Q2 2021 Federal Signal Corp Earnings Call
And you need assistance during the conference call you may signal, an operator by pressing star and zero.
I would now like to turn the conference over to Ian Hudson Chief Financial Officer. Please go ahead.
Good morning, and welcome to Federal signal second quarter Conference call I'm Ian.
And Hudson the company's Chief financial.
And so also.
And also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer.
We will refer to some presentation slides today as well as to the earnings news release, which we issued this morning.
Slides can be followed online by going to our website federal signal dot com clicking on the investor.
And so it all icon and signing into the webcast.
We have also posted the slide presentation and the earnings release under the Investor tab on our website.
Before we begin I'd like to remind you that some of all comments made today may contain forward looking statements that are subject to the safe Harbor language found in.
Today's news release and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website.
Presentation also contains some measures that are not in accordance with U S generally accepted accounting principles and.
And our earnings release and filings we reconcile these non-GAAP measures to GAAP.
<unk>.
In addition, we will file our form 10-Q later today.
I'm going to begin today by providing some detail on our second quarter results before turning the call over to Jennifer to provide her perspective on our performance market conditions and thoughts on the rest of the year.
After our prepared comments.
GAAP net Jennifer and I will address your questions.
Our consolidated second quarter financial results are provided in today's earnings release.
In summary, we delivered another outstanding quarter with operating results exceeding our expectations, despite dramatic increases in commodity costs and ongoing some.
And then Cain disruption, including factors linked to the global shortage and semiconductors.
As a reminder, and the prior year quarter. We also took several cost saving actions in response to the uncertainty created by the pandemic, which reduced our cost in Q2 last year by approximately $14 million.
While most of these savings were either temporary cost reductions or volume related some are more permanent actions in Q2. This year. The return of many of these costs represented a year over year expense headwind of approximately $5 million.
Consolidated net sales for the quarter were 300.
Supplies and $55 million up $65 million or 24% compared to last year.
Consolidated operating income for the quarter was $38.5 million up $7.2 million or 23% compared to last year.
Consolidated adjusted EBITDA for the quarter was 51.
$9 million up $6.5 million or 14% compared to last year that translates to a margin of 15, 5% and Q2 this year compared to 16, 8% last year.
Net income for the quarter was $29.7 million.
Up from $21.4 million.
Last year.
That equates to GAAP EPS for the quarter of <unk> 48 per share up 37% from 35 per share last year.
On an adjusted basis EPS for the quarter was <unk> 50 per share and improvement of 19% compared to <unk> 42 per share last year.
Order intake for the quarter was again outstanding with orders of $361 million, representing an increase of $159 million or 79% compared to Q2 last year.
Consolidated backlog at the end of the quarter set a new company record at 430.
$1 million.
That represents an increase of $104 million or 31% compared to Q2 last year, and an increase of $133 million or 44% from the end of last year.
In terms of our group results Esg's net sales for the quarter were 2.
$291 million up $67 million or.
Or 31% compared to last year.
Esg's operating income for the quarter was $38.5 million up $9.9 million or 35% compared to last year.
Esg's adjusted EBITDA for the quarter.
<unk> was $56 million up $9.7 million or 24% compared to last year.
That translates to an adjusted EBITDA margin for the quarter of 18% at the high end of our current target range, but down 110 basis points compared to last year.
ESG reported.
<unk> orders of $300 million and Q2, this year and improvement of $142 million or 19% compared to last year.
SSG net sales for the quarter were $53 million compared to $56 million and Q2 last year, which included a large fleet sale of public.
Safety equipment to a customer in Europe.
<unk> operating income for the quarter was $7.8 million compared to $10.4 million last year.
Ssg's adjusted EBITDA for the quarter was $8.7 million compared to $11.7 million last year.
Adjusted EBITDA.
EBITDA margin for the quarter was 16, 3% compared to a record margin of 29% in Q2 last year, which included favorable sales mix and lower operating expenses.
Ssg's orders for the quarter was $61 million up $17 million or 39% compared.
To last year with most of the improvement, resulting from higher demand for public safety equipment, and both domestic and international markets.
Corporate operating expenses for the quarter was $7.8 million compared.
Compared to $7.7 million last year.
Turning now to the consolidated income.
Statement, where the increase in sales contributed to an $11.3 million improvement in gross profit.
<unk> gross margin for the quarter was 24, 4% compared to 26% last year.
As a percentage of sales, our selling engineering general and administrative expenses.
Water, we're down 100 basis points from Q2 last year.
Other items affecting the quarterly results include a $1.3 million reduction and restructuring charges of $2.3 million decreased and other expense and a $700000 reduction and interest expense.
Tax expense for the quarter.
For the quarter by $1.9 million.
Largely due to the increase and pre tax income levels, partially offset by higher excess tax benefits from stock compensation activity.
Including the effects of these higher tax benefit our effective tax rate for the quarter was 21, 2% compared with 22, 2%.
Increase here at.
At this time, we expect our full year effective tax rate to be approximately 23%.
On an overall GAAP basis, we therefore earned 48 per share and Q2 this year compared with 35 per share in Q2 last year.
To facilitate.
Facilitate earnings comparisons we typically.
<unk> adjusted our GAAP earnings per share for unusual items recorded in the current or prior year quarters in the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition related expenses pension related charges Corona virus related expenses and purchase accounting expense effects.
On this basis.
Loss of adjusted earnings for the quarter was <unk> 50 per share compared with 42 per share last year.
Looking now at cash flow, where we generated $13 million of cash from operations during the quarter, bringing the year to date operating cash generation to $39 million.
During the quarter, we elected to.
And our iterate the timing of certain tax payments to preserve tax planning flexibility in the event of a possible increase in U S corporate tax rate.
With this approach, we expect to see lower tax payments and the third and fourth quarters, while at the same time and creating the potential for future tax savings in.
In addition in Q2.
Last year, our cash flow benefited from certain deferrals that were permitted under the cares Act.
We have also increased investments and our rental fleet given the improving utilization levels, we are experiencing.
For the rest of the year, we are expecting strong cash flow generation and we continue to target cash conversion.
Approximately 100% on a net income basis.
We ended the quarter with $169 million of net debt and availability under our credit facility of $268 million.
Our current net debt leverage remains low.
And with our financial positioning range remaining strong we have significant.
<unk> flexibility to pursue strategic acquisitions invest and organic growth initiatives and return cash to stockholders through dividends and opportunistic share repurchases.
On that note, we paid dividends of $5.5 million during the quarter, reflecting a dividend of <unk> <unk> per share and we recently announced that <unk>.
And for the third quarter.
That concludes my comments and I would now like to turn the call over to Jennifer.
Thank you Ian I'd like to start my comments with a quick update on a subject that we've been talking about for a long time and infrastructure Bill.
Reports from late yesterday were encouraging and finally appears that infrastructure legislation.
<unk> is likely some components reported to be part of the deal which includes a total of 550 billion and new federal investment and U. S. Infrastructure include 110 billion for roads $73 billion per power infrastructure 65 billion to expand broadband access and 55 billion for water.
Water infrastructure 46 billion for environmental Resiliency, and 11 billion for transportation safety, we are optimistic that and infrastructure package. In these areas would provide funding that would support the use of the majority of our product offerings, including equipment sales and rentals of dump trucks and trailers.
Balers safe digging trucks road, marking equipment and sewer cleaners and street sweepers.
Turning now to our performance and the quarter. Our teams again delivered impressive results with meaningful growth and both the top and bottom line, while achieving adjusted EBITDA margin towards the high end of our.
Target range, despite widespread supply chain disruptions and an impressive and commodity cost environment topline growth was largely across the board with particular strength and the sales of dump truck bodies and trailers.
Which were up around $15 million from Q2 last year.
Thanks to the proactive action of our teams.
And we are also able to respond to customer demand by delivering more safe digging trucks and sewer cleaners than we had originally anticipated over.
Over the last several years, we have successfully diversified our revenue streams and end market exposures through a combination of organic growth initiatives and M&A.
And that helped.
<unk> us to partially mitigate the impact of these factors during the second quarter.
Another area of notable strength during the second quarter was in our aftermarkets business, while the second quarter is typically a seasonally strong period for aftermarket. We originally had some concerns entering the quarter that rental activity.
And Canada would be adversely impacted by various shutdown measures taken in response to the pandemic thankfully vaccination levels are increasing quickly and Canada and restrictions are easing rental activity and demand for used equipment was higher than expected with rental utilization and Canada exceeding our targets and returning to pre pandemic levels.
Rental utilization that you asked is also improving for example rental utilization of our jetstream water blasting equipment exceeded the levels. We saw in 2019 to improved utilization followed a strong spring shutdown cleaning season, which has historically been a leading indicator of industrial and market recovery.
Covered in June with a combination of high rental utilization and strong used equipment sales are JJ rental business reported the highest monthly revenue and its history.
Those favorable trends have continued into July as well overall, our aftermarket revenues in Q2. This.
This year, we're up $26 million or <unk>, 46% year over year growing to represent a higher share of ESG revenues for the quarter at around 30%.
That shift and mix helped to partially mitigate the impact of higher commodity costs and production related inefficiencies associated.
And with supply chain disruption, helping ESG to deliver and adjusted EBITDA margin at the high end of the current range.
As we mentioned on our last call. Following the suspension of chassis production at 1 of our suppliers. We made the decision to temporarily shut down production at our facility in Streator, Illinois for a 2 week period.
Around the fourth of July holiday.
The team worked tirelessly to mitigate the impact of this short term disruption by effectively managing production schedules to meet record customer demand with the expansion of our street and facility now complete our production and May approach the record levels, we experienced in 2019.
Would bring us to deliver more units than anticipated ahead of the shutdown and despite the inefficiencies associated with supply chain constraints.
Like many companies. We are also experienced increased freight charges as we expedited the supply of certain components and higher commodity costs.
As they have done and the past.
<unk>, our procurement teams took several proactive measures, including securing availability of certain steel and locking and pricing based on forecast and needs. We also worked diligently to mitigate the impacts by implementing several price increases and surcharges.
Despite these actions and with demand being significantly.
Really higher than we had expected we experienced unfavorable price cost year over year headwind of approximately $3 million during the quarter, mostly within our dump truck and trailer business. In Q2, we also realized the benefits from strategic investments, we had made in prior quarters and building additional stock.
Unit and procuring additional chassis, so that we had greater flexibility to meet customers need. These investments have enabled us to deliver on customer expectations and some cases supply and chassis. When they were unable to procure the chassis, which resulted in a higher concentration of low margin chassis that we supplied as opposed to customers.
<unk> supply chassis.
Although this unfavorable impact on margins. This quarter, we are playing the long game by prioritizing customer deliveries and satisfaction. We continue to believe that and these challenging times the strong will get stronger and we've seen this happen while the current widespread macroeconomic factors could.
Some impact on our margins and the near term we are taking this opportunity to try to leverage our competitive advantage and gain market share.
Demand for our product offerings continues to be strong as demonstrated by our outstanding second quarter order intake of $361 million our teams.
Could have energized as we enter the second half of the year with a record backlog, reflecting strength across our end markets and continued confidence and a post pandemic recovery.
<unk> has been widely shared by our customers and dealer partners and seems to be further solidified by recent economic stimulus as a reminder.
And the American rescue plan Covid relief package passed earlier. This year included $1.9 trillion of economic stimulus with approximately 350 billion earmarked for state local and territorial governments for a variety of purposes, including the maintenance of essential infrastructures, such as sewer systems and streets.
And may the first 175 billion tranche started to be distributed by the Treasury Department with a second tranche expected in 2022 recent market planning sessions with our dealer channel highlighted early indications that the first tranche was starting to be allocated to essential service purchased.
Purchases.
As a provider of equipment used for these essential services like sewer cleaning and street sweeping we stand to benefit from additional aid that may be provided to state and local sources for these purposes.
On the municipal side demand for sewer cleaners, and street sweepers remains high and within our.
SSG public safety businesses, we're also seeing benefits from new product introductions, and our ability to meet customer demand. We believe we are a stronger position than many of our competitors and are gaining share. We have also seen a notable uptick and our industrial end markets with improved orders for our guzzler and jetstream products.
Within our dump body and trailer business and Q2. This year were more than double last year's orders with growth growth across all end markets, resulting in a record backlog. This is another area, where we believe we are gaining share that will position us well for the future while our backlog is at a record high and their RFP.
Or a few headwinds that we are we like many other industrial companies will continue to monitor closely during the second half of the year.
The first factor that many of you will be aware of is the continued impact of the global semiconductor shortage, which is causing significant disruption regarding chassis delivery. This situation.
Asian changes weekly.
We do not rely on any 1 single chassis manufacturer and with the proactive actions. We took we have so far been able to pivot to alternative suppliers to minimize the financial impact. However, the situation remains fluid and ongoing chassis delivery delays are almost universal.
So due to component shortages.
Beyond chassis, we're experiencing other supply chain tightness ranging from reduced availability of paint the policy within our road, marking business to still lenders that are used and certain trucks. So far this year, we've been able to successfully navigate through the difficulty but it remains a.
<unk> situation.
The second factor relates to the current commodity cost environment. We currently expect the price cost impact in Q3 to be and the same neighborhood as we saw this quarter, but with the pricing actions. We have taken we are expecting to see improvement beginning in the fourth quarter with more price realization expenses.
<unk> is our backlog turn.
On a more positive note we continue to have relatively good access to labor at many of our facilities, which has recently been an issue for many companies our ongoing commitment to environmental social and governance initiatives is positioning us well and the communities and.
We operate and is a differentiating factor and our ability to attract labor at many of our facilities. We are still getting multiple quality applicants for open positions at our largest facility and certain of our <unk> locations are starting to see traction from its recently introduced school of well program.
Overall, our access to labor remains good.
Further our company wide efforts to raise awareness about vaccines assist eligible employees and gaining access to vaccines and encourage participation levels are paying off with a company wide vaccination rate of approximately 50% domestically.
<unk> about 2 thirds of our businesses have achieved vaccination rates that are higher than the relevant state average. We have also had notable improvements in Canada during the second quarter with greater vaccine accessibility COVID-19 related disruptions have diminished as vaccine vaccination.
Karen and most importantly, 100% of our employees that have been affected by Covid has since recovered.
I now want to take a few minutes to provide and update on some of our strategic growth initiatives on the organic front I've already touched on the success of our aftermarket initiative. We also remained bullish about.
About safe digging prospects and with noted industrial and market recoveries and infrastructure spend optimism throughout the channels, we are confident and safe digging trends will continue to improve.
Our true value safe digging product line portfolio includes a complete range of truck mounted safe digging equipment, which can.
And a broad range of applications included expanded application and utility markets.
As an example, 1 of the nation's largest utility companies recently announced plans to Bury 10000 miles of its power lines to reduce the risk of California wildfires use of safe digging technologies significantly.
Difficultly minimize the chances of damaging underground infrastructure during the digging process and provides significant environmental benefits by minute minimizing damage to tree routes. We've included a picture of our safety equipment inaction, while preserving trees at the same time and the accompanying slide.
The technology has also been utilized and recent bridge re servicing infrastructure projects with a vacuum capabilities, providing added efficiencies and the cleanup of related debris true bag product demonstrations for the quarter were up 4% from last year and our education efforts are also having a positive impact.
Packed and sewer cleaner demand with the inclusion of the optional safe digging package, turning our sewer cleaners into a multipurpose vehicle.
And the new product development front, our R&D efforts continue to drive organic growth as an example, approximately 75% of our air Sweeper orders in June we're associated.
And with recent product introductions.
And Q2, our SSG team launched the new low cost ultra low profile reliant light bar as part of the group strategic initiatives to gain market share through the expansion of licensed sirens product offerings and the value tier the reliant provides customers.
And with an ultra low profile light bar that is competitively priced while providing advanced programming features and excellent optical performance and enhances the warning effectiveness and appearance of the emergency vehicle.
Our sales team is currently showing the reliant customers are supplying distribution with sample bars for customer.
Patients initial feedback from the market has been excellent and we have received orders and are currently shipping the new product to customers and the U S and Mexico.
We have several product launches and the pipeline with street sweeper electrification remaining a key area of focus we are actively working on our next vehicle and our electrified.
Demonstration new product development roadmap. We've also recently identified and additional battery partner and are continuing to receive positive feedback from customer demonstration.
As we have said before M&A will continue to contribute meaningfully to our future growth. We are pleased with the progress we're making on integrating <unk>.
Terrific K teams are energized by the opportunities identified during the 80.20 improvement training sessions, we recently held.
Our current M&A pipeline continues to be very active as Ian noted in his comments, our financial position and liquidity are strong, enabling us to pursue strategic acquisitions and there.
And the growth M&A opportunities our teams are currently reviewing.
Although we may experience some temporary challenges and the near term we are positioned federal signal and a manner in which we will fully participate and the economic recovery by increasing capacity within our facilities investing in new product development and gaining market share.
Turning now to our outlook for the rest of the year demand for our products continues to be high with our second quarter order intake up 79% compared to the prior year, resulting in a backlog entering the second half of the year, which is at a record level for <unk>.
Strength of our second quarter earnings our record backlog and improving aftermarket.
And our site and North America gives us increased confidence and the year.
Assuming no significant delays and a receipt of chassis from our supplier.
We are increasing our adjusted EPS outlook for the year to a new range of $1.78 to $1.90 from the prior range of $1.73 to $1.85.
We are also encouraged by the long term opportunities that infrastructure legislation would create for almost all of our businesses.
Our recent capacity expansion, we will we would be well positioned to meet the associated increase in demand for our products. At this time I think we're ready for questions operator.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then 1 on your telephone keypad and you will hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then 2.
We will pause for a moment as callers join the queue.
The first question is from Chris Moore from CJS Securities. Please go ahead.
Hey, good morning, guys. Thanks for taking a few questions good morning.
Yes, so maybe just obviously.
You guys and kind of typical seasonality in Q4, given all the uncertainty on supply chain commodity costs from where you sit today and that's a big step, but could you review a little bit in terms of you know kind of the puts and takes of the relative strength that you've you're looking at between Q3 and Q4.
For I know you talked about you know kind of price increases, perhaps hitting in Q4 and.
Maybe could you talk about Q3 versus Q4, a little bit.
Okay.
Yeah, I think Chris 1 of the things that we've seen in the second quarter was really the strength of the aftermarket business and some of that we believe is.
Tied to <unk>.
Just what is what is happening and in the marketplace with respect to lead times and availability of equipment and so we've seen a nice uptick in the aftermarket business both on the rental side.
As well as used equipment sales, both in Canada, where we've seen a really strong utilization and really throughout Q2.
But we've also seen improvement in the U S with utilization of the fleet. So.
That trend has continued into July and the early part of July so we.
We expect that to continue to be strong into Q3 and as long as the weather.
Yeah.
Stay safe.
And the northern parts of North America that could also continue into Q4.
We talked about the impact from the unfavorable price cost impact in Q2.
We're expecting something in a similar kind of neighborhood and in the third quarter before that starts to turn in Q4, but I think overall.
The environment is.
<unk> is really the.
And the benefits, we're seeing from the diversification of our revenue streams I think that certainly helped us in Q2, and we would expect that to continue for the balance of the year.
And in a nutshell book, we're sitting on record backlogs and subject to supply chain.
And constraint our intention is to produce as much of that as possible.
I'd note that we had in a 3 million dollar headwind in Q2, we expect it to be somewhere in that neighborhood and Q3, and we expect that to recover given the price actions that we've taken on.
2 more favorable place and Q4.
But again, our objective is to produce as much of that backlog as we can subject to supply chain challenges.
Got it and I appreciate that's helpful.
Maybe just talk a little bit more.
And gross margin. So obviously there year over year, they were down and 6 basis points you talked.
A bit about some of the things for higher and higher percentage of low margin chassis.
And kind of indicated they could be down a little bit near term.
And on a relative basis, but.
Kind of the focus is is on share at this point in time, and maybe you could just expand a little bit on the gross margins.
Yeah, I think Chris it's a combination of things I think when you look at <unk>.
<unk> G and the comps that that had in Q2 of last year. It had we referenced the sizable.
<unk> order that we received and shipped and our European business and the second quarter of last year that was a large order with a very strong margin.
And that can sometimes cause.
And some issues with respect to the comparisons on a quarter over quarter basis within SSG, if theres, a large fleet order and and really Thats, what we saw and and.
And SSG, so ssg's gross margin was down about 210 basis points quarter over quarter.
We also referenced the fact that last.
<unk> had the impact of a number of cost saving actions there are things.
Temporary salary actions that were taken as well as the impact of some furloughs and.
And the other thing that is that is a factor as the medical expense was lower lost share with people not going to the doctor. So that was a headwind.
Wind and that did impact gross margin within SSG.
And as it relates to ESG. The gross margin was down about 60 basis points and there were a couple of moving pieces there as we as we referenced is the chassis mix.
Issue as well as some.
Subcontract the work that we had for Robert.
Road, marking services.
Business, we actually use some sub contracting services there and that gets included in both our revenue as well as our costs. So that that can have a dilutive impact on our gross margins.
There's also the material cost impact that we referenced which is partially offset by the improved mix from higher aftermarket business.
Services and then there's also just general inefficiencies associated with some of the supply chain disruption as our teams have kind of maneuvered.
A number of ways to juggle production schedules to deal with supply chain issues. So a couple of a number of different moving pieces, but.
But those are kind of the main points.
Very helpful.
Ill leave it there and jump back in line and thank you guys.
Thank you Chris.
The next question and assurance GLA expression of Raymond James. Please go ahead.
Hey, good morning, everybody.
Hey, I just wanted to start off on the price cost commentary.
And just to make sure I'm crystal clear, but green.
$3 million net headwind this quarter similar to meet Q and I think you point to improving trends into <unk> would you expect to be kind of net neutral at that point and can you just kind of talk about your price visibility into 2022, and maybe some of these cost reversing back out.
I think bill if suddenly the $3 million headwind that we that we saw in Q2 that was mostly within within the dump truck business.
We think that will be and a similar range and Q3, and then that will start to turn.
I don't know if it will be net positive for that business overall, but I think.
And for overall ESG, we are expecting it to be neutral in Q4, but there are certain pockets, where they will it will turn at different points in time.
So I think overall it will be neutral in Q4.
And as we look further out.
As it relates to kind of the pricing power and the pricing die.
<unk>, we have obviously for certain businesses that have long.
<unk> times with backlogs and this is primarily facility cleanings and at the moment.
And that backlog is already is price, but as again, we've talked about the fact that we've taken actions to secure pricing on steel.
And so that product line.
So we feel pretty good going into 'twenty, 2 the pricing and the cost.
No what we're going to be dealing with.
On the dump truck side, we have as Jennifer mentioned, we've taken a series of actions as it relates to price and we think that as we enter 'twenty 2.
We.
We'll start to realize.
Benefits and <unk>.
Certainly that will be we're expecting that to turn positive as we enter 2002.
And then I guess on that it's something that we're monitoring we're monitoring it very closely so we're going to take the price actions that we need to and order as we move forward.
Got.
That's very helpful. And then maybe staying on the dump body side.
Could you just broadly characterize the demand environment for us there and in that vein sort of maybe how the Oss Dolby you integration is tracked and maybe what surprised you and getting to know the team more.
Sure sure so demand.
For dump bodies has been strong and as I noted exceeded our expectations.
1 of the reasons that we were and the position during Q2 that.
We had purchase deal and we werent expecting frankly, the level of demand that we have.
And the teams really about a year.
To go with the new product development initiatives that we introduced there we're seeing a lot of traction on that and we believe that we're gaining share. So encouraged by the outlook for that particular business.
And really overall outstanding operation teams and some pretty challenging environment.
Our SW we're on track.
So that's always good to be able to say.
Great team out there lot of opportunity and that part of the country, given kind of the construction and different activities and the northwest part of the United States. We held our 80.20 training sessions. The teams really responded well.
And.
We're couldnt be we're very encouraged about the outlook and the other thing thats encouraging and we're starting to see those teams really optimize production in terms of certain equipment, that's going to be supplied.
And by other Tbi facilities, and then <unk> will concentrate and certain types of equipment.
Equipment so overall.
And a good place.
Got it Super helpful. And then and then I just have 1 last 1 and some safe digging, but I think you pointed to some pretty big increases and demo activity year over year I was wondering if you could maybe comps.
To pre Covid levels are you sort of tracking ahead.
And we're doing so going into and through the pandemic as it relates to demo activity on that front.
Yeah, We think we're pretty good and I can't give you a little bit more detail.
Our true value demos are up 39% year over year factor demos are up 122% year over year, and Allergan, which you didn't ask but I've got.
Net of what you hear up 38% year over year. So it is something that we think is particularly important.
And what's exciting to us we're starting to see even new applications and some of the training that we've done and I talked about the.
And utility companies initiative to Berry.
Underground.
The data for 10000 miles, we did a demonstration of our equipment to that utility. It was well received and addition to that.
Take a look at the slide and.
In terms of some of the environmental benefits that our customers are starting to see and promote.
In terms of preserving trees using this equipment and.
<unk> true routes. The other thing that's really encouraging and we talked about the strength of our aftermarket business, but we're seeing that strength for in our rental business for safe digging equipment.
So we believe that we are back to where we were and 19.
Closed then.
We'll continue to see progress on that front.
Got it and then maybe because you brought up 1 last I'll squeeze and but on the rental and rental side can you remind us of your geographic exposure on the company owned fleet I was under the impression it was very.
Canada, and north and up north focused and any color would be sort of.
And I appreciate it.
Yeah sure we've got strong rental partners.
Cover that have defined geographies.
And we our rental fleet is as you said.
Canadian focused.
We also cover the.
And the Dakotas taxes.
And as certain parts of the Midwest.
And it's really and areas, where we have chosen that.
We're going to move forward and we don't have a rental partner and that particular area in terms of units Felix It's about a 60.40 split with unit weighted weighted more towards Canada.
And the split.
1 of the advantages that.
And we can move and we can move equipment pretty easily to respond to customer demand.
And we also supply equipment to our rental jaco supply equipment to our rental partners when needed.
Got it helpful I'll leave it there and pass it off.
Okay.
The next question is from Steve Barker from Keybanc capital markets. Please go ahead.
Good morning, everyone. This morning.
Okay.
Obviously, a really strong overall revenue quarter and ESG as you net out the shutdowns capacity expansions aftermarket strength.
Is this revenue level of $3.35, sustainable and <unk> or does that step down do you think.
I think Steve we obviously you had.
Benefits from.
Accelerating some of the deliveries prior to the shutdown that and so some.
Some of that probably moved from Q3 into Q2, but I think we are still expecting strong revenue performance and.
And so meaningful year over year improvement and Q3, yes.
It's possible just given all the puts and takes so there could be EBIT could and it could meet that level of <unk>.
Yes, it's possible.
And then I presumably.
And Youre modeling <unk> is the highest revenue level of the year, Jennifer just going back to your comments that youre going to make as much of the backlog as you can.
Yes, I mean, some of it depends on supply chain.
Right right yes.
And Doug.
Good job managing that so far it appears.
And just modeling it out it looks like if I'm at the mid point or above on guidance, you'll be back to double digit incremental margins and the back half. So is it fair to say that 8% is likely the low point of the year for incremental.
Yeah, I think as we talked about Steve with Q3.
And.
As it relates to price costs that will likely be similar to Q2, but we're expecting that to turn and Q4. So yes. I think we are we would expect that to pick up a little bit.
Yeah, and and Jennifer I understand the desire to take market share even with the margin pressure from expedited freight.
And are overtime I just have a couple of questions.
Why do you think those customers will be loyal to you and the future just given everyone's responding to unusual circumstances right now.
I think that some of the features and the MPD is starting to make a different does some of the features and functionality that we offer on our.
<unk> and differentiates us from the competition.
The.
And the used equipment market is playing more and more of a rule.
And so the value that our equipment commands on the used equipment market has been and a critical differentiating factor from any of our businesses. So.
Our equipment to a critical driver of it.
Yeah. So what do you think once you convert those customers this day.
Yeah.
And well control.
Yeah, I know and.
And how do you walk the line between wanting to take share on a specific order.
So those are selling something that might not make as much economic sense, just given the margin profile due to these unusual factors like what's the thought process that goes into that.
And again as we talked about we're playing the long game here.
And if there's an opportunity to convert a large strategic.
Verse Timur Timna.
And typically people don't buy federal signal products across the board because of price.
Bribe them, because the features and functionality the reliability and the resale value.
So we typically try to sell on that and we've been successful.
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With that particular initiative, so very rarely are we and the price game.
Right.
And yes, no. It's just right now with expedited freight and things you just may have a little lower incremental margin like we saw this quarter, but you don't expect that to last because of the value proposition of the products.
Exactly.
And and just 1 more on the PPG initiatives to Bury power lines are there any specific regulations in California that would advantage your products over risk excavators, I know and some places there they're mandated or required right.
Yes, we're not aware of any regulations in California that would mandate.
Our product, but as we said we've been very actively involved and demos.
And they've been well received and we think that this is the first of many conversations.
Great. Thanks for the time.
Thank you.
As a reminder, it is star 1.
To ask a question.
The next question is from Greg Burns from Sidoti. Please go ahead.
Good morning.
I, just wanted to and I guess to talk.
Talk about.
And.
Some of the supply chain constraints I know it doesn't sound like.
And it sounds like you have a handle.
And the chassis situation, so there's not going to be any shutdowns, so and we think about.
And your ability to produce and the second half is it more about.
And efficiencies dealing with the supply chain as opposed to actual shutdowns that we saw.
From the chassis as earlier this year or what's going.
Be the limiting factors are bottlenecks that might.
Limit your ability to produce and the second half.
Yes, I want to be clear about the chassis situation is challenging.
We have.
Weekly communications with our teams about the chassis availability and what's challenging is that the situation.
And all around changes so you think youre getting chassis and a certain date and then you get a note that is getting pushed out a couple of weeks.
So.
I don't want to communicate anything else, but our teams have done an excellent job in terms of addressing a very fluid situation and at some level, we don't produce chassis, except for 1 product.
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We've seen supply chain challenges across the board and we talked about and everything from wiring harnesses 2 cylinders to limitations on our proxy for our road marking equipment.
It does feel like and I've seen.
Other industrial companies use this word and we agree it feels like whack a mole.
1 thing under control and there's something up.
So it creates inefficiencies.
Air Freighting things, we're sending people on planes to go pick up chassis.
Doing what we need to do to convert that backlog.
Customer demand and we expect that to continue.
To the rest of the year.
But.
Our teams have done an excellent job and.
These very challenging circumstances addressing it.
Okay, and then in terms of.
The investments Youre, making on.
And meet complete is there any way you could quantify that in terms of number of vehicles or not.
Dollars, you're putting into the year.
Your fleet.
Yes, it's something that we track very closely Greg and I think if you. If you look back to last year, we scaled back the investment and the fleet.
Because we we saw utilization levels.
And the decline a little bit with the pandemic.
As we saw that start to pick back up again, we made the decision to add some more units into the fleet. So we probably added and.
Net.
And net addition has been somewhere in the range of $10 million.
But that also is net of some strong used equipment sales.
And again, that's something we monitor closely because we also track the age of the equipment and the fleet. So it's totally the Nevada and net increase of about $10 million on a year over year basis.
And the teams have done a really nice job and a pretty difficult environment.
Beginning in 2020 kind of 1.
Metering.
Investments down and then we started.
Last year.
Increasing our investments and the rental fleet. So we're in a pretty good place there.
I guess with your view.
And your inclination be to.
To invest more dollars and given what youre seeing.
It sounded like I think you mentioned that obviously, the aftermarket and displayed a strong because suppliers are constrained okay. Okay.
And the other thing that's important to know is it gives our gives us other options with our customers.
And if in fact, you know where and he.
<unk> situation, if we can't provide them a new piece of equipment.
And their timetable then we've got either a rental opportunity or a piece of used equipment.
Okay, great. Thanks.
Next is a follow up from Steve Barker from Keybanc capital markets.
Please go ahead.
Hey, Thanks for taking 1 more just a modeling question on SG&A, you've talked about some inefficiencies in terms of airfreight, sending people on planes to get the chassis and I'm sure incentive comp is going to be starting this year, but even with all that given how strong revenue is is it isn't it reasonable to think you can drive.
I have some pretty solid SG&A leverage, maybe 30 or 40 basis points of share.
Yeah, I think Steve obviously this quarter there was some impact because of the SG&A was look as a percentage of sales at least was lower because our revenue included the chassis and the subcontractor.
Mhm.
And the revenue so that was favorable as it relates to SG&A expenses and sales, but yeah. I think you know where where obviously, we always with our ATI principles, we're always striving to get savings.
And in our SG&A.
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So I think there is room always room for improvement.
I don't know that it will continue at the same rate that it was in Q2 as a percentage of sales we're expecting that.
Revert to more normal patterns.
And with yes.
Similar to what we saw in 2020, maybe maybe a little better.
Yes.
And it always.
Aimed for improvement and we.
And incentive comp as you mentioned is obviously, a big factor and in the SG&A line.
So that that's something of an unknown and that's always going to be dependent on how we how we do the right. Yes. So thats the 1 and variable the other variable we have and we've referenced this on prior calls.
<unk> is is this.
And to market liability on the Nonqualified plan that flows through that line and net that's a little unpredictable at times that really tied to the performance of the market.
Yeah, but just given the strength of the revenue that's likely to come through and the back half.
And if you step back up to a high 13% range Youre still going to have some pretty nice year over year leverage looks like.
Yeah, that's fair that's fair.
Okay. Thanks [laughter].
This concludes the question and answer session I would like to turn the conference back.
Back over to Jennifer Sherman for any closing remarks.
Yeah.
Thank you and closing I would like to reiterate that we are confident and the long term prospects for our businesses and our markets. Our foundation is strong and we are focused on delivering profitable long term growth through the execution of our strategic initiatives Federal signal is and a very.
Very good place I would also like to give a public. Thank you to all of our employees with a special shout out to our purchasing and our operation teams at our businesses for their commitment and creativity and dedication addressing this challenging supply chain environment. In addition, I would also like to express our thanks to our stockholders distributed.
Dealers and customers for their continued support thank you for joining us today and we'll talk to you soon.
This concludes today's conference you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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