Q2 2020 Federal Signal Corp Earnings Call
[music].
Greetings and welcome to the Federal Signal Corporation second quarter earnings Conference call.
This time, all participants are not listen only mode.
Great question answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It's now my pleasure to introduce your host in Huston Chief Financial Officer. Thank you you may begin.
Good morning, and welcome to Federal Signal's second quarter of 2020 conference call I'm in Hudson, The company's Chief Financial Officer.
Also with me on the call today is Jennifer Sherman, <unk>, President and Chief Executive Officer.
We were supposed to some presentations life today as well as to the earnings news release. Once we issued this morning. The slides can be followed online like going through our website federal signal dotcom thinking on the investor call icon signing into the webcast.
We have also posted a slide presentation and the earnings release under the Investor tab on our website.
Before I turn the call ever to Jennifer I'd like to remind you that some of the bulk of common make today may contain forward looking statement.
Object to the Safe Harbor language found in today's news release, and federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website.
I presentation also contains some matches that are not in accordance with U.S. generally accepted accounting principles in our earnings release on filings. We reconcile these non-GAAP measures to GAAP measures. In addition, we will file form 10-Q later today.
Jennifer it's going to kick things off today with some introductory comments I will then give some more details on a second quarter financial results before turning the call back to John if I could give a business update and provide phillips our outlook for the rest of the yeah.
So that we will open the line for any questions.
With that I would now like cynical 11 scanner.
Thank you Ryan I'd like to start I give my profound thank each of our boys and our dealer partners for their commitment over the past several months.
Since the outbreak of the pandemic a critical area of focus it's been onto our health and safety and we've implemented a host of we measures to ensure a safe work environment for our employees.
He's done have included adjusting our production processing at our facilities to comply with say distancing guideline in order to protect the safety of our employees. We've also invested in temperature screening capability at many of our facilities issued a face mask policy and provided our employees with additional paid time off.
These are clearly challenging times, the many different level, but I could not be prouder of our performance during the second quarter with our teams demonstrating impressive operational execution, an exceptionally difficult circumstances well at the same time continuing to provide a safe working environment for our employees.
Each of our businesses is considered a central and supporting critical infrastructure needs in public safety that met all of our manufacturing facilities remain operational throughout the quarter, albeit with certain of our operations temporarily affected by facility closures either due to government issued mandate.
Our other corona virus related issue.
At the beginning of the quarter we acted.
Weekly decisively in response to a variety of operational challenges, resulting from the pandemic by adjusting our operating costs and modifying our production gradual.
As our teams developed strategies to operate in the new cobot environment, we experienced double digit sequential improvement and average weekly sales in both May and June.
The combination of these factors helped us to maintain a high level of performance and delivered adjusted EBITDA margin of 16.8% in the quarter exceeding the upper end of our target range.
The strong resolved that we were able to deliver an exceptionally difficult circumstances during the quarter, where a testament the quality of our businesses are experienced leadership team the commitment of our employees and the agility of our team.
While managing through this difficult water. We also continue to focus on our long term growth initiative.
For example on <unk> organic side, we introduced a new regenerative air sweeper that does not require the operator to have a commercial driver's license.
We also made progress on our plant expansion at Baxter lumpy and now MRO, which will initially provide additional space for social distancing, an additional capacity to support our longer term growth on the M&A front, we completed the acquisition of PWB.
In addition, I'm also pleased to report that the company will be issuing our inaugural long form sustainability report later in the third quarter I'll now turn the call back to even to go over the numbers.
Thank you Jennifer our consolidated second quarter financial result, I provided in todays earnings release in summary, our teams continue to execute at a high level with both about groups delivering adjusted EBITDA margins in excess of the target ranges.
Consolidated net sales for the quarter were $270 million compared to $324 million last year consolidated operating income in Q2, this year was $31.3 million compared to $46.3 million last year.
On an adjusted basis consolidated operating margin in Q2. This year was 12.7 cents compared to 14.6% last year.
Consolidated adjusted EBITDA for the quarter was $45.4 million compared to $57.1 million in Q2 last year.
That translates to a margin of 16.8% in Q2, this year compared to 17.6% last year.
Net income in Q2, this year was $21.4 million compared to $32.8 million last year.
That equates the GAAP earnings of 35 cents per share compared to 54 cents per share last year on an adjusted basis EPS. The Q2 this year with 42 cents compared to 55 cents in Q2 last year.
Well what is in Q2, this year with $201 million compared to $308 million last year. Despite the lower order backlog at the ended the quarter remained healthy at $333 million that compares to $348 million in Q2 last year.
In terms about group for adult DSD sales for the quarter with $214 million compared to $267 million in Q said Q2 last year.
Yes. These operating income was $28.6 million compared to $44.8 million in Q2 last year.
SGS adjusted EBITDA for the quarter was $40.9 million compared to $54.4 million a year ago.
Translates to an adjusted EBITDA margin of 19.1% in Q2, this year compared to 20.4 that last year.
Yes, Steve reported total orders of $158 million in Q2, this year compared to $253 million last year.
That's just the second quarter sales with $56 million this year compared to $57 million last year.
SSD is operating income for the quarter was $10.4 million up from $9.5 million in Q2 last year.
As fees adjusted EBITDA for the quarter was $11.7 million compared to $10.3 million a year ago and its adjusted EBITDA margin in Q2. This year was 20.9% up from 18% last year.
SSG orders in Q2, this year with $44 million compared to $55 million last year.
Corporate operating expenses in Q2, this year was $7.7 million down from $8 million last year.
Turning now to the consolidated income statement, whether decreasing sales resulted in an $18.7 million reduction in gross profit.
Consolidated gross margin in Q2, this year was 26% compared to 27.4% last year.
Our results in Q2. This year included the recognition of approximately $3 million of excess overhead costs the flow through the income statement as inventory period costs due to lower production levels.
Selling engineering general and administrative expenses for the quarter were down $4.4 million from Q2 last year.
Other items affecting the quarterly results include a 600000 dollar reduction in acquisition related expenses.
1.3 million dollar increase in restructuring charges and a 200000 dollar decrease and interest expense largely due to lower average interest rates in comparison to the prior quarter.
Other expense in Q2. This year was also $2.1 million higher than last year, primarily due to the recognition of a $2.5 million charge associated with the withdrawal from a multi employer pension plan.
Tax expense in Q2, this year was down $5.5 million compared to the prior year largely due to lower pretax income level and the recognition of a 1.1 billion dollar excess tax benefit related to stock compensation activity.
Including the effects of the excess tax benefit our effective tax rate in Q2. This year was 22.2% lower than expected and down from 26.1% in Q2 last year.
At this time and assuming no additional excess tax benefits, we expect our full year effective tax rate to be approximately 25%.
On an overall GAAP basis, we therefore on 35 cents per share in Q2, this year compared with 54 cents to share in Q2 last year.
To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior quarter.
In the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition related expenses pension related charges restructuring activity Corona virus related expenses and purchase accounting expenses that.
On this basis, our adjusted earnings for the second quarter, but were 42 cents per share compared with 55 cents per share in Q2 last year.
Looking now at cash flow, where we generated $60 million of cash from operations. In Q2. This year that represents an improvement of $25 million or 73% from Q2 last year.
The year over year improvement was primarily due to working capital timing differences inclusive of that some of actions taken early in the quarter to present short term liquidity in response to the pandemic lower rental fleet investment income.
In Paris, instead of prior year and deferrals of some payments in the current yet as outlined in the cat.
During the quarter, we paid down approximately $36 million of debt completed the acquisition of Pwc and funded cash returns to stockholders.
We ended the quarter with $171 million of net debt, which is down from $210 million at the end of Q1 and current availability of $245 million under our credit facility.
As a reminder, we executed a new five year 500 million dollar credit facility last July we can increase borrowing under that agreement by an additional $250 million for acquisitions.
Our net debt leverage remains low.
And essentially unchanged from year end.
Cash flow so far in July has met expectations with no material change in customer delinquencies or bad debt.
With no debt maturities until July 2024, we are continuing to approach the uncertainty and challenges with result, and from a position of strength given our financial position, which has improved further since the end of the first quarter. We also remain committed to adding long term value to our stockholders.
No we paid a dividend of eight cents per share during the second quarter amounting to $4.9 million.
We recently announced its similar dividends for the third quarter.
Although we didnt know buyback any shares in Q2, we currently have about 91, what $91 million of authorization remaining under our stock repurchase program.
That concludes my comments and I would now like to turn the call back to Jennifer.
Thank you mean.
You will have seen in today's release, we reinstated guidance for the year. There were several factors that gave us confidence to do this and provide us with optimism as we look forward.
First we clearly demonstrated that we can manage our costs.
As we have discussed previously we aim to consistently operate within our target EBITDA margin ranges.
I referred to mitigate the financial statement impact of than many of the pandemic related operational challenges, we implemented a number of cost saving actions during the quarter you actually that we took helped us to maintain a high level of performance and deliver an adjusted EBITDA, which exceeded the upper end of our target range.
These actions included temporary employee furloughs salary reductions for the company's enterprise leadership team reductions in director fees and limits on discretionary spending we estimate that these actions resulted in Q2 cost savings of approximately $14 million in comparison to our plan.
For the year.
As a result of anticipated gradual improvement in our production level. We have brought back many of the furloughed employees. Although we did complete a reduction in force. We also made the decision to roll back the annual Merit based.
Salary increases from both domestic salaried employees active in the third quarter.
We are currently targeting similar savings in the second half of the year as we realized in the second quarter.
Now turning to current demand, we entered the second quarter with backlog at record levels and lead times for certain product lines extended as we move through the quarter, our incoming order rate increase.
As we mentioned on our first quarter earnings call order intake in April was slow with the various government mandate would stay at home orders and travel restrictions significantly impacting our sales and marketing activities.
For much of the quarter. Our sales teams were unable to attend trade shows perform equipment demonstrations or conduct in person sales meetings. In addition, certain customers were unable to take delivery of equipment given travel restrictions in the limited personnel they had available.
These factors significantly impacted our order intake however, as second quarter progress many of the government mandated restrictions that were imposed in states across the U.S. started to eat.
Be it a different times in a different levels with that and with sales travels coli resuming we have seen a commensurate increase in equipment demonstrations to illustrate we were able to complete 125 demonstration and presentations of our Trubridge branded vehicles in June of this year, which was.
Doubled the amount performed in April and May combined and slightly more than in June of last year.
Taper off we've also seen monthly increases in the amount of presentation demos of our street sweepers and sewer cleaners.
This has contributed to sequential improvement in our average weekly order intake in both man Jim Our weekly average orders in May were 16% higher than April and our weekly average orders in June were 24% higher than Matt.
We are encouraged with what we have seen to date in July with improvement in demand for sewer cleaner and safer digging trucks noted since June.
And while these are promising sign our June orders were not back to levels that we saw last year and note. The outstanding orders that we reported in the third quarter of last year included a $27 million of acquired backlog for the from the morale transaction.
Within our specific end markets, we have seen the quickest recovery within our truck bodies business.
As you may recall on our last call, we talked about a significant drop off in orders that we had seen in April driven in large part by the lack of available customer supply chassis.
At one of our TV I locations with many of the chassis Oems shutdown as a reminder, unlike many of our other vehicle based business.
TV by the customer almost always provides the chassis.
That situation improved as the quarter progressed as evidenced by the flow of chassis deliveries into our facilities.
It reached a low point of approximately two deliveries per day in may whereas in June that improved around aided day and while it's still not back to typical levels. We have noted further improvement in July.
The second quarter is typically seasonally strong for TB and.
And despite the supply chain issues on the effects of the pandemic TV I was able to deliver its highest quarterly EBITDA margin since we completed the acquisition three years ago.
Sure we've seen resilience in our aftermarkets, an SSG businesses.
Aftermarket business represented approximately 26% of his team's revenues for the quarter, which is up from 24% in the first quarter in Q2 last year, we continue to see solid demand for replacement parts in the quarter part sale.
$31 million.
Softness we saw on utilization levels of our rental fleet. During the first quarter continued into my but we did see signs of improvement in June most notably in Canada, where utilization levels approached prior year levels.
Overall, our rental income in Q2 was down in comparison to very strong comparative in the prior year quarter, but was up 6% versus the first quarter.
Our safety and security group demonstrated its resilience with impressive performance in Q2, this year generating higher income on slightly lower sales compared to the prior year. Its adjusted EBITDA margin for the quarter with outstanding at almost 21%.
Before we have diversified our public revenue funding sources, while the pandemic has impacted the financial help the municipalities. We our position so that our exposure to public funding mechanisms is diversified with multiple funding sources our businesses in both SG.
And SSG are deemed essential and we see market share gain opportunities and are encouraged by potential future opportunity as we see catalyst for growth all of it.
Explain in further detail.
Historically, approximately 60% of federal Signal's revenues were generated from some kind of public funding mechanism over the course of allow seven year several years through a combination of acquisitions and organic growth initiatives that percentage is now less than 50% as the growth in our industrial and rental business has.
Outpaced that of our public funded revenue stream.
Furthermore, our publicly funded revenue stream include revenues that are generated from sales to municipalities outside the U.S., most notably in Canada. Following the acquisition of Joe Johnson in 2016 and in Europe through our Vama business located in Spain. We have also seen significant growth in the.
Last two years in export sales of our public safety product to customers in Latin America.
Within its G. R. Two primary products sold to U.S. municipalities are sewer cleaners and street sweepers sewer cleaners represent our largest product line in terms of sale.
Sewer cleaners.
We were cleaner purchases are typically found it to water taxes as opposed to gentlemen, this supposed fun.
Both sewer cleaners and street sweepers provide essential services and the focus on cleaning remains the most important during and after this global pandemic.
Through our reclaiming Tomorrow together initiative, we are also identifying ways to make our equipment, even more essential as big as an example, our sewer cleaners are being used to clean the field Museum in Chicago prior to its reopening within SSG our sales to municipal customers are primarily represented by sales of.
Public safety products to emergency first responders and systems that worn inhabitants of weather related dangers like tornadoes or tsunami.
Certain of our new technology offerings, our funding through the emergency be charged on use your cell phone bill.
Yes, we are monitoring developments relating to a potential infrastructure, bill, which would be a catalyst for growth for many of our businesses. The proposed 1.5 trillion dollar Bill that was recently passed by the house of Representatives includes funding to repair roads and bridges expand broadband access in rural areas.
And to rebuild the modernized American infrastructure with significant investments in public transit the energy grid clean water and wastewater system Affordable housing school and hospitals legislation also include by America procurement requirement.
If such infrastructure legislation would a path with our various businesses, which support maintenance infrastructure markets federal signal with stand to benefit specifically, we would expect broadband in Fiveg fiber network expansion and electrical grid updates to drive demand for our true back line of safe digging truck.
Which allow for Steve we accessed underground utility and provide for limited disruption from directional drilling in fiber insertion. In addition upgrades an expansion of clean water systems with increased utilization of our sewer cleaners as new ways stations and pipe upgrades would require clean.
Following the 2019 acquisition of Mark Wright lines equipment, our product offerings also include road, marking and line removal equipment and we provide ROE marketing services, we would expect our am our products and service offerings to benefit from the more than 300 billion earmarked for road resurfacing and repair.
Our work, which could also lead to increased demand for our street sweeper products.
Further our dump truck body in trailer products are utilized.
Commercial housing and road construction, which month of the products outlined in legislation, resulting in increased need to haul asphalt start travel and other material.
In addition to demand for new equipment, we would expect to see increased demand for aftermarket businesses through increased parts and services used equipment a rental activity. We will continue to monitor any additional development.
Finally, our strong balance sheet will continue to provide opportunities for us to drive both organic growth initiatives phenomena.
Strong cash flow generation low debt levels and strong financial position will help us to navigate through the ongoing challenges presented by the pandemic at the same time, we remain committed to our long term capital allocation priorities of investing inorganic growth initiatives and funding cash returned to shareholders.
With our strong cash position the available financing under our revolver and our conservative leverage we're confident in our ability to continue to not only fund our existing operations, but also pursue strategic transactions and participate in an M&A environment with more reasonable valuation.
Expectations than existed in the pre coated world.
To illustrate that during the quarter, we completed the acquisition of Pwc, a distributor of maintenance and infrastructure equipment, covering North Carolina, South Carolina parts of Tennessee, PW, it's been a long term partner federal signal and this transition facilitated orderly ownership transition and an attractive geographic.
If market for approximately $6 million the acquisition added a third location to our current footprint in this population dense region, which will allow us to better serve our customers and accelerate the growth of our aftermarket business.
In general, we see M&A market, starting to open again with more deals flowing through.
Although the pandemic may create some logistical challenges we are now more optimistic and our ability to get the deals done than we were 90 days ago.
We're also in a position to be opportunistic as it relates to acquiring certain manufacturing facilities that we currently for example, we recently executed a letter of intent to acquire one of our dump truck manufacturing facilities at a very attractive valuation. We also secured a parcel adjacent land.
Both will facilitate the expansion of our footprint to support a strategic growth initiatives to broaden our access to end markets and to allow us to better support our customers.
There remains an amount of uncertainty surrounding the potential business impacts from Cowen 19, and we unfortunately are not immune to the effects of the pandemic. While we have been proactive in our approach is I just mentioned the pandemic continues to great ongoing challenges and running our operations at normal levels.
With the recent increasing cases across many states in which we operate it is possible that we may continue to experience elevated employee absentee levels in the second half of the year, we're committed to taking the necessary steps to minimize disruption with the objective of achieving more normal production level.
As a reminder, we started the year strong with our first quarter earnings up 30% on a year over year basis in recent years, our second quarter earnings have represented the strongest of the year impart due to the prevalence of annual actively activities. The typically occur during the quarter.
Through the pandemic many of these activity, which include industrial plant shutdowns rental activity in spring cleanup were either significantly curtailed or canceled and are not expected to be rescheduled until next year, our backlog remains at a healthy level, providing us with visibility into the second half of the year.
Assuming that we do not experienced any significant covance related disruptions for the duration of the year. We currently expect our adjusted EPS for 2020 to be in the range of $1.53 to $1.65.
At this time I think we're ready for questions operator.
Thank you we will now be conducting a question and answer session.
He would like to ask the question. Please press star one near telephone keypad.
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Hey Press Star too if you would like to remove your question from the Q.
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One moment, please while we pull for your question.
Our first question some from the line of Steve partner of Keybanc Capital markets. Please proceed with your question.
Thanks, Good morning.
Thanks, Dave.
Really good to hear about the sequential improvement as the quarter progressed now normally threeq revenue steps down from Twoq you does the 17% decline this quarter break that pattern, meaning that we should think threeq revenue is up sequentially.
Yes, I think Steve you know as we mentioned April was.
The lowest subject of in terms of the average weekly revenues that we had in April it was the low point in that it's improved sequentially each month since then.
I think with that said and with the with the caveats about no no additional disruption from any coated related incidents I think we would expect.
To see that continue into the quarter. So.
Yeah, I think I think we're expecting that trend to continue so the Q3 would be expected to be higher than Q2, just given that April was laws.
Yes, hi, understandable, so that suggest to half revenue should come in above the 556 million in the first half I would think is that fair.
With that yes, with the same caveat.
Yes, yes.
So the reason I ask is at the midpoint of the EPS Guide you put up 78 cents in the back half versus 81 in the front half. So if revenue is expected to be up presumably that means you would come in towards the higher end of the guidance range all else being equal.
Where is there something in there that would avoid.
That's clearly our objective of what we tried to factor into the guidance was a certain number of days that we might experience disruption related to cope with it.
And Thats why the range is little bit Brock wider than you typically see.
So we're move we're clearly targeting the higher end of that range, but we wanted to make sure certain things are outside of our control and we're going to the right things by our employees. So we factored in a certain number of cobot disruption dates and we're hoping there fewer rather than more yeah I think Steve.
I think the Atlas, we gave kind of indicates our implies that we're expecting to be offering toward the high end about talking EBITDA range for the year.
There are I think Jennifer mentioned in the prepared remarks, we are.
From a cost savings that standpoint, we did bring back employees.
So that we're expecting the cost savings in the second half of the year to be basically the equivalent of the amount we saved in Q2.
We have frail committed to investing in new product development, because we think we're in a position to continue to invest for the future and so thats going to remain.
Some of those costs will be will be added in the second healthier so that may create a little bit of margin pressure and when you compare it to the.
The strength of the Q2 margin performance.
Yeah.
Yes to that point, if my models right. This was the best SSG margin on the segments history. Despite a 2% decline in revenue can you talk through what drove that specifically and should we be thinking that's a sustainable at 19% plush.
Yeah, I think a couple of things here. One is we acted very quickly and decisively.
In terms of adjusting our production.
To respond to the pandemic.
We instituted on staggered shifts at SSG we're.
In order to meet the requirements of safely on safety is two things worked out pretty well.
Mix played an important factor in that but again, Mark Webber is running that business and mark in the team are doing a super job in terms of their continuous improvement activities that it's going to vary quarter to quarter, but.
They did a fantastic job in some pretty challenging situation.
Achieving that margin level.
Yeah, that's why I ask I mean, if you if you staggered production or reduce production you would think you'd have a have absorption issues and yet you are able to put up the best margin in the segments history. So was that primarily mix that drove that and is that a mix that we can expect in the back half and there was some mix.
Aspects to it Steve the probably the largest was within our European business, we had a very large.
Contract.
The shifts during the.
During the quarter and I think some of that is also a factor in the orders when SSD, we've talked about the orders.
They're not necessarily as indicative as they are on equity because you can receive the audran ship in the same quarter, but we had a large order that we received in Q1 that shipped in Q2, and so that was really from a timing standpoint that was really accelerated in the first quarter. So I think even when you look at the audits the ought to drop that we saw in.
Q2, a lot of that was timing related because of when we receive disorder and so that shift. It was predominantly in may and June that most of that ship and that was a print that was that there was a favorable margin shipments. So there's definitely some mix aspects and most of it was within our European business.
Understood. Thanks, I'll get back in line.
Yeah.
Thank you. Our next question is coming from the line of Mike Boguski Collyer Securities. Please proceed with your question.
Morning burning warning.
Hey, good morning, guys, how we're doing.
Good.
Good so I just want to follow up on those ask your questions. There I mean this past quarter.
What's what's potentially your worst quarter during their pay their topline constructive yet the margins certainly delivered here.
No you thought to making some upside changes to your long term margin targets, which the segments that you passed this test with.
With flying colors Sir.
We're not going to make changes this quarter I'm kind of given the uncertainties. The pandemic, but you know we are absolutely Oh, we'll make changes if we can sustain this.
On a ongoing basis and we have adjusted our margin targets upward both at MSG analysts and investors T. over the last couple of years and we'll continue to take a look at it we just want to confirm that it's sustainable.
Through these challenging market conditions, but it's something that we're very focused on as I've mentioned before it is a component of our short term incentive bonus program. So theres an incentive across our organization.
Regarding improvement of the EBITDA margins.
Okay.
Great.
Looking at the back half outlook here I also wanted to ask a question for some of it more color.
I guess, which category as you feel best about is going into the segments for the back half of the year and which ones are the most cautious on the right differences between let's say a street sweepers and vacuum trucks et cetera.
You know as they look at the second half of the year no we talked about on the call.
Our TV I businesses SSG.
Aftermarkets business evolved proved to be.
Pretty resilient RGB I business bounced back quicker.
And we're encouraged by what we're seeing there.
I'm also encouraged by.
The order trends for our Vactor business in July.
We saw improvements versus June in both sewer cleaners, and our safe digging equipment.
Street sweepers have been pretty steady.
That's the best way to describe it off the April lows, we've seen some improvement.
So and then MRL or acquisition.
Particularly the high Mark the services part of it has done really well.
So I think you know as I look forward one of the things that gave us confidence.
And in order to reinstate guidance was the improvement that we were seeing kind of across the board.
We need to continue to see chassis deliveries occur that's important it does have a little bit a knock on effect for our SSG business.
But you know we're going to continue to invest in new product development. That's been important we have leading market positions and I believe that you know as we come out of this pandemic that we will gain market share.
It is I'm encouraged by what we're seeing longer term in the market.
Got it thanks, that's great color.
I also want to ask into your comments about the pension about the the pension charges in the quarters. You had mentioned you would have done today multiemployer plan on yet I didn't see any increase in the pension liability on your balance sheet from the previous quarter I know on no pension expert. So I just want to make sure is there something we should be seeing in the future some increase in your.
Your balance sheet stations to your pension.
Any other industry watching.
Cash flow and that on that.
On that line or not in that part of your business you probably might you probably won't see on the pension line item in on our balance sheet, where you'll see it is it's a component within our on Oh gosh current liabilities. So you'll see it in the current liabilities that will be a component.
That we will we and we currently expect to pay in the second out the so it will.
It will be in and out within the year on because we'll expect to pay that withdrawal liability during the second albeit.
Okay is that a high dollar amount or.
It's a 2 million charge that we recognized.
That's how I feel good afternoon dollar enough yeah, Okay got it.
Great that makes that makes sense. Thanks, so much guys I'll.
Hi back into appreciate it.
Thank you Mike.
[music].
Thank you. Our next question is helping to line up Walter check of Seaport Global. Please proceed with your question.
Hi, good morning, good morning, great quarter guys.
When they ask about to see the order trends trends you the declines.
In the second quarter year over year were pretty steep.
And it sounds like the orders are coming back nicely.
June.
Yeah, I'm wondering if you think you'll be able to get back to prior run rates.
Or something changed about the end markets as a result to solve the fires from recession that would just went through.
Yeah, a couple of comments first of all we expect Q3 orders based on what we're seeing today to be better than Q2 orders and from a trend standpoint, it's moving in that direction.
In my prepared remarks, a couple of things to note versus Q3 last year as we had the acquired backlog of Morocco, which is about $27 million.
So that you need to deduct that and we also had very strong quarter, but you know.
I am encouraged by what I'm, saying and we expect Q3 orders to be better than Q2.
With respect to our end markets.
Again, I believe that we're in a very good position right now because we have leading brands, we're investing in new product development and we've got some nice successes there in our TV I businesses. For example, they introduced a new product at the end of the first quarter.
On the dirt tough product and they you know crossed a million dollars in a couple of months in a very difficult quarter, so that something where I believe longer term.
Well, we don't see any changes and in fact, if anything we see opportunities to gain market share.
Okay great.
And I wonder are strictly about some of the troop extending into utilities. What we're hearing is that the utility capex budgets are still intact and there's still spending.
Are you seeing from your utility customers.
Yes. So April may were tough [laughter], because things were shut down as I talked about on the call. We saw a sea change in June to the positive we did double the number of demonstrations, which are very important for the sale of that product.
That we did in May and June we April and May combined hereafter more than we did in June of last year.
So we are encouraged that in addition to that safe taking products so from July or up versus June.
So again, the terms are going right direction.
We've seen some good interest.
In some of our new product introductions, specifically the coyote.
So as we move forward, we that's an important growth area for us that we'll continue to in Boston I think the other thing that's important to understand is the market conditions longer term I believe in safety gains will be more favorable for us because some of the western Canadian smaller comes.
Monies that were very dependent on oil and gas are struggling.
Okay got it then a less form for me the the profits with great for the free cash flow looks very good as well.
As you provided or can you give us an idea. So 2020 free cash flow that you think you might be able to generate.
Yeah, I think well we aim for kind of cash conversion on a net income basis of about 100%. We continue to think that will be the case this year in terms of.
On a capex I think we're looking at between.
30 to 35 million of Capex. This year, that's it that's a tick higher than what we talked about last quarter and a lot of that is really right. Some of things as Jennifer mentioned about some opportunities we have to purchase.
Some of our leased facilities, a pretty attractive rate. So that those are some of the things that we're looking at and that might cause our capex to tick up a little bit.
Okay.
I mentioned that Capex are heavily thanks.
Sure.
To close to finishing that Patrick.
Great question, we had paused the construction.
During March and April due to the pandemic.
We've re initiated the prod jacked.
We're on track to complete major portion of it by the end of third quarter. The final portion by the end fourth quarter on what's been great is we've been able to move into some of that space and it's really helped us with the safety listing requirements.
In place in Illinois, and then a true benefit so we're encouraged by the progress that we're seeing.
In addition to that as I talked about in the call.
We had other projects that are continuing rugby facility RMR out facility as I talked about we signed a letter of intent to acquire our facility up in Minnesota at attractive valuations. So.
Good work being done there which longer term.
We were both support our growth I'm supports some M&A and also some.
Some improvement with respect to productivity.
Okay, great quarter guys. Thanks.
Thank you all.
Thank you. Our next question something of a line of Chris Marr CJ Securities. Please proceed with your question.
Hey, good morning, guys.
Morning.
Good morning press a quarter.
Hey, I want to make sure sure I want to make sure I understand the a 14 million in cost savings in Q2 is that all temporary is some of it permanent I'm trying to understand if the cost structure.
I will meaningfully different pre coping versus a post cobot.
Yeah, Chris I think I think the first thing we would we would say that is versus our plan for the yet and so.
Our plan for the was clearly we were set up for another record year at the beginning of the yet.
That obviously didn't turn out to the case with the pandemic. So the 14 million was really versus the plan that we had for the second quarter.
As we look out to the second half the we think will be.
At a similar level of savings versus the plan for the second up here, so roughly evenly split seven seven ish million in each of Q3 in Q4. So some of you know about half of it is coming but would be coming back things like we had obviously travel and entertainment was that was significantly down in Q2 as as we are.
I.
Seeing some of those things free up a little bit we've seen a little bit more travel with getting our sales teams getting back on the road now that some of the stay home restrictions of lifted so some t. any will pick back up again.
We had temporary furloughs of employees, that's probably the biggest driver roughly 14 million savings.
Many of those have returned.
As we pick back up on production levels, but unfortunately, as Jennifer mentioned, we did.
We did execute a reduction in and fourth so that did result in some eliminations of physician.
Got it and that's helpful.
You just when you look at the competitive landscape post cobot, Jennifer sort of touched on this moment ago kind of suggested that.
You guys should enjoy improve positioning, especially especially with respect to smaller clarity. So in on the seek digging side Western Canada. It sounds like there's a small smaller oil and gas focused are there other logical areas where.
You just you may begin to better position competitively.
Another good example would be our some of our TV I businesses.
Were there some smaller competitors.
There are other examples but that would be the other.
Yes.
And those Chris typically they may be in different geographies from where we currently off so.
That would be different regional players that businesses and regional business and so.
Those would be the types of this.
Got it.
All right I'll jump back in line appreciate guys.
Thank you. Our next question is how can a line of Greg Burns of Sidoti and company. Please proceed with your question.
Good morning, Craig.
When we look at your backlog have you seen any major.
Project cancellations or delays.
You either on the municipal or industrial side of the business.
No not at all.
Okay, and we look at.
Yes, the municipal side, you outlined the diversity of the revenue streams there but.
And the other conversations with the customers change there are they are they are they pulling back on.
Projects are waters.
Have you seen any kind of changed given.
What we're seeing a lot of the major.
Initial markets around the country.
Either from Colgate or.
More recently with some of the.
There are protesting and things like that.
Yeah. So you know today, we have an outside of the pandemic impact we haven't seen.
Impact from those discussions it's something we're monitoring closely.
We wanted to give you all some additional data about the nature and specifics regarding our businesses in the various public funding sources.
With respect to some of the discussions around our public safety systems business.
We have diversified that business quite a bit.
And we are we done our export business the Latin America's increased we have a portion of that business in Europe. So.
Some of it is immune from the discussions that are going on right now in the states another portion of its in Canada.
We would expect right now that new police car registrations.
Could be down 10% to 15% next year.
But as we move forward that only represents a portion.
Our business. So it's something we're monitoring closely but we believe given the funding sources that for many of our products like water taxes for sewer cleaners.
We'll be somewhat insulated from any impact the other thing I think it's important to is the nature of our products.
They clean.
And right now there's a premium placed on clean.
Okay, and I guess that.
So last question the fed sick response have you seen any.
Hi, good traction with that initiative repurchasing some of your equipment or highlighting the futility of.
Your equipment for cleaning and sanitation purposes, Yeah. So right now on the interest is very high we've had over 4 million hits on are fed Sig response.
We're in the process of demonstrating it.
There's a great diamond demo video on our website fed sick response, but we're in very kind of early days right now to offer any kind of conclusive data regarding the take rate.
Okay. Thank you.
Yes.
Our next question.
Right.
When we gain capital market. Please proceed with your question.
Good morning, guys. Thank you for taking my questions absolutely good morning.
Good morning, I was wondering maybe you could talk a little bit about some of the strategic initiative that you had discussed and the last call. You've obviously had only here specifically actually beat the market share share gains you've made mention of it multiple times a longer term you are expecting market share gains are especially versus original competitors just kind of wondered if may.
It's a little bit too early just yet but have you seen any sort of movement. There where you can really point to the fact that you are gaining share from some regional competitors.
Huh were an early days, we've got some anecdotal evidence.
Regarding some accounts.
That.
Ben are different orders have been placed with us versus our competition.
Let me go back minute to the investments that we're making because I think they are important and they will differentiate us from the competition going forward, our reclaiming tomorrow together initiative.
One focuses on our digital customer experience.
And that's been an area that we really accelerated stock with pandemic in terms of creation of materials and videos for our salespeople everything from training videos to marketing videos and I think that's something as we move forward.
Our customers will value second we continue to invest in new product development, probably Great example is electrification Hurst some of our street sweeping products.
To expensive undertaking we've been working on it for quite some time, we're going to continue work on it you've had some positive demos come out west and that again is a good example, and initiative that we believe longer term customers were value and will differentiate.
From the competition, because candidly, it's pretty complex and it costs a lot of money.
So it's those type of things that we believe will allow us to take leap frog I had the other thing we're very focused on is reducing lead times for our sewer cleaner and our safe taking businesses as we talked about pre coded there.
But the problem for us are too long and we've been making good progress on that particularly.
As we continue with finishing the plant expansion down at Vactor.
And we're going to be in a really good position.
As we go into 2021 with reduce lead times that will allow us to both benefit from any infrastructure Bill.
And we think take share from the competition.
That's helpful and then.
Following up on on the comment there you are talking about in terms of supply chains. If you will.
The last quarter, there were some potential for supply chain issues or disruptions domestically. It doesn't sound like you saw too much for that rather improve does as the stay at home ordering opened up but can you talk a little bit about your expectations for supply chain domestically here for the second half of the year.
Sure.
We had some challenges with some part.
At some of our businesses in March and April we the teams did a super job working through those probably the most significant initiatives. We talked about was in our TV I business with the chassis. We were at a low point of two per day at one of our facilities.
It's you know.
Improving I went back up to eight and we see speaking further improvement in July so I feel pretty good about where we are with that but in general on as we sit here today, assuming no additional shutdowns, we don't expect any supply chain disruptions from second.
Here.
Okay, and it's very helpful for you to Ah to put out the the revenue diversification on the municipalities on their budgets.
Very useful information, but I was also wondering if you can maybe talk a bit about your your dealer distributor channels or are you seeing any sort of stress there as it relates to their ability to access capital.
No [laughter] you noted our teams do it really good job of staying in contact with our dealers.
Mark Webber, our COO and myself I'm I've spoken to many of our large dealers do two of us on and there. Many of them have very strong balance sheets are continuing to invest and I really think it's an asset.
Federal signal and something that differentiates us from the competition, we've had no real collection issues, our cash flow as demonstrated by the second quarter continues to remain strong and I see it we're very fortunate to have to do partners that we do.
Got it and last quick question I'm, just looking out the cash flows from operational quarter and the activities around working capital.
Just kind of wondering as we look into the second half year.
Were there any sort of one off type situations that you implemented in the quarter to kind of help working capital that'll sort of unwind in the second half a year or are there some permanent.
Things that you were able to improve working capital manager for you guys.
Yes, there was.
A number of temporary things that we did most of the at some point in the future will unwind that were also some things as it relates to the Kazakhs that allowed us to defer some.
Some some payments for example, I think there's about three and half million of income tax payments that we differ from Q2 into Q3.
There were also some deferrals of some on payroll taxes that the Kazakh allows.
Those those are more longer term deferrals of thing you can pay 50%.
In 2021, and then they are the 50% in 2022, so at the end of.
Q2 that was about two and a half million dollars. So that would be we would expect that to continue.
But those are kind of some of the temporary things that were resulting from the Kazakh provisions. The other things that really drove the cash flow with where.
Lower rental fleet investment and I think thats one of the things that.
We were in a favorable position for being both the manufacturer of the equipment and also having.
The direct contact with the customers as it relates to utilization levels. So that if we see you know any debt downturn and utilization levels. We can scaled back on what we're adding to the fleet. So that was certainly a factor.
During this this quarter in comparison to Q2 of last year, when we were probably adding more units to the fleet.
Got it thanks, a lot for your time guys appreciate it.
Huh.
Thank you. Our next question has come from a lot of Steve BARDA Key Bank capital markets. Please proceed with your question.
Hey, Thanks for letting me jump back end up the Liam.
First just a modeling question the 33 million SGN ending the quarter was the lowest since early 2017, when the revenue base was a good bit higher and I think you said you expect a 14 million in savings into Q to be that amount to be spread across threeq and Fourq. You does that mean, we're thinking SGN a on a dollar basis, we'll run back towards the high.
Hi, $30 million range in the back half.
So Steve just on your on your as you know I think you said 33 men I think we're looking at more like 37, I think thats, what we have for Q2 so.
Well I, just want a bunch of add backs or or deductions for the cobot expansion integration. Okay. So if you've got right adjust adjusted okay.
That's right.
Yeah, I think when we look at it kind of as a percentage of sales that that's typically how we approach our equity in a it's been in that kind of 12, and a half to 13 and a half range <unk> over the last several quarters. So I think you know.
We will we will adjust as you know basis as we demonstrate in Q2 I think we will remain flexible.
There are things that flow through the EPS DNA line that.
Can be a little unpredictable things like.
We have a a mark to market liability I think we've talked about previously that sometimes flows through those that can cause some volatility, but the most part we we typically going to target a similar question as sensitive salads as weve as we've had in the last several quarters.
Okay.
Jennifer you spend a lot of time in your prepared comments talking about all the catalyst that could come from an infrastructure, Bill, which I think which I agree with.
But how are you handicapping that actually getting signed into law.
So historically at federal signal I.
Discouraged our businesses from ever including an infrastructure Bill.
As part of their annual operating plan.
Because my own believe has been that you know it wasn't going to happen I think though [laughter]. So you know that we've taken a approached this is not something that this is new for us to say, okay. How do we plan and what do we do.
Look I don't know anymore than everybody else does we monitor closely my personal belief is you know as we.
Both sides of the party were pretty divided country right now and this seems to be an area, where there's commonality I think its economic stimulus for the country. So as we come out of the election, I think that theres, a better probability than I've ever thought before that in infrastructure Bill will be passed.
Interesting, Okay, and then the PW he comments.
I may have missed this but why wouldn't that'd be a better fit for one of the dealers.
Just given the.
Dynamics of that particular territory, we believe that right now on the JJ team.
It is the best entity on to.
Work with the local team in terms of rebuilding that territory, we think theres a lot of opportunity there and we made the decision that with the owner as part of his succession process that federal signal and particularly the JJ team was best.
Physician to help grow that business.
Is there a lot of overlap in that region with existing dealers.
No its exclusive.
Okay. So this is not a situation where your necessarily competing with your own channel.
Correct, we its exclusive so and the minutes this okay.
Thank you.
Absolutely.
There are no further questions at this time I would like to turn the floor back over Jennifer Sherman for any closing remarks.
There's no denying these are uncertain time. This experience has confirmed my strong belief that our workforce is unparalleled in its passion commitment and grit and why we may have some challenging days or periods I'm confident that we will band together and work through these challenges as we have many others we.
Our nimble and we'll continue to move quickly.
Our portfolio of businesses includes many market leading brands with solid fundamentals, we have a strong financial position a history of robust cash flow generation, a culture of winning a clearly defined strategy and experienced team with a proven track record of anticipating issues and proactively implementing.
Responses. The Corona virus has not changed any of these factors I am optimistic about long term future of our company I.
I would like to thank our shareholders employees distributors dealers and customers for their continued support. Thank you for joining us today be safe and we'll talk to you soon.
This does conclude todays teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.