Q4 2020 Federal Signal Corp Earnings Call
Greetings and welcome to the Federal Signal Corporation fourth quarter earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the final payer and patient.
And he wants you to require operator assistance during the conference. Please press star zero on your telephone keypad and he's not.
The conference is being recorded and I'll now turn the conference over to your host Mr. Ian Hudson Chief Financial Officer. Thank you you may begin.
Good morning, and welcome to federal signal fourth quarter of 2020 conference call.
And Ian Hudson, the company's Chief Financial Officer.
Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer.
And we refer to some presentation slides today as well as to the earnings release, which we issued this morning.
Slides can be followed online by going to our website federal signal dotcom clicking on the investor call icon and signing into the webcast. We have also posted the slide presentation and the earnings release under the investors tab on our website.
Before we begin and I'd like to remind you that some of our comments made today may contain forward looking statements that are subject to the safe Harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission day.
Documents are available on our website.
Our presentation also contains some measures that and.
In accordance with U S generally accepted accounting principles.
Our earnings release and filings we reconcile these non-GAAP measures to GAAP measures.
In addition, we will file our form 10-K later today.
Jennifer is going to start today with her perspective on our performance and then I will provide some more detail on our fourth quarter and full year financial results. Jennifer will then go over our outlook for 2021 before we open the lineup for any questions with that I will now like to turn the call over to Jennifer.
Thank you Ian.
Like to start by giving my profound thanks to each of our employees and our business partners for their ongoing commitment I'm immensely proud of how our teams have managed through these challenging times.
It's hard to believe that it's been a little over a year since the first COVID-19 patient with reported and your.
Since the outbreak of the pandemic the health and safety of our employees has been our highest priority and we worked quickly to implement a host of measures to establish a safe work environment for our employees.
These steps have included adjusting our office spaces and production processes at our facilities to comply with safe distancing guidelines. During 2020, we invested and temperature screening capabilities and most of our facilities issued a mandatory facemask policy provided our employees with additional paid time off and made at her.
And test kits available for free to our employees and their family members.
As the National COVID-19 vaccine distribution has gotten underway. It is clear to me that Vaccinating. Our workforce is the single most effective tool at our disposal to protect our employees and customers and keep our business is operating efficiently and and not shop, putting this pandemic behind us.
Is critical to our long term success, so with that and mine. We recently kicked off a company wide effort to raise awareness about COVID-19 vaccines assist eligible employees and gaining access to available vaccines and encourage participation levels.
Through the pandemic our businesses have worked closely with local health departments, and Illinois, where we have three of our largest manufacturing facilities. Many of our employees are now eligible to receive vaccine as essential workers and partnership with the local health Department, we have organized and onsite vaccination about in March for all.
Eligible employees at that site.
I'm extremely appreciative to everyone that help make this happen and hope that we can host similar events at our facilities and other states when our employees become eligible and addition to protecting our employees one of our objectives and launching this initiative is to provide comfort to the customers and suppliers with whom we frequently interact.
And person that our high percentage of our customer facing.
Boys have received the vaccine. We also want to provide a mechanism to encourage eligible employees to feel more comfortable traveling to support our customers sharing the same sentiment as others. We are anxious to move beyond COVID-19 during.
During the fourth quarter with the resurgence and cases across much of the country. Many of our businesses experienced COVID-19 related disruptions. The fact that we were able to navigate through these issues and deliver strong results was a real testament to our teams.
Felipe those trends are now improving there is no doubt that these remain tumultuous and uncertain times. However, this experience has confirmed my strong belief that our work force is unparalleled and its passion commitment and grit and while we may have some challenging days for periods I'm confident that we will band together and.
Worked through these challenges as we have many others.
Overall, our performance for the fourth quarter represented a strong finish to 2020, a year and which we delivered the second highest adjusted EPS in the company's history.
Surpassed only by the $1 79 per share reported in 2019.
Despite the impact of the pandemic on our topline I was pleased with how our teams responded quickly taking action to control costs, which not only preserved our EBITDA margin, but and improved it by 40 basis points on a year over year basis. In fact, both of our groups exceeded the upper <unk>.
And of their current target EBITDA margin range as in 2020.
While many companies conserve capital and 2020, we were proactive in taking a number of actions to position the company well for 2021 and beyond as we continue to focus on our long term growth objectives by funding strategic investments to support the future growth of the company and three critical areas.
First we have made significant investments and our existing plants to add additional capacity to support our long term growth and to gain operational efficiencies through the use of newer machinery and equipment. We recently completed our plant expansion and backyard and are making progress on expansion of our manufacturing facility.
And rugby North Dakota, and late Crystal, Minnesota earlier, and the year. We also completed the expansion of our MRO facility and billings Montana.
Second we continued to invest and new product development and we are seeing the benefits from these efforts with an estimated $200 million of revenue and 2020 being generated from the sales of products introduced in the last three years on.
Among those products was the 'twenty 100, <unk> are full sized sewer cleaner, which we launched in 2018 for 'twenty 100 ice sewer cleaner introduced intelligent controls on the truck and was entirely designed around our customers' need for ease of use.
And Operability two years following the launch we continue to see strong results from that product line and positive customer feedback on the design during 2020 and on the back of our success for the 'twenty 100 eyes, we launched a smaller sewer cleaner and a truck cheddar and machine that incorporates the same intelligent controls.
The 'twenty 100 on the.
The initial response to these products has been very positive TBE I. Our dump bodies business was also successful and bringing several new products to market and 2020 addressing specific customer needs are improving our competitive positioning.
A few examples I would note on the launch of the J crafts apex dump body, which features smoothed sides with no seams and a tough dump body that result, and a significantly better flow of materials for the end user and the dirt top S.
And <unk>, which is a heavy duty abrasion resistant dump body with a simplified design that allows us to manufacture and fulfill the needs of our customers within a lead time of approximately six weeks, which is much shorter than manufacturers of competitor products.
Overall revenues from these new products accounted for nearly 10% of <unk> overall revenues during the year, and which TPI delivered the highest EBITDA margin under our ownership.
Within SSG, we've increased our recurring revenue streams through commander, one a product that leverages, our existing install base outdoor warning siren and provides a unique differentiator for federal signal timing control equipment.
Of our total R&D spend in 2020, approximately 20% was invested and electrification projects and we are pleased to report that during the fourth quarter. We received our first orders for our hybrid Electric Street sweeper electrification will continue to be an important initiative for the company moving.
Forward.
Third we reacted quickly to introduce several new digital marketing tools to enhance the customer experience of our customers under reclaiming Tomorrow together initiative. These tools, which include virtual equipment demonstrations and digital training academies allow us to reach our customers and a new.
We also launched our e-commerce site and the fourth quarter, which initially focuses on certain product lines within our safety and security systems group.
Our strong cash flow generation supports not only these organic growth initiatives, but also ongoing debt repayment cash returns to shareholders and acquisitions and June of 2020, we completed the acquisition of PWA and last week, we completed the acquisition of <unk> equipment and repair and on.
October of 2020, we issued our inaugural long form sustainability report I'm incredibly proud of the progress we've made on our environmental social governance initiatives and thrilled to share our many accomplishments for the issuance of this report.
With our commitment to continuous innovation strong governance and reduced resource consumption, we continued to build and deliver equipment that has beneficial impact to both the environment and human safety. We are proud to be a company, whose products have inherent environmental and social importance and we.
Hope that our pride is evident on reading the report.
Let me now spend a minute on our recent acquisition of SW O. S. W is a leading manufacturer of dump truck bodies and a custom up fitter of truck equipment and trailers and is headquartered and Snohomish, Washington, with and up to filling location and Tempe, Arizona and a service center and I've mentioned, Alberta since it.
Wiring TBE I and 2017, the geographic expansion of our existing platform of market, leading dump bodies and trailers has been and important strategic initiative. The acquisition of <unk> W. Represents a highly strategic transaction, adding three premier brands that serve attractive infrastructure.
<unk> construction and other industrial end markets and the <unk>.
West Coast, Arizona and in parts of Canada.
We have previously noted that our dump truck businesses have a general correlation with new housing starts to region and wish Oh SW operates along the west coast has been the fastest growing areas and the country and the last five years to capitalize on that growth potential and expand its reach Oh SW completed two acquisitions.
In recent years and represents a good anchor tenant for future growth on the West coast.
With its main operations located in Washington State, where the Corona virus pandemic first hit and the U S. O S. W. Financial performance was adversely impacted in 2020. However, it is a company with strong brands.
Real long term contracts with municipalities and a reputation for making quality products.
And the acquisition will also extend our current product offerings by filling in several caps and the TBA is existing trailer portfolio.
Although we expect this acquisition to be neutral to our 2021 earnings. The acquisition provides considerable opportunity for long term value creation through the application of our 80 20 improvement principles organic growth initiatives and additional bolt on acquisitions and I will now turn the call back to Ian to go over the <unk>.
<unk>.
Thank you Jennifer.
Actual results for the fourth quarter and full year of 2020 are provided in today's earnings release overall, our fourth quarter results represented a strong finish to the year before I talk about the fourth quarter. Let me highlight some of our full year results consolidated net sales for the year were approximately $1, one 3 billion down.
Down about 7% compared to the prior year operating income for the year was $131 $4 million.
Compared to $147 1 million and the prior year.
Consolidated adjusted EBITDA for the year was $182 2 million compared to $191 3 million and the prior year.
That translates to a margin of 16, 1% for the year up 40 basis points from the prior year and above the high end of our target range.
GAAP earnings for the year equated to $1 56 per share compared to $1 76 per share and 2019 on.
On an adjusted basis, we reported full year earnings of $1 67 per share compared to $1 79 per share and the prior year.
For the rest of my comments I will focus mostly on comparisons of the fourth quarter of 2020 to the fourth quarter of 2019.
Consolidated net sales for the quarter were $295 million compared.
Compared to $314 million and the prior year.
<unk> operating income for the quarter was $33 8 million compared to $36 4 million and the prior year on an adjusted basis consolidated operating margin was 12% up 10 basis points from the prior year.
Consolidated adjusted EBITDA for the quarter was $47 million compared to $48 5 million and the prior year that translates to a margin of 15, 9% for the quarter and improvement of 50 basis points over the prior year.
Income from continuing operations for the quarter was $26 million compared to $29 7 million and the prior year that equates to GAAP EPS of <unk> 42 per share for the quarter compared to <unk> 48 per share and the prior year.
On an adjusted basis EPS for the quarter was <unk> 44 per share, which compares to <unk> 48 per share and the prior year.
Orders for the quarter were $276 million down from record levels and the prior year quarter, but up $10 million or 4% from the third quarter of 2020 that momentum continued into 2021 with strong order intake and January contributing to a backlog of 330.
<unk> million dollars.
At the end of last month.
That represents an increase from $304 million.
And the end of 2020.
In terms of our fourth quarter group results ESG sales were $238 million compared.
Compared to $252 million and the prior year.
Esg's adjusted EBITDA for the quarter was $44 $2 million up 1% from the prior year.
That translates to an adjusted EBITDA margin for the quarter of $18, 6% above our target range and up 120 basis points from the prior year.
Our after market revenues for the quarter were up about 11% year over year again contributing to the strong margin performance overall, our aftermarket revenues represented roughly 25% of Esg's revenues for the quarter, which is up from 21% and the prior year period.
SSG sales for the quarter were $57 million compared.
Compared to $62 million and the prior year.
Ssg's adjusted EBITDA for the quarter was $11 2 million compared to $12 6 million and the prior year and its adjusted EBITDA margin for the quarter was 19, 6% compared to 23% and the prior year.
Corporate operating expenses for the quarter were $9 8 million compared to $8 4 million and the prior year with the increase primarily related to unfavorable fair value adjustments of certain post retirement reserves, which represented a headwind of about <unk> and the quarter and higher M&A expenses.
Turning now to the consolidated income statement, where the decrease in sales contributed to a $5 $6 million reduction and gross profit.
<unk> gross margin for the quarter was 25, 7% compared to 25, 9% and the prior year.
As a percentage of sales, our selling engineering general and administrative expenses for the quarter were down 40 basis points from the prior year.
Other items affecting the quarterly results include a $700000 increase and acquisition related expenses.
A $1 $1 million increase and other income and a $600000 reduction and interest expense.
Compared to the prior year tax expense for the quarter increased by $2 $8 million largely due to the recognition of fewer discrete tax benefits than in the prior year quarter.
Although it was up on a year over year basis, our effective tax rate for the quarter was lower than we expected at around 23%, primarily due to the recognition of benefits associated with stock compensation activity and other discrete items, which collectively added about <unk> <unk> to our fourth quarter EPS.
For 2021, we currently expect a tax rate of approximately 24%.
That rate includes an estimate of tax benefits associated with stock compensation activity similar to those recognized in recent years.
On an overall GAAP basis.
We therefore and 42 per share in the quarter compared with 48 per share and the prior year.
To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items. During the fourth quarter, we made adjustments to GAAP earnings per share to exclude acquisition related expenses pension related items Corona virus related expenses and purchase accounting expense effects on this basis, our adjusted earnings for the <unk>.
<unk> was <unk> 44 per share compared with 48 per share and the prior year.
Looking now at cash flow, where we generated $57 million of cash from operations and the quarter, bringing the total amount of operating cash generation for the year to $136 million that represents a year over year improvements of $33 million or 32% the.
And the improved cash flow facilitated a $30 million debt reduction and the quarter as well as continued strategic investments and new machinery and equipment and other organic growth initiatives like the expansion of several of our manufacturing facilities.
And 2021, we are currently anticipating that our capex, including investments associated with ongoing plant expansions will be lower than in 2020, and and the range of between $20 million and $25 million.
We ended the year with $128 million of net debt and availability of $280 million under our credit facility.
As a reminder, we executed a new five year $500 million credit facility in July of 2019.
We also have the option to trigger an increase and our borrowing capacity by an additional $250 million for acquisitions.
On net debt leverage remains low and.
Even after factoring in the <unk> acquisition that we completed last week.
We remain committed to our long term capital allocation priorities of investing and inorganic growth initiatives pursuing strategic acquisitions and funding cash returns to shareholders.
On that note, we paid a dividend of <unk> <unk> per share during the fourth quarter amounting to $4 $9 million and we recently announced that we are increasing the dividend by 13% to <unk> <unk> per share and the first quarter.
That concludes my comments and I would now like to turn back the call to Jennifer for our outlook for 2021.
Thank you Ian and looking forward, we remain focused on delivering strong results, while continuing to execute on our long term strategy. Our strong balance sheet provides opportunities for us to drive both our organic growth initiatives and pursue additional strategic acquisitions like <unk>.
Over the last several years, we have transformed our end market exposure and implemented our revenue diversification strategy that has enabled.
Abled us to adjust as needed to market conditions, our aftermarket business has grown to represent about a quarter of esg's revenues and we see additional opportunities to grow that business.
For example, late in 2020, we accelerated and and it should have at one of our <unk> solution centers to expand our parts offerings by in sourcing manufacturing of certain parts that we had previously procured from third parties.
We are also work to develop strong contingency planning protocol.
<unk>, our journey of 80, 20 and invest for growth.
We are closely monitoring the potential actions that the new administration may take to boost the economy, including potential federal stimulus packages that may be provided at the state or local level to aid municipalities, whose budgets have been impacted by the pandemic and a potential infrastructure bill while theirs.
Still uncertainty as to the magnitude and timing of any federal stimulus package I would like to provide a framework of what we know and what we believe the potential benefit to federal signal could be.
The initial proposal.
Under the American rescue plan Covid relief package call for approximately one nine trillion of economic stimulus with initial projections of approximately $350 billion going to state local and territorial governments with the goal of keeping frontline workers employed distributing the vaccine.
<unk>, increasing testing reopening schools and maintaining essential services.
As it provider for equipment used for these essential services like sewer cleaning and street sweeping federal signal is well positioned to benefit from additional aid that may be provided to state and local sources for these purposes.
Sure.
Excuse me, we have recently completed our annual market planning process with our dealer partners and they remain cautiously optimistic about market conditions and 2021, noting that both corporate and sales tax collections appear to have held up better than originally anticipated which should add.
And stability to their revenue sources.
Although the dollar amounts that have been cited and the potential infrastructure Bill are uncertain. It is clear that the U S is in desperate need of renewed investment and its infrastructure and estimated 47000 bridges and 40% of our highways are in need of replacement, whereas entire sewer systems have exceeded their useful life cycles.
We expect and our long term infrastructure Bill will provide visibility for project planning.
And could see capital equipment demand increase in such areas as roads bridges broadband clean energy and public transportation buildup.
And we anticipate that this would provide benefits for the majority of our product offerings, including.
Equipment sales and rentals of dump trucks, and trailers safe digging trucks road, marking equipment sewer cleaners and street sweepers.
Within our industrial markets, we continue to be bullish about our prospects with respect to our safe digging initiative and are monitoring further developments on the regulatory front. We are also optimistic that the recent increase in oil.
Prices could generate increased demand for the sale and rental of our industrial products, we have positioned federal signal in a manner and which we fully participate and the post pandemic recovery by increasing capacity within our facilities, reducing lead times to a level, where we can better respond to customer needs.
Investing in new product development and gaining market share on.
On the flip side, we are anticipating some of the cost savings that resulted from actions taken in 2020 are expected to return in 2021, representing an estimated year over year expense headwind of approximately $8 million like many companies. We have noted and increased material costs over the last several weeks.
And we are responding accordingly.
We are also monitoring the availability of chassis and.
Certain locations linked to a nationwide shortage and semiconductors and expect to be proactive where appropriate so that any supply chain disruption is minimized. This could have more of an impact on television.
As we get more visibility into the year, including the timing of widely available vaccines. We are committed to increasing our target EBITDA margin range on the M&A front, our deal pipeline remains active and some of the logistical challenges that were experienced in 2020 have started to ease a little we continue.
And to believe that M&A will be important part of our future growth.
Now turning to our outlook.
We are encouraged by conditions and our end markets and the ongoing execution against our strategic initiatives and are monitoring the potential for additional tailwind.
As a reminder, seasonal effects typically result, and our first quarter earnings being lower than subsequent quarters, mainly due to the pandemic 2020 was a bit of anomaly in that regard. We started off 2020 with record production levels. During the first quarter at our largest facility and minimal impact from the <unk>.
Pandemic, which did not meaningfully impact our operations until the last few weeks in March and the first quarter of 2020. We also recognized a benefit of approximately <unk> <unk> per share associated with fair value adjustments to certain reserves as a result in 2020, our first quarter represented a higher share.
<unk> of our full year earnings than we typically would expect.
While we are very encouraged with recent order trends, including the sequential quarterly order improvement that we experienced since the second quarter of 2020, our operations are still being impacted by disruptions associated with the pandemic. These factors range from operational inefficiencies related to employee absentee.
Awesome to the impact of the recent lockdown measures that have been put in place across much of Canada, most notably in Ontario.
In addition, and several of our businesses have been impacted by the adverse weather conditions that much of the U S is experiencing in recent weeks for example, our three facilities and the Houston area and our dump truck facilities in Alabama, and Mississippi had to be closed for several days due to the harsh weather conditions.
Fortunately, we did not experience any significant damage to our operations, but we did lose several days of production.
Considering the factors impacting the first quarter. We currently anticipate the second half of 2021 to be stronger than the first half.
Still remains uncertainties surrounding COVID-19 commodity costs and chassis availability yet. Despite this we are expecting a strong year in 2021 with topline growth double digit improvement and pre tax earnings and adjusted EPS of between $1 73, and $1 85 with that we're ready to open.
And the lines for questions operator.
Okay.
At this time, we will be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is and the question queue. You May Press star two if he would like terminal for your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star key.
One moment, please while we poll for questions.
Our first question is from Steve Barger of Keybanc capital markets. Please state your question.
Hey, Thanks, Good morning, Greg.
Morning.
Your guidance indicates you expect topline growth and that makes sense, you've got a fairly easy comp or do you think you can get back to 2019 and levels of just over $1 2 billion. This year that would imply kind of a high single digit organic growth rate for.
Total growth rate I guess.
Yes, I think so Steve I think when you layer and the acquisition as well.
I think we would be expecting that yes, I think the other thing I would say is.
It's still early days and 2021.
We're encouraged by the sequential improvement we saw and orders in Q4 and January and February orders have been strong we're encouraged by what we're seeing.
That's great and.
And do you expect positive year over year growth and every quarter or will the headwinds you talked about likely make <unk> down year over year, and then returning to growth as the year progresses.
And I think Thats net.
While we were trying to signal with Q1 Q1 last year was just extremely strong for us I mean, we came out.
And really strong Jennifer talked about the record production of factor our largest facility.
And we really didn't feel much of an impact of the pandemic really until the second quarter and so.
Pandemic is still here and we're still navigating through some operational challenges.
There was also a couple of kind of nonrecurring benefits that we had in Q1 last year that may not repeat.
I think Q1's, a tough comparison and Thats really what we were trying to signal, but the rest of the year, we feel pretty good about but just with with Q1 and the weather challenges that we've seen recently.
We would expect the second half EBITDA to be stronger than the first half of the year on.
Understood and you spent a lot of last year and you still have some ongoing projects expanding capacity and I know mix matters, but what level of revenue do you think the platform will be able to support once you get through that.
Just trying to get a sense for how much growth you can sustain before requiring additional capacity expansions and does this take you to $1 5 billion and $1 6 billion.
Depending on the plant capacity and factor and the capacity with support and between 30% and 40% and at many of our other facilities. The number is similar.
We feel like the investments that we've made make us very were and a great position with respect to some of our organic growth initiatives, but also some other smaller acquisitions that we're looking at.
And because some of those product line acquisitions, we would be able to move into some of those facilities I think.
Pensions gives us flexibility to so as we look at acquisitions that maybe this product lines that we can fold into our existing footprint.
We also have our <unk> solution centers, which is spread across.
Much of the country, Jennifer talked about deposits initiative, we have there. So we can be fairly flexible with our footprint and the expansions give us additional flexibility.
For I think one other challenges we've had this year is because of.
The expansions have actually helped us with the social distancing that we've had to adhere to and the manufacturing facilities. So that's actually helped.
And as spread out a little bit more this year, but I think long term once we're through this pandemic I think the flexibility of our manufacturing model is going to be important as well, yeah and one thing I would add is in past rebounds, and one of the challenges that we've had is we cut so much and then our lead times get very extend.
And then the rebound occurs and our lead times are so long that frankly, we have lost market share to competition, we've been laser focused on reducing those lead times. So we're well positioned to respond to the market and I think that that's one of the accomplishments that has it and really proud of what the team has been able.
Due in 2020.
So that flexibility and ability to respond quickly should lead to better Incrementals is that what's giving you confidence to ultimately expand your EBITDA margin targets whenever that happens yes.
And one more and I'll get back detract, yes, and attraction for one other thing I would add is and the traction we're getting on new product development.
Yeah, Yeah, I'll ask one more and I'll jump back in line.
With your second truck body deal now.
And just what do you think the addressable market is for those products that you compete in and then maybe talk about.
And the.
And a backward looking way I know that if there is an infrastructure bill it will really drive that higher but what do you think that that truck body addressable market is.
Yes, so we look at both.
<unk> body and the trailer body. So we look at both of those the OLED <unk> with acquisitions more focused and the dump body. So.
Overall, we look at kind of somewhere around $1 8 billion.
But we it's.
It's a very regional play as I tried to indicate my comment.
And I was out and Seattle earlier this week.
<unk> and the new employees and meeting with the management team.
Really energized about longer term, what this acquisition can add to our <unk> business.
And they had a tough 2020.
Got some work to do but they are the leading brand on the west coast.
And this opens up new geographies charts from their two locations and the Seattle area Theyre up fitting center and Tempe, and then their location up and Edmonton and puts us and are positioned to have a great anchor tenant for kind of future expansion on the west coast, which frankly was avoid and our footprint.
Got it thanks nice job.
Thank you.
Our next question is for like Szeliski, a colleague and security.
Please state your question.
Good morning, Hello, Hello, Good morning.
Can you maybe start off can you parse at least directionally on just.
And EBITDA margins for Asia.
Two segments do you think youll have expansion and both are one off on down this coming year.
Yes, I think we're expecting to see expansion and policy can vary quarter to quarter.
But.
And we're encouraged by again the order trend, we've seen and as I talked about earlier in Q4 beginning of the year.
And our SW is one that.
Similar to other acquisitions that we've done.
Has a lower EBITDA margin and particularly given some of the challenges they faced in 2020, but we're excited about the synergies and about the possibilities and as we've effectively proven in the past our intention is to bring them within our up to our target EBITDA range over the next couple of years and that creates.
Kind of additional opportunity for us.
Got it.
And just moving on.
On to the infrastructure bill potential here.
And that's just not the best comparison, but can you just can you take us back when the Big Highway Bill was passed and probably going on about six years ago now.
That was passed what happened and back then and you start getting calls about new equipment as soon as any question Ray on the bill or the people wait until the following fiscal year's budget we're on.
And what's the.
What would be the lag time between when if and when they passed it and if and when you start chances and decent orders.
Yes, a couple of things I'd kind of note is we're a very different business today than.
And then we were six years ago, we didn't have the tbi business, we didn't have morale and we really didn't have meaningful safety gate. So that would be the first thing I would do.
Point out but I.
I think.
Frankly, we have more of a focus on it today as an organization that we did in the past has more visibility where monetary it.
Working with the teams. So we have plans in place we have stock trucks available.
And our biggest challenges I previously referenced in the past has been as we come out of these chat.
Challenging times the markets tend to recover pretty quickly for many of our products and then our lead times get extended and the past they've been extended out past a year. So we're very focused on having equipment available. So we can quickly respond to these market opportunities.
And we're monitoring it closely we think it will benefit our tbi businesses.
Our safe digging businesses, our road striping businesses.
No.
It's kind of across the board.
Okay.
Maybe one last one just wondering a little bit of commentary if you would on the on the balance sheet plans for 2021.
Sure and a fourth quarter you brought down your debt.
<unk> had a cash and a multiyear high.
We're holding on to show net cash for the acquisitions you did.
And although SW.
Beyond that and your speakers grew some of your plans for the balance sheet for the year, especially on the risks inventories operating.
Cash flow if your clients for Keith.
Those lead times for going to extend and you have to invest and some additional inventory and the.
And now 2021.
Yes.
And some a little bit of that Mike just as we've talked about trying to be and are positioned to fully participate in our recoveries and particularly if there's a meaningful infrastructure bill.
So there is some strategic investments that we are thinking about making and some additional stock units. We also talked a little bit about.
Procuring some additional chassis just to maintain some flexibility there so that may be a little bit more investment and on the inventory side and then we would typically have.
Nothing nothing overly significant but those are some of the things we're looking at.
I think historically I think if you go back the last five six years.
The playbook has almost been by integrate delever by integrate Delever and so I think thats one of the things that we would be looking at because acquisitions are going to be.
<unk> to be and important part of the growth for this company and our.
And we would expect that we will be doing more acquisitions in 2021.
Got it fair enough guys. Thanks, so much I appreciate it.
Okay.
Okay.
Our next question is from Felix and motion of Raymond James.
On your question.
Good morning <unk>.
Morning, everybody.
Felix.
You guys made some brief comments about this and the opening but could you maybe flesh out a little bit more what youre seeing on supply chain right now, maybe specifically with regards to chassis availability and really the second part of it how has labor availability track for you all kind of throughout the quarter.
I think that with.
With respect to chassis I'll divide my comments up into kind of two categories. If you look at Baxter Alger and about 50% and the time, we supply the chassis and about 50% of the time the customer supply chassis.
We have and we've dealt with chassis availability. This is something that our teams have a core competency in terms of dealing with because if you go back and time.
2018, there were some chassis issues and we effectively worked our way through it but we're in a position now where we're procuring more chassis to make sure that we're in a position that we can either supply the chassis ourselves or if a customer can't get access to a chassis will have chassis available.
And for those customers, so mark Webber and the teams have done a really nice job on mapping out all of 'twenty, one and adding some significant cushion in there because as we talked about on the call. We believe that the second half is going to be strong.
And I think theres a lot of upside here depend.
And depending what happens and we're positioning ourselves for that upside.
The second category I would talk about is tbi and as I noted in my prepared remarks, that's a little bit different of a situation because we don't own the chassis the customer supplies the chassis.
So we've been working very closely with those customers to make sure that they're procuring the choices that they need to satisfy that demand, but again I guess I would say is we've been down this road before and we've effectively managed the situation and im comp.
And that our teams will be able to do the same this year.
And Phil is just on labor availability, just said just a second part for your question I think we are very fortunate and many of the areas in which we operate and that we have great access to highly skilled quality workforce.
So we have not.
Add significant issues with labor availability and one thing we have.
They are navigating through it and absenteeism and related really COVID-19 related issues and.
And as Jennifer mentioned.
And the fourth quarter with many of the.
And the cases resurging and the early part of the fourth quarter, we had some.
Fairly significant absenteeism and some of our facilities.
Wiring to quarantine individuals and things of that nature, but thankfully those trends are improving.
Across the country as well as within locations and as Jennifer mentioned, we're also getting some good traction on our initiatives to get our eligible employees access to the vaccine. So.
I think we are starting to see some light at the end of the tunnel here, which is a positive.
Yes. This is a great fact in our largest employee basis in Illinois and.
And our in our Illinois employee base, 50% of our employees are in the vaccine process and something I'm really proud of because we all believe that putting this pandemic behind us is critical.
One other thing I would notice as we set forth on our ESG report.
The social part of.
And the programs we offer is important and we tend to be the premier employer and something we're very proud and the communities, where we live and operate.
Got it that's super helpful. I appreciate all that color.
And then I was hoping to maybe touch on the aftermarket momentum youre seeing a little bit would you kind of expect that piece of the book to outgrow the rest of the ESG business into 2021, and any puts and takes you can kind of give us around that would be super helpful.
I think Felix it's certainly something that the momentum is definitely there I mean, we've talked about it growing as a percentage of esg's revenues.
Q4 was up to 25% versus 21, and Q4 19, I think particularly as we we've talked about being ready and well positioned for this recovery.
And recovery via true and infrastructure by low economic stimulus or anything like that.
Having access to our rental fleet gives us more flexibility that we didn't have <unk>.
Obviously when markets recover quickly.
That's our rental fleet, we also have several.
Dealer partners that also have our equipment and that retro fleet. So that's another important piece so I think.
It's it's certainly something that we are hoping will continue to grow but that's not to say, we don't want to continue the sale of new equipment, but I think growing the total dollar amount of our aftermarket business is something that really is something we're focused on we have several initiatives to grow that aftermarket business, we've talked about the parts initiative.
And I were insourcing, the manufacturing of certain parts at one of our <unk> solutions locations again, highlighting that flexible manufacturing model that we have so yeah. I think it's been a very successful strategic initiatives that we've had and it's really.
Been a meaningful contributor to the strong margins that we've had over the last few years.
Okay Fair enough and then just last one for me you made some interesting comments about oil and gas and the investor presentation could you remind us of the total exposure you have to that end market and the business and then.
Some of that or is most of that concentrate on the rental sites and he puts and takes would be helpful. I'll leave it there.
Exactly.
It's a relatively small part of 'twenty and 'twenty revenues I would say, it's certainly less than 5%.
But it is primarily concentrated currently and net rental fleet, we do track utilization of our rental fleet.
Geographically we have.
And then we make decisions based on where we replace that rental fleet. So.
We've been tracking demand Youll I think one other things that we had noted earlier and the year was that and utilization levels and slowed down a little bit and some of that was due to oil and gas and so with that we we were able to kind of scale back the investment and the rental fleet of around and we actually stepped up for sale of used equipment to reduce the other.
<unk> size of the fleet, we had some really strong sales of used equipment and Q4 that was up about $6 million on on a.
On a year over year basis, so used equipment sales are strong and Q4.
And some of that what we've seen recently.
A little bit of an uptick and the industrial activity.
For not just within our rental business, but some of our other businesses that focus on industrial products. So that's that's a really encouraging sign for the industrial markets that have been.
Fairly significantly impacted during 2020 and do you think I would add is an uptick and <unk> creates an opportunity for our safe digging equipment.
There is upside there and Thats really what I was trying to indicate and my remarks.
Got it thank you I appreciate it.
Our next question is from Creston <unk> of CJS Securities. Please state your question good morning, Chris.
Good morning, right, Yeah, maybe just.
Talk a little bit more about steel prices.
I know you said, it's probably mostly impacts <unk>, just trying to get a sense of.
The ability to pass through how quickly.
You can re price.
Yes.
Do you have much steel inventory. So at this point in time, so trying to understand when and if there is an impact when you might feel.
Yeah. So.
Obviously this is something that.
We monitor very closely.
Put it and contacts.
We have about $45 million of direct steel purchases each year and that obviously can vary with volume 50% of that.
Relate to Tbi.
And we and on top of that we have another $10 million of direct aluminum purchases with this I'll stop tbi. So I think what's important here is the tbi business. They don't have the kind of back on extended backlogs that factor and Elgin might have so they have the ability to pass on price.
Increases and steel surcharges as necessary and.
And that team is very active in terms of monitoring at all of our teams are the commodity costs and taking appropriate actions as necessary.
We've also locked in our pricing.
And at many of our businesses and stuff.
For example, our Baxter and Allergan business has locked and steel pricing through into the third quarter and pretty favorable prices.
And our tbi businesses, it's less but they have more of and ability to.
<unk> react as necessary.
It's something that Mark is working very closely with the teams on.
I think the other thing I would point to is go back to 2018 and look at how we managed our way through this.
The teams did a fantastic job and we.
We're using those same on protocols again and then we also have for 80 20 program. So we're constantly looking at.
How do we offset that material and labor inflation.
As the call. So I think it's something that on.
Other companies, we are closely monitoring, but we have plans in place to address.
Got it helpful.
And your early comments today, you talked about the electrification opportunity and.
And I Wonder if maybe you could just talk a little bit further about that other specific product lines where that debt.
<unk> you.
And just any additional thoughts on that initiative.
Sure.
It is and a critical initiative, we spent 20% of our R&D budget and 2020 on electrification and the way. We're approaching this is for approaching and at the group level.
We've got group ESG resources that are working on this electrification project.
We started with one of our street sweeper projects.
Really excited that we got our first order for the orders for those projects for that product in the fourth quarter and so our intent is we've got a plan, where we're going to take that electrification technology.
And push it through our portfolio as the products allow.
So it's something that we recognize is an important unmet customer need and we believe that we are ideally positioned to address it going forward.
On a number of municipalities have announced goal of having a certain percentage of their fleet.
On the electric vehicles by a certain day and.
And we track those goals and we want to be the leading provider of that equipment.
For those entities.
Got it that's very helpful exciting area.
Ill jump back in line I appreciate it.
Thanks, Chris.
As a reminder, if he would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is and our question queue. You May Press Star two if you and dietary missing your question from the queue for participants using speaker equipment and it may be necessary to pick up.
And your handset before pressing the star one.
One moment, please while we poll for more questions.
Our next question is from Greg Burns of Sidoti <unk> Company. Please state your question.
Good morning.
How much revenue do.
Good morning.
Revenue do you expect or W contribute and 'twenty one.
And we're looking at is obviously a partial year, Greg So we're looking at somewhere between 35 and $40 million.
Okay.
And in terms of the incremental operating expenses that you expect to come back online that incremental.
8 million.
Does that and reference to is that GAAP GAAP opex for this year the annualized run rate from the fourth quarter like.
What do we based it off yes, it's predominantly.
So on the $8 million more than half of that is going to be employee related expenses be it for obviously, we had furloughs at some point in the day, we had some salary actions that the executive team took as well as.
All of our salaried employees really took and the second half year. So there's some of that is going to come back and there is a merit component.
The other year over year. It is really a year over year variance on a GAAP basis, but about more than half of the $8 million is employee related and medical is probably going to be a bit of a headwind does it go in because it's been pretty low this year with less people going to the doctor. So that's another part of it but and then there is also <unk> as we we scale back TNA.
Pretty significantly.
And the Q2 and Q3 and as we've talked about getting.
Primarily our sales resources back to visit with customers.
That's picking back up again, so that would be another headwind.
The thing I would add to is for adding <unk>.
Sales resources and certain areas to support some of the strategic initiatives that we've talked about on the call.
Okay.
And then just.
Just.
Following up on the question about the electrification.
Projects.
When you look at the.
The market do you see the demand for electric.
Accelerating the replacement cycles here could you.
I don't know see and accelerated.
Demand or turnover and your customers fleets.
Given the demand for electric how do you how do you see that kind of playing out and maybe what's the market the total market opportunity for electric.
And we've taken a close look at the data and are two takeaways is the answer to your question is yes, and the larger municipalities.
And in those towns where the large universities are located.
Okay.
Okay.
Okay. Thank you.
Thanks, Greg.
Our final question and answer on Steve Barger of Keybanc capital markets. Please state your question.
Thanks.
Yes, I just want to go back to electrification as well where are the R&D dollars going is this are you buying batteries from a third party and the work is to integrate it into the product or just how how are you.
Proceeding down the road towards electrification.
Electrification.
Yes, yes, we are buying batteries from third parties and are the dollars are along the integration path and working to integrate those.
And that technology into our products.
We also have created a number of prototypes.
So our approach has been we've created the prototypes we've shared those prototypes with various municipalities.
For feedback and then we've taken net feedback and incorporated the feedback and then that was really this was phase two and we got the orders.
But then we also have some dedicated resources, both internally and externally that we've been working with on the longer term electrification project for federal signal.
What percentage of the product line do you think lends itself to electrification.
The smaller the product the more likely it is to be electrify MLP subject to electrification.
But look I think we're going to let the experts the battery experts figure out.
Some of the demands of the larger product lines like sewer cleaners, but as you know we have a number of smaller products that we think would be right for electrification the larger ones like sewer cleaners, and they haven't quite figured that out yet, but I'm confident over time they will.
Got it and.
And I know HW had a tough year in 2020 like a lot of companies, but what's your organic growth and if growth rate been if you look at it say over five or 10 years.
It's Ben.
High single digit.
Over the last three years to four years and they also did as we mentioned, Steve and did a couple of acquisitions and <unk> 19.
The one and up in Canada was one of them and then there was also a more local acquisition that they did so.
Organically, it's grown high single digits, and then they've also tagged on to acquisitions.
In 2019.
Yes.
Feel very strongly even stronger after visiting this week that tough year in 2020, we've got some work to do.
But.
Longer term outstanding brands, Great management team, some great contracts and I really believe that this can be that anchor tenant on the west coast for our future smaller acquisitions organic growth.
And as I said earlier, it really fills and that if you look at our footprint.
There is a nice swaps up the middle of the country, but on the west and East Coast.
This builds on and important void.
And sorry, if I missed this I went to the website it looks like Theres a lot of Skus do they build for stock or is this completely custom order.
And again going back to the earlier conversation on capacity is there opportunity to to shift production to drive margin or a premium product lines that don't move.
Yes, we think this business is ripe for 2020 are our 80 20 principles.
To answer your question, it's a lot of custom work.
But again.
We have as you can imagine knowing us that are pretty specific plan in place.
To improve their EBITDA margin performance.
Over time.
And.
Just excited about the level of activity and the quality of the management team and to footprint frankly, with the two locations and Washington State The operating center in Arizona, and and the manufacturing facility up and had mentioned and as you know we've got other manufacturing facilities and have intent that we're looking at how do we optimize that footprint. There also.
And Steve that in terms of footprint that they operate their main manufacturing facilities.
And our impressive facility and they've actually one of the acquisitions that they completed in 19, and they've actually consolidated that into that into that footprint and the main head and the main operations.
And last one for me.
Unless I'm mistaken and this was a record year for free cash flow and conversion was over 100% as you look forward thinking about working cap or integration costs or anything else do you expect you can exceed the 107 million and free cash flow. This year and can you keep conversion around a 100% for 2021.
Yes, I think the goal is 100% on.
Cash conversion on net income basis see Theres a couple of things.
Obviously, there was about $7 million of deferrals that we had for under the cares Act.
About half of that is due to be paid.
And 21, and then the remainder is paid and 22 so.
That will be a little bit of a headwind from a cash flow perspective, there's also certain investments.
And that we may make in rentals as well as I mentioned earlier, we scale back some of that.
Investment and the fleet in 2020, with the lower utilization as and when things pick back up again, we may choose to make some additional investments and the fleet.
But I think overall, we would be targeting 100% cash conversion.
But.
This year as you said was a record it was just a fantastic cash flow generation, yet I think yes, I mean I would ask.
We talked about is the chassis situation.
Part of the solution to that is to invest and chassis.
And particularly given some of the shortage issues and the fact that we believe the second half is going to be strong. So we want to be well positioned to respond to that customer demand and we believe having those chassis is part of that equation.
Yes, so given that youre thinking about double digit improvement and pretax earnings even if conversion were to slip a little bit.
With some of the items that you've talked about it sounds like you can still maintain or maybe beat the 107.
Our goal is to be better at least at 100% or better.
Alright.
Have a great year. Thanks, Thanks I appreciate it.
We have reached the end up for question and answer session and I will now turn the call over to Jennifer Sherman for closing remarks.
In closing I would like to reiterate that we are confident and the long term prospects for our businesses and our market.
Our teams are performing at a very high level.
Despite some significant challenges during 2020 and remained focused on delivering high quality results, we remain committed to investing and our businesses and our people to generate sustained long term success for our shareholders. Our foundation is strong and we are focused on delivering profitable long term growth to the execution.
<unk> of our strategic initiatives, we would like to express our sincere thanks to our stockholders employees distributors dealers and customers for their continued support. Thank you for joining us today and we'll talk to you next quarter.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Okay.