Ian Hudson - CFO Jennifer Sherman - President & CEO

Christopher Moore - CJS capital Steve Barger - KeyBanc Capital Markets Walter Liptak - Seaport Global Robert Barger - KeyBanc Capital Markets

Good morning, and welcome to Federal Signal second quarter 2017 conference call. I'm Ian Hudson, the company's Interim 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 news 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've also posted a slide presentation and the news 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 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 US Generally Accepted Accounting Principles. In our news release and filings, we reconcile these non-GAAP measures to GAAP measures.

In addition, we will file our Form 10-Q later today. I'm going to start today by addressing our second quarter financial results.

Jennifer will then provide her perspective on our performance, current market conditions, and our outlook for the remainder of 2017. After our prepared comments, Jennifer and I will address your questions.

Our consolidated second quarter financial results are provided in today's earnings news release. The second quarter results in Q1 month of operation of Truck Bodies and Equipment International or TBEI, which we acquired on June 2nd this year.

The results of TBEI have been included within our Environmental Solutions Group for the quarter. Please also note that the second quarter of last year included one month of operating results of Joe Johnson Equipment, which we acquired on June 3rd last year.

Overall, our second quarter results exceeded expectations. Consolidated net sales for the quarter were $224 million, up $52 million or 30% compared to Q2 last year.

Excluding acquisition related effects, our organic sales growth was about 2%. Operating income for the quarter was $18.7 million, up $4.4 million or 31% compared to last year.

The increase was primarily driven by a $6.1 million improvement within ESG, partially offset by $1 million reduction within SSG and a $700,000 increase in corporate expenses. Consolidated operating margin for the quarter was consistent with the prior year at 8.3%.

Consolidated adjusted EBITDA for the quarter was $28.9 million, up $9.5 million or 49% compared to last year. That equates to a consolidated adjusted EBITDA margin of 12.9% in Q2 this year compared to 11.3% last year.

Income from continuing operations was $11.5 million in Q2 this year compared to $9.4 million last year. That translates to GAAP EPS of $0.19, which compares to $0.15 per share last year.

On an adjusted basis, EPS for Q2 this year was $0.23 compared to $0.17 per share last year. As in the first quarter this year, total orders were up significantly in comparisons to the prior year.

In Q2 this year, we reported total orders of $271 million, an increase of $84 million or $0.45 compared to Q2 last year. The improvement was driven by organic order growth of $26.7 million or 19% and the effects of the current and prior year acquisition.

Jennifer will talk about some of the contributing factors in her remarks. We ended the quarter with a consolidated backlog of $223 million, which was up $73 million or 49% compared to last year, and up $49 million or 28% from the end of the first quarter.

At the group level, ESG's reported sales of $174 million were up $55 million or 46% compared to last year. Organic sales within ESG were up about $5 million, with higher domestic shipments of sewer cleaners and vacuum trucks being partially offset by fewer sales of street sweepers.

ESG's operating income for the quarter was $21 million, up from $14.9 million in Q2 last year. And it's operating margin for the quarter was 12%, down from 12.5% last year, primarily due to increases in depreciation and amortization and purchase accounting expense effects of $2.5 million and $2 million, respectively.

ESG's adjusted EBITDA for the second quarter was $29.3 million, up $10 million or 58% from a year ago. And it's adjusted EBITDA margin for the quarter was 16.8%, up from 15.5% last year.

The increase was primarily due to the inclusion of 2 additional months of JJE activity and 1 month of TBEI in Q2 this year. ESG's result in Q2 this year also benefited from a favorable adjustment of product liability and Workers Compensation reserves of about $1 million.

ESG reported total orders of $214.7 million in Q2 this year, an increase of $79.4 million or 59% compared to the prior year quarter. The orders in Q2 this year include approximately $45 million of backlog acquired in the TBEI transaction.

TBEI's product lines typically experience relatively short lead times with most of its order shipping in less than 2 months. Including acquisition impact, ESG reported organic order growth of $22.3 million or 24%, primarily driven by increased demand for sewer cleaners and vacuum trucks.

Within SSG, Q2 sales were down $2.8 million or 5% largely due to lower sales of public safety products and its operating income for the quarter was $5.6 million compared to $6.6 million last year. SSG's adjusted EBITDA for the quarter was $6.7 million, down from $7.7 million a year ago, largely because of incremental strategic investments made in support of new product development initiatives.

SSG's adjusted EBITDA margin for Q2 was 13.4% this year compared to 14.6% last year. SSG reported total orders of $56.4 million, an increase of $4.4 million or 8% from last year.

Primarily due to higher domestic orders for public safety products and improved international orders for industrial products. Corporate expenses for the quarter were $7.9 million compared to $7.2 million a year ago.

The increase was primarily driven by higher acquisition-related expenses and legal costs. Turning now to the consolidated income statement, where the increase in sales contributed to a $9.7 million improvement in gross profit.

Consolidated gross margin was 24.4% for the quarter, down from 26.1% last year, largely due to the incremental depreciation expense and purchase accounting expense effects, which I alluded to earlier. Selling, engineering, general and administrative expenses of $34.9 million were up 15% compared to the prior year quarter, largely due to the addition of expenses of businesses acquired in the current and prior year and a $600,000 increase in amortization expense, partially offset by the favorable adjustment of product liability in Worker's Compensation reserves.

We also incurred $600,000 more acquisition related expenses in Q2 this year. All of these factors roll into the company's $18.7 million of operating income for the second quarter.

Other items affecting the quarterly results include a $900,000 increase in interest expense associated with higher average debt levels, following the TBEI acquisition and $100,000 reduction in other income. Tax expense in Q2 was up, due to higher pretax income levels and the effective tax rate for the quarter was at 34.7%, compared to 33.8% in Q2 last year.

With a recent increase in the Illinois corporate tax rate, we expect our full year effective tax rate for 2017 to be approximately 35%. That assumes no other changes in U.S.

corporate tax rates. On an overall GAAP basis, we've therefore earned $0.19 per share in Q2 this year compared with $0.15 per share 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. From the current-year quarter, we made adjustments to GAAP earnings per share to exclude acquisition-related expenses and purchase accounting expense effects, on this basis our adjusted earnings per share for the second quarter was $0.23, compared with $0.17 a share in Q2 last year.

Continuing the trend from the first quarter, our operating cash flow in Q2 is much improved compared to last year. We generated $32.1 million of cash from continuing operations in Q2 this year compared to $10.6 million last year.

That brings the total operating cash flow generated in the first half of this year to $485.8 million compared to $3.9 million in the first half of last year. The initial payment made to acquire TBEI at the beginning of June was $271.8 million.

Of that amount, $243 million was funded through borrowings under our credit facility with the remainder being paid with the existing cash on hand. The strong cash flow generation enabled us to pay down $20 million of borrowings before the end of the second quarter.

And our pro forma debt leverage at the end of June was 2.4x, down from 2.7x at the completion of the TBEI acquisition. We ended the quarter with $252 million of net debt and availability under our credit facility of $93 million.

During the second quarter, we also executed an interest rate swap to fix the rate on $150 million of our variable-rate borrowings. With the healthy cash flows expected to be generated by our businesses, we continue to be focused on delivering in the short-term.

However, the long-term priorities for our capital are unchanged and while maintaining strong liquidity and flexibility, we remain committed to investing in organic growth initiative, considering additional M&A opportunities and returning value to shareholders. On that note, we paid a dividend of $0.07 per share during the quarter, amounting to $4.2 million and we recently announced a similar dividend for the third quarter.

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

Thank you, Ian. It was an outstanding quarter.

We are pleased to report significant year-over-year growth in orders, sales, earnings and operating cash flow. The improvement resulted from a combination of organic growth and M&A activity.

The continued momentum within ESG was particularly encouraging. As I mentioned, back in February, we started to see an uptick in organic orders, particularly on the industrial side towards the end of last year and this trend has continued through the first half of 2017.

In Q2, our organic orders were up $27 million or 19%, whereas for the first half of 2017, they were up $56 million or 20%. The improvement was largely driven by ESG, where we've seen a significant increase in demand for sewer cleaners and vacuum trucks in comparison to last year.

We continue to be pleased with the progress we've made in our strategic initiative to expand into the utility market with the launch of the ParaDIGm. On the industrial side, one of the metrics we monitor is the number of used equipment units available to auction.

The most recent data indicates that the number of used sewer cleaners and vacuum trucks is now less than 50, which is more typical level than in recent years where there's been more than 300 units available. With signs that levels of used equipment in our end markets may be returning to more normal levels, we have seen strong interest from customers replenishing their rental fleet and that has driven much of the recent order improvement.

We are also encouraged by utilization levels within our rental fleet, particularly relating to products serving industrial markets, like vacuum trucks, hydro-excavators and water blasting equipment. On the municipal side, our markets remain steady overall.

So far in 2017, we have seen strong demand for sewer cleaners, which has been partially offset by some recent deferrals of international street sweeper fleet orders. We have also seen some delays in the timing of expected orders for public safety products on the SSG side.

Such deferrals are not uncommon. We don't believe the opportunities have been lost; rather there has been some shifting in the timing of the expected orders.

Turning now to our recent M&A activity. As Ian mentioned, we completed the acquisition of TBEI at the beginning of June, which took us one step further to achieving our strategic and financial goal.

Strategically, the acquisition will allow the company to strengthen its market position, as a specialty vehicle manufacturing, maintenance and infrastructure market. It also accelerates our longstanding goal of growing our share of industrial revenues faster than our municipal revenues in order to achieve a more balanced split.

This will help to enhance our growth potential and to mitigate the impact of cyclicality from any one particular end market. With respect to our financial objectives, in 2015 we talked about our appetite for adding at least $250 million from acquisitions to our revenue run rate by 2018.

The acquisition of TBEI coupled with the prior acquisition of JJE essentially achieves that target. We also spoke earlier this year about our goal of profitably growing our revenues in excess of $1 billion by 2020.

The acquisition of TBEI is a meaningful step towards achieving that target. I'd like to spend a minute providing some initial observations about the TBEI acquisition.

We were encouraged with the performance in the first month since the acquisition completed. TBEI's results during the summer months tend to be stronger than other periods, and June was no exception.

In fact, in 2 of the last 3 years, June has represented its highest sale month of the year. On the flip side, the fourth quarter for TBEI tends to be it's softest quarter.

In the vast majority of cases, TBEI's customers own and provide the chassis on which the dump body or trailer is mounted. In addition, its production volumes are much higher than our other businesses within ESG.

As such, our results going forward may be more susceptible to adverse effects from chassis shortages. Although we have not experienced any material delay, since the completion of the acquisition, we are monitoring the availability of chassis at certain locations.

In addition, we are planning to make certain investments as part of our ongoing efforts to integrate operations with Federal Signal. Such short-term investments may be in the form of adding resources or reporting tools, which should provide benefits down the road.

We recognize that there is more integration work ahead, but we are pleased with the progress that our integration team has made so far. I've talked previously about the critical steps we have taken in recent years to position the company for future profitable growth.

Since I became CEO, we have now completed 3 acquisitions and although we are focused on paying down debt in the near term, we are maintaining an active acquisition pipeline. With these acquisitions, the mix of businesses has changed over the last several quarters.

As we mentioned last quarter, we believe that referring to comparisons of EBITDA and EBITDA margin is becoming a more relevant measure of our underlying operating performance than operating income and operating margin. With that in mind, we affect the following EBITDA margin targets for each of our group.

The EBITDA margin target, absent any abnormal market conditions, are between 15% and 18% for ESG; and between 15% and 17% for SSG. As you know, we have a diverse set of businesses and actual margins may vary from quarter-to-quarter because of the different end markets in which we operate.

Achieving EBITDA margin towards the higher end of these ranges will require favorable conditions in many of those end markets. After factory and corporate cost, which can change year-over-year, our consolidated EBITDA margin target ranges from 12% to 16%.

We believe our historical margin performance and our margin targets, even at the lower end of the range, would place Federal Signal in the top tier when compared to other companies in the specialty vehicle space. We will continue to employ our 80/20 principles in each of our businesses to maximize performance.

I would now like to move on to our earnings outlook. As I mentioned on our first quarter earnings call, we started to see notable improvement in orders, particularly on the industrial side towards the end of the last year.

The achievement of the higher end of our original outlook for 2017 required the continuation of this order momentum into the second quarter. Although we do not expect the growth in orders from customers replenishing rental fleet to continue at the same pace in the second half of the year, as in the first half, the continued order strength on the industrial side in the second quarter and the progress we are making with our initiative to expand into the utility market provides us with increased confidence in our full year outlook.

While our municipal markets continue to be steady overall, we've seen some recent deferrals of large orders, which we believe to be temporary. We are, were encouraged by TBEI's performance in June, and what had historically been a seasonally strong month.

While these results are promising, we realize that these are early days with respect to the acquisition. We are monitoring chassis availability at certain locations and planning to make additional investments as part of our ongoing integration effort.

After factoring in a preliminary estimate of the amortization expense resulting from the acquisition related accounting impacts, we currently expect that TBEI will contribute up to $0.03 of accretion in 2017. With the growth in organic orders experienced in the first half of the year contributing to a strong backlog for vacuum trucks and sewer cleaners and the accretion currently expected from TBEI, we are raising our full year 2017, adjusted earnings outlook from a range of $0.70 to $0.78 per share to a new range of $0.77 to $0.80 per share.

With that, we are ready to open the lines for questions. Operator?

Good morning guys. So maybe we can start on the muni side.

Are there any products that you view as kind of leading indicators of demand on the municipal side. Just trying to get a sense, I know it's always difficult to look at the maybe market peers out, but trying to get a sense as to how you look at there, and are there any specific products that kind of drive that?

Across our portfolio, the SSG side, we talked about some deferrals that we've seen with respect to some large orders both in the U.S. and in Europe.

On the ESG side, on the municipal side, we've seen very strong orders for our sewer cleaner. Our Elgin orders are actually up the first half of the year, 10% over the first half of last year.

We have seen some delay in international orders that we think might push into next year. But overall, as we've talked about the demand has been particularly on the ESG side strong.

Got you. Obviously, you talk about the sewer cleaner and vacuum trucks.

So the rental numbers are way -- much lower, give you a good sense there. Any more feel in terms of kind of where that demand is coming from?

Was it just pent-up demand or just the number of availability on the rental side wasn't there, so there was more active -- more purchases, just trying to get a feel for kind of how far out you see that strength going?

As I talked about, we monitor the used equipment auctions and we've seen a dramatic decline in our equipment available in the auction houses. We've seen the first half of this year, we saw a strong demand for replenishment of our rental partners' equipment -- our equipment that's in our rental partners' fleet.

So that was encouraging. In addition to that, our rental utilization rates are up and we have seen increase in terms of the parts and service work.

But that used equipment overhang, we expect to continue through 2017 and into '18, and it will impact sales of our new equipment.

Got you. Just the last question.

You talked about the -- your replenishment on the rental fleet side. You don't expect to remain as strong in the second half.

Just can you talk about that a little bit further?

It's been unusually strong in the first half of this year. There is some seasonality in the second half of the year.

This in the North American business that we have seen in the past where in some situations it drops off some in the fourth quarter.

Hey. Good morning.

You just said the used equipment overhang could continue to the back half, were you monitoring auction volume before the oil and gas slow down? Or how many pieces of equipment do think are out there in kind of a structural level just as normal transactions?

We've been -- we monitored it for a while, Steve. I think Jennifer mentioned that if you go back couple of years, the number of vacuum trucks and sewer cleaners that were available at auction was in excess of 300 units.

Right now it's less than 50, it's probably more in the 40 range. And so, that's what gives us some encouragement in terms of the -- as that used equipment passes through the system, we're expecting to see some uptick in rental demand.

I think that's was we've seen with our customers replenishing their fleets because now there've been able to sell their rental fleets at relatively competitive prices, where previously the influx of the used equipment in the market was just dragging down the prices. So when those customers were trying to sell the rental piece of equipment, they were competing with that used equipment.

So as that flushes through, we see our customers wanting to replenish their fleet.

I totally understand. I guess, the 300 units was a function of the slowdown in oil and gas or what?

Was that an abnormally high number of units and you're getting to a normal level at 40?

Yes. Steve, we think we -- there were a couple of competitors that may have resulted in bankruptcies, certainly up in Canada and so there was some influx of the used equipment from competitors that didn't survive the downturn in oil and gas.

So we think it was a pretty abnormally high level. We think where it is right now it's probably more of a normal level.

Right, okay. So less competition from the rental channel now?

Or, sorry, from the auction channel now?

Correct.

Correct.

Given the order and inquiry rates and your -- the comments just on the lower used equipment levels. How should we think about organic growth for legacy ESG products in the back half?

We think of the organic growth on the municipal side at GDP type rates. On the industrial side, it's a little bit higher, as we've talked about.

And then some of the new market's initiatives like utility were still in early days, but we're hopeful as we get traction at that initiative will even be higher.

Right, okay. And you would think, based on -- I know it's early to talk about 2018, but the trends that you're seeing, you would expect those general order trends to persist into the out year as well?

We're still at -- the composition of the company has changed pretty dramatically and we're still in early days with respect to TBEI, it's encouraging. But I think we'll have more color commentary in the third quarter call.

Okay. I guess to that point, can you tell us what the year-over-year change for TBEI orders were?

Did it see the same kind of growth rate that maybe legacy ESG saw?

When we talk about year-over-year, it's a little difficult to see because they also entered an acquisition in September of last year. So it's a little bit clouded by their Q3 acquisition of Travis.

We, sorry, I think it's probably premature to comment on that.

Okay. Well, I guess just then can you talk about what you're hearing from the distribution channel and your sales team and what the back half looks like for TBEI?

Is it, you had a, your due diligence I guess, is it, how does it look relative to what you had expected a few months ago?

It's consistent with the due diligence as I mentioned on the call, Steve, June is typically one of their highest months. The last 2 of the 3 prior years, June was the strongest and that continued this year and the fourth quarter due to seasonality is typically the lowest.

We're learning about the Travis business that they acquired in the fourth quarter of last year. But today, they are on track with where we expected them to be.

I wanted to ask about, just the, just directly with O&G market. Are you seeing a pickup in, I mean how, can you talk a little bit about like quote activity for anything oil and gas related?

And it seems a little bit early to be getting a pick up here, but maybe you're starting to see that?

Yes, I mean it's what we want as we previously talked about, is really the auction date is very important. We continue to believe that overhang of used equipment will mute demand for our new equipment for some time period in oil and gas.

However, what's encouraging and we're still, these are early days as the rental utilization for our equipment in oil and gas type markets is up and we have seen some encouraging signs in the parts and services business, where we see some of the signs of that used equipment being taken out of mothball and put back into work. But with respect to new equipment sales, we expect that used equipment overhang to continue into, through '17 and into early '18.

Okay. So no orders yet?

Nothing meaningful.

Okay. And you mentioned the utility markets and that we're, I think you commented that we're in the early days.

I wonder if you could provide a little bit more data about, or color on the utility market is this product in testing with fleets? How many fleets are there?

And as the utility truck market really starts to get commercialized, do you envision it being kind of an event where you get a lot of orders or is it going to be kind of a slower build in orders in utility trucks?

Yes, we're still in early days, as you know we meaningfully entered this market last July with the launch of our ParaDIGm product. We've been really focused on developing channel and the customer relationships.

We're on track in terms of where we thought we'd be, which is encouraging. The other data point that I think is encouraging is in addition to selling our ParaDIGm product there's been upselling opportunities for our prodigy and our larger HXX to some of these utility customers, But I go back to, we're in early days and we consider this type -- this opportunities to really be a slow build as we develop the channel within this market.

Okay, sounds good. And then just a couple of more for me.

You talked about that municipal sector order deferral in the U.S. and international and think you called out Europe.

Do you know why you're seeing the deferral, is there anything that you can pinpoint that would provide us with some idea of when the timing of orders would pick up?

In the Street Sweeper side of the business, it's really some of the larger Middle East orders that have been then pushed back. And then on our Public Safety Systems business, again, it's the larger fleet orders both in the U.S.

and Europe that has been moved out a couple quarters. We believe these are just deferrals that will get this business.

It's really just a matter of timing.

Okay, right. Just shifting from 1 quarter to the next?

Correct.

Okay. And then on your EBITDA margin targets, any thought on the timeframe for when you would see margins in any kind of self-help programs that would help you to get those to those target margins?

Yes. As I mentioned on the call, we really -- the 80/20 principle that we started on that journey about 5 years ago are really part of our culture here.

And we continue to employ those principles. So as we move forward, with the addition of David Martin, in the Chief Operating role, we're very focused on continuous improvement.

And as I talked about on the call, hitting the higher end of that range will also require some favorable market conditions. But it's something that we believe that we can achieve.

And I would also note, as we benchmark ourselves versus specialty vehicle company peers, these margin targets really put us in the top tier of that group.

Okay, alright that’s great. Alright, thank you.

Thank you Wal.

Thanks. I have some questions about the hydro-excavator market.

Do you have an estimate for how big your installed base is, in terms of units and what your market share is for that product line?

There's a -- we look at it really based on the individual end users, so our hydro-excavation equipment, as you know, there is municipal applications, there is oil and gas applications, there's industrial applications and then we also have a new market in terms of utility applications, that we really look at it on segmented basis. So I have -- we can have a longer conversation about that.

We talk about, for example, on the utility side of the market, we talk about safe digging as $200 million. So we can walk you through each of those particular opportunities offline.

Okay. So I guess just if you think about -- if you have the growth rates for those kind of four buckets or anything handy, how do you think utility should grow?

And I guess just broadly speaking, the market share question too if you have a guess?

Yes. We believe that on the municipal side, it's typically GDP type growth, although this year with respect to sewer cleaners, we've seen much stronger than that on the industrial side, it's 4% to 5%.

We're still in very early days with respect to our utility initiatives, so it will be something that we're establishing this as a relatively new product with some new opportunities in that market. So it'll be a much -- an opportunity that will gain momentum over time.

Understood. Okay, I'll take the rest of that offline.

And on the SSG side, you talked about some investments for new product development, what are you working on, when should we start to see some revenue growth from those new products if you have a estimate?

Sure. We previously talked about the G-series, which is a product that we launched late in 2015, early 2016.

We're starting -- we're doing some expansions to that particular product line. We're looking at IT enabling some of our safety and security products.

We're looking again at working with some of our large customers, the interplay of our various products. So really encouraged in terms of the products that are in the pipeline.

We've talked previously about our body-worn video partnership with Edesix. And we're still in early days on that.

There's also that I would note a pretty significant investment on the sale side as we introduce these new products.

Just in terms of building out your own sales force you mean and getting …

Correct.

… more exposure to the market that way? Are the new product developments coming from -- is that a customer pull situation?

Or is it a Federal Signal push trying to develop different applications around existing products?

I think it's really a mixture. But as a company, we started in terms of an overhaul of our innovation processes about three years ago and focused on this market-based approach, both on the SSG and the ESG side and we're through the ParaDIGm, through the G-series and we're really starting to see the benefits of that.

So the short answer is the mixture. But compared to where we were five years ago, pretty significant difference in terms of how do we look at new product development.

Great. And last question from me.

Obviously, nice operating cash flow, first half of this year. How should we think about the full year, can we annualize at this rate?

Or is there something that will effect from a working cap standpoint in the back half?

Yes, with the JJE in the equation, Steve, now it's a -- cash flow can be a little probably more volatile. It depends on kind of their inventory levels; with it being a distribution business if it has a large order that is spilling that can require more finished goods on hand.

And we saw a little bit of that at the end of last year. And so coming into 2017, our working capital levels were probably a little higher than we would've liked.

A lot of that was due to the fact that there was a lot of inventory filling, a large Q1 order for JJE. So it's probably, it's going to be annualizing, it might be a little rich because we did have some run, we hit the ground running, if you will, in Q1 just from a working capital standpoint.

So just a straight annualization of the $45 million is probably a little on a high side but it should be, we would still expect significant improvement year-over-year.

Got it. And sorry, if I missed this, did you say what the CapEx expectation is for the year?

Yes. We think right now we're at, we think it's probably going to be around $10 million if not slightly less.

And that includes TBEI as well, Steve, which is pretty low CapEx requirement.

Just a couple of follow-ups. Jennifer, you mentioned, chassis, the potential for chassis shortages.

I wonder if you brought that up just as a kind of an ongoing thing or is there something we should be concerned about in the back half of the year?

I think at this point in time, we wanted to educate you all as we're getting educated with respect to TBEI, that particularly on the class 6 to class 8 chassis, it's something that we are monitoring availability. It hasn't had an impact thus far, but we're in early days, and we'll continue to monitor it going forward.

Okay that sounds great. And price cost, we haven't talked about that at all on this call, but some material cost have gone up.

I wonder if you can just talk about your pricing strategies and your ability to pass through some rising metal costs?

Yes. So while we typically, we're fairly well locked in for about 6 months out in terms of our raw material pricing even with the addition to TBEI, which has a pretty high steel buy.

So we're pretty well locked down for at least the next couple of quarters. And in terms of passing it along to our customers, we typically are able to do that relatively well, but I think as we evaluate a number of things in our pricing strategy, and we typically, we have a price increase every year.

And that's factored into the equation. But we've not really had any meaningful increases as the result of raw materials in the last 6 months.

I think the only thing I'd add is if you look at our cost of goods sold across Federal Signal, steel only accounts for about 10%. So it's a type of thing, as Ian mentioned, that we can lock for a period of time, we monitored closely and we believe with our 80/20 initiative and pricing that we can address.

Thank you, very much. In closing, I'd like to reiterate that we are confident in the long-term prospects for our businesses and our markets.

We would like to express our sincere thanks to our employees, our stockholders, distributors, dealers and customers for their continued support. Thank you for joining us today.

And we'll talk to you next quarter.