Federal Signal Corp /De/ Q2 FY2020 Earnings Call

Good morning, and welcome to Federal Signal's Second Quarter 2020 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'll 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 have also posted the slide presentation and the earnings release under the Investor tab on our website. Before I turn the call over to Jennifer, I'd like to remind you that some of our comments made today may contain forward-looking statements that are subject to the safe harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website. Our presentation also contains some measures that are not in accordance with U.S. generally accepted accounting principles. In our earnings release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-Q later today. Jennifer is going to kick things off today with some introductory comments. I will then give some more details on our second quarter financial results before turning the call back to Jennifer to give a business update and provide thoughts on our outlook for the rest of the year. After that, we will open the line for any questions. With that, I would now like to turn the call over to Jennifer.

Thank you, Ian. I'd like to start by giving my profound thanks to each of our employees and our dealer partners for their commitment over the past several months. Since the outbreak of the pandemic, a critical area of focus has been on their health and safety, and we have implemented a host of new measures to ensure a safe work environment for our employees. These steps have included adjusting our production processes at our facilities to comply with safe distancing guidelines in order to protect the safety of our employees. We have also invested in temperature screening capabilities at many of our facilities, issued a face mask policy, and provided our employees with additional paid time off. These are clearly challenging times at many different levels. But I could not be prouder of our performance during the second quarter with our teams demonstrating impressive operational execution in exceptionally difficult circumstances while at the same time, continuing to provide a safe working environment for our employees. Each of our businesses is considered essential in supporting critical infrastructure needs and public safety. That meant that all of our manufacturing facilities remained operational throughout the quarter, albeit with certain of our operations temporarily affected by facility closures, either due to government-issued mandates or other coronavirus-related issues. At the beginning of the quarter, we acted quickly and decisively in response to a variety of operational challenges resulting from the pandemic by adjusting our operating costs and modifying our production schedule. As our teams develop strategies to operate in the new COVID environment, we experienced double-digit sequential improvement in average weekly sales in both May and June. The combination of these factors helped us to maintain a high level of performance and deliver an adjusted EBITDA margin of 16.8% in the quarter, exceeding the upper end of our target range. The strong results that we were able to deliver in exceptionally difficult circumstances during the quarter were a testament to the quality of our businesses, our experienced leadership team, the commitment of our employees, and the agility of our teams. While managing through this difficult quarter, we also continue to focus on our long-term growth initiatives. For example, on the organic side, we introduced a new regenerative air sweeper that does not require the operator to have a commercial driver's license. We also made progress on our plant expansion at Vactor, Rugby, and MRL, which will initially provide additional space for social distancing and additional capacity to support our longer-term growth. On the M&A front, we completed the acquisition of PWE. In addition, I'm also pleased to report that the company will be issuing our inaugural long-form sustainability report later in the third quarter. I'll now turn the call back to Ian to go over the numbers.

Thank you, Jennifer. Our consolidated second-quarter financial results are provided in today's earnings release. In summary, our teams continue to execute at a high level, with both of our groups delivering adjusted EBITDA margins in excess of the target ranges. Consolidated net sales for the quarter were $270 million compared to $324 million last year. Consolidated operating income in Q2 this year was $31.3 million compared to $46.3 million last year. On an adjusted basis, consolidated operating margin in Q2 this year was 12.7% compared to 14.6% last year. Consolidated adjusted EBITDA for the quarter was $45.4 million compared to $57.1 million in Q2 last year. That translates to a margin of 16.8% in Q2 this year compared to 17.6% last year. Net income in Q2 this year was $21.4 million compared to $32.8 million last year. That equates to GAAP earnings of $0.35 per share compared to $0.54 per share last year. On an adjusted basis, EPS for Q2 this year was $0.42 compared to $0.55 in Q2 last year. Orders in Q2 this year were $201 million compared to $308 million last year. Despite the lower orders, our backlog at the end of the quarter remained healthy at $333 million. That compares to $348 million in Q2 last year. In terms of our group results, ESG sales for the quarter were $214 million compared to $267 million in Q2 last year. ESG's operating income was $28.6 million, compared to $44.8 million in Q2 last year. ESG's adjusted EBITDA for the quarter was $40.9 million compared to $54.4 million a year ago. That translates to an adjusted EBITDA margin of 19.1% in Q2 this year compared to 20.4% last year. ESG reported total orders of $158 million in Q2 this year compared to $253 million last year. SSG's second-quarter sales were $56 million this year compared to $57 million last year. SSG's operating income for the quarter was $10.4 million, up from $9.5 million in Q2 last year. SSG's adjusted EBITDA for the quarter was $11.7 million compared to $10.3 million a year ago, and its adjusted EBITDA margin in Q2 this year was 20.9%, up from 18% last year. SSG's orders in Q2 this year were $44 million compared to $55 million last year. Corporate operating expenses in Q2 this year were $7.7 million, down from $8 million last year. Turning now to the consolidated income statement, where the decrease in sales resulted in an $18.7 million reduction in gross profit. Consolidated gross margin in Q2 this year was 26% compared to 27.4% last year. Our results in Q2 this year included the recognition of approximately $3 million of excess overhead costs that flow through the income statement as inventory period costs due to lower production levels. Selling, engineering, general, and administrative expenses for the quarter were down $4.4 million from Q2 last year. Other items affecting the quarterly results include a $600,000 reduction in acquisition-related expenses, a $1.3 million increase in restructuring charges, and a $200,000 decrease in interest expense, largely due to lower average interest rates in comparison to the prior year quarter. Other expense in Q2 this year was also $2.1 million higher than last year, primarily due to the recognition of a $2.5 million charge associated with the withdrawal from a multi-employer pension plan. Tax expense in Q2 this year was down $5.5 million compared to the prior year, largely due to lower pretax income levels and the recognition of a $1.1 million excess tax benefit related to stock compensation activity. Including the effects of the excess tax benefit, our effective tax rate in Q2 this year was 22.2%, lower than expected and down from 26.1% in Q2 last year. At this time, and assuming no additional excess tax benefits, we expect our full-year effective tax rate to be approximately 25%. On an overall GAAP basis, we therefore earned $0.35 per share in Q2 this year compared with $0.54 per share in Q2 last year. To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior year quarters. In the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition-related expenses, pension-related charges, restructuring activity, coronavirus-related expenses, and purchase accounting expense effects. On this basis, our adjusted earnings for the second quarter were $0.42 per share compared with $0.55 per share in Q2 last year. Looking now at cash flow, we generated $60 million of cash from operations in Q2 this year, representing an improvement of $25 million or 73% from Q2 last year. The year-over-year improvement was primarily due to working capital timing differences, inclusive of actions taken early in the quarter to preserve short-term liquidity in response to the pandemic, lower rental fleet investment in comparisons to the prior year, and deferrals of certain payments in the current year as outlined in the CARES Act. During the quarter, we paid down approximately $36 million of debt, completed the acquisition of PWE, and funded cash returns to stockholders. We ended the quarter with $171 million of net debt, which is down from $210 million at the end of Q1 and a current availability of $245 million under our credit facility. As a reminder, we executed a new 5-year $500 million credit facility last July. We can increase borrowing under that agreement by an additional $250 million for acquisitions. Our net debt leverage remains low and essentially unchanged from year-end. Cash flow so far in July has met expectations with no material change in customer delinquencies or bad debt. With no debt maturities until July 2024, we are continuing to approach the uncertainty and challenges with the result and from a position of strength given our financial position, which has improved further since the end of the first quarter. We also remain committed to adding long-term value to our stockholders. On that note, we paid a dividend of $0.08 per share during the second quarter, amounting to $4.9 million, and we recently announced a similar dividend for the third quarter. Although we did not buy back any shares in Q2, we currently have about $91 million of authorization remaining under our stock repurchase program. That concludes my comments, and I would now like to turn the call back to Jennifer.

Thank you, Ian. As you will have seen in today's release, we reinstated guidance for the year. There were several factors that gave us confidence to do this and provide us with optimism as we look forward. First, we clearly demonstrated that we can manage our costs. As we have discussed previously, we aim to consistently operate within our target EBITDA margin ranges. In an effort to mitigate the financial statement impact of many of the pandemic-related operational challenges, we implemented a number of cost-saving actions during the quarter. The actions that we took helped us to maintain a high level of performance and deliver an adjusted EBITDA, which exceeded the upper end of our target range. These actions included temporary employee furloughs, salary reductions for the company's enterprise leadership team, reductions in director fees, and limits on discretionary spending. We estimate that these actions resulted in Q2 cost savings of approximately $14 million in comparison to our plan for the year. As a result of anticipated gradual improvement in our production levels, we have brought back many of the furloughed employees, although we did complete a reduction in force. We also made the decision to roll back the annual merit-based salary increases for most domestic salaried employees effective in the third quarter. We are currently targeting similar savings in the second half of the year as we realized in the second quarter. Now turning to current demand. We entered the second quarter with backlog at record levels and lead times for certain product lines extended. As we move through the quarter, our incoming order rates increased. As we mentioned on our first-quarter earnings call, order intake in April was slow, with the various government-mandated stay-at-home orders and travel restrictions significantly impacting our sales and marketing activities. For much of the quarter, our sales teams were unable to attend trade shows, perform equipment demonstrations, or conduct in-person sales meetings. In addition, certain customers were unable to take delivery of equipment, given travel restrictions, and the limited personnel they had available. These factors significantly impacted our order intake. However, as the second quarter progressed, many of the government-mandated restrictions that were imposed in states across the U.S. started to ease, albeit at different times and at different levels. With that, and with sales travel fully resuming, we have seen a commensurate increase in equipment demonstrations. To illustrate, we were able to complete 125 demonstrations and presentations of our TRUVAC branded vehicles in June of this year, which was double the amount performed in April and May combined and slightly more than in June of last year. Since April, we've also seen monthly increases in the amount of presentations and demos of our street sweepers and sewer cleaners. This has contributed to sequential improvement in our average weekly order intake in both May and June. Our weekly average orders in May were 16% higher than April, and our weekly average orders in June were 24% higher than May. We are encouraged with what we have seen to date in July, with improvement in demand for sewer cleaners and safe digging trucks noted since June. And while these are promising signs, our June orders were not back to the levels that we saw last year. And note, the outstanding orders that we've reported in the third quarter of last year included $27 million of acquired backlog from the MRL transaction. Within our specific end markets, we have seen the quickest recovery within our truck bodies business. As you may recall, on our last call, we talked about a significant drop-off in orders that we had seen in April, driven in large part by the lack of available customer-supplied chassis at one of our TBEI locations, with many of the chassis OEMs shut down. As a reminder, unlike many of our other vehicle-based business, at TBEI, the customer almost always provides the chassis. That situation improved as the quarter progressed, as evidenced by the flow of chassis deliveries into our facilities. It reached a low point of approximately 2 deliveries per day in May, whereas in June, that improved to around 8 a day. And while it's still not back to typical levels, we have noted further improvement in July. The second quarter is typically seasonally strong for TBEI, and despite the supply chain issues and the effects of the pandemic, TBEI was able to deliver its highest quarterly EBITDA margin since we completed the acquisition 3 years ago. Third, we have seen resilience in our aftermarkets and SSG businesses. Our aftermarket business represented approximately 26% of ESG's revenues for the quarter, which is up from 24% in the first quarter and in Q2 last year. We continue to see solid demand for replacement parts in the quarter with part sales of $31 million. The softness we saw in utilization levels of our rental fleet during the first quarter continued into May, but we did see signs of improvement in June, most notably in Canada, where utilization levels approached prior year levels. Overall, our rental income in Q2 was down in comparison to a very strong comparative in the prior year quarter but was up 6% versus the first quarter. Our safety and security group demonstrated its resilience with impressive performance in Q2 this year, generating higher income on slightly lower sales compared to the prior year. Its adjusted EBITDA margin for the quarter was outstanding at almost 21%. Fourth, we have diversified our public revenue funding sources. While the pandemic has impacted the financial health of municipalities, we are positioned so that our exposure to public funding mechanisms is diversified with multiple funding sources. Our businesses in both ESG and SSG are deemed essential, and we see market share gain opportunities and are encouraged by potential future opportunities as we see catalysts for growth. All of this I will explain in further detail. Historically, approximately 60% of Federal Signal's revenues were generated from some kind of public funding mechanisms. Over the course of the last several years, through a combination of acquisitions and organic growth initiatives, that percentage is now less than 50% as the growth in our industrial and rental business has outpaced that of our public-funded revenue stream. Furthermore, our publicly funded revenue streams include revenues that are generated from sales to municipalities outside the U.S., most notably in Canada, following the acquisition of Joe Johnson in 2016 and in Europe through our VAMA business located in Spain. We have also seen significant growth in the last 2 years in export sales of our public safety products to customers in Latin America. Within ESG, our 2 primary products sold to U.S. municipalities are sewer cleaners and street sweepers; sewer cleaners represent our largest product line in terms of sales. Sewer cleaner purchases are typically funded through water taxes as opposed to general municipal funds. Both sewer cleaners and street sweepers provide essential services, and the focus on cleaning remains utmost important during and after this global pandemic. Through our Reclaiming Tomorrow, Together initiative, we are also identifying ways to make our equipment even more essential. As an example, our sewer cleaners are being used to clean the Field Museum in Chicago prior to its reopening. Within SSG, our sales to municipal customers are primarily represented by sales of public safety products to emergency first responders and systems that warn inhabitants of weather-related dangers like tornadoes or tsunamis. Certain of our new technology offerings are funded through the emergency fees charged on user cell phone bills. Fifth, we are monitoring developments relating to a potential infrastructure bill, which would be a catalyst for growth for many of our businesses. The proposed $1.5 trillion bill that was recently passed by the House of Representatives includes funding to repair roads and bridges, expand broadband access in rural areas, and to rebuild and modernize American infrastructure with significant investments in public transit, the energy grid, clean water and wastewater systems, affordable housing, schools, and hospitals. The legislation also includes Buy America procurement requirements. If such infrastructure legislation were to pass, with our various businesses which support maintenance and infrastructure markets, Federal Signal will stand to benefit. Specifically, we would expect broadband and 5G fiber network expansion and electrical grid updates to drive demand for our TRUVAC line of safe digging trucks, which allow for safe access to underground utilities and provide for limited disruption from directional drilling and fiber insertion. In addition, upgrades and expansion of clean water systems would increase utilization of our sewer cleaners as new waste stations and pipe upgrades would require cleaning. Following the 2019 acquisition of Mark Rite Lines Equipment, our product offerings also include road marking and line removal equipment, and we provide road marking services. We would expect our MRL products and service offerings to benefit from the more than $300 billion earmarked for road resurfacing and repair work, which could also lead to increased demand for our street sweeper products. Further, our dump truck body and trailer products are utilized in commercial housing and road construction, which much of the products outlined in legislation resulting in an increased need to haul asphalt, dirt, gravel, and other material. In addition to demand for new equipment, we would expect to see increased demand for our aftermarket businesses through increased parts and services, used equipment, and rental activity. We will continue to monitor any additional developments. Finally, our strong balance sheet will continue to provide opportunities for us to drive both our organic growth initiatives and M&A. Our strong cash flow generation, low debt levels, and strong financial position will help us to navigate through the ongoing challenges presented by the pandemic. At the same time, we remain committed to our long-term capital allocation priorities of investing in organic growth initiatives and funding cash returns to shareholders. With our strong cash position, the available financing under our revolver, and our conservative leverage, we are confident in our ability to continue to not only fund our existing operations but also pursue strategic transactions and participate in an M&A environment with more reasonable valuation expectations than existed in the pre-COVID world. To illustrate that, during the quarter, we completed the acquisition of PWE, a distributor of maintenance and infrastructure equipment covering North Carolina, South Carolina, and parts of Tennessee. PWE has been a long-term partner of Federal Signal, and this transition facilitated orderly ownership transition in an attractive geographic market for approximately $6 million. The acquisition added a third location to our current footprint in this population-dense region, which will allow us to better serve our customers and accelerate the growth of our aftermarket business. In general, we see M&A markets starting to open again with more deals flowing through. Although the pandemic may create some logistical challenges, we are now more optimistic in our ability to get the deals done than we were 90 days ago. We are also in a position to be opportunistic as it relates to acquiring certain manufacturing facilities that we currently lease. For example, we recently executed a letter of intent to acquire one of our dump truck manufacturing facilities at a very attractive valuation. We also secured a parcel of adjacent land. Both will facilitate the expansion of our footprint to support a strategic growth initiative to broaden our access to end markets and to allow us to better support our customers. There remains an amount of uncertainty surrounding the potential business impacts from COVID-19, and we, unfortunately, are not immune to the effects of the pandemic. While we have been proactive in our approach, as I just mentioned, the pandemic continues to create ongoing challenges in running our operations at normal levels. With the recent increase in cases across many states in which we operate, it is possible that we may continue to experience elevated employee absentee levels in the second half of the year. We are committed to taking the necessary steps to minimize disruption with the objective of achieving more normal production levels. As a reminder, we started the year strong with our first-quarter earnings up 30% on a year-over-year basis. In recent years, our second-quarter earnings have represented the strongest of the year, in part due to the prevalence of annual activities that typically occur during the quarter. Due to the pandemic, many of these activities, which include industrial plant shutdowns, rental activity, and spring cleanups were either significantly curtailed or canceled and are not expected to be rescheduled until next year. Our backlog remains at a healthy level, providing us with visibility into the second half of the year. Assuming that we do not experience any significant COVID-related disruptions for the duration of the year, we currently expect our adjusted EPS for 2020 to be in the range of $1.53 to $1.65. At this time, I think we're ready for questions.

Our first questions come from the line of Steve Barger of KeyBanc Capital Markets.

It's really good to hear about the sequential improvement as the quarter progressed. Now normally, 3Q revenue steps down from 2Q, does the 17% decline this quarter break that pattern, meaning that we should think 3Q revenue is up sequentially?

Yes, as we mentioned, April marked the lowest point for our average weekly revenues, and we have seen sequential improvements each month since then. Assuming there are no further disruptions from any COVID-related incidents, we expect this trend to continue into the third quarter. Therefore, we anticipate that Q3 will be higher than Q2, particularly given how April performed.

Yes. Understandable. So that suggests 2 half revenue should come in above the $556 million in the first half, I would think. Is that fair?

Yes, with the same caveats, yes.

The caveats, yes. So the reason I ask is, at the midpoint of the EPS guide, you'd put up $0.78 in the back half versus $0.81 in the front half. So if revenue is expected to be up, presumably, that means you would come in towards the higher end of the guidance range, all else being equal? Or is there something in there that would avoid?

That's clearly our objective. What we tried to factor into the guidance was a certain number of days that we might experience disruption related to COVID. And that's why the range is a little bit wider than you typically see. So we're clearly targeting the higher end of that range, but we wanted to make sure certain things are outside of our control, and we're going to do the right things by our employees. So we factored in a certain number of COVID disruption days, and we're hoping they are fewer rather than more.

Yes. I believe the outlook we provided suggests that we expect to operate towards the high end of our target EBITDA range for the year. As Jennifer mentioned in the prepared remarks, we have brought back employees, and we anticipate that the cost savings in the second half of the year will be roughly equivalent to what we saved in Q2. We remain committed to investing in new product development because we believe we are in a position to continue investing for the future. Therefore, some of those costs will be incurred in the second half of the year, which may create slight margin pressure when compared to the robust margin performance in Q2.

Yes. And yes, to that point, if my model is right, this was the best SSG margin in the segment's history, despite a 2% decline in revenue. Can you talk through what drove that specifically? And should we be thinking that's sustainable at 19% plus?

Yes. I think a couple of things here. One is, we acted very quickly and decisively in terms of adjusting our production to respond to the pandemic. We instituted staggered shifts at SSG in order to meet the requirements of safe distancing. That worked out pretty well. Mix played an important factor in that. But again, Mark Weber is running that business, and Mark and the team are doing a super job in terms of their continuous improvement activities. So it's going to vary quarter-to-quarter, but they did a fantastic job in some pretty challenging situations of achieving that margin level.

Yes. That's why I ask. I mean if you staggered production or reduced production, you would think you would have absorption issues. And yet you were able to put up the best margin in the segment's history. So was that primarily mix that drove that? And is that a mix that we can expect in the back half?

Yes, there were some mixed factors, with the most significant being in our European business. We had a substantial contract that shipped during the quarter, which I believe also influenced the orders. Regarding SSG, the orders might not be as reflective as they are for ESG since you can receive and ship an order in the same quarter. We received a large order in Q1 that shipped in Q2, leading to an accelerated impact from a timing perspective in the first quarter. Thus, when we observe the order decline in Q2, much of it was timing-related due to when we received this order. This shipment occurred mainly in May and June and came with a favorable margin. So, there were indeed mixed aspects, primarily within our European business.

Our next question has come from the line of Mike Shlisky from Colliers Securities.

So I just want to follow up on those last few questions there. I mean, this past quarter was potentially your worst quarter during the pandemic from a top-line perspective, yet the margins certainly delivered here. Have you given any thought to making some upside changes to your long-term margin targets for each of the segments now that you passed this test with flying colors here?

We're not planning to make changes this quarter due to the uncertainties surrounding the pandemic. However, we will consider adjustments if we can maintain this situation over the long term. We have increased our margin targets for both ESG and SSG in the past couple of years, and we will keep monitoring this. Our goal is to ensure it's sustainable through these challenging market conditions, and it's a top priority for us. As previously mentioned, this is part of our short-term incentive bonus program, so there is an organization-wide incentive to improve EBITDA margins.

Okay. Great. Looking at the back half outlook here, I also wanted to ask a question for just a little bit more color. I guess, which categories do you feel best about in each of the segments for the back half of the year? And kind of which ones are you the most cautious on? Are there any differences between, let's say, street sweepers and vacuum trucks, et cetera?

As I look at the second half of the year, we've discussed that our TBEI businesses, including SSG and our aftermarkets business, have shown resilience. Our TBEI business recovered the fastest, and we are optimistic about the progress we are witnessing. I'm also pleased with the order trends for our Vactor business in July, where we observed improvements compared to June in both sewer cleaners and safe digging equipment. Street sweepers have remained stable; that's the best way to put it. Since the lows in April, there have been some enhancements. Additionally, our acquisition of MRL, particularly the services segment, has performed very well. Therefore, looking ahead, one reason we felt confident reinstating guidance was due to the positive trends we are seeing across the board. It's crucial for chassis deliveries to continue, as they have a slight impact on our SSG business. Nevertheless, we will persist in investing in new product development, which is vital. We hold leading market positions, and I believe that as we emerge from this pandemic, we will capture market share. I am optimistic about the long-term prospects in the market.

Got it. That's great color. I also want to ask, Ian, some of your comments about the pension charges in the quarter. You had mentioned you had exited a multi-employer plan. Yes, I didn't see any increase in the pension liability on your balance sheet from the previous quarter. I'm no pension expert. So I just want to make sure, is that something we should be seeing in the future, some increase in your balance sheet expectations for your pension? Or are there any other things we should be watching for that cash flow on that line or in that part of your business?

You probably won't see it on the pension line item in our balance sheet; instead, you'll find it as a component within our current liabilities. We expect to pay it in the second half of the year, so it will be reflected as a current liability and will be resolved within the year when we pay that withdrawal liability.

Okay. Is that a high dollar amount or?

It's a $2.5 million charge that we recognized. That's the best...

Our next question has come from the line of Walter Liptak of Seaport Global.

I wanted to ask about just the order trends. The declines in the second quarter year-over-year were pretty steep. And it sounds like the orders are coming back nicely in June. I'm wondering, do you think you'd be able to get back to prior run rates? Or has something changed about the end markets as a result of the virus and recession that we just went through?

Yes. A couple of comments. First of all, we expect Q3 orders based on what we're seeing today to be better than Q2 orders. And from a trend standpoint, it's moving in that direction. In my prepared remarks, a couple of things to note versus Q3 last year as we had the acquired backlog of MRL, which was about $27 million. So that you need to deduct that. And we also had a very strong quarter. But I am encouraged by what I'm seeing. And we expect Q3 orders to be better than Q2. With respect to our end markets, again, I believe that we're in a very good position right now because we have leading brands. We're investing in new product development, and we've got some nice successes there. In our TBEI businesses, for example, they introduced a new product at the end of the first quarter, their DuraTuff product, and they crossed $1 million in a couple of months in a very difficult quarter. So that's something where I believe longer term, we don't see any changes. And in fact, if anything, we see opportunities to gain market share.

Okay. Great. And I wonder, specifically about some of the TRUVAC spending and the utilities. What we're hearing is that the utility CapEx budgets are still intact, and they're still spending. What are you seeing from your utility customers?

Yes. So April and May were tough because things were shut down. As I talked about on the call, we saw a change in June to the positive. We did double the number of demonstrations, which are very important for the sale of that product that we did in May and June, I mean, April and May combined. They're often more than we did in June of last year. So we are encouraged by that. In addition to that, safe digging products so far in July are up versus June. So again, the trends are going in the right direction. We've seen some good interest in some of our new product introductions, specifically the Coyote. So as we move forward, that's an important growth area for us that we'll continue to invest in. I think the other thing that's important to understand is the market conditions, longer term, I believe in safe digging will be more favorable for us because some of the Western Canadian smaller companies that were very dependent on oil and gas are struggling.

Okay. Got it. And then last one for me. The profits look great, but the free cash flow looks very good as well. Have you provided or can you give us an idea of the 2020 free cash flow that you think you might be able to generate?

Yes. I think, Walt, we aim for kind of cash conversion on a net income basis of about 100%. We continue to think that will be the case this year. In terms of kind of CapEx, I think we're looking at between $30 million to $35 million of CapEx this year. That's a tick higher than what we talked about last quarter. And a lot of that is really related to some of the things that Jennifer mentioned about some opportunities we have to purchase some of our leased facilities at pretty attractive rates. So those are some of the things that we're looking at, and that might cause our CapEx to tick up a little bit.

Okay. And mentioning CapEx, how are things going with Streator? Or are you close to finishing that project?

Yes. Great question. We had paused the construction during March and April due to the pandemic. We've reinitiated the project. We're on track to complete a major portion of it by the end of the third quarter, the final portion by the end of the fourth quarter. What's been great is we've been able to move into some of that space, and it's really helped us with the safe distancing requirements in place in Illinois. And been a true benefit. So we're encouraged by the progress that we're seeing. In addition to that, as I talked about on the call, we had other projects that are continuing. Rugby facility, our MRL facility. And as I talked about, we've signed a letter of intent to acquire a facility up in Minnesota at attractive valuation. So good work being done there, which longer term will both support our growth, support some M&A, and also some improvement with respect to productivity.

Our next question has come from the line of Chris Moore of CJS Securities.

I just want to make sure I understand the $14 million in cost savings in Q2. Is that all temporary? Is some of it permanent? I'm trying to understand if the cost structure will be meaningfully different pre-COVID versus post-COVID?

Yes. So Chris, first of all, I want to clarify that this relates to our yearly plan. At the start of the year, we were on track for another record year, but the pandemic changed that. The $14 million in savings is compared to our plan for the second quarter. Looking ahead to the second half of the year, we anticipate similar savings, roughly $7 million in each of Q3 and Q4. Some of this amount will come back, especially as expenses for travel and entertainment, which significantly decreased in Q2, start to increase again as restrictions ease. Our sales teams are beginning to travel more as stay-at-home orders are lifted. The temporary furloughs of employees accounted for a large part of the $14 million in savings, and many of those employees have returned as production levels have increased. However, as Jennifer pointed out, there was also a reduction in force, resulting in some job eliminations.

Got it. That's helpful. When considering the competitive landscape after COVID, and as Jennifer mentioned earlier, it seems that you should have better positioning, particularly against smaller competitors. Regarding safe digging in Western Canada, which appears to be more focused on smaller oil and gas companies, are there other areas where you might be in a stronger competitive position?

Another good example would be some of our TBEI businesses where there's some smaller competitors. There are other examples, but that would be the other area.

And those, Chris, typically, they may be in different geographies from where we currently are. So that would be different regional players. That business is a regional business. And so those would be the types of business.

Our next question comes from the line of Greg Burns of Sidoti & Company.

When we look at your backlog, have you seen any major project cancellations or delays either on the municipal or industrial side of the business?

No, not at all.

When we examine the municipal sector, you mentioned the variety of revenue sources there. Have discussions with customers shifted? Are they scaling back on projects or orders? Or have you noticed any changes considering the conditions we're observing in many major municipal markets across the country, whether due to COVID or more recent protests and related events?

Yes. So far, we haven't experienced any impact outside of the pandemic. We're closely monitoring the situation and wanted to share more details about our businesses and the various public funding sources. Regarding our Public Safety Systems business, we have significantly diversified it. Our export business to Latin America has grown, and we also have a portion of that business in Europe, which is somewhat shielded from the ongoing discussions in the states. Additionally, we have some operations in Canada. Currently, we anticipate that new police car registrations may be down by 10% to 15% next year. However, this represents only a part of our business. While we’re keeping a close watch on the situation, we expect that many of our products, such as sewer cleaners funded by water taxes, will be relatively insulated from potential impacts. It's also worth noting that the nature of our products focuses on cleaning, and there is currently a heightened emphasis on cleanliness.

Okay. And I guess that leads me to the last question. The fedsigresponse, have you seen any kind of traction with that initiative, repurposing some of your equipment or highlighting the utility of your equipment for cleaning and sanitation purposes?

Yes. So right now, the interest is very high. We've had over 4 million hits on our fedsigresponse. We're in the process of demonstrating it. There's a great demo video on our website, fedsigresponse, but we're in very kind of early days right now to offer any kind of conclusive data regarding the take rate.

Our next questions come from the line of Marco Rodriguez of Stonegate Capital Markets.

I was wondering if maybe you could talk a little bit about some of the strategic initiatives that you had discussed in the last call, and you've obviously hit on here. Specifically, actually, the market share gains, you made mention of it multiple times that longer term, you are expecting market share gains, especially versus some regional competitors. Just kind of wondered if maybe it's a little bit too early just yet, but have you seen any sort of movement there where you can really point to the fact that you are gaining share from some of the regional competitors?

We're still in the early stages. We have some anecdotal evidence about certain accounts that have chosen us over our competition. I want to emphasize the investments we're making, as they will set us apart from competitors in the future. Our Reclaiming Tomorrow, Together initiative focuses on enhancing our digital customer experience, an area we've accelerated during the pandemic, creating valuable training and marketing materials for our salespeople. Moving forward, we believe our customers will appreciate this effort. Additionally, we're investing in new product development, such as electrifying some of our street sweeping products, which has been a costly project we've been working on for a while. We've seen positive demos in the West, and we think this initiative will ultimately provide significant value to our customers and differentiate us from competitors due to its complexity and expense. We are also focused on reducing lead times for our sewer cleaner and safe digging businesses, which had been an issue for us before COVID, and we're making good progress, especially with the ongoing plant expansion at Vactor. As we head into 2021, we expect to have reduced lead times that will allow us to benefit from any infrastructure bill and potentially increase our market share against competitors.

All right. That's helpful. And then following up on the comment that you were talking about in terms of supply chains, if you will. I know the last quarter, there was some potential for supply chain issues or disruptions domestically. It doesn't sound like you saw too much or that it rather improved as the stay-at-home orders opened up. But can you talk a little bit about your expectations for supply chain domestically here for the second half of the year?

Sure. We faced some challenges in March and April at certain parts of our businesses, but the teams did an excellent job addressing them. The most significant issue we encountered was in our TBEI business related to the chassis, which dropped to a low point of two per day at one of our facilities. Fortunately, it has since improved to eight, and we've observed further progress in July. Overall, I feel optimistic about our current situation. Assuming there are no additional shutdowns, we do not anticipate any supply chain disruptions for the second half of the year.

Got it. And it was very helpful for you to put out the revenue diversification on the municipalities on their budgets, very useful information. But I was also wondering if you can maybe talk a bit about your dealer/distributor channels. Are you seeing any sort of stress there as it relates to their ability to access capital?

No. Our teams effectively maintain contact with our dealers. Mark Weber, our COO, and I have spoken to many of our large dealers together. Most of them have strong balance sheets and continue to invest. This is a key asset for Federal Signal and sets us apart from the competition. We haven't experienced any significant collection issues, and our cash flow remains robust, as demonstrated in the second quarter. We are fortunate to have the dealer partners that we do.

Got it. And last quick question. Just looking at the cash flows from operations in the quarter and the activities around working capital. Just kind of wondering, as we look at the second half of the year, were there any sort of one-off type situations that you implemented in the quarter that kind of helped working capital but was sort of unwind in the second half of the year? Or are there some permanent things that you were able to improve working capital management for you guys?

Yes, there were several temporary measures we implemented that will eventually reverse. We also took advantage of the CARES Act, which allowed us to defer some payments. For instance, we deferred around $3.5 million in income tax payments from the second quarter to the third quarter. There were also some payroll tax deferrals allowed by the CARES Act, which are longer-term; we can pay 50% in 2021 and the other 50% in 2022, amounting to about $2.5 million at the end of Q2. We anticipate that continuing. These measures were largely temporary and stemmed from the CARES Act. Furthermore, our cash flow was positively impacted by lower rental fleet investment. Being both the manufacturer of the equipment and having direct contact with customers regarding utilization levels puts us in a good position; if we notice a downturn in utilization, we can reduce our fleet additions. This was a significant factor this quarter compared to Q2 of last year when we were adding more units to the fleet.

Our next question has come from the line of Steve Barger of KeyBanc Capital Markets.

Ian, I have a modeling question. The $33 million in SG&A this quarter is the lowest we've seen since early 2017, when the revenue was significantly higher. I believe you mentioned that you expect to save $14 million, with that amount distributed across the third and fourth quarters. Does this imply that SG&A on a dollar basis will increase back to the high $30 million range in the latter half of the year?

So Steve, just on your SG&A. I think you said $33 million. I think we're looking at more like $37 million. I think that's what we have for Q2. So I just wanted to make sure...

Where a bunch of add backs or deductions for the COVID expense and integration and restructuring, right?

When we consider SG&A as a percentage of sales, we've typically seen it in the range of $12.5 million to $13.5 million over the past several quarters. As we've shown in Q2, we're prepared to adjust and remain flexible. Certain items that appear in the SG&A line can be somewhat unpredictable, like our mark to market liability, which we've discussed before. This can introduce some volatility. However, our goal is to maintain a similar SG&A percentage of sales as we've experienced in previous quarters.

Okay, Jennifer, you discussed many potential benefits from an infrastructure bill, which I agree with. How do you assess the likelihood of it being signed into law?

Historic businesses have never included an infrastructure bill in their annual operating plans, and I have always believed it was unlikely to happen. We have developed an approach to address this situation. I don't have any more information than anyone else; we keep a close watch on it. My personal view is that our country is currently quite divided, but this is one area where there is some common ground. I believe it could serve as economic stimulus for the nation. As we move past the election, I think the chances of an infrastructure bill being passed are the highest I have ever believed.

Interesting. Okay. And then the PWE comments, I may have missed this, but why wouldn't that be a better fit for one of the dealers?

Just given the dynamics of that particular territory, we believe that right now, the JJE team is the best entity to work with the local team in terms of rebuilding that territory. We think there's a lot of opportunity there. And we made the decisions with the owner as part of his succession process that Federal Signal and particularly the JJE team was best positioned to help grow that business.

Is there a lot of overlap in that region with existing dealers?

No, it's exclusive.

There are no further questions at this time. I would like to turn the floor back over to Jennifer Sherman for any closing remarks.

There's no denying these are uncertain times. This experience has confirmed my strong belief that our workforce is unparalleled in its passion, commitment, and grit, and while we may have some challenging days or periods, I'm confident that we will band together and work through these challenges as we have many others. We are nimble and will continue to move quickly. Our portfolio of businesses includes many market-leading brands with solid fundamentals. We have a strong financial position, a history of robust cash flow generation, a culture of winning, a clearly defined strategy, an experienced team with a proven track record of anticipating issues and proactively implementing responses. The coronavirus has not changed any of these factors. I am optimistic about the long-term future of our company. I would like to thank our shareholders, employees, distributors, dealers, and customers for their continued support. Thank you for joining us today. Be safe, and we'll talk to you soon.

This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.