Federal Signal Corp (FSS) 2017 Q4 法說會逐字稿

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 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 Call icon and signing into the webcast. We have also posted the slide presentation and the earnings release under the Investor tab on our website.

Before we begin, I'd like to remind you that some of our comments made today may contain forward-looking statements that are subject to the safe harbor language found in today's earnings 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, an 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 may be 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 onetime noncash pension settlement charge of $6.1 million and higher expenses associated with hearing loss litigation.

Consolidated adjusted EBITDA for the year was $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 a 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 were $247.6 million, up $72 million or 41% compared to the prior year period. The improvement included organics 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 were $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 improvement included 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's 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 to 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 translates 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 about $1 million of expense for a specific warranty matter. ESG's orders 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 of large orders with favorable margins and manufacturing efficiencies associated 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 referenced earlier, corporate expenses for the quarter were $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 consolidated 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 the addition of expenses of businesses acquired in the current year, a $1.8 million increase in amortization expense and the high 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 a 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 plan, they did not impact the company's cash flow. However, in connection with the lump sum offering, we incurred a pretax noncash 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, associated with higher-average debt levels following the TBEI acquisition; a $300,000 increase in acquisition-related expenses; and a $200,000 increase in other income.

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

Other factors affecting income taxes during Q4 this year included an $800,000 tax benefit from changes in valuation allowance on state deferred tax assets, an additional tax expense resulting from higher pretax 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 benefit 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 rate 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 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 loss settlement. 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 puts the total amount returned to stockholders in the form of dividends during 2017 to $16.8 million. We recently announced a 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, 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 TBEI transaction in June, bringing our pro forma debt leverage ratio at the end of the year to 2.2x, down from 2.7x at the closing of the acquisition. This puts us in a solid position with significant flexibility to find both organic growth initiatives and M&A going forward.

Since our last earning 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 Weber back on board as our Chief Operating Officer. Mark rejoined Federal Signal in January after spending 4 years at Supreme Industries where, as CEO, he led a successful operational and strategic turnaround of the business culminating in its sale to Wabash 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 career in the specialty vehicles 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 extend the company's market leadership position.

In his new role, Mark will be spearheading our Eighty-Twenty 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 targets into their operating plans for 2018.

Utilizing Eighty-Twenty principles, these initiatives include a combination of material cost 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 intend to reinvest into revenue-generating initiatives. Of course, we also intend to apply our Eighty-Twenty Improvement operational model to 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'm also encouraged that the strategic initiatives that we put in place over the last couple of years are gaining traction. As Ian just highlighted, we ended 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're 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're also exploring potential channel partnerships to accelerate our 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 are 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 3 acquisitions, including the largest acquisition in the company's history in June of last year. Each of those acquisitions have 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 customers.

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 temporary slowdown in the rental activity during the first quarter of each year.

We've also been pleased with TBEI's contribution since we closed the acquisition at the beginning of June. As part of our due diligence process, we had identified that certain investment in people and processes will need to be made in integrating TBEI into a public company environment. We've 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 expectation. They are delivering on our strategic objectives and are in our track to meet the previously communicated accretion estimates.

After taking some time to digest and integrate TBEI, we are becoming more actively engaged in managing our acquisition pipeline, which continues to be healthy. Over the last 2 years, we've developed infrastructure internally to support M&A and expect that 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 Pittsburgh and Philadelphia. In both cases, the jury returned a verdict in favor of the company, absolving the company from any liability.

As we have 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 nuisance 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 levels.

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 are 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 by 2020. With the progress being made on our strategic initiatives and the acquisition of TBEI, it is likely we will 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 are seeing positive economic indicators across many of our end markets.

On the industrial side, our customers are encouraged about prospects in their end markets, including oil and gas. This renewed optimism has contributed to a significant increase in orders, including those to replenish customer rental fleets.

In addition, we've also seen strong utilization levels within our own rental fleet, particularly relating to products serving industrial markets, like vacuum truck, hydro-excavators and water blasting equipment. And I'm pleased with the progress we are making with our plan to expand in the utility market.

We also monitor industry data on new housing starts and activity within Class 8 trucks, 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 organic quarter growth of 25%, we entered 2018 with strong backlog. With lead times for certain products slightly extended as a result of this increased demand, we saw some dealers place advanced 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 and in an effort to reduce lead times, including increasing our capacity and applying our flexible manufacturing model by shifting production of certain product lines to other locations. We expect that our book-to-bill ratio will revert 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 growth 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 result 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?

(Operator Instructions) We'll take our first caller today -- question today from Steve Barger from KeyBanc Capital Markets.

It's Ken Newman on for Steve this morning. My first -- so my first question, I was curious, could you -- you talked a little bit about material and wage inflation. I'm curious, could you kind of help remind us what kind of steel pass-throughs 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 for 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're also monitoring right now the impact from Bill 233 -- 232, sorry about that. But we think this could take time to materialize.

We feel confident in our ability to mitigate the impact of our future increases in cost of steel through price increases, but that could take some time. I also talked about our Eighty-Twenty Improvement program. We're hopeful that that will offset some of these material price increases that we're seeing in wage inflation, but it's something that we're going to monitor closely.

That's helpful. And you talked about, maybe seeing a more normalized book-to-bill in subsequent quarters. I'm curious, can you talk about just order-quoting activity that you've 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 we've -- with respect to January orders, I think from what we've seen so far, they are encouraging. Jennifer talked about the recent trade show we were at and that there seems to be some good momentum in the industry. That -- so I think, in subsequent quarters, it may revert, but we're pretty encouraged with the January orders so far.

Okay. One more for me and then I'll get back into the queue. With the impressive growth that you've seen in ESG, it might be helpful to remind us how big the hydro-excavation installed base is in the U.S. today and what kind of growth rate you expect it to grow in 2018?

And then, obviously, your market share is lower in Canada relative to the U.S. in that product. But given that it is such a large market, it'd be great to get a sense for the installed base in Canada as well as what you expect it to grow at in '18.

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. As 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 fleets 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 although we're in early days, we're really encouraged by the progress we're making to date.

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

Just a follow-on to that last question about the hydro-excavators going into the upstream energy sector. We're hearing a lot of about the E&Ps changing their CapEx programs and spending -- looking at spending a lot more money in 2018. Are you seeing that flow-through in any way? Like, have you gotten any upstream-related hydro-excavator orders yet or is that something that's still going to come?

Yes, I think what we've seen so far, Walt, is we've seen, 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 fleets. We've seen a lot of the replenishment of those fleets and that's -- there's been a fair amount of replenishment of the hydro-excavator vehicles. So that's what we've seen.

In terms of direct sales to end customers serving oil and gas markets, 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, we talked -- well, we've talked in previous calls about the kind of used equipment overhang, and we monitor the third-party auction data, and we've seen that overhang kind of revert to more normalized levels. So that's also an encouraging piece of data.

Okay. Do you have any -- or 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, these -- in terms of a mix standpoint, our hydros are some of our higher-margin products. So that -- to the extent that we sell more of them, it could lead into margin improvement.

Okay, great. And just thinking about the fourth quarter orders. The organic growth looked strong and looks seasonally stronger than normal. I wonder if it's -- just your comments, did it surprise you how the orders came in in the fourth quarter? Looked like it was kind of across the board.

Yes, I think one of the things, Walt, that we talked about is, we saw some advanced orders. Jennifer made reference about $15 million to $20 million of orders in Q4, we think, was -- we have certain product lines where the 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 just -- we're continuing to see some pretty good traction on some of our strategic initiatives we've had in the -- and implemented in the last couple of years.

Okay. 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 prebuys, like ahead of a price increase?

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 wonder 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 impacts, for instance, legal, it sounds like that might be a headwind, price cost, volume leverage?

Obviously, tax rate is going to help you by that $0.10. But still you've got $0.85 adding in the $0.10 for tax rate offsetting the new products. Then I wonder if you can help us with the other buckets that are going to get to that -- the 2018 guidance.

Yes. So I think, as it relates to the accretion, Walt, we referenced on the call that in 2017, TBEI contributed about $0.03. We've also said that by the second anniversary of the acquisition, the expected accretion was 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 20 -- actually, 21 months in now with that acquisition. We said the accretion for JJE would be $0.10 to $0.15 by 2018. And so we're well on track for those. So I think in terms of the accretion, those are the 2 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 from me. On TBEI, if I'm 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 has TBEI been trending for you? And is it expected to grow in 2018?

It's absolutely expected to grow in 2018. We've talked about that the seasonality of that business, typically the fourth quarter for TBEI is the softest quarter; they -- typically Q2 and Q3 are their stronger quarters. We are on track to meet the accretion estimate that we saw. And depending on -- they have both a municipal and industrial side of that business. We expect the municipal side of that business to grow GDP plus and in the industrial side of the business, we think there is more opportunity.

We did mention on the call that, as we identified in 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're seeing encouraging trends in those end markets.

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

Maybe we could just start on the specific of the initiative. So you -- the increased investment on -- it sounds like 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 markets that you're targeting at this point in time? Or are the products just kind of additional to what's already out there?

I really think it's a combination. We are kicking off a process where Mark and myself and 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'll see a combination of both some 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 investment 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 or?

I think there is a bias right now particularly around our utility initiative and the success that we've had. But 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 in '18 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 will be focused on -- specifically on those -- those pieces 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're absolutely right, in the first quarter, at the -- the further north you go, the seasonal -- 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 makes a very -- I'll add. Ian makes a very important point there that I want to make sure everybody picks up, is that a lot of that delivery would take place in 2Q and beyond, really due to kind of the northern climate that our equipment operates in.

Got you. And just my last question. On the M&A pipeline, obviously, it's been full as of quarter ago, something like that. But in terms from what you're seeing on the other side from a pricing perspective in terms of what some of these potential sells are 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 with the 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.

We'll go next to Greg Burns with Sidoti.

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?

Sure. I mentioned on the call last week, I was at one of our largest trade shows for ESGs, the WWETT Show in Indianapolis. We introduced a number of new products. On the hydro-excavation side, we introduced a product that significantly takes a lot of weight 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, on 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 years, we've had a significant new product development effort on our public address systems, what we call our PAGA product, which provides 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 Jetstream side of our business, our teams have introduced a number of tooling products and they were on display that week at the WWETT show. We've had success during 2017, and we expect future success in 2018.

So overall, we put -- we started an initiative 3 years ago in terms of revamping how we approach 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'd 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's -- it certainly is going to be an 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 those growth initiatives that we have internal targets for, it varies 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 trials that we have. We saw that we -- in Q4, we had the trials in Pittsburgh 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.

We also, as I mentioned, were successful in settling about 700 cases for $700 to plaintiffs, which we consider a nuisance value. So there was also a charge in the fourth quarter related to that.

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

I was wondering if you could circle back a little bit here on the Eighty-Twenty Improvement plans. You're kind of targeting for some savings for fiscal '18. Of the 4 areas that you're sort of attacking, if you will, are there any, 1 or 2, that are, I guess for lack of a better word, kind of slightly easier lower-hanging fruit to obtain some cost reductions? And in the same vein, any of these 4 that are a little bit more difficult to obtain?

First thing I want to say is this is not new. We've been employing Eighty-Twenty principles for the last 5 years, since Dennis Martin has joined the company. What we're really doing 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 Weber, as I mentioned, our COO, this is a high priority with him -- for him. He's worked with our businesses to develop plans. So each business has different opportunities. I often get asked what inning are we in in our Eighty-Twenty journey? We've 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're putting in processes to benefit us for the long term. And if you'd talk to a plant manager at Elgin, this is really part of the culture that we've been successful in terms of implementing, and we continue to do so.

That's helpful. And so when I'm thinking -- or when we're thinking about this -- these offsets here to potential material and wage inflation in fiscal '18. If you assume that you hold volumes kind of steady, do you think that these 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's, obviously, a lot of unknowns at this point. But that's certainly the target of this program, is to reduce the impact of the wage and labor inflation.

As it relates to the -- kind of what we've planned for 2018, I think we've seen -- we published our EBITDA margin targets, we were operating 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.

And -- we talked earlier, we had a question about steel. So a lot of it's really going to depend on in terms of what happens with respect to steel prices. It's something that we're monitoring closely. As I mentioned, we've been able to lock in for a period of time our 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'm not sure if I missed this on the call, but you talked about some advanced 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, it accounted for approximately $15 million to $20 million of the orders.

Got that. I'm sorry, I apologize, I probably didn't ask my question very well. But what sort of drive -- drove those additional orders from the dealers? Were they pent-up demand, was there something else going on at the end market, any color there?

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

Got you. 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 Eighty-Twenty stuff. You mentioned that you take some of these savings and invest in fast-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 a increase in 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 may be 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 '18 of $15 million to $20 million. Can you kind of just talk a little bit about the buckets where that's going to spent and also the -- kind of the cadence of spend through the year?

Yes. So it's -- if you look at our CapEx in 2017, it was about $8 million. So that's kind of an unusually low amount for Federal Signal. We've also got a full year of TBEI in place. So some of that incremental CapEx in 2018 will be spent on TBEI. And we're looking to fund the investment of additional machinery equipment that should help with some efficiencies in the long run. And then, there is also, with the tax reform, some of that incremental CapEx spend is somewhat intentional in that we would get some additional bonus depreciation on that spend.

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

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, Ken, in terms of a 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 volumes?

Correct. Correct.

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

So I want to try and ask the price cost question in a different way. And kind of looking at the EPS walk that we went through, the guidance looks conservative, adding in the M&A acquisition, the lower tax rate. It doesn't look like there's a lot of volume leverage in the guidance.

And I wonder if you're doing that on purpose because of concern about the potential for rising steel cost and so you wanted to make sure you had some dry powder in the earnings guidance? Or are we kind of overblowing the price cost situation for 2018?

Yes. I think it's more of the latter one. I'm not sure exactly which numbers you're using for the accretion. But I think based on our -- we are -- we feel that our outlook reflects some pretty good growth.

Okay. Maybe to ask it another way. Are you thinking price cost is going to be a headwind or neutral in 2018 to your EPS?

Closer to neutral.

Neutral? Okay. Great...

I think, if you -- Walt, if you do 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 $0.06-ish, depending on the timing of the year, of incremental accretion from the acquisitions and then the rest would be growth. So there's a lot of growth that's baked in to our guidance.

Okay. Okay, great. And then if I could just ask one follow-up on SSG. The order activity looked significantly better this quarter. And over the -- it seems to me over the last couple of years, SSG has been -- hasn't been contributing much.

I wonder if you called out municipal markets getting better in some of the large -- longer-term outdoor warning systems. Are we finally seeing a turn in some of the spending and what can be done within this segment to kind of get -- continue to get better revenue growth and operating leverage out of it?

Yes. First, I'll say it's a key area of focus for all of us, including Mark. And we were encouraged by the 28% year-over-year improvement in orders we saw in the fourth quarter.

However, this is a lumpy business. And one thing I will 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 because of 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 system side of the business, can drive that lumpiness.

But we've got a renewed focus in terms of new product development. In terms of our ETI, or Eighty-Twenty Improvement, program, we're encouraged by what we're seeing in terms of the material cost reductions, 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.

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 and our markets. 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.

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