Jennifer Sherman - President & CEO Ian Hudson - CFO.

Ken Newman - KeyBanc Capital Markets Walter Liptak - Seaport Global Chris Moore - CJS Securities Greg Burns - Sidoti Marco Rodriguez - Stonegate Capital Markets Steve Barger - KeyBanc Capital Markets.

Good day, everyone, and welcome to the Federal Signal Corporation Fourth Quarter Earnings Conference Call. Today's call is being recorded. For opening remarks I’ll turn the conference over to Ian Hudson, Chief Financial Officer. Ian, please go ahead..

Good morning and welcome to Federal Signal's fourth quarter 2017 conference call. I'm Ian Hudson, the company's Chief Financial Officer. Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer. We will refer to some presentations 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 Call icon and signing into the webcast. We have also posted the slide presentation and the earnings release under the Investors tab on our website.

Before we begin I'd like to remind you that some of our comments made today may contain forward-looking statements that are subject to the safe harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website.

Our presentation also contains some measures that are not in accordance with U.S. Generally Accepted Accounting Principles. In our earnings release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-K later today.

I'm going to begin today by providing some detail on our fourth quarter and full year results, before turning the call over to Jennifer to provide her commentary on our performance in 2017 and update on some of our strategic initiatives and thoughts on our outlook for 2018. After our prepared comments, Jennifer and I will address your questions.

Our financial results for the fourth quarter and full-year of 2017 are provided in today’s earnings release. The results include a $20 million net tax benefit, representing the company's preliminary estimate of the impact of the Tax Cuts and Jobs Act, which was enacted in December. The ultimate impact may differ from this estimate.

As a result of additional interpretive guidance that maybe issued during 2018. In addition the fourth quarter of this year includes the operating results of Truck Bodies and Equipment International, or TBEI which we acquired in June of 2017. The post-acquisition results of TBEI have been included within our Environmental Solutions Group.

Overall our fourth quarter results represent an outstanding finish to a strong year, driven by both organic growth and M&A. Before I talk about the fourth quarter, I would like to briefly highlight some of our full year results for 2017.

Consolidated net sales for the year were $898.5 million, an increase of $190.6 million or 27% compared to the prior year. Our organic sales growth was about 4%.

Operating income for the year increased by $9.4 million or 16% to $67.1 million, primarily driven by an $18.3 million improvement within our Environmental Solutions Group, which was partially offset by a one-time non-cash pension settlement charge of $6.1 million and higher expenses associated with hearing loss litigation.

Consolidated adjusted EBITDA for the year was a $113.1 million, up $29.6 million or 35% compared to last year. The increase was mainly due to improvement within ESG of $30.8 million or 42%. Consolidated adjusted EBITDA margin for the year was 12.6%, up from 11.8% last year and within our previously communicated target range.

GAAP earnings for the year including the tax benefit and pension charge that I just referenced, equated to $1 per share, up 56% from $0.64 per share last year. On an adjusted basis, we reported full year earnings of $0.85 per share, which is up $0.16 per share or 23% compared to $0.69 per share last year.

Continued momentum in organic order intake and the addition of orders from acquisitions contributed to year-over-year order improvement of $343.6 million or 51% and our total orders for the year exceeded $1 billion.

On the back of this strong improvement, we ended the year with a consolidated backlog of $257.5 million, which was up $121 million or 88% compared to last year. For the rest of my comments, I will focus mostly on comparisons of the fourth quarter 2017 to the fourth quarter of 2016.

Consolidated net sales for the quarter was $247.6 million, up $72 million or 41% compared to the prior year period. The improvement included organic growth of approximately $27 million or 16%.

Operating income of $14.9 million was up $1.1 million or 8% from last year, with a $9.7 million improvement within ESG, being partially offset by the recognition of the pension settlement charge and higher hearing loss expenses.

Consolidated adjusted EBITDA for the quarter was $32 million, up $11 million or 52% compared to last year, mainly due to improvement of $11.9 million or 74% within ESG. Consolidated adjusted EBITDA margin for the quarter was 12.9%, up from 11.9% last year.

GAAP earnings for the quarter was $0.48 per share compared to $0.20 per share last year and on an adjusted basis EPS for the quarter was $0.24, a 50% increase when compared to $0.16 per share last year. We reported total fourth quarter orders of $302.7 million, an increase of $137 million or 83% compared to the prior year period.

The improvements include a significant organic growth of approximately $84 million or 51%. With this improved demand our year-end backlog was up $54 million or 26% compared to the end of the third quarter. At the group level, ESG reported sales of $192 million were up $70.4 million or 58% compared to last year.

Higher domestic shipments of vacuum trucks, sewer cleaners and street sweepers contributed the organic sales improvement of $26.2 million or 22%.

ESG’s operating income for the quarter was $19.9 million, up 95% from last year, its adjusted EBITDA for the quarter was $28 million, up $11.9 million or 74% from a year ago, that translate to an adjusted EBITDA margin of 14.6% in Q4 this year, which compares to 13.2% last year.

ESG’s results in Q4 this year include higher incentive compensation costs and $1 million of expense for specific warranty matter. ESG’s order of $246.8 million in Q4 this year were more than double the amount reported last year.

The year-over-year improvement included organic growth of approximately $73 million or 61%, largely consisting of improved orders for street sweepers, vacuum trucks, sewer cleaners and refuse vehicles.

Within our Safety and Security Systems Group fourth quarter sales were up $1.1 million or 2%, and operating income of $8.9 million was largely unchanged from Q4 last year. SSG’s adjusted EBITDA for the quarter was $10 million, down slightly from $10.

2 million a year ago, and although SSG’s 18% adjusted EBITDA margin was down in comparison to 18.7% last year, its margin in Q4 this year exceeded the high-end of our target range, benefiting from the shipment of a number large orders with favorable margins and manufacturing efficiencies associate with higher volumes.

SSG reported total orders of $55.9 million, an increase of $10.9 million or 24% from last year, largely due to higher demand from global public safety markets and improved orders of outdoor warning systems.

Excluding the pension settlement charge I reference earlier, corporate expenses for the quarter was $7.8 million compared to $5.4 million a year ago. The increase was primarily driven by higher hearing loss expenses and increased employee incentive costs.

Turning now to the consolidate income statement, where the increase in sales contributed to a $16.2 million improvement in gross profit. Consolidated Gross margin was 24.9% for the quarter compared to 25.8% last year.

Selling, engineering, general and administrative expenses of $40 million were up 28% compared to the prior year, largely due to addition of expenses of businesses acquired in the current year, a $1.8 million increase in amortization expense and the higher hearing loss expenses.

SEG&A expenses as a percentage of sales for the quarter were down 160 basis points from Q4 last year. As we referenced on our last conference call, in the fourth quarter we launched the voluntary lump-sum pension offering to certain participants of our frozen U.S.

benefit plan, because the lump-sum settlement payments were made using assets of the pension plans they did not impact the company’s cash flow. However in connection with the lump-sum offering we incurred a pre-tax non-cash settlement charge of $6.1 million in the fourth quarter when payments were made.

While this item reduced our operating income this year, pending changes in accounting rules will result in most of our pension related costs being included as a component of non-operating income. This change will be applied to both current and prior periods reported in our SEC filings beginning in 2018.

Other items affecting our fourth quarter results include a $2.2 million increase in interest expense associate with higher average debt levels to following the TVI acquisition, a $300,000 increase in acquisition related expenses and a $200,000 increase in other income.

In Q4 this year we recognized the $16.9 million income tax benefit, largely due to the $20 million net tax benefit, which represents the preliminary estimate of the impact of tax reform.

Other factors affecting income taxes during Q4 this year included an $80,000 tax benefits from changes in valuation allowance on state deferred tax assets, and additional tax expense resulting from higher pre-tax income levels.

In the prior year quarter income tax expense was low at $1.2 million, largely due to the recognition of a $2.2 million net tax benefits from changes in valuation allowance. Excluding special tax items our effective tax rate for the full year of 2017 was approximately 34%, which compares to 34.5% in 2016.

In 2017 approximately 90% of our earnings were in the U.S. as we head into 2018 we therefore expect to see meaningful benefit from the lower 21% corporate tax rate.

However the reduction in the corporate tax will be partially offset by the removal of the domestic production deduction, higher state taxes associated with the full year impact of the increased Illinois tax rates, a reduced federal benefit on state taxes and unfavorable changes in foreign rate effects.

Taking all of these factors into account we currently expect our effective tax rate in 2018 to be between 26% and 27%. On an overall GAAP basis we earned $0.48 per share from continuing operations in Q4 this year compared with $0.20 per share in Q4 last year.

To facilitate earnings comparisons, we typically adjust 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 restructuring charges, acquisition related expenses, purchase accounting expenses and charges related to pension and hearing of settlements. We also excluded certain special tax items including the net tax benefit resulting from tax reform.

On this basis, our adjusted earnings per share for the quarter was $0.24, up 50% compared with $0.16 in Q4 last year. Turning now to the balance sheet and cash flow, we generated $21.4 million of cash in Q4 this year compared to $9.6 million last year.

For the full year operating cash flow was $73.5 million, up significantly compared to $26.7 million in 2016. During the fourth quarter we paid down an additional $5 million of debt ending the year with $240 million of net debt and availability under our credit facility of $106 million.

While we expect to benefit from a lower cash tax rate in 2018 and beyond we are not expecting any immediate repatriation of cash from overseas following tax reform to be significant.

We continue to be focused on delevering in the short-term, however the long term priorities for our capital are unchanged and while maintaining strong liquidity and flexibility we remain well positioned to invest in internal growth initiatives, pursue strategic acquisitions and consider ways to return value to stockholders.

On that note we paid a dividend of $0.07 per share during the fourth quarter amounting to $4.2 million, which brought the total amount return to stockholders in the form of dividends during 2017 to $16.8 million. We recently announced the similar dividend for the first quarter of 2018.

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

Thank you, Ian and good morning. In a nutshell 2017 was a very good year. Among the many highlights that Ian just referenced I was particularly pleased with the 35% year-over-year increase in adjusted EBITDA and an improved margin of 12.6%, which was within our target range.

We continue to deliver margin performance above many of our peers within the specialty vehicle space. This strong operational performance contributed to a 23% increase in our adjusted EPS.

In addition the $47 million improvement in operating cash flow helped us to pay down approximately $34 million of debt since we completed the TBI transaction in June bringing our pro-forma debt leverage ratio at the end of the year to 2.2 times down from 2.7 times at the closing of the acquisition.

This puts us in a solid position with significant flexibility to fund both organic growth initiatives and M&A going forward. Since our last earnings call we have welcomed a new member of our leadership team and I’d like to start by reiterating how thrilled we are to have Mark Webber back on board as the Chief Operating Officer.

Mark rejoined Federal Signal in January after spending four years at Supreme Industries, where as CEO he led a successful operational and strategic turnaround of the business culminating in sales Law Batch National in September of 2017.

Under his leadership, Supreme’s revenues grew at a compound annual growth rate of approximately 6% and operating margins improved by over 300 basis points. He has spent his entire carrier in the specialty vehicle space at Cummins, Federal Signal and Supreme. Mark is a seasoned and trusted leader who consistently delivers results.

He is uniquely qualified to drive strategic priorities and accountability within Federal Signal and possesses a laser focus on operational excellence. I am confident in his ability to align our growth aspirations with industry leading operational practices to drive and extent the company’s market leadership position.

In his new role Mark will be spearheading our 80-20 improvement program or ETI as we refer to it. During 2018, as part of our ongoing commitment to maintaining and improving our competitiveness in the marketplace, each of our businesses have incorporated specific productivity improvement target into their operating plans for 2018.

Utilizing 80-20 principles, these initiatives include a combination of material costs reductions, manufacturing efficiencies, refinement of pricing strategies and working capital optimization.

While we aim to reduce the impact of material and wage inflation with these initiatives, we also seek to generate additional savings, which we intent to reinvest into revenue generating initiatives. Of course, we also intent to imply our 80-20 improvement operational model for future acquisitions.

As I enter my third year as CEO at Federal Signal, I’m thrilled with the leadership team that we now have in place. I am also encouraged with the strategic initiatives that we put in place over the last couple of years are gaining traction.

As Ian just highlighted, we added a strong year with an outstanding fourth quarter with significant year-over-year growth in orders, sales and earnings.

Our strategic initiatives and benefits from acquisitions have both contributed to that growth, in the fourth quarter we saw continued momentum within our Environmental Solutions Group, which again reported a significant year-over-year improvement in orders.

In fact, its reported orders of $247 million were more than double last year’s orders with organic growth representing $73 million or 61% of the improvement. We also saw a 24% improvement in orders within our Safety and Security Systems Group during the fourth quarter.

On the organic growth front, we are making great progress with our initiative to expand into the utility market. The success is a result of the investments we have made in both new product development and channels.

Specifically the paradigm utility excavator truck introduced last year was the first product launch from our revamped innovation initiative. We now have a dedicated sales team in place and we are also exploring potential channel partnerships to accelerate progress. In 2017, our equipment sales into this market increased by approximately 80%.

Last week I attended one of our largest trade shows, the WWETT Show in Indianapolis, where we introduced a number of new products. The reception to these new product offerings was overwhelmingly positive and it was rewarding to see the tangible output of our ongoing focus on new product development.

Continued commitment to this program will remain a key priority in the years to come. On that note, with the savings we expect to realize from the lower U.S. tax rate we plan to utilize some of those savings in support of long-term growth opportunities.

Those will include investments to fast track the development of new products, supplement or augment our sales channel, or to make investments in the development of our people.

We’re also anticipating that our capital expenditures will increase to between $15 million and $20 million in 2018 with planned investments in new machinery and equipment aimed at maximizing the efficiency of our production processes at both our legacy businesses and TBEI.

Since the beginning of 2016, we have completed three acquisitions including the larger acquisition in the company’s history in June of last year. Each of those acquisitions has helped us to diversify our end markets and expand our product offering.

From a strategic standpoint, the JJE acquisition has allowed us to provide a more comprehensive suite of offerings to our customer. We continue to see strong utilization of the equipment in our rental fleet in the fourth quarter with rental income up almost 30% year-over-year.

Rental demand for our hydro-excavation vacuum trucks has been particularly high. While utilization levels of our fleet increased steadily throughout 2017, seasonal factors typically resulted in temporarily slowdown of the rental activity during the first quarter of each year.

We have also been pleased with TBEI’s contribution since we closed the acquisition at the beginning of June. As prior of due diligence process, we had identified that certain investments in people and processes will need to be made in integrating TBEI into a public company environment.

We have made great progress in those efforts and have made a number of additions to the management team. As we mentioned on our call TBEI’s fourth quarter is typically its softest, but with strong performance earlier this year TBEI contributed about $0.03 of accretion in 2017 at the top end of the range we had previously indicated.

Overall the acquisitions are performing within our expectations. They are delivering on our strategic objectives and are on track to meet the previously communicated accretion estimates. After taking some time to digest and integrate TBEI, we’re becoming more actively engaged in managing our acquisition pipeline, which continues to be healthy.

Over the last two years we’ve developed infrastructure internally to support M&A and expect the future strategic acquisitions will be a meaningful part of our growth. I also wanted to provide a brief update on our hearing loss litigation as we saw increased trial activity during the fourth quarter with trials in Pittsburg and Philadelphia.

In both cases the jury returned a verdict in favor of the company absolving the company from any liability. As we’ve demonstrated in 2017 we are committed to vigorously defending the company’s position in its hearing loss litigation. During 2017 we settled a number of cases for nuance value.

We continue to be committed to vigorously defending this litigation and there are more trials scheduled to take place in 2018 than in 2017 and as such our legal expenses may increase in comparison to 2017 level. At the beginning of 2018, we like many other companies will be required to adopt new revenue recognition accounting rule.

As a company we are not expecting a significant impact in our business. However the new rules will likely result in a reduction of our top line of approximately $10 million, that reclassification adjustment will have no impact on our operating income. Despite this accounting impact we’re expecting solid top line growth in 2018.

This time last year we announced a goal of profitably growing our revenues in excess of $1 billion dollars by 2020. With the progress being made on our strategic initiatives and the acquisitions of TBEI it is likely we’ll achieve this target much earlier than 2020.

We entered 2018 with strong order momentum across most of our businesses contributing to a healthy backlog. In addition we’re seeing positive economic indicators across many of our end markets. On the industrial side, our customers are encouraged with our prospects in their end markets including oil and gas.

This renewed optimism has contributed to a significant increase in orders and including those to replenish customer rental fleet. In addition, we’ve also seen strong utilization levels within our own rental fleet, particularly relating to products serving industrial markets like vacuum trucks, hydro-excavators and water blasting equipment.

And I'm pleased with the progress we’re making with our plan to expand in the utility market. We also monitor industry data on new housing starts and activity within Class A truck which we believe will have a correlation to TBEI’s business, both of those have a generally positive outlook for 2018. On the municipal front our U.S.

markets remain healthy overall with strong demand for sewer cleaners. We continue to monitor market conditions in the Middle East, during 2017 some larger fleet orders from customers in that region were deferred into 2018. Although we do not believe these orders have been lost the timing of receiving such orders remains uncertain.

With the strength of our orders in the second half of the year including an organic order growth of 25% we entered 2018 with strong backlogs. With lead times for certain products slightly extended as a result of this increased demand we saw some dealers place advance orders during the fourth quarter.

We estimate that those orders represented between $15 million and $20 million of our fourth quarter orders. As a result our year-end backlog included a higher concentration of units that will be delivered in the second quarter or beyond.

We are taking the necessary actions in an effort to reduce lead times, including increasing our capacity and applying a flexibility manufacturing model, a shift in production of certain product lines to other locations. We expect that our book-to-bill ratio will work to more typical levels in subsequent quarters.

While we expect to realize significant benefits from tax reform, we are committed to utilizing some of those savings to accelerate our longer term close initiatives such as developing new products and enhancing our sales channel.

We currently expect that the reduction in the corporate tax rate net of these planned investments will benefit our 2018 earnings by approximately $0.10 per share.

We are anticipating meaningful year-over-year improvement in the first quarter, although seasonal effects typically results in the first quarter earnings being lower than subsequent quarters and will likely represent between 16% and 18% of our annual earnings.

For the year, we expect adjusted earnings per share to be between $1.10 and $1.20, which would represent a year-over-year improvement of between 29% and 41%. With that we are ready to open the lines for questions.

Operator?.

Thank you, Jennifer. [Operator Instruction] We will take our first question today from Steve Barger with KeyBanc Capital Markets..

Hey, good morning guys. Good morning, it's Ken Newman on for Steve this morning..

Hi, Ken..

So my first question, I was curious could you -- you talk a little bit about material and wage inflation, I am curious could you kind of help remind this what’s kind of steel pass through you have within your various businesses? And then maybe if you could also quantify what’s baked into the guidance from a price cost perspective?.

Sure absolutely, we actively lock-in our steel prices by a number of months for our ESG businesses. We are seeing some inflation on steel and aluminum, which is not surprising given how long these prices have been depressed. We are also monitoring right now the impact from Bill 232, we think this could take time to materialize.

We feel confident in our ability to mitigate the impact of our future increases in costs of steel through price increases, but that could take some time.

I also talked about our 80-20 improvement program, we will hopeful that that will offset some of these material price increases that we are seeing in wage inflation, but it’s something that we going to monitor closely..

That’s helpful.

And you talked about maybe seeing a more normalize book-to-build in subsequent quarters, I am curious could you talk about order quoting activity that you have seen so far into the first quarter, have you already seen that kind of normalization or is that something where the momentum is kind of carried forward so far?.

Yes, Ken I think with respect to January orders I think from what we have seen so far they’re encouraging, Jennifer talked the recent trade show we were at that there seems to be some good momentum in the industry that -- so I think in subsequent quarters it may reverse, but we are pretty encouraged with the January orders so far..

Okay. One more for me and then I will get back into the queue. With the impressive growth that you see in ESG it might be helpful to remind us how big the hydro-excavation installed base in the U.S. today? And what kind of growth rate you expect it to grow in 2018? And then obviously your market shares are lower in Canada relative to the U.S.

in that product, but given that is it such a large market it will be great to get a sense for the installed base in Canada as well as what you expect it grow out in 2018..

We don’t break it out because our hydro-excavation market has a number of different end customers. We sell some of the hydro-excavation equipment as you know into the municipal market, we sell some of it to industrial customers and then as I talked about we also have our utility initiative.

So it’s a pretty fragmented market depending on who the end user is. We saw in 2018 very healthy demand in the municipal side, we talked about our customers are optimistic on the industrial side and part of that is driven by some recovery in oil and gas and we saw replenishment of both our own rental fleet and some of our customers rental fleets.

And then on the utility side of the market for hydro-excavators we’re off to a very strong start, I talked about in the call that our orders for the hydro-excavators going in the utility market were up over 80%. And though we’re in early days we’re really encouraged by the progress we are making to-date..

Appreciate, I’ll jump back in line..

Thanks, Ken. .

We will take our next question from Walter Liptak with Seaport Global. .

Hi, thanks. Good morning, guys. So great quarter, great way to end the year, just a follow on to that last question about the hydro-excavator going into the upstream energy sector. We're hearing a lot about the E&Ps changing their CapEx programs and looking at spending a lot more money in 2018.

Are you seeing that flow through in anyway like have you gotten any upstream related hydro-excavator orders yet or is there something that still going to come?.

Yes, I think what we've seen so far Walt, is we've seeing and we've talked about this, really strong utilization in the rental fleet not just our rental fleet, but also sales to some of our rental partners who have their own fleet.

We've seen a lot of the replenishment of those fleets and there has been a fair amount of replenishment of the hydro-excavators vehicles. So that's what we've seen. In terms of direct sales to end customers serving oil and gas market, it’s still relatively light I would say.

It's the signs of encouragement are there and our customers are expressing some more optimism. But we haven't necessarily seen that direct increase in customers from customers serving directly -- serving the end markets of oil and gas..

The other thing I would add, what we've talked in previous calls about kind of used equipment overhang. And we monitor the third party option data. And we’ve seen that overhang kind of revert to more normalized levels. So that’s also an encouraging piece of data..

Okay.

Would you have any in the 2018 guidance, do you have an expectation for upstream energy hydro-excavator recovery or is that something that would be incremental to your outlook?.

We have some that's included. We definitely have year-over-year improvement that's included in the guidance for 2018. And we also use in terms of a mix standpoint our hydros some of our higher margin products. So that to the extent that we some more it could lead to margin improvement..

Okay, great. And just thinking about the fourth quarter orders, the organic growth look strong and look seasonally stronger than normal. I wonder if it’s just your comments that it surprised you at how the orders came in, in the fourth quarter.

Looks like it was kind of across the board?.

I think one of the things Walt that we talked about is that we saw some advanced orders, Jennifer referenced about $15 million to $20 million of orders in Q4. We think was -- we have certain product lines where these lead times have become a little extended. So we saw some advanced orders in Q4 that was a little bit of a surprise.

But otherwise, we continuing to see some pretty good traction on some of our strategic initiatives we've had implemented in the last couple of years..

Okay. And if I can just dig a little bit further into it.

Have you raised prices on any of the machines? And do you think any of the fourth quarter ordering was related to any pre-buys like ahead of price increase?.

Yes, each of our product lines have different timing in terms of raising prices. But historically several of our ESG products do raise prices in the fourth quarter and that does contribute to some of the order demand that we see in the fourth quarter..

Okay, great. And then, maybe a last one, I wondered if you could help us think about the 2018 EPS walk. Because I think you've got M&A accretion from still JJE and from TBEI in 2018. And any other positive or negative impact for instance legal sounds like that might be a headwind, price cost, volume leverage.

Obviously tax rate is going to help you by that $0.10. But starting at $0.85 adding in the $0.10 for tax rate offsetting the new product spend.

And I wonder if you can help us with the other buckets that are going to get to the 2018 guidance?.

Yes, so I think as it relates to the accretion well, we've referenced on the call that in 2017 TBEI contributed about $0.03. We've also said that by the second anniversary of the acquisition, there would be expected accretion with between $0.07 and $0.12. We're still on track for that.

It's likely going to be kind of a steady run-rate to get to the second anniversary of the deal to hit those numbers. And then similarly with JJE, JJE was a pretty meaningful contributor in 2017. We are 18 to 21 months in now with the acquisition, we said the accretion for JJE would be $0.10 to $0.15 by 2018. And so we are well on track for those.

So I think in terms of the accretion those are the two kind of data points I think I would factor in, with the residual being the growth in our legacy businesses..

Okay, great. And just a last one for me on TBEI, if I am recalling this right, when you made that acquisition, I think there was a little bit of concern about what the growth rate might be as you get into 2018, 2019. How was TBEI been trending for you and is it expected to grow in 2018..

It’s absolutely expected to grow in 2018. We have talked about that the seasonality of that business, typically the fourth quarter for TBEI is softest quarter, and typically Q2 and Q3 are their stronger quarters.

We are on track to meet the accretion estimate that we saw and depending on both the municipal and industrial side of that business, we expect the municipal side of that business to grow GDP plus in the industrial side of the business we think there is more opportunity.

We did mentioned on the call, that as we identify the due diligence there were some investments that we were going to have to make in people and process, the integration team has made nice progress on that in 2017 and some of that will continue in 2018.

The other thing I’d point out is there are some good indicators in terms of housing starts and Class 8 Chassis and right now we are seeing encouraging trends in those end markets..

Okay, sounds great. I’ll get back in queue. Thank you. .

Thanks, Walt. Appreciate it. .

We’ll go next to Chris Moore with CJS Securities..

Hey, good morning. Thanks for taking my questions, guys..

Good morning, Chris. .

Good morning. Maybe we could just start on the specific of the initiative. So -- the increased investment on -- so now it’s going to be new products and expanding sales channels.

Are there any new markets that -- you obviously had great success in the utility market any new markets that you are targeting at this point in time or the products just kind of additional to what’s already out there..

We really think it’s a combination, we are taking off a process where Mark and myself, the leadership team is working with each one of our individual businesses to identify and accelerate some of the ideas they have around new product development in channel, which is equally important.

So I think you will see a combination of both from existing markets that we’re in and some adjacencies. And overall we talked about $0.03 about $2.5 million of expense related to this. And you should really think of this as long-term investments to support the organic growth of the business..

Got it, that’s helpful.

And from the kind of that sales channel perspective, that would be more ESG focused than SSG?.

I think there is a bias right now, particularly around our utility initiative and the success that we have had, so we will be looking at opportunities across all of our businesses..

Got it. Previously you had talked about potentially expanding the Joe Johnson rental fleet a bit, it sounds like Q1 historically is kind of soft on the rental side.

Any thoughts for later on 2018 in terms of putting some more capital on that front?.

Yes, Chris, I think last time we talked about adding up to $20 million of incremental units in the fleet, those -- that would be focused on specifically on those piece of equipment have attractive returns, strong utilization levels.

So that’s really hasn’t changed I think in terms of the timing of when we would make that additional investment you are absolutely right, in the first quarter the further north you go the seasonality plays a part.

So the investment would likely be to have those units ready to add to the fleet by April time I would say, second quarter when the weather tends to pick up a little bit. So that’s in terms of the timing and it’s something we would monitor, the ultimate extent of that investment is going to be very dependent on sales out of the fleet.

We’re not just going to add the units just for the sake of adding the units it’s got to be replenishing fleet as well as some incremental investment.

So being able to control kind of the production flow from manufacturing the equipment and then adding it to the fleet it helps that we’re able to shut off the switch if things -- if the demand isn’t there on the rental side..

Got you terrific. Last question….

And Ian made the very -- I will add Ian made a very important point there, and I make sure everybody picks up is that a lot of that delivery would take place in 2Q and beyond really due to kind of a northern climates that our equipment operates in..

Got you.

And just my last question, on the M&A pipeline obviously it’s been full as of a quarter ago something like that, but in terms from what are you seeing on the other side from a pricing perspective in terms of with some of these potential sales we’re looking for has that changed much over the last 6 to 12 months?.

We have seen upward pressure on multiples, but as we said repeatedly we’ll continue to be disciplined buyers and I think we’ve got a good track record now within M&A transactions that we’ve done over the last two years particularly the Joe Johnson transaction, TBEI.

And acquisitions will continue to play a meaningful part of our growth going forward..

Great, appreciate it. I’ll jump back in line guys, thank you..

Thanks, Chris..

We’ll go next to Greg Burns with Sidoti..

Good morning..

Good morning, Greg..

Good morning. In terms of the some of the new products outside of the paradigm that you mentioned on the call could you maybe give us some more color as to maybe some more specifics as to what those are and the timing of when we might see some of those hitting the market? Thank you..

Sure I mentioned on the call last week I was at our largest tradeshows for ESG the WWETT show in Indianapolis.

We introduced a number of new products, on the hydro-excavation side we introduced the product that significantly takes a lot of lead out of the product that to comply with certain regulations that are in Canada and other jurisdictions it was very well received.

In addition to that in the Vactor side we’ve introduced a whole new control panel whole new boom approach to vacuum excavation.

And so on the SSG side we’re introducing over the last couple of years we’ve had a significant new product development effort on our public address systems what we call our TAGA [ph] product, which provide kind of redundant warning in areas where there is a high need and we’re introducing that product in the first quarter of this year.

On the debt stream side of our business, our teams have introduced a number of tooling products and they were on display last week at the WETT Show we’ve had success during 2017 and we expect future success in 2018.

So overall we put -- we started an initiative three years ago in terms of revamping how we approached new product development and we’ve got a number of products -- projects right now that are in the pipeline across all of our businesses both ESG and SSG.

So we feel comfortable with both the opportunities that we’ve been introducing and the pipeline of opportunities going forward..

Do you have a target for how much revenue you maybe like to generate from new products over maybe the next 12 to 18 months or is there some kind of like internal like measure on the success of kind of these new product initiatives?.

Yes, Greg, we have internal targets that we assign to our people, but we don’t really disclose the public targets, but as Jennifer said it certainly is going to be important part of our growth and that’s why we’re very committed to using some of the cash savings from tax reform to fund the fast tracking of some additional new product development.

And you know those growth initiatives that we have internal targets for it varied by business-to-business..

Okay.

And how much was the hearing loss litigation expense in 2017 and how much might that increase in 2018?.

So it was about $1.5 million higher in 2017 versus 2016 as we’ve spoken about the biggest driver of that incremental expense is the number of trails that we have. We saw that in Q4 we had the trials in Pittsburg and Philadelphia there are currently more trials scheduled in 2018 than we had in 2017.

So that might pick up a little bit -- the expense might pick up a little bit in 2018..

And also I mentioned we are successful in settling about 700 cases for $700 for plaintiff, [ph] which we consider nuisance value, so there was also a charge in fourth quarter related to that..

Okay, thank you. .

We will take our next question from Marco Rodriguez with Stonegate Capital Markets. .

Good morning, thank you for taking my questions. I was wondering if you could circle back a little bit here on the 80-20 improvement plans you are kind of targeting for some savings for fiscal 2018.

Of the four areas that you are sort of attacking if you will are there any one or two that are I guess for lack of better work kind of slightly easier lower hanging fruit to obtain, some cost reductions and the same any of the four that are a little bit more difficult to obtain?.

The first thing I want to say, this is not new, we have been employee 80-20 principles for the last five years since Dennis Martin joined the company, we were reviewing here is kind of quantifying kind of the -- and capturing the results of the efforts that are ongoing in our businesses.

It really depends on the business in terms of which ones and Mark Webber as I mentioned our COO this is a high priority return for him, he has worked with our businesses to developed plans.

So each business had different opportunities out in gas, what inning are we in 80-20 journey we have been doing this for a while, but it’s really part of our culture and we continue to see opportunities going forward. And the other thing I would point out is, this is -- we are putting in process to benefit us for the long-term.

And if you talk to our plant manager, this is really part of the culture that we have been successful in terms of implementing and continue to do so..

Thanks, that’s helpful.

And so when I am thinking or when we’re thinking about these offsets here to potential material wage inflation in fiscal 2018, if you assumes that your whole volume kind of steady do you think that this improvements would completely offset this the inflation aspects here or do you think you get some sort of margin improvement?.

Marco, I think that’s the goal, there is obviously unknowns at this point but that’s certainly the target of this program is to reduce the impact of that wage and labor inflation.

As it relates to the kind of what we plan for 2018 I think we have seen -- we published our EBITDA margin targets, we were offering within those on a consolidated basis for this year. We would expect some improvement on those margins I think and this would be a key contributor to improving those margins year-over-year..

We’ve talked earlier we had a question about steel, so a lot of it’s really going to depend on in terms of what had happened with respect to steel prices it’s something that we are monitoring closely.

As I mentioned, we have been able to lock-in for a period of time steel, but it’s really uncertain what’s going to happen there and like many companies we’re going to continue to monitor that closely and take necessary actions..

Got it.

And I am not sure if I missed this on the call, but you talked about some advance orders kind of coming in with some extended lead times, what were the specific drivers that kind of led that to your understanding?.

Some of our dealers because of the extended lead times have placed advanced orders and we believe in the fourth quarter accounted for approximately $15 million to $20 million of the orders..

Yes, got that, I am sorry, I apologize, I probably didn’t ask my question very well, but what sort of drop would drove those additional orders from the dealers were they pent up demand, was there something else going on at the end markets, any color there?.

Yes, I mean, really what they are trying to do is reserve slots, because of pent up demand. .

Got you. Okay. And then just circling back in regard to the savings that you guys are going to take from the tax reform and as well obviously the 80-20 stuff, you mentioned that you take some of these savings and invest in SaaS tracking, new product development and the sales force efforts.

Just wanted to get a little bit more color here, are we talking about investing in additional heads or is this more of an increasing the budgets for these particular areas?.

No, I think Marco, it’s a combination of both, as Jennifer mentioned it’s not necessarily just new product development initiatives, it’s also augmenting our sales channels. So we may be adding resources to expand our sales channels. We maybe increasing our R&D spend, exploring certain additional new product development initiatives.

So it’s a combination of both really..

Okay. And last quick question on the CapEx guidance for fiscal 2018 of $15 million to $20 million.

Can you kind of just talk a little bit about the buckets of where that’s going to spend and also the kind of the cadence of spend through the year?.

So, if you look at our CapEx in 2017, it was about $8 million, so that’s kind of an unusually lower amount for Federal Signal. We have also got a full year of TBEI.

And so some of that incremental CapEx in 2018 will be spend at TBEI and we were looking to fund the investment of additional machinery equipment this should help with some efficiencies in long run.

And then there is also with the tax reform some of the incremental CapEx spend is somewhat intentional and that we would get some additional bonus depreciation on that spend..

Got it, thanks a lot guys, appreciate your time..

Thank you. .

We’ll go next to a follow-up from Steve Barger with KeyBanc Capital Markets. .

Hey, thanks for the follow-up here.

Just a quick modeling question, incremental margins were a bit choppy in 2017 particularly in SSG, curious if you kind of help us think about margin progression or the walk in 2018 as we try to configure our models?.

So I think in terms of the modeling, I think we certainly expect each of our groups to be in the EBITDA margin ranges and certainly on a consolidated basis we’d expect to be within the range with some improvement on 2017 actuals..

Got it. And that’s inclusive of any kind of increase in material costs and steady.....

Correct. .

Thanks..

We’ll go next to a follow-up from Walter Liptak with Seaport Global..

Hi, guys. So I want to try and ask the price costs question in a different way and kind of looking at the EPS walk that we went through. The guidance was conservative adding in the M&A acquisition, the lower tax rate, it doesn’t look like there is a lot of volume leverage in the guidance.

And I wonder if you are doing that on purpose because of concern about the potential rising steel costs.

And so you wanted to make sure you had some dry powder in the earnings guidance or are we kind of over blowing the price costs situation for 2018?.

Yes, I think it’s more of the later one, I am not sure exactly which numbers you are using for the accretion. But I think it’s based on our -- we are -- we feel that our outlook reflect some pretty good growth. .

Okay.

Maybe to ask it another way, are you thinking price costs is going to be a headwind or a neutral in 2018 to your EPS?.

Well, pretty neutral. I think, Walt if you do the walk from $0.85, and you look at $0.10 in terms of tax reform, you look at the accretion numbers that we gave for TBEI and JJE in terms of incremental accretion that would put you 6-ish cents.

Depending on the timing of the year incremental accretion from the acquisitions and then the rest would be growth. So there is a lot of growth that's baked into our guidance..

Okay, great. And then if I could just ask one follow-up on SSG, the order activity looked significantly better this quarter. And it seems to me over the last couple of years SSG has been it hasn't been contributing much. And I wondered if you called out municipal markets getting better and some of the large longer term outdoor warning systems.

Are we are finally seeing a turn in some of the spending and what can be done within this segment to kind of continue to get better revenue growth and operating leverage out of it?.

First I'll say, it's a key area of focus for all of us including Mark. So we were encouraged by the 28% year-over-year improvement order receipts on the fourth quarter.

However this is the lumpy business and one thing we remind you of is that some of that fourth quarter order growth was driven by some of our initiatives, but some of it was driven by we see kind of the municipal spending cycles. So that business can vary season-to-season.

And also some of the larger orders that we'll see on the industrial side of the business, particularly the systems side of that can drive that lumpiness. But we've got a renewed focus in terms of new product development in terms of our ETI or 80-20 improvement program.

We're encouraged by what we're seeing in terms of the material cost reductions and some of the pricing strategies that we're putting in place. So it is an area of focus as we go forward. But that being said, it will be lumpy quarter-to-quarter depending on these larger orders and the municipal buying cycle. .

Okay, great. Thank you. .

Thank you. .

And with no questions in queue, I'll now turn the call back over to Jennifer Sherman for closing remarks..

In closing, I'd like to reiterate that we are confident in the long-term prospects for our business in our markets. We’d like to express our thanks to our stockholders, employees, distributors, dealers and customers for their continued support. Thank you for joining us today. And we'll talk to you next quarter..

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect..