Federal Signal Corporation Q1 FY2026 earnings call

We delivered strong financial results for the quarter with 35% year-over-year net sales growth, 52% operating income improvement, gross margin expansion, a 190 basis point improvement in adjusted EBITDA margins, robust cash generation, and strong order intake. ESG delivered 38% year-over-year net sales growth, 46% increase in adjusted EBITDA, and 130 basis point improvement in adjusted EBITDA margin. SSG had 22% top-line growth, 47% increase in adjusted EBITDA, and 460 basis point improvement in adjusted EBITDA margin. Current market conditions had orders increase 13% year-over-year excluding certain impacts. We have multi-year growth initiatives including raising SSG's EBITDA margin targets, enterprise-wide investments in centers of excellence, capacity optimization initiatives, and various operational and sales channel optimization projects.

ESG's net sales for the quarter were $533 million, up $145 million or 38% compared to last year. ESG's operating income for the quarter was $89.1 million, up $29.4 million or 49% compared to last year. ESG's adjusted EBITDA for the quarter was $113.3 million, of $35.8 million, or 46% compared to last year. That translates to an adjusted EBITDA margin for the quarter of 21.3%, an improvement of 130 basis points compared to last year. ESG reported total orders of $534 million in Q1 this year, an increase of $54 million, or 11% compared to last year. SSG's net sales for the quarter were $93 million this year, up $17 million, or 22%. SSG's operating income for the quarter was $23.6 million, up $7.8 million, or 49% compared to last year. SSG's adjusted EBITDA for the quarter was $24.7 million, up $7.9 million, or 47%. That translates to an adjusted EBITDA margin for the quarter of 26.6%, up 460 basis points compared to last year. SSG's orders for the quarter were $89 million, up $1 million, or 1% from last year.

We are raising our full year adjusted EPS outlook to a new range of $4.80 to $5.05 from the prior range of $4.50 to $4.80. We are also increasing our full year net sales outlook to a new range of between 2.57 billion and 2.66 billion from the prior range of between 2.55 billion and 2.65 billion. We are maintaining our CapEx outlook of between 45 million and 55 million for the year. We also remain active in the M&A markets across both of our operating groups.

There was an approximate $20 million year-over-year reduction in international export orders spanning product lines across both groups due to political impacts from current geopolitical conflicts. We will experience some inflation on steel pricing in the second half of the year even though we've locked in pricing for majority of product lines.

Q: Good morning, Tim. Morning. Good morning. Jennifer, I was surprised you didn't weave in some Michigan basketball reference into your comment. Go blue. So just kind of how the first quarter played out and how that plays into the balance of the year. From a seasonal perspective, I guess the question just both from an earnings and order standpoint, the first quarter did not play out as the first quarter normally does. I'm just curious if there was anything that went for you more than you thought and maybe that pulled ahead earnings. I'm just curious how we should read the first quarter basically in the context of the full year is the spirit of the question.

A: Yeah, I mean, I'll start with a couple of comments. Our teams just did an outstanding job. And what always gives me encouragement is that it's not any one business. There was really strength across the board. And again, I just want to do a shout out to our teams group because we're continuing to execute on the programs we put in place. With that, I'll add a couple of comments. You know, our acquisitions did better than expected and got off to a strong start this quarter, you know, particularly New Way. And we saw strong performance in early days from our mega ground force teams. And then SSG had a better quarter than expected. So, you know, again, strong performance across the board with SSG. very encouraging start with respect to the acquisitions and SSG. With respect to the cadence of the seasonality of EPS, I'll start with that the seasonality of our earnings isn't as pronounced this year, largely due to some of the seasonality of the recently acquired businesses that are different than our legacy businesses. And so for the remainder of the year, we're expecting our EPS contribution to be roughly evenly split by quarters.

Q: Hey, good morning, guys. Good morning, Ross. Hey, just to start off on the free cash flow, I mean, record quarter for you. It looks like there's an unusual benefit from inventory. Is this related more to new acquisitions and kind of just pruning what you guys acquired, or is it more of the progress on bringing down the lead times?

A: Yeah, there's definitely some of that with the recent acquisitions. I mean, we ended the year probably at a higher level of working capital than last than necessary, so there was an effort there to kind of work down some of that. I think you see that in the cash generation during the quarter, so contribution from those acquisitions was pretty good during Q1. There's also some of that, as you mentioned, reducing the lead times, but I think overall, you know, just a really strong management of working capital by the businesses and just obviously the increase in in the earnings there. So those are the main factors. And then just to follow up on that, I have one more. I mean, kind of going forward in the second quarter, third quarter, should we expect more of a inventory benefit as well, the working capital, or is this just kind of a one-time thing to start the year?

A: Maybe. Certainly, we're not expecting to be as dramatic as what we saw in Q1. We're still expecting strong cash generation for the balance of the year, I would say. What we've seen in the early part of April is this as well. So I think we're still expecting, you know, very strong cash generation for the balance of the year. You know, we aim for cash conversion of 100% on an annual basis. Obviously, we were ahead of that for Q1, but that is still the long-term goal. And I'll add to the new way, Gene. did an excellent job of implementing federal signals approach, and we saw benefits from that in Q1.

Q: Hey, great quarter, guys. Thank you. I wonder if you could talk a little bit more about the order growth. I think in the prepared remarks, you talked about a 13% order growth rate. I wonder if you could just go through those in a little bit more detail. What, you know, kind of what, you know, is it industrial, is it municipal that you're seeing the order growth, and what kind of products are getting the orders?

A: Yes, sure, absolutely. You know, a couple of comments about the orders this quarter that are important to understand. As you know, we have a few moving pieces here, given the discontinuation of the third-party Labrie refuse trucks and the impacts of the acquired backlog. As I stated in my prepared remarks, kind of looking forward, we have about 55 million of Labrie, these third-party refuse trucks, in our backlogs. You know, as we strip out these non-recurring items and give you the cleanest view on net sales and orders for what we view as continuing operations to 2027 and beyond, we provided a reconciliation on page 9 of the earnings presentation. When you look at that, orders are up 13%, but that does include the impact of New Way and some of the other acquisitions. I think one of the challenges here is there can be noise in these organic growth numbers because we've effectively merged the sales and production functions across Mega Ground Force and our road marketing businesses, MRL, Hogg, and Blasters. And this is a function of our 80-20 and integration growth strategies. So if you think about the underlying core organic orders without the impact of LaBrie or any of the acquisitions, that number was down about 20 million. which was a reduction in international export orders, as we described in the prayer remarks. Excluding that, organic orders were flat.

Q: Hey, great quarter, guys. Thank you. I wonder if you could talk a little bit more about the order growth. I think in the prepared remarks, you talked about a 13% order growth rate. I wonder if you could just go through those in a little bit more detail. What, you know, kind of what, you know, is it industrial, is it municipal that you're seeing the order growth, and what kind of products are getting the orders?

A: Yeah, I think, Walt, the first point would be, just as Jennifer mentioned in her remarks, that our backlog-relevant businesses represented about 45% of our net sales last year. To the point on the debris backlog, there is still $55 million of debris backlog remaining, and we expect to work that down over the next few quarters. And also, as we continue to reduce lead times for primarily for street sweepers and sewer cleaners, you know, backlog could come down a bit there. So those are kind of the main things that we could see backlog come down because of the debris dynamics as well as just reducing those lead times.

Q: Morning. Morning. Jennifer, you've been pretty vocal about your desire to reduce lead times and backlogs in things like back trucks and street sweepers. Can you just give us an estimate of how much throughput you've realized with those 2019 to 2022 capacity investments that you mentioned? And is there more room for improvement kind of as we think about 26 and beyond?

A: Yeah, absolutely. So, you know, really pleased with the progress at our vacuum truck facility and at our Elgin facility this quarter on what we call, and you referenced, build more trucks. Overall, you know, we saw kind of 15% year over year improvement. You know, our lead times now for our sewer cleaners are running about 11 months. and for our street sweepers, the four-wheel sweepers, a tick above a year. So, you know, again, we've made nice progress. We're going to continue to make progress. We think it's really important that those lead times be in that, you know, four- to six-month range, depending on the particular product line. And, you know, that will give us, you know, we'll be able to be more nimble in terms of responding to market opportunities. So again, really pleased with the progress, and we have the capacity and labor to continue.

Q: Good morning, Tress. Good morning, guys. Congrats. Maybe SSG margins, obviously, just overall exceptional to be even getting better. Much of that is due to internal actions. That said, maybe can you talk a little bit about the competitive landscape there? Has it changed much over the last few years? Are there a couple of players that you see consistently? I'm just, you know... Just interested to see, you know, kind of overall what you're seeing and what you're going up against in that marketplace.

A: Yeah, you know, again, one of the things I like to talk about about Federal Signal is that we have – it's not the – typically our success is not the result of one initiative. I say internally a lot that we've got a lot of bets. a lot of different projects across the enterprise. So with respect to SSG, what's encouraging, and I think one of the driving factors that why we raise those margin targets is not only what they've accomplished, but what we see in the pipeline for further opportunities. And let me provide some color on that. New product development, that team is introduced several new products to respond to customers' needs in new end markets. And we're in early innings of getting traction on that. One of the things that that team just does an exceptional job on is speed to market in terms of speed to respond to a particular customer need. Another example would be on the insourcing side. That team identified the opportunity to in-source printed circuit boards, and it gives it flexibility on the new product development team and accelerates our speed to market. And then I talked about we completed the implementation of our fourth printed circuit board line in Q4, and we're seeing the benefits of that. So in terms of the dynamics of the competitive market, it's primarily privately held competition, We're very active in that M&A market. So as we move forward, you know, that team is bringing on some new products in the second half of the year. We're making some additional investments with respect to that new product development. We're making some additional investments on the talent side of things. And I feel really good about the opportunities in 2027 and beyond.

Q: Good morning. Good morning, Mike. Can you just give us a few more comments on your international shipments in the quarter? Are some of the issues that you're facing with getting those out the door because your customers are in countries that are facing military conflicts, or is it more of a political question or tariffs? Just give us more color as to what's going on there.

A: Yeah, I think what I was talking about in the prepared remarks, was really a reduction in international export orders of about $20 million, approximately $20 million year over year. And that would involve several product lines. So it's not materials in and of itself to any single product, but it's the aggregate impact. So that would include street sweepers It would include a small portion of our SSG business. It would include a small portion of our road marketing business. Also want to, we had a one-time large order Q1 of last year out of Mexico. So it's that year-over-year comparison of those large non-recurring, I mean large international export orders that I was talking about in the prepared remarks.

Q: Oh, thank you. Just a two-parter on the same topic, on EST orders. There was an earlier question asked, and I didn't pick it up, but the split between how the orders perform between the publicly funded versus your industrial customer base, and then part B of that, Jennifer, was I didn't follow, I think you said orders when you You know, you need to slice and dice them, but I thought you said after doing that, they came out to be flat. What did you mean by that, assuming I heard that correctly?

A: Yeah, I'll start, and then Ian can pick up. You know, what I was talking about is a couple things that are really important to understand about the orders for Q1 is, one, you know, the discontinuation of the third-party livery refuse trucks and the impacts of acquired backlogs. Second would be, as I talked about earlier, we've really merged the mega ground force and also our road marking businesses. So it's becoming across both sales and production functions. So it's becoming increasingly difficult to parse out which was a mega order and which was a ground force order. and the same thing applies to the MRL, hog, and blasters road marking businesses. So I was trying to give some context in terms of the orders. In addition to that, I said that our international export orders were down about $20 million. So orders were up 13%, but when you exclude the international organic orders were flat.

Q: Morning, Greg. You mentioned just now just maybe some, looking at some acquisition opportunities on the SSG side of the business. Could you just talk about maybe the, The pipeline you see there, what you're looking for, is it scale in existing businesses, maybe new product lines or geographic expansion? And do you think you might get something done this year?

A: Yeah, great question. So as we talked about, we really started cultivating that pipeline about two years ago. And, you know, we have spent a lot of time over the last couple of years in terms of you know, meeting with different founders or second generation. So we're encouraged by the opportunities in both 26, 27, and beyond. And they would come in a couple different flavors. One would be audible and visual warning devices that serve different end markets. One of the drivers, frankly, of building the warehouse in University Park is to open up additional manufacturing capacity. for both new products we're introducing and for acquisitions that we might integrate into that particular building. It is a very attractive niche for us. We think there are opportunities to leverage our channel, which would be important, leverage manufacturing. Given the investments that are material that we've made in printed circuit board lines, There would be opportunities, one obvious cost and efficiency synergy. And we think police is the largest portion of our SSG business. So there'd be opportunities to within that police car upfitting the products that we utilize there to expand our portfolio products. So that gives you some flavor. Some of them are smaller. But they kind of range in all different sizes. But the team is actively working on those as we speak.

Q: We would 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. Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you, and have a great day.