Q4 2022 Federal Signal Corp Earnings Call
Speaker 1: And.
Speaker 1: And that have that.
Speaker 1: thatthis good.
Speaker 2: call. All participants will be in listen only mode. Should you need assistance, please be single conference specialist by pressing the star key, follow friend zero.
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Speaker 2: I would now like to turn the conference over to Ian Hudson, Chief Financial Officer. Please go ahead. Good morning and welcome to Federal Signals 4th Court of Conference Call. I'm Ian Hudson, the Company's Chief Financial Officer.
Speaker 2: Also with me on the call today is Jennifer Sherman, our president and chief executive officer.
Speaker 2: We will refer to some presentation slides today as well as to the earnings release which we issued this morning. The slides can be followed online by going to our website, federalsignal.com, clicking on the Investor Core icon and signing into the webcast.
Speaker 2: We have also posted the slide presentation and the earnings release under the Investor tab on our website.
Speaker 2: Before I turn the call over to Jennifer, I would 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 filings with the Securities and Exchange Commission.
Speaker 2: These documents are available on our website.
Speaker 2: Our presentation also contains some measures that are not in accordance with US generally accepted accounting principles.
Speaker 2: In our earnings release and filings, we reconcile these non-get measures to get measures.
Speaker 2: In addition, we will file our form 10K later today.
Speaker 2: Jennifer is going to start today with a recap of the year and then I will provide some more detail on a fourth quarter and full year financial results. Jennifer will then provide her perspective on our performance and go over our outlet for 2023 before we open the line for any questions.
Speaker 3: our employees and our business partners for their ongoing commitment to the company.
Speaker 3: As I reflect back on my tenure as CEO , I take great pride in the growth that we've experienced since 2016. Since then, through a combination of organic growth initiatives in M&A, our sales have doubled from a little over 700 million in 2016.
Speaker 3: to more than 1.4 billion in 2022. That represents a compound annual growth rate of around 13%.
Speaker 3: With M&A representing about two-thirds of our top-line growth since 2016, acquisitions have played a key role in increasing shareholder value. We are committed to remaining disciplined in our approach to both diligence and valuation.
Speaker 3: and have established a reputation as a partner of choice. In fact, of the 11 transactions announced over this time period, eight have been internally sourced.
Speaker 3: We have also gained traction on our key organic growth initiatives, which have helped us to further diversify our revenue streams and market exposures and become a more resilient company. I'm also inspired by the manner in which our businesses have achieved these stellar financial interventions into the other
Speaker 3: which are outstanding both in absolute terms and in comparison to our specialty vehicle peers, while navigating through a series of complex challenges including a global pandemic, unprecedented inflation levels, and worldwide supply chain disruption.
Speaker 3: Our team's successful execution against our long-term financial framework and growth strategy has created meaningful value for our stockholders with our cumulative returns outpacing each of the key benchmark indices we monitor.
Speaker 3: As I look ahead, I remain bullish about our long-term prospects.
Speaker 3: and the ongoing execution of our strategy. I take encouragement from our active M&A pipeline.
Speaker 3: The additional financial flexibility provided by our increased credit facility and the fact that although we are currently performing at a high level, there is still room for further growth with the capacity we've added in recent years.
Speaker 3: Despite ongoing supply chain tightness in the marketplace, 2022 was a record year for a federal signal.
Speaker 3: Our teams remained relentlessly focused on serving our customers, helping us to deliver the highest net sales and adjusted EPS in the company's history, record orders, and an improved EBITDA margin of 15% towards the high end of our target range.
Speaker 3: In addition to our strong financial performance, we also made progress against several of our long-term strategic objectives in 2022.
Speaker 3: Within our environmental solutions group, we again saw increased aftermarket demand with particular strength in rental utilization and parts in used equipment sales. Overall, our aftermarket revenues in 2022 were up 10% over last year.
Speaker 3: Demand for a range of safety. Digging trucks also remain high with orders of 41% year over year. This growth follows investments we've made in facility expansions, new product development, and channels for this key strategic initiative.
Speaker 3: Our investments in electrification projects continued and we are encouraged that these efforts will provide additional opportunities to further diversify our customer base, penetrate new end markets, and gain access to new geographic regions.
Speaker 3: We made several strategic investments for the future by purchasing new machinery and equipment aimed at automating and insourcing production of certain components.
Speaker 3: During 2022, we also completed the acquisition of our facility in University Park, Illinois, which is home to our domestic SSG operations and our aftermarket parts business.
Speaker 3: Our 80-20 improvement initiatives remain a critical part of our culture and we continue to focus on reducing product costs and improving manufacturing efficiencies across all our businesses.
Speaker 3: We demonstrated our commitment to returning value to our stockholders funding a combined 38 million of cash dividends and share purchases.
Speaker 3: To highlight our ongoing focus on operating in a socially responsible and sustainable manner, we also published our third annual Sustainability Report in May of 22.
Speaker 3: I'm incredibly proud of the progress that we've made in our environmental, social, and governance initiatives, and thrilled to share our many accomplishments highlighted in this report. We measure our performance utilizing several leading ESG rating agencies, and we are pleased with the improvement of our ratings during 2022.
Speaker 3: Our ongoing commitment to the communities in which we operate is also a differentiating factor in our ability to attract talent and support strong labor relations. During 2022, the union at our Rugby North Dakota Manufacturing Facility was de-certified following a process.
Speaker 3: that was initiated by our employees. I'll turn the call back to Ian to go over the numbers.
Speaker 2: Thank you, Jennifer. Our financial results for the fourth quarter and four year of 2022 are provided in today's earnings release.
Speaker 2: Before I talk about the fourth quarter, let me highlight some of our full year consolidated results.
Speaker 2: Nets sales for the year were approximately $1.43 billion, a record high for the company, and an increase of $222 million or 18% compared to last year. Organic sales growth for the year was $130 million or 11%.
Speaker 2: Operating income for the year was $160.8 million, an increase of $30.1 million or 23% from last year. Adjust the debit date for the year was $215 million, up $34.5 million or 19% compared to last year.
Speaker 2: that translates to a margin of 15% this year of 10 basis points from last year.
Speaker 2: Gap earnings for the year equated to $1.97 per share of $0.34 per share or 21% from last year.
Speaker 2: On an adjusted basis, we reported full year earnings of $1.96 per share of 21 cents per share or 12 per cent from last year. Ordered for the year were $1.69 billion, another company record, and an increase of $153 million or 10 per cent from last year.
Speaker 2: of my comments I will focus mostly on comparisons of the fourth quarter of 2022 to the fourth quarter of 2021.
Speaker 2: consolidated net sales for the quarter for $392 million, an increase of $19 million or 30% compared to last year.
Speaker 2: Organic sales growth for the quarter was $71 million or 24%.
Speaker 2: Consolidated operating income in Q4 this year was $46.6 million, up $16.5 million or 55% compared to last year.
Speaker 2: Consolvated Adjusted EBITDA for the quarter was $61.1 million of $21.1 million or $53% compared to last year.
Speaker 2: That translates to a margin of 15.6% towards the high end of our target range and up 230 basis points from last year.
Speaker 2: GAPEPS for the quarter was 57 cents to share of 25 cents to share or 78% from last year.
Speaker 2: On an adjusted basis, EPS for Q4 this year was 57 cents per share, an improvement of 17 cents per share or 43% compared to last year.
Speaker 2: Borders in Q4 this year were $444 million, the second highest quarterly orders in the company's history.
Speaker 2: In terms of our fourth quarter group results, ESG's sales were $325 million, an increase of $80 million or 33% compared to last year.
Speaker 2: ESG's adjusted EBITDA's the quarter was $57.6 million up $21.4 million or 59% compared to last year.
Speaker 2: That translates to an adjusted EBITDA margin of 17.7% in Q4 this year towards the high end of the group's target range and up 300 basis points from Q4 last year.
Speaker 2: S.S.G. sales in Q4 this year were $66 million, up $10 million or 18% compared to Q4 last year.
Speaker 2: SSG is adjusted EBITDA for the quarter with $13.2 million, up $2.2 million or 20% from last year.
Speaker 2: SSG's Adjusted EBITDA margin for the quarter was 19.9% of 20 basis points from Q4 last year.
Corporate operating expenses in Q4 this year were $10.2 million compared to $4.1 million in Q4 last year, which included a non-recurring $3.5 million benefit from the reduction in the fair value of contingent consideration associated with acquisitions.
Turning now to the consolidated statement of operations where the increase in sales contributed to a $29.2 million improvement in gross profit.
Consolvated gross margin for the quarter was 24.7% of 230 basis points compared to last
As a percentage of sales, selling, engineering, general, and administrative expenses for the quarter, we're down 70 basis points from Q4 last year.
During the fourth quarter of this year, we recognize $500,000 of expense from acquisition and integration related activity compared to a $3 million benefit in Q4 last year, with the majority of the year over the year change driven by the prior year contingent consideration benefits I just refer to.
Other items affecting the quarterly results include a $600,000 increase in amatization expense, a $3.2 million increase in interest expense.
and a $700,000 increase in other expense. In Q4 last year, we also recognized a noncash pre-tax pension settlement charge of $10.3 million associated with a pension and utilization project. Income to X expense the quarter was $7.4 million.
compared to a $300,000 income tax benefit in the prior year, with the year-of-year change largely due to higher free tax income levels and a $1.9 million reduction in discrete tax benefits.
including discrete tax benefits are effective tax rates the full year of 2022 with approximately 20%.
But 2023, we currently affect the tax rate of between 25% and 26% excluding any discrete tax benefits. On an overall gap basis, we therefore earned 57 cents per share in Q4 this year compared with 32 cents per share in Q4 last year.
To facilitate earnings comparisons, we typically adjust our gap earnings to share for unusual items recorded in the current or prior quarters. In the current year quarter, we made adjustments to gap earnings to share to exclude acquisition related expenses and debt settlement charges.
On this basis are adjusted earnings in Q4 this year with 57 cents per share compared with 40 cents per share in Q4 last year.
Looking now at cash flow, where we generated $40 million of cash from operations during the quarter, bringing the total amount of year-to-day operating cash generation to $72 million.
Early in the fourth quarter we executed a new five-year eight hundred million dollar credit facility replacing the five hundred million dollar credit facility that was previously in place.
During the fourth quarter we completed the acquisition of Toho for an initial payment of approximately $43 million and in early January we completed the acquisition of Blasters for an initial payment of approximately $13 million.
A current net debt leverage ratio remains low, even after factoring in recent acquisitions.
We ended the quarter with $316 million of net debt and availability under our credit facility of $428 million.
With our financial position strengthened by the increased borrowing capacity under our new credit facility and our healthy cash generation, we intend to pursue additional strategic eGCH acquisition like our recently announced practice deals.
We also have significant financial flexibility to invest in organic growth initiatives and fund cash returns to stockholders. On that note, we paid a dividend of $0.9 for share during the fourth quarter, amounting to $5.4 million, and we recently announced a similar dividend for the first quarter.
That concludes my comment, and I would now like to turn the call back to Jennifer. Thank you Ian. Overall, our fourth quarter results represented a strong finish to a record year. Within our environmental solutions group, increased sales volumes, contributions from recent acquisitions and strong price realization.
contributed to a 33% year-over-year net sales increase and a 300 basis point improvement in EBIT-DOM margin.
During the fourth quarter, production and shipments at our streeter and Belgian manufacturing facilities improved by approximately 20% as compared to the third quarter.
The production improvements are encouraging and demonstrate that we are benefiting from the actions taken to mitigate the global supply chain shortages, including investing in additional safety stock inventory, bringing additional suppliers online, re-engineering products and insourcing where possible.
With its supply chain continuing to improve, our safety and security systems group also delivered impressive results during the quarter, including 18% top-line growth and an EBITDA margin of approximately 20%. This performance was achieved despite a week-long plant shutdown at a university of Michigan.
impacts and deliver essential equipment to customers, including working substantial overtime and on previously scheduled holidays. With its consistently strong performance over the last several quarters, at this time we are increasing the EBITOM margin target for our safety and security.
systems groups to a new range of 17 to 21% from the previous range of 15 to 18%.
Demand for our product offerings continues to be as strong as ever as demonstrated by our outstanding fourth quarter order intake of $444 million, contributing to another record backlog entering the year and reflecting strength across our end markets. This order strength has continued so far into 2020.
surplus of funds directly attributed to funds provided by economic stimulus packages.
In 2021, the Treasury began distribution of the first 175 billion tranche that was earmarked for state, local and territorial governments for a variety of purposes, including the maintenance of essential infrastructure such as sewer systems and street.
The second 170 billion tranche, the Schedule for Distribution Beginning in 2022.
This positive dealer sentiment is supported by the ongoing strength of US municipal orders which were up 13% year-over-year with notably strong demand for street sweepers and sewer cleaners.
In fact, in 2022, our municipal orders for street sweepers are up.
around 34 million or 22% over last year, while sewer cleaner orders are up 27 million or 15% over the prior year.
We are also seeing strong domestic municipal demand within SSG with orders for public safety equipment up 10% year over year. Over the last few years, several major urban domestic municipalities had paused making investments in public safety equipment in response to the defun police movement.
This trend appears to have started to reverse. We have also seen strong demand for our public safety equipment for international markets.
Turning to the 1.2 trillion infrastructure bill, which has 550 billion for new investments in roads, bridges, power, water, and broadband infrastructure, public transportation airports.
We are beginning to see demand pick up in the form of equipment inquiries from contractors who are working with State Departments of Transportation agencies on roads, bridges, and related projects. Additionally, conversations among our dealer channel indicate contractors.
are now planning out projects through 2024 and are beginning to make inquiries based on their large equipment needs to correctly tie to these infrastructure funds. Within our industrial and markets, we saw a 10% year-over-year improvement in domestic orders during 2022.
The improvement has been almost across the board, but most notably for our true vac, safe digging trucks, and our endogular industrial vacuum loaders, which collectively were up 67 million or 62 percent year-over-year.
While industrial order strength continues, we continue to experience some softness and orders for dump truck bodies as customers and dealer provided stock chases and pool chases for all size classes remain a primary constraint for this product offering as dump bodies typically receive lower prioritization from dealers when chasey availability is limited based on allocations from OEMs.
As chassis availability improves, we expect to see increased squatters based on pent-up demand, particularly with the anticipated need for dump trucks for infrastructure-related projects.
We remain committed to our vehicle electrification initiative and continue to identify new ways to integrate electrification into our suite of products and offer solutions to our customers on their path towards reducing their carbon footprint and improving air quality without compromising performance.
We are experiencing high demand for our dealer network for demonstrations of our plug-in hybrid broom bear and hybrid pelican sweeper products.
We are also excited to announce that Elgin will be introducing a full-size electric sweeper at the ConExpo trade show in March. A fully electric rugby very-class platform dump body will also be featured at this trade show.
We continue to incorporate recent acquisition into our electrification road map. And Dust will be introducing a new switching-go system on a class for electric chassis at the NTEA Work Show next week.
With the continued advancements in electrification, we have also developed dedicated resources and partnered with industry experts to research and identify the most relevant state and federal funding information for sweepers, actively linking our customers to EV funding opportunities.
In addition to electrification, our innovation teams remain committed to providing solutions to solve customer problems and have launched more than two dozen new products in 2022.
Examples include the TrueVac TRXX series of trailer mountains, safety viewing projects, factors launch of a five cubic yard version of the impact compact combination sewer cleaner and Elgin's introduction of a non-CDL broom badger street sweeper.
Jetstream also introduced its largest pump product, the 5200Q pump, which is capable of more than 700 horsepower and ground horsepower launched a new 200 ton capacity belly dump cool trailer.
With a focus on features and functionality, our solutions aim to simplify ease of operation and training, reduce operating costs and maximize asset utilization. Innovation will continue to play a critical role in our long-term growth. With lead times for new equipment, continuing to be extended, we expect demand for our craft, future workshop, vehicle infrastructure, disconnect and target activities associated with cheap SaaS.
what it was at the same time last year. With the combination of high rental demand and strong used equipment sales in recent quarters, we are planning to add units to our rental fleet to replenish units that were sold in 2022. As a result, we are expecting that a larger portion of our first quarter production of VACTER, TRUEVAC, and LG units.
will be used to replenish our rental fleet in comparison to the prior year. We also see additional opportunities to grow our aftermarket business by expanding it in new geographies we believe to be underserved. In Colorado, for example, we have now secured a new facility which we expect to be fully operational during the second quarter.
In early January , we completed the acquisition of Blasters, a leading manufacturer of truck-mounted water-blasting equipment.
Blasters designs, manufacturers and sells the liquidator and ultra high pressure water-based road marking and rubber removal trucks. Blasters also engages in the sale of certified pre-owned units and supports the recurring aftermarket needs of its customers through parts and service offerings.
The acquisition represents a strategic product line addition to Mark Right Lines, thereby giving us the opportunity to cross-leverage both businesses' robust market positions and allowing us to serve our shared customer base with a comprehensive range of world-class products and solutions for road and surface infrastructure maintenance.
I recently attended the ATSIS trade show in Phoenix where the combined MRR blasters booth generated a lot of interest. Last week we announced the signing of the TRACLIS acquisition agreement.
Trackless is a leading Canadian manufacturer of multipurpose off-road municipal tractors and a variety of attachments which provide year-round value to its customers.
the interchangeable trackless attachments.
can help customers achieve carbon reduction and other environmental goals by operating a single highly versatile unit instead of several purpose-built vehicles.
Trackless also supports the recurring aftermarket needs of its customers through a comprehensive parts offering, sales of which represent up to 20% of annual revenue.
With our Joe Johnson equipment subsidiary currently the largest distributor of trackless products in North America, we have a great appreciation of trackless products and a reputation for quality and innovation. We are excited about the opportunity to leverage our existing distribution channel to expand the geographic reach of trackless products and accelerate the growth trajectory of this business.
The acquisitions of blasters and track lists will further bolster our position as an industry leading diversified manufacturer of specialty vehicles for maintenance and infrastructure markets.
Our geopipeline remains active and we continue to believe that M&A will be an important part of our growth.
Turning now to our outlook. Conditions in our end markets remain strong, with ongoing execution against our strategic initiatives and opportunities to drive improved efficiencies, we are confident that we will have another record year in 2023. We have started to see the benefits from federal stimulus funding in our recent order trends.
contributing to a record backlog entering 2023 and improvement in supply chain. Although seasonal effects typically result in our first quarter earnings being lower than subsequent quarters, we are anticipating year over year growth with earnings in the first quarter of 2023 expected to represent a similar percentage.
of our current target range.
We also currently expect to report a justed EPS of between $2.15 and $2.40 per share despite an aggregate year-over-year EPS headwind of approximately $0.23 per share resulting from the normalization of our tax rate and higher interest expense.
Our outlook also assumes a nominal contribution from trackless acquisition, which we currently expect to complete during the second quarter.
With an active M&A pipeline, ongoing investment in new product development recently completed capacity expansions.
good access to skilled labor, and anticipated multi-year tailwinds from infrastructure legislation and economic stimulus, our businesses are well positioned for long-term sustainable growth. With that, we are ready to open the lines for questions. Operator
We will now begin the question and answer session. To ask a question, you may press star, pin 1 on your telephone keypad.
If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2.
At this time, we will pause momentarily to assemble our roster. Our first question is from Mike Schliske with DA Davidson. Please go ahead.
Good morning, Mike. Good morning, and thanks for taking my questions. I guess the first question is probably the one you are written down to answer once the community starts. Most obvious one is I graduated one segment margin targets. What kept you from raising the other one? What should we be watching for in 23 to hopefully make that turn fair?
I'll make that second jump there. As we talked about last year, we saw supply chain starting to improve in our SSG segment earlier than the supply chain improvement starting to traction in our ESG segment.
So, you know, we want to make sure when we increase these margin targets, they're going to hit the targets. And so, although we're encouraged by the supply chain improvement we saw in Q4 for ESG, we'll still need some time to make sure that that's going to stick.
and supply chain improvement has not been linear in our world. We have good days and bad days, and the good news is we're having more good days and bad days.
But, you know, we go a little bit forward, a little bit sideways, a little bit backwards, and we move towards the top. So it's really driven by the improvement, the sustainable improvement that we've seen in supply chain, where SSG predated ESG.
but we're watching it carefully and we're committed to increasing.
Great, thanks for that. I didn't hear much commentary this quarter around trash supply. I was curious, is there a reason? Was it just things are kind of back to normal for you, or it's just not something that's been as much of a focus as it has in the past couple quarters?
Yeah, so let me start with TBI. Chassis supply is still a problem. In terms of prioritization for our TBI customers, we don't own the chassis. And that situation is typically lower in the queue. And it is a constraint right now. Based on the public comments made by some of the chassis of the allowances and components, we are not getting my mic at all, the point where communism leaves and we are not getting my mic at all, the point where communism leaves us.
We're hopeful as we get to the second half of the year that we're going to see improvement.
on our non-TBEI vehicle businesses. We're still on allocation.
But we've gotten better at allocation. We've been able to go out and procure some additional chassis. Our dealers have been able to procure chassis. Some of our customers have been able to procure chassis.
Would we like more chases? Absolutely. But we've done a pretty good job of maneuvering our way through this.
And again, we're hopeful that we see more chassis availability in the second half of the year, but we don't control that. Yeah, and I think my just to build on Jennifer's point, obviously we've made a strategic decision to provide more chassis. When you look at our inventory on a year-over-year basis, about $13 million.
we supplied more chassis. I think that is something that over time we would like to go back to a more steady state. Given the environment we're operating in, we've made the decision to provide more chassis than we typically would.
Great. I want to throw one more in there, perhaps a two-part question on the trackless deal. Can you share, is that company using off-the-shelf engine or a large company brand engine in their machines? I love to meet you again.
any purchasing synergies there with other businesses like your street street business, etc. And the other part of the question is, I noticed they've got an industrial moan business, their Tation Maintenance. That's not going to focus the federal signal in the past. My knowledge, nothing tremendous. Are you looking to expand more into the green parts of the infrastructure going forward? ah
Yeah, let me start with this is a deal that I've been working on. Our team has been working on since 2015.
Our J.J. team, as we talked about in the prepared comments, is the largest distributor of trackless equipment, so we know the company well. It's just an outstanding company.
With respect to, yes, they do purchase large engines and from a large engine supplier. And yes, we believe there's synergies there. And we're excited about that. This acquisition, although smaller, I just think has great growth opportunities.
We're planning on having a kind of winter attachments package and a summer attachments package. The summer attachments package would include the moor attachments that you referenced.
And we believe again that this particular company very well managed, just a great company will be able to offer depending on the geographies, either summer, winter, or both, or either or.
And it really helps our customers reduce their carbon footprint also. Because instead of having several multipurpose vehicles, they can have one vehicle with multiple attachments.
And then again, we believe with our footprint, the opportunity to grow the thereafter markets business that attachment is great.
I was absolutely thrilled. The management team is fantastic, and we really think there's a ton of opportunity going forward. That's great color. I really appreciate it. I'll pass it along.
The next question is from Felix Bocian with Raymond James. Please go ahead. Good morning Felix. Hey, good morning everybody. Hey Jennifer, morning.
I was just curious on the top line guide if we could maybe talk about some of the key puts to take. As I think about going from 22 to 23, I think there's going to be obviously some M&A impacts and price impact. You mentioned aftermarket being a growth source. I'm wondering, Ian, could you bucket those for us and maybe talk about what you're applying on a ****.
So of the organic growth component, it's a pretty wide range, I think, and that's reflective mainly of supply chain, particularly on the dump truck side of the business. So I think when you look at the organic growth of 6 to 16, on the lower end...
Price would probably be about half of that with volumes making up the difference. And then obviously as you go further up the range that's going to be mainly volume driven. Okay, got it. Super helpful. And then you talked about adding to the rental fleet and I think you talked about doing it in the first quarter. And I guess maybe this is just a bigger picture question. But how do you think about utilization of that rental fleet today?
And sort of, where do you think the fleet size could go in the next coming years here, just as we think about, obviously, infrastructure being a driver, and so on.
Yeah, so let me start with quotes are up so far this year pretty meaningfully. So we're expecting to have a good year on rentals.
Number two is we have strong rental partners. So we're not, as you know, the only entity that rents our equipment. We have several strong rental partners and our expectation is to continue and invest in those rental partners. We expect the fleet.
partly because the supply chain challenges. There's a tremendous amount of demand for used equipment in 2022. So we're replenishing in Q1 to kind of get back to where we are, where we were. And it's important we do that in Q1 because...
as we get into the summer, particularly in areas of Canada, in the northern half of the U.S. So that equipment has pretty high utilization. I'll share with you that our utilization has been strong throughout 2022.
and we expect that to continue into 2023. In terms of the size of the rental fleet, we don't have plans to dramatically grow the fleet. We're gonna respond to customer demand and continue to be disciplined. We're gonna respond to customer demand and continue to be disciplined.
And we're also going to rely upon our rental partners.
Okay, okay. And then maybe just my last one, and maybe this is better for Ian, but I'm curious if we could talk about free cash flow conversion into next year and maybe beyond. But obviously, CapEx is stepping down post the facility additions.
Orton Capples, obviously been a big headwind in 2022. So I guess, you know, A, I'm just curious how you think about, you know, the conversion into 2023. And then just to confirm, you know, there really wasn't anything baked in, you know, from either a ring purchase or a dead paydown perspective in the guide. Is that right, Ian?
There's a little bit of debt pay down assume just based on what we're expecting from a kind of a cash generation standpoint. I think if you look at the full year, obviously our cash conversion was impacted with some of the investments we had to make in inventory levels mainly. So our conversion was below our target. We typically target.
the needs to have inventory supply chain, as Jennifer mentioned, is not solved. It's improved, but we still are fighting through challenges on a regular basis. So I think we will be up from where we were in 22, but maybe not all the way back to our...
to our target level because we still have record backlogs that we were actively trying to work down those backlogs and reduce lead time. So I think we'll still see some investment in inventory. For example, in reference to investments we're making in chassis and that's an important investment.
in terms of serving the needs of our customers. But our teams are focused in terms of both balancing the inventory we need to support our backlogs and supply chain challenges with some, we have inventory reduction goals at each of our businesses for 23.
Understood. Thank you for the time I'll pass it on. Thank you. Again, if you have a question, please press star then one.
The next question is from Greg Burns, Lucidodian Company. Please go ahead.
Next question is from Greg Burns, Lucidodian Company. Please go ahead. Morning, Greg. Morning.
What is the interest expense for next year? So we're guiding to between 18 to 20 million on a full-the-abasis. Okay, great.
And then you mentioned production being up, I guess I don't know if it was in dollar or units, units but up 20%.
sequentially. Where are you in terms of your capacity utilization? I know you've added a lot of added capacity over less year or so, but obviously you've been production constrained because of the supply constraints. So how much more capacity do you have if you could produce to demand you know how many more units or how much
between 60 and 70 percent depending on the quarter last year. So there's plenty of room for future growth.
Okay. Okay. And then with the track list acquisition, just so I understand the platform. Do they sell those attachments?
solely for their own units or do they, these attachments sold to other.
for their own units or are these attachments sold to other
Can someone just buy like their attachments and then attach it to their own trucks? It's I mean theoretically I guess you could buy their attachments and attach it to their own trucks But the purpose of it is for the trucks the tractors they manufacture
Okay.
Okay, okay, perfect. Thank you.
The next question is from Steve Barger with Keydank Capital Markets. Please go ahead. Good morning, Steve.
Good morning. If we look at the midpoint revenue guide, it implies high single or low double-digit unit volume growth, but the midpoint of EPS suggests about 20% incremental margin. And I know there's still supply chain challenges, but when you think about footprint and mix, how do you think the portfolio should flex?
If we look at the midpoint revenue guide, it implies high single or low double digit unit volume growth, but the midpoint of EPS suggests about 20% incremental margin. And I know there's still supply chain challenges, but when you think about footprint and mix, how do you think the portfolio should flex in a perfect state on volume increases?
I think in a perfect state, Steve and I will say a good state. I will carry out this by saying our guide wasn't a perfect state, but in a good state, you know, we typically with the back dogs where they are right now, we typically can...
generate some decent operating leverage in anywhere from 20 to 30 percent, I think we've seen in the past. So I think, you know, we would be expecting somewhere within that range from an operating leverage standpoint for both both groups. But again, when we put the guidance together, we did not assume a perfect state.
We have understood. I know there are still challenges out there. Going back to the conversation on cashflow conversion, over five years you have averaged 97 percent. Free cashflow conversion has been around 66 percent. With the last two years below that.
As you pursue this acquisition driven strategy, should we assume that you just become more capital intensive over time? Or will there be opportunities to kind of take some of those acquired assets and consolidate them? And just can you talk about how you think about that? Yeah, I think Steve the last couple of years have been unusual because that would...
more in line with what we would expect.
Okay. And if I look back at the acquisition track record, you know, the deals have gotten a little more expensive, trending closer to two times price to sales. Has the margin profile gotten better as well? Are you just seeing more expensive deals because of, you know, financial conditions or scarcity value or whatever the case may be?
I think the couple that we've completed in the last couple of quarters, I think the margin profile is attractive. And that's really what's been of interest. And when you look at it on a sentence or a multiple of sales, that's what's driven. It's driven that increase, but I think the margin profile of what we've...
acquired in the last several quarters is, you know, towards the upper end of that target range and that's one of the things that when we look at increasing those target ranges for ESG, that's one of the factors that is in play. Yeah, and I'll add there, you know, if you look at the last couple of acquisitions.
They have been sustainable through cycle margin profiles. So we like that part of the business and we also believe that the after markets, parts of those businesses is an important part of the valuation equation.
Understood. And I know this can be tricky to know for a private company, but before you drive synergies, but has the cash flow profile or the cash flow conversion for those acquisitions mirrored what you target for federal signal, or is there anything that can keep you from getting there?
It absolutely mirrors what we target for federal signal. All of these businesses have been relatively low catbacks.
It absolutely mirrors what we target for a final signal. All of these businesses have been relatively low catbacks.
great example would be trackless. You know they've invested in best in class equipment. There's very little investment that's required on our part in terms to grow that particular business.
Okay, very good. Thanks.
The next question is from Chris Moore with CJS Securities. Please go ahead.
Good morning guys. Good morning. Good morning. Maybe just back to the the Revenue Guide for a second. So the organic range is 6 to 16 percent. Is there any significant difference in the assumptions in the overall health of the economy at the lower and higher ends or is it really more just a function of how the supply chain treats you?
I think it's mainly a function of supply chain Chris because I think you know obviously the backlog at the end of the year that gives us great visibility. You know I think what we've seen so far this year the orders have been pretty strong as well. So I think in terms of
the visibility, the back-up provides, you know, it gives us great visibility. So supply chain is the primary driver of the size of the range. And again, it's mostly on the jump truck side of the business. Get in the top.
I think Jennifer talked about supply chain, excuse me, lead time still being something of an issue. In fact, there seems to be a good barometer on lead times. My understanding last fall, there was 10 to 11 months there versus a normal 6 to 9. Has that changed much at all?
about the same. And we've increased the output and the production, but at the same time the demand has remained really strong. God, and maybe just one last for me. I guess everyone's kind of waiting for the new normal to return. It doesn't look like that's going to happen. So maybe you could talk a little bit about some of the things.
that you were kind of forced into doing that you're not going to go back on, you know, whether that might be sourcing or making internally, you know, just trying to understand kind of how the federal signals positioned a little bit better post-pandemic.
Yeah, so I think, you know, there's silver linings and everything and the silver lining has come out of this pandemic slept supply chain is Mark Webber's really led a great initiative in terms of coordination among our businesses for critical parts.
So we've had several examples. One is our Elgin business had a problem with a part to China and our jet stream business stepped in and is now manufacturing that part. Our sewer cleaner business had a problem with a part and our SSG business stepped in and was able to manufacture that part. We've had a problem with a part to China and our SSG business stepped in and was able to manufacture that part.
We have examples across the enterprise where given the various capabilities that we have, we can step in and help sister businesses.
That's been very beneficial. We've started to insource more in terms of we need to make sure that we've got in certain situations critical parts and that's been a important part of the success that we had in 2022. In general...
our supply base because of our exposure to public revenue source. We've had our supply base is primarily a North American supply base and it has been historically. That has benefited us through the tariff situation, through the pandemic and through the supply chain challenges. Our teams, we have great suppliers and our teams have done a great job.
additional suppliers, which is important, and I think we're incredibly well positioned for 2023.
Perfect, I'll leave it there. Thanks, guys. The next question is from Walt LibTak with Seaport. Please go ahead. Good morning, Walt.
Perfect. I'll leave it there. Thanks, guys. Thanks, West. The next question is from Walt Liptack with Seaport. Please go ahead. Good morning, Walt. Good morning, guys.
Great quarter and you know great long term too. That was impressive hearing about the the kegger over the long term. One day I asked about the first quarter. You talked about it being seasonally lower, but you also said that you're going to be adding to the fleet. You know, and you know, so I think we can work out the numbers from the.
rental units of our own that go in our own rental fleet. So we're using production for essentially units that won't generate that immediate income because they go into our own rental fleet. So it's almost like an intercompany transaction. So that's the main reason that we were just calling that out because while
while we're not expecting production to drop off. A lot of that production will be for units that go in our own rental fleet. So that was the primary message we were trying to just indicate there, because you know, with the strong used equipment sales that we've seen throughout 2022, and with the continued high demand for rentals, you know, in both...
And I would just add is the historical seasonality of our business Q1 is our softest quarter.
Okay, and what do you expect the operating leverage to look like in the first quarter?
So, in the first quarter, I mean, for the full year, I think we're looking at leverage in the 20 to 30% range as we talked about. I'd have to get back to you on the first quarter.
Okay, all right, thanks. And then if I can ask one on inflation and selling prices, are you still seeing inflationary pressure and what are the pricing strategies? Are you still finding that you need to increase prices in 2023? Yes, we are still seeing inflationary pressure. Okay.
particularly on the various component parts that we buy. Often, we've got a lot of notice.
And we have made it clear that both to our dealers and our customers that we will react.
when needed and pass those costs on as necessary. Yeah, we've seen, you know, of steel has come down. We have seen that to the summary, but for some of the other components we haven't seen much relief to this point and as, you know, we typically have a manual price increase that goes in our fa-
So we're encouraged with the actions that we've taken in response. And this is obviously an absolute dollars, not necessarily back to the margins that we were at before, but we were favorable on a year-over-year basis during 2022.
Okay, great. Okay, and then the last one for me is just on the EV products. And it sounds like some of the products are getting commercialized. Are you taking orders or are those orders somehow tied to some of the government infrastructure programs and other sorts of government funding that may still be in the pipeline?
We've started to take some orders on certain product lines. As I mentioned in my prepared remarks, we have a program that's available on, for example, in our street sweeping business that identifies public funding that's available to assist customers in purchasing EV equipment.
are agbeping.
Okay, great. Thank you.
Thank you. Again, if you have a question, please press star then 1.
The next question is from Dave Storms with Stonegate Capital Markets. Please go ahead.
is from Dave Storms with Stonegate Capital Markets. Please go ahead. Excuse me, I actually meant to withdraw my question.
Okay. Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to Jennifer Sherman for any closing remarks.
In closing, I'd like to reiterate that we are confident in the long-term prospects for our businesses and our markets. Our teams are performing at a high level and remain focused on delivering high-quality results. We continue to aggressively address supply chain challenges and we believe we are winning in the marketplace with our customers.
We remain committed to investing in 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 of our strategic initiatives. We would like to express our sincere thanks to our stockholders, employees, distributors, and our valuable defenders.
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