSG University Park in Illinois outside the businesses for the SSG business supports primarily you know the emergency first responders.

That business is ticking along quite nicely. The order intake has been good to had a great quarter.

At some of our vehicle based businesses again it varies based on the state that you're offering and with the various stay at home orders that are in place we have three facilities in Illinois, and they stay at home owners are in place and so while we are an essential business that there has been an impact as Jennifer talked about on him on the per day.

Activity levels so.

If I would say that I'd add back the facility we've seen a high degree of have an impact.

From the the the productivity issues that Jennifer described so that's probably towards the higher end of that range and I would add is our Spanish facility was closed down by the government for two weeks.

Got it.

Bottom line, so all of that's going to contribute to the second quarter results.

Understood. Thanks, a lot I appreciate your time.

Thank you.

Our next question comes from Steve Barger with Keybanc. Please proceed with your question.

Hey, good morning, sorry, I got on late or another call ran over.

Ken was already on but I just had a couple of quick follow ups sure.

I move or maybe you addressed this already but when you think about lower production supply chain or labor issues, and then offset by the cost actions you're taking do you expect you get the positive swing in free cash flow. The revenue slowdown typically brings in the next couple of quarters or will that be hindered by you know.

The circumstances.

I think I think see where we're monitoring our cash levels very closely I think you I don't if you heard on the cold, but we talked about cash balances as of today and what we've seen in April to date, our net debt position as of today is actually lower than it was at the end of 2019, So weve.

Pretty encouraged with the cash flow that we've seen so far in April.

But you know it's early days I think we're continuing to expect that we got to generate.

Good cash flow as we have a even even if you go back says you know the 15 16 timeframe. We were positive operating cash flow, we put some things on pools that we talked about we put some of the discretionary capex that's been a pools, we're continuing to pay the dividend, but we have suspended a further share repurchases. So.

Yeah, we are encouraged with what we've seen so far but.

I think it's it's a it's you know and other it's something that we continually monitor we put in a number of working capital measures in place as you can probably imagine.

And we're encouraged so far with what we've seen.

I was hearing I would yeah I would add is that you know.

Longer term and longer term can be ended third quarter fourth quarter [laughter]. He says.

You know, we really believe there's some good M&A opportunities.

Right just.

And would that be more on the U.S.G. side or safety.

He has to are you.

Okay, that's great.

And then [laughter] there are some smaller ones on the safety side also that we're taking a look at but the the relatively larger ones would be on the as cheese.

Right.

But again I think we've proven ourselves to be pretty prudent in valuation. We continue to do so and you know like other companies. We believe that valuations will be more reasonable then pre pandemic.

Right, Yes, no I think that makes sense have you actually seen the the bankers coming to you talking about resetting prices on deals that you may have previously about it or or is that more of a.

Proactive assumption that that that will take place.

I think bankers have generally been on kind of a quad play pause, but as we've talked about in the past we've developed relationships with a number of different acquisition candidates and we continued to I know we continue that dialogue you know not nothing is going to happen in the second quarter by.

We think its critical we continue that dialogue and M&A will be an important part of our future and there's some.

Really good strategic acquisitions out there.

Great and then last on slide 13.

You're talking about your four initiatives.

First one being improving digital customer experience, what does that really mean, what what have you invested and what does that look likes to the customer and how does it help.

First couple of things one is we are rapidly and we have in a very very aggressive timeline or people will tell you increasing the a number of videos that we have about our products about training.

We're looking at contact let's delivery in terms of what we can do so I've been impressed by the speed and we've got teams around that E. Commerce is a critical part of our future, particularly for assets cheap businesses.

And we are committed to that and continuing that particular initiative.

So we believe it's an opportunity to really distinguish us from some of our competition.

Considering that many of our competitors are you know smaller entities and this will be an area of focus as we move forward.

For contact list delivery is that having a third party auditor come in and verify the the machine has built a spike or is that something that you would do internally the.

Video call or something is you because you inspect the vehicle.

Yeah, I think it is really focuses on both the expectation in the training that's necessary to use many of our complex pieces of equipment.

And the team have you know we started this over five weeks ago six weeks ago and I'm just the content that we've already been able to deliver that allows us to deliver the equipment do the inspection remotely and do the training remotely and.

That's critical as we move forward.

Well yeah.

And we're also looking at ways of how do we make our equipment safer for the end users of the equipment and what do I mean by that as we have multiple people that come in and out of trucks. So we're working on methodology is it's going to lobby the sanitized inbetween USIS quickly and efficiently.

Hi, I'm curious do you think that this you know indirect inspection and contact list delivery in video training will represent a permanent change in how business gets done or do you think this is just you bridging the gap to things getting back to normal.

Yeah, I think it's probably a combination of both.

On you know our dealers play a critical role and the delivery of our Vactor are true back and Elgin equipment.

So you know our customers I'm training is important and a lot of times. It is it just one time training because you there of new employees and this equipment is pretty complicated and there's a variety of different uses so I think that you'll see more digital training, but it's not going to replace.

Some of the face to face opportunities that our customers require.

Alright, thanks for the time.

Yeah.

Our next question is a follow up from Walter Liptak from Seaport Global. Please proceed with your question.

Good morning wall.

Hi, Thanks, I Wonder is.

Follow up from your prepared remarks, you talked about some of those the sewer system challenges that some of the municipal the cities are having some sort of problem I wonder if you could provide some detailed on that and what kind of services federal signal providing to help solve the problems.

Yeah. So those challenges I really driven by a couple of things. One is initially lack of available coiled paper and people were using things they shouldn't use in the sewer systems.

And number two is our habits have changed quite a bit you know I'm every when used to go to work in school and now people are at home. So it's put a lot of strain on certain sewer systems, there's actually I'm quite a social media campaign on by different water departments on this particular issue trying to educate.

And users about this and as a result, you know you need to clean the sewers more frequently there's been clog system back up.

And our equipment, it's become more essential than ever.

So why is.

One other thing I guess I would add there as parts, we talked about in the call our parts <unk> not only for US has been solid in April, but we've talked to a number of our dealers and they're continuing to see very strong parts business during April.

Okay sounds great and then the Capex you mentioned there were some reduction there and wonder if you could just.

Maybe I misunderstood what is the capex going to be for 2020, yeah. So so well the the estimate is between 25 and 30 million for the year and some of that is kind of the already committed spend on the the expansion of factor and rugby North Dakota. So it's come down by you know about.

5 million right now, but it's something that we you know we are continuing to evaluate.

And we're looking at things with the delay of all the expansion that we talked about some of the payments will be made over a longer period of time as opposed to.

More you know we originally anticipating those with those would be more heavily weighted in the first off the it so those they may be spread a little more evenly throughout the year.

Yeah, and I wasn't clear on the factor expansion, we put that on hold.

Because of the visitor policy that we had in place and we didn't want outside visitors and.

Since we put on hold we've re initiated that project with additional controls in place.

And it's about a quarter behind but we were close to finished.

And we expect that we should be finished by the end does a third quarter.

It's an important project, particularly for safe distancing for us.

Okay, great. Thanks, Good luck with the second quarter.

Thank you.

Our next question comes from Greg Burns with Sidoti and company. Please proceed with your question.

Good morning, Grad accounting for more.

Just.

You mentioned you haven't really seen any cancellations on your <unk> municipal side.

Since you ended the quarter I have you seen any movement in the backlog either.

Customers delaying or pushing things out or canceling.

Happening on the municipal side with your customers from his perspective.

Municipal side, you know Jennifer as Jennifer mentioned I'm very little in terms of cancellations east.

To date in April historically, you know, we rarely see that because if you think about the municipal side of the business. It's often part of a a public RFP the purchase about products. So.

It's quite rather we see any cancellations we've seen some on the municipal sorry on the industrial side as a in the past we had a little bit of that in so far in April but all of those the impact of those cancellations are reflected in the backlog that we reported and it's still at record levels. So that should give you.

Some idea that we're not talking about a immaterial amount of cancellations given that the backlog at the end of the quarter was at a record level.

Okay. Thanks, and then.

Just talk about.

The complexion of your oil and gas exposure now versus maybe in.

15, 16, I think it's less whole goods, maybe more rental oriented but can you just talked about maybe your exposure there.

How about how the business has changed maybe.

From 15 16, so now.

I'll start 80 in can add some color that you know back in 15 and 16, we excited around $90 million and we now size it around $30 million and we diversified our end markets as I talked about my prepared remarks significantly through both M&A and organic initiatives.

Yes.

On our exposure is really a lot of its around our rental fleet and replenishment of that rental fleet.

Although I would add that you know we believe that the rental fleet will be.

An important strategy as people continue to come back to work in projects every started and we expect our rental rates rental utilization to increase as we move to the second and third quarter.

Yeah, we've seen it Greg I think Jennifer talked about on the on in the prepared remarks, we've seen somebody effects of the depressed oil prices on a utilization rates of a rental fleets, primarily the safety equipment.

Rental income in Q1 this year was down about 8% over Q1 of last year and it's also you know some of our rental partners. We're also seeing the same thing. So it's affected some of the new orders from some of our rental apartments for safety equipment.

Okay, and how much did mark right line.

Tribute to orders and backlog this quarter.

So it was about so MRL they it was about.

16 million.

In Q1.

Orders and backlog.

Yes, so they would they would be the that would be the orders they received into first quarter.

Some of those although it will be a very small <unk> would have shipped out in Q1. So.

The addition to backlog would have been.

Probably somewhere in the five to 5 million dollar range.

Okay, and then so looking at the U.S. Yoo orders and down 2.5% satellite TV I.

It was wrong in the quarter.

Sure.

That.

That was down but.

Hi back out the contribution from Mark right in line, where where were you seem to most weakness was a TV I or was or other areas.

Orders are starting.

Decline a little bit.

Yeah. The did you write TV I was strong the safe digging was was down to the probably the most significantly in really as Jennifer talked about the fact to the demos and presentations are a rail factor in the sale process, there and with the restrictions that we've had in place on travel and you know attendance.

The trade shows given a lot of the what we've seen has been kind of the fruits of a lot of almost missionary work way trying to educate people onto the efficiency benefits other products as well as the safety benefits our sales team hasn't really been able to get out there and to kind of demonstrate those features so we've seen.

Some impact on incoming orders.

I will say that you know a backlog still very very strong again the record backlog at the end quarter includes a good amount offs Ah Ah safety equipment and and that's one of the other factors to consider I guess, the other thing I want to add about safety and it's important to understand is that.

You know despite these quarterly challenge is longer term. This is a critics remains a critical part of our growth.

And several of our smaller safe digging competitors have a much higher reliance upon oil and gas.

So we believe going forward, giving our diversified end markets that this will create opportunities for us.

Okay, great. Thank you.

At this time I would like to turn the call over to Jennifer Sherman for closing comments.

He's our tumultuous an uncertain times, there's no denying this experience has confirmed my strong belief that our workforce is unparalleled in its passion commitment and grit and while these days may seem top I'm confident that we will band together and work to these challenges as we have many others, we are nimble and if.

Moved quickly.

In closing I would like to thank our stockholders employees distributors dealers and customers for their continued support.

During this pandemic I've implemented a new rule, which requires us to end all internal discussions on a positive notes applying my own rules for this call I would encourage us all to think about the fact that never before as the entire world them collectively focused on one thing developing and producing a vaccination for this disease. There are currently.

Over 70 active vaccine trials and I for one would not have bought against the U.S. or world innovation machine.

I'm also optimistic about the long term future of our company I firmly believe that although 2020 will be challenging federal signal would be stronger going forward. Thank you for joining us today be safe and well talk to you soon.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.