Federal Signal Corporation

Greetings and welcome to the Federal Signal Corporation's second quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Felix Bochen, Vice President, Corporate Strategy, Investor Relations. Thank you, Felix. You may begin.

Good morning, and welcome to Federal Signal's second quarter 2024 conference call. I'm Felix Bochen, the company's Vice President of Corporate Strategy and Investor Relations. Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer, and Ian Hudson, our Chief Financial 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've 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 news release, and in federal signals 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 10Q later today. Ian will start today by providing details on our second quarter financial results. Jennifer will then provide her perspective on our performance, an update on our multi-year growth outlook, and our updated guidance for 2024. After our prepared comments, we will open the line for any questions. With that, I would now like to turn the call over to Ian.

Thank you, Felix. Our consolidated second quarter financial results are provided in today's earnings release. In summary, we delivered strong financial results for the quarter with double-digit year-over-year organic net sales and earnings growth, gross margin expansion, and a 280 basis point improvement in EBITDA margin. Consolidated net sales for the quarter were $490 million, a record high for the company and an increase of $48 million or 11% compared to last year. All of the growth this quarter was organic. Consolidated operating income for the quarter was $81.1 million, up $21.7 million or 37% compared to last year. Consolidated adjusted EBITDA for the quarter was $97.7 million, up $22.2 million, or 29% compared to last year. That translates to a margin of 19.9% in Q2 this year, up from 16.1% in Q2 last year. Gap EPS for the quarter was $0.99 per share, up $0.33 per share, or 50% from last year. On an adjusted basis, EPS for the quarter was $0.95 per share, up $0.28 per share, or 42% from last year. Order intake for the quarter was again strong, with second quarter orders of $473 million contributing to a backlog of $1.08 billion at the end of the quarter, an increase of $73 million, or 7% compared to Q2 last year. In terms of our group results, ESG's net sales for the quarter were $409 million, up $36 million, or 10% compared to last year. ESG's operating income for the quarter was $72.9 million, up $16.7 million, or 30% compared to last year. ESG's adjusted EBITDA for the quarter was $88.2 million, up $17.5 million, or 25% compared to last year. That translates to an adjusted EBITDA margin for the quarter of 21.6%, an improvement of 260 basis points compared to last year, and performance towards the upper end of our current target range. ESG reported total orders of $396 million in Q2 this year, compared to $409 million last year. SSG's net sales for the quarter were $82 million this year, up $12 million, or 18%. SSG's operating income for the quarter was $18.3 million, up $4.2 million, or 30% compared to last year. SSG's adjusted EBITDA for the quarter was $19.3 million, up $4.1 million, or 27%. That translates to a margin of 23.7% above SSG's current target range and up 180 basis points compared to last year. SSG's orders for the quarter were $77 million, an increase of $5 million, or 7%, compared to last year. Corporate operating expenses for the quarter were $10.1 million, down from $10.9 million last year. Turning now to the consolidated income statement, where the increase in sales contributed to a $26.7 million improvement in gross profit. Consolidated gross margin for the quarter was 29.4%, a 290 basis point increase over last year. As a percentage of sales, our selling, engineering, general, and administrative expenses for the quarter were down 20 basis points from Q2 last year. Other items affecting the quarterly results include a $200,000 increase in acquisition-related expenses, a $100,000 reduction in amortization expense, a $700,000 decrease in other expense, and a $2.4 million reduction in interest expense. Tax expense for the quarter was $16.7 million, up $4.3 million from the prior year. Our effective tax rate in Q2 this year was 21.5% compared to 23.5% last year, with the reduction primarily due to a $2.6 million discrete tax benefit recognized in connection with the amendment of certain state tax returns to claim a worthless stock deduction. At this time, we expect our effective tax rate for the remaining half of the year to be between 25% and 26%, excluding any additional discrete tax benefits. On an overall gap basis, we therefore earned $0.99 per share in Q2 this year, compared with $0.66 per share in Q2 last year. To facilitate earnings comparisons, we typically adjust our gap earnings per share for unusual items recorded in the current or prior quarters. In the current year quarter, we made adjustments to gap earnings per share to exclude acquisition-related expenses and the discrete tax benefits I previously mentioned. On this basis, our adjusted earnings for the quarter were $0.95 per share compared with $0.67 per share last year. Looking now at cash flow, we generated $41 million of cash from operations during the quarter, an increase of $5 million from Q2 last year. That brings the total cash generated from operations in the first half of this year to $72 million, an increase of 67% over the first half of last year. We ended the quarter with $207 million of net debt and availability under our credit facility of $533 million. Our current net debt leverage ratio remains low. With our financial position remaining strong, we have significant flexibility to invest in organic growth initiatives pursue strategic acquisitions, and return cash to stockholders through dividends and opportunistic share repurchases. On that note, we paid dividends of $7.4 million during the quarter, reflecting a dividend of 12 cents per share, 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. Our second quarter results represent another outstanding quarter, as our team sent quarterly performance records across many metrics, including net sales, EBITDA margins, and adjusted EPS, all while maintaining a healthy order intake. Within our environmental solutions group, we were able to deliver 10% year-over-year net sales growth and a 25% increase in adjusted EBITDA, with increased production at several of our businesses and continued price realizations representing meaningful year-over-year drivers. Overall, in what is typically a seasonally strong quarter, ESG's adjusted EBITDA margin was up 260 basis points year-over-year. We were particularly encouraged with the progress we have made across the enterprise on our Build More Trucks initiative this quarter. Our dump truck body businesses had another strong quarter with sales up 22% on the back of improving chassis availability and higher build rates. The increased dump truck body production coupled with our ongoing 80-20 initiatives at several key facilities was again a contributing factor in our year-over-year margin improvement within our ESG segment. In fact, monthly chassis receipts at our ox bodies facility grew sequentially throughout the quarter with June chassis deliveries the highest experience since the first quarter of 2021. We remain focused on maintaining our industry leading lead times in this space as we raise our production levels. Our strategic dump truck growth initiatives are also gaining momentum. OxBodies is broadening its geographic reach in key states such as Texas. The rugby team is progressing along its 80-20 journey in the form of product and SKU simplification. And Switch & Go is on track to start production of its new Class 3 interchangeable multi-body product in August. The Switch & Go Class 3 product launch provides customers additional flexibility in what remains a constrained medium-duty chassis environment. At our largest manufacturing facility in Streeter, production increased by 15% year-over-year, including the $13 million of sewer cleaner shipments that were affected by the third-party component supply issue that we experienced in March. MRL, our road marking and line removal business, is also benefiting from improving supply chain conditions and a constructive demand backdrop as the team was able to drive a 29% year-over-year increase in sales. In addition to anticipated multi-year benefits stemming from the infrastructure bill, we also see the ongoing shift towards early autonomous vehicle functionality, and the addition of smart features for passenger cars as a key long-term driver of road striping demand. Big picture, while supply chain performance has not yet fully recovered to pre-pandemic levels, supply chains are consistently improving for our family of specialty vehicle businesses. This improvement in supply chain should, over time, allow us to drive additional output and gain manufacturing efficiencies as we aim to reduce lead times for certain products, including vacuum trucks and street sweepers. From a capacity perspective, our access to labor remains good, and our large-scale capacity expansions that we completed between 2019 and 2022 position us well to profitably absorb incremental volumes into the current facility footprint. Shifting to aftermarkets, activity levels remain strong across our offerings. Performance was led by increase in part sales, service rental, and rental income partially offset by lower used equipment sales as our teams are working diligently to balance rental unit availability and used equipment sales to best serve our customers. In short, rental utilization and demand for our rent-to-own equipment offerings remains high. From a strategic perspective, our growing aftermarket ecosystem is allows us to better serve our customer needs throughout the entire business cycle. Especially in the higher interest rate environment that we are experiencing today, the option to rent new or acquire used pieces of equipment represents an important alternative for many of our industrial customers to access equipment in a timely and affordable manner. As we continue to scale our aftermarket business, we see additional long-term growth opportunities As acquired businesses are integrated into the platform, we further increase our parts capture rate, optimize underserved regions, and address non-traditional Federal Signal customer cohorts through our rent-to-own service offerings. In total, aftermarket represented approximately 25% of ESG revenue in the second quarter of 2024. Shifting to our safety and security systems group, the team delivered another quarter of outstanding results with 18% top-line growth, a 27% increase in adjusted EBITDA, and 180 basis point improvement in adjusted EBITDA margin on the back of sales volume increases and price realization. Sales of public safety equipment paved the way with 25% year-over-year growth as our light bar and siren products are resonating in the marketplace. This strong underlying demand for our products coupled with the insourcing investments we've made in recent years and our ongoing 80-20 efforts have contributed to achieving a mid-teens year-over-year improvement in volume. Going forward, our teams remain energized to continue to execute on a robust NPD pipeline across all of our SSG businesses as we aim to fortify and grow our position as the industry leader of audible and visual safety equipment. We have also been pleased with our cash generation through the first half of the year, as cash generated from operations rose 67% compared to last year. On an annual basis, we continue to target 100% cash conversion levels. Another highlight of the quarter included the publication of our latest sustainability report. In the report, we highlight the ways in which we make a difference to our customers, our communities, and our environments. We know that as a global manufacturer of critical infrastructure and safety products, we have the responsibility to operate sustainably with a long-term positive impact to our employees, customers, partners, and stakeholders at large. These efforts also position us well in the communities in which we operate and serve as a differentiating factor in our ability to attract labor at most of our facilities. The report also highlights the progress we have made against our sustainability goals that were initially established in 2018, and having achieved our electricity, water, and CO2 intensity reduction goals early, we have announced our new 2030 energy intensity reduction goals. Shifting now to current market conditions. Demand for our product offerings and services remains high, with our second quarter order intake of $473 million just falling short of last year's record second quarter orders of $480 million. For comparison purposes, please note that last year's orders included approximately $8 million of acquired backlog from the track list acquisition. In recent years, we have supplied a higher concentration of chassis than our customers. But as chassis availability has improved, customer buying patterns have started to revert to the more typical 50-50 split that we have historically experienced. This shift resulted in 9 million fewer chassis orders in Q2 this year compared to last year. This trend is also expected to represent a year-over-year net sales headwind of approximately 10 million in the second half of the year, but should have some nominal margin benefits. The composition of orders remains balanced between our publicly funded and industrial end markets as contribution from both subsets were similar on a year-over-year basis. On the publicly funded side, demand for our flagship sewer cleaners has remained consistently high throughout 2024 on the back of solid core funding mechanisms. Our SSG business is experiencing a similarly stable growth pattern as orders increased 7% in the quarter. This includes a $6 million public safety equipment order from a major municipality slated for delivery in 2025. Lastly, resulting from our ongoing end customer and market diversification efforts, our dump truck body business enjoyed double-digit order growth with municipal customers in the second quarter. On the industrial side, orders for dump truck bodies continue to lead the charge with orders up 32% year over year. Similar to last quarter, we believe this to be driven by a combination of pent-up replacement demand, execution on our strategic initiatives across different end markets, and high current equipment utilization levels. We are also seeing strong demand for our metal extraction support equipment as we are starting to reap distribution benefits from the combined ground force and tow haul platforms. Lastly, our teams remain laser-focused on positioning our businesses to be able to capitalize on projects resulting from the $550 billion bipartisan infrastructure bill. Although we believe the opportunity still remains in its early stages today, we anticipate many of our special vehicle offerings to participate in an array of projects and, importantly, at different stages of projects. As an illustrative example, While we expect the use of dump trucks to be fairly consistent throughout the life of a project, we expect road marking or street sweeping demand to be weighted more heavily toward the end of a project when a new road is marked or projects are cleaned. In fact, we have seen some examples of dump truck orders tied to early infrastructure projects, including a multi-unit order for a highway construction project in the southwest that we booked this quarter. We are also encouraged with early feedback we've received on our guzzler microtrenching vacuum truck, which is ideally suited for the installation of broadband infrastructure. Our teams will be showcasing our guzzler microtrencher at the upcoming Fiber Broadband Association show. In summary, demand for our products remains strong, and our teams are focused on executing our growth initiatives and building more trucks while continuing to maintain a healthy order intake. I now want to take a few minutes to provide an update on our through cycle revenue targets and growth initiatives. While we have historically talked about a high single digit annual revenue growth target, we are officially raising the bar to a low double digit annual growth target, which is roughly consistent with our actual track record since 2016. Achieving that growth will be multifaceted as we expect low to single low to mid single digit base level and market growth to be supplemented by outsized growth from our organic initiatives and contribution from M&A. In fact, we see opportunities for several businesses to expand their geographic reach as we start to harness the increasing benefits of the power of our growing specialty vehicle platform with our aftermarket operations at the heart of that value proposition. An excellent example of that platform power is the 30% year-over-year growth we achieved at TRACKLESS in the first year of federal signal ownership. We also see these platform benefits fueling other strategic growth initiatives, including new product development, aftermarket support, sales channel, and procurement optimization. Shifting to inorganic growth, our M&A pipeline remains active with several opportunities currently under evaluation. In line with our M&A strategy set forth in 2016, We are primarily focused on three types of acquisition opportunities. First, identifying new market adjacencies to penetrate within our ESG and SSG segments. Second, opportunistically adding to verticals in which we already operate. And finally, acquisitions to further accelerate our aftermarket growth. We remain vigorous and vigorous. and our due diligence processes as we aim to identify the right strategic conditions for federal signal. But we believe our track record, integration process, modest debt profile, and strong free cash flow generation all position us as an acquirer of choice in our markets. Lastly, as we indicated, we were pleased with our margin performance in the quarter, with performance towards the upper end of our current target range. Recall, our stated margin targets are meant to be annual and through the cycle targets. When we last raised our targets on our third quarter 2023 earnings call, we outlined four foundations supporting the raise, including leveraging our capacity expansions, the rollout of our codified federal single operating system, continued growth in our aftermarket business, and value-added M&A. At Elgin, our pilot plan for the rollout of our recently codified federal single operating system We saw some initial productivity and cost optimization benefits associated with this initiative in Q2. We are pleased with the progress we've made on a number of these foundations through the year at many of our businesses, but we are not done here. We see ourselves as being in the early innings of what we view as a multi-year opportunity to drive structural improvement. Turning now to our outlook for the rest of the year. Demand for our products and our aftermarket offerings remains high with our strong order intake this quarter contributing to a backlog which provides us with excellent visibility into the second half of the year. With our second quarter performance, our current backlog and continued execution against our strategic initiatives, we are raising our full year adjusted EPS outlook to a new range of $3.20 to $3.35 from the prior range of $2.95 to $3.15. We're also reaffirming our full year net sales outlook of between 1.85 billion and 1.9 billion. This outlook, which does not assume any M&A, reflects our view of continued healthy demand for our new equipment, parts, and aftermarket services, and also assumes a continuation of daily build rate increases at several key facilities somewhat offset by fewer production days in the second half of the year. We also continue to expect double-digit improvement in pre-tax earnings and EBITDA margin performance in the upper half of our target range. Lastly, we are maintaining our CapEx outlook of $35 million to $40 million for the year. At this time, I think we are ready for questions.

Operator. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.

Thank you.

Our first question comes from the line of Steve Badger with KeyBank Capital Markets. Please proceed with your question.

Thanks. Good morning.

Good morning, Steve.

Really strong quarter. I wanted to start with the ESG incremental margin of 46%, following 40% in the first quarter. Can you talk through... volume, mix, and price, and just what do you expect for incrementals in the back half?

Yeah, so Steve, I think as we look kind of the breakdown on the top line, volume, that was 8% of the 10% growth. Price was about 2.5%. We had a little bit of a headwind from fewer chassis. I think Jennifer talked about that impact. So that was about a 1% drag on the top line there. So As we think about kind of the drivers of the margin improvement, volume was the biggest driver of that, and just the efficiencies that we get from ramping up production at several of our facilities. We did have favorable price-cost dynamics in the quarter, so that was also a factor. And then the other thing is, you know, we had the after-markets business as well as some of our recent acquisitions, which have a slightly more attractive margin profile. As those businesses have grown, that's pulled up kind of the overall average, and so that's had some margin benefits as well. As we think about kind of the back half of the year, I think the guidance that we've given would indicate that we're still expecting incrementals for ESG to be kind of north of 30%. So that's kind of what's implied in the outlook.

Yeah, for sure. If I model to the high end of the new guidance, the quarters in the back half will – certainly have good margins, but will run maybe 7 to 8 cents lower than what you just put up. Is mix getting worse? Is it holidays? Can you talk about why 95 cents isn't a sustainable run rate given the backlog and the capacity you have?

Yeah, a couple of things. I think Jennifer alluded to the fewer production days that we have in the second half of the year versus the first half of the year. That's kind of always something that we face in the second half of the year. There's a couple of other, we talked about the chassis impact, the $10 million that will impact the top line. That won't be much of an earnings impact because it's typically passed through. So that should have a little bit of a margin benefit there. And then just the other thing to remember is we talked on our last earnings call about some incremental rental fleet investment that we were making. Most of that is in the second half of the year. So that will also be a factor.

And sorry if I missed this. What's the difference in production days between the first half and the back half?

I think it's in kind of the six to seven range.

And did you say what the incremental investment in rental is?

So this was on our first quarter call. We talked about a $20 million incremental fleet investment. So that will have some impact with most of that being in the second half of the year. That's nothing new. That's the same as what we talked about in Q1.

Understood. Yeah. Thank you.

Thank you. Thank you. Our next question comes from the line of Walt Lipak with Seaport Research. Please proceed with your question.

Hey, good morning, guys. Great quarter.

Good morning.

Morning. I wanted to ask about the dump truck orders were very strong. It's nice to see that recovery happening. I think that's the second or third quarter in a row. I wonder if you could talk a little bit about the cadence of orders, and I think you kind of alluded to some of this, Jennifer, in your presented comments. Are those orders, I mean, you know, at what point do you start getting into tough comps? You know, do you see sort of this pent-up demand? giving way to sort of a normalized growth rate. How should we think about the second half for dump truck ordering?

Yeah, I mean, first of all, we were pleased with orders overall. And as we know them called dump truck orders were strong. You know, I think that was the it is a combination of execution on strategic initiatives, particularly some of the geographic expansion issues initiatives. The teams have done a really nice job. There's pent-up demand, chassis improvement. We talked about during this quarter at Oxbodies, we saw kind of the highest number of chassis available that we've seen for several years. And then finally, there's pent-up demand. Then we're starting, we have some examples that we cited, one on the call of benefits from infrastructure. And, you know, their lead times are much shorter than, for example, right now, sewer cleaners and certain street sweepers. So, you know, we're able to, for many of those orders, flip those orders with the order comes in and we're able to deliver it within the quarter. The other thing that was encouraging on the dump truck order side is it was pretty balanced between municipal and industrial.

Okay, great. So it sounds like the order activity was great. you know, good and kind of consistent during the quarter and you're feeling good going into the third quarter for order activity.

The order activity was consistent throughout the quarter and, you know, really accolades to the team for just strong performance and continued execution of the strategic initiatives.

Okay. And, okay, thanks for that. Going back to the production question, And, you know, what are the pluses and minuses around, you know, you guys increasing the production in the second half? Because you got the backlog that's there. It sounds like the orders are coming in strong. You know, is it supply chain that's the biggest risk? Is it factory productivity? You know, and what could help you, you know, build more trucks in the second half?

So I'll start with, again, we were really encouraged by what we saw in Q2. So I'll start there. The teams did a really nice job in terms of building more trucks at many of our facilities. It can always vary business to business, but some of the critical considerations are we need to ramp and train labor. We generally have pretty good access to labor, but we need to hire and train them. Supply chain. always remains a factor. You know, we've talked about, you know, chassis availability is pretty good. The medium duty chassis market continues to be tight. It represents a pretty small percentage of our overall business. We, you know, the fewer production days in the second half of the year. But again, I want to emphasize, you know, we would expect kind of a gradual continued improvement as we work our way through the year. because this is the teams are razor focused on reducing lead times at several of our facilities and increasing production rates.

Okay, great. And, you know, sticking with ESG, you made a comment that I hadn't heard before about autonomous vehicles and the MRL road striping. Is there something that's changed in that market or they're like regulations or something or some funding for that? that or is it just a product development that you're working on?

Yeah, I think as more and more people have smart features on their cars that notify you, for example, when you're changing lanes and alert you, you need road striping, solid road striping to utilize those features. And if our teams are talking to customers and talking to agencies, having the ability to to utilize those features that are in many of the automobiles we drive continues to be an important part of the driver for our products.

Okay, great. Okay, I'll get back in queue. Thanks.

Thanks, Mom. Thank you. Our next question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Good morning, guys. Another terrific quarter. No surprises. All right. So you've discussed, you know, rental. In many cases, the rent-to-own strategy really been helpful in this high-rate environment, you know, a differentiator. If rates come down a little this year, more in 25, is that going to have a meaningful impact on the aftermarket mix? Yeah.

We believe with the infrastructure bill, there's going to continue to be demand for rental products. This is particularly important to our industrial customers, particularly around safe digging. And if product adoption of that particular product line increases, rental is often a format to try before you buy. So I think, again, part of our strategy that we've talked a lot about is we're very flexible in terms of whether you want to buy new equipment, you want to rent equipment, you want to buy used equipment at a different price point. We can respond to all those various needs. The other thing I'd point out is, as you know, 50% of our business is publicly funded, which is really kind of immune to to the interest rate environment.

Got it. Very helpful. You guys have done a really good job leveraging acquisitions into new geographies. You talked about Markwright and Trackless as an example. Are there any meaningfully under-penetrated geographies for any of your product lines at this point in time?

Yes.

We'll leave it there.

Do you like the harshness of that answer?

Fair enough. I was hoping you'd get more specific, but I also understand from a competitive standpoint.

I'm more than happy to give some examples. The room was cringing. Specifically, let's talk about dump trucks. We have geographic areas where we're the number one market provider and part of the strategic initiatives of several of those dump truck businesses to extend that geographic reach. Number two is track list would be a good example. We have not fully optimized our go-to-market strategy. There's several geographies where track list doesn't really does nominal sales of any, and we're in the process by either leveraging our JGE footprint or pairing with other dealers to expand their geographic reach, and it creates opportunity. We believe that ground force and tow haul and the optimization we've done on distribution has allowed us to penetrate new geographies, and we think we're in early stages there. So geographic expansion for many of our product lines is a critical strategic initiative.

Perfect. I will leave it there. I appreciate it, guys. Thanks, Chris.

Thank you. Our next question comes from the line of Ross Barenboik with William Blair. Please proceed with your question.

Hey, good morning. This is Sam Carlo on for Ross. Thanks for taking my question. Good morning. So the ESG segment backlog declined 1% from the first quarter. Can you talk about what this means for top line growth given that the ESG book to bill is less than one for the quarter? Is there a possibility that once you work through this backlog that sales could be pressured?

Yeah, I think, Sam, we've talked for several quarters now about trying to reduce lead times by increasing production while maintaining that healthy order intake level. And I think that's really what we did this quarter. You know, we were pleased with the order levels that we saw. Jennifer alluded to some of the comparisons and the fact that going to kind of the comparisons on, you know, the fact that it was down about 1% year over year. There was the trackless backlog that was in last year's numbers. That was about 8 million. And then there was also the chassis dynamics, which it was down $9 million year over year. On a full year basis, we're expecting that chassis impact to have about a $25 million impact on orders. So that's something to consider as we go forward. But I think this was the first time that our sales had outpaced orders since the fourth quarter of 2020. And so that's resulted in some long lead times. And so that's why there is such a focus there on reducing those lead times while maintaining the healthy order intake level. Just on the chassis, you know, even though it's a $25 million impact, that's largely PASU revenue. So from an earnings standpoint, it doesn't have much of an impact. It actually would like to have some margin benefits.

Got it. That makes sense. And then kind of one follow-up. At 25% of ESG or 25% of revenue, and my math implies that aftermarket revenue was flat from the second quarter of 23. Is that right?

Am I thinking about that right? It was up a little bit. It was about 1.5%. It was up, and kind of the factors in that, parts were up about 1%. They're up 6% year-to-date. Rental income was up 4% in the quarter. That's up 6% year-to-date. And then service was up 11%, and that's about the same year-to-date. What was down is the used equipment sales, and the issue there is because there is strong demand for used equipment, and we saw strong sales in the fourth quarter of last year, there is a need to kind of replenish that fleet because, you know, but the timing of it is a factor because we're going into or we're in the middle of kind of peak rental season right now, so we want to make sure we're balancing holding onto the units for the rental fleet as well as satisfying customer demand for used equipment And so that's one of the factors in that incremental fleet investment we talked about last quarter.

And I'll just add, particularly in this higher interest rate environment for our industrial customers, rental for safe digging equipment in particular is a critical option. So we want to make sure we're in a position to be able to satisfy that strong rental demand.

Got it. No, that makes sense. I'll leave it there. Thank you.

Thank you. Our next question comes from the line of Mike Sielski with DA Davidson. Please proceed with your question.

Yes, hi, good morning. I'm actually taking my questions. Good morning, Mike. Good morning, Mike. Hey, the backlog growth looks, you know, very, very solid here. But do you get the sense that even with the growth you're already seeing, are there folks who are waiting on the sidelines until after the election? to kind of make any big decisions? And it could even be in the private sector, people in the oil and gas world. Are they holding off and there could be an additional slug of orders to start 2025 here?

No, we haven't heard that. You know, with respect to, you know, we've seen only nominal benefits as we talked about from the infrastructure bill thus far. We would expect it was bipartisan legislation. We would expect many of the projects, over 60,000 projects have been announced. We would expect those projects to continue regardless of the outcome in November. So as we sit here right now, we haven't heard anything meaningful about the impact of the presidential election on our orders.

Okay. I also Well, certainly appreciative that you're bringing up your top line growth outlook for the long term through the cycle. Does that also, when you go into double digit growth for top line, does that also kind of introduce on the margin side that you'll remain towards the upper end of that, of your 2023 announced target, or even potentially pull forward an increase in the margin targets in the not too distant future?

I think that we were pleased with the performance in Q2. We meaningfully increased the guidance range for the rest of the year. We believe that, as we've talked about before, the EBITDA margin targets we set are long-term through the cycle. We'll continue to revisit those targets, and with the various strategic initiatives, including our federal signal operating systems, and value-added M&A, you know, we believe that there's further opportunity in the long run to increase those EBITDA margin targets as part of, you know, our planning. So, you know, we're pretty bullish about the opportunities as we move forward.

All right. Can you comment on the orders and backlogs as well for the quarter? How much pricing has driven the growth in each of those? Because it's beyond the full company basis, not by segment.

Yeah, price, Mike, is anywhere from 2% to 3%. And that's kind of what we, you know, I think at the beginning of the year, we guided to that on the top line. And so that's also reflective of kind of the orders and the backlog. So, yeah, that 2% to 3%.

Great. I'll leave it there. Thanks so much. Thank you. Thanks, Mike.

Thank you. Our next question comes from the line of Greg Burns with Sidoti and Company. Please proceed with your question.

Good morning. Greg? Good morning. When you look across your brand or product portfolio from an aftermarket perspective, are there some brands, maybe particularly with some of the newer acquisitions that have a lower percentage of aftermarket sales and is there an opportunity there with maybe some particular brands to increase that. And then longer term, do you have a target on where you want to take aftermarket sales to as a percent of revenue? I know it was at about 25% this quarter, but do you have a targeted goal that you're hoping to achieve in terms of next? Thanks.

Yeah. So, you know, depending on the timing of the acquisition, you know, we continue to stage, you know, the parts optimization throughout the FS solution and JGE platform, and that's an important part of the synergies and the growth story. I think a really good example is the Toll Hall and Ground Force acquisition. They've done a really nice job of collectively growing that particular business. Our intention, as we just announced, is to both grow you know, the overall business and after markets as a percentage of that business. Said another way, we want to grow both the numerator and the denominator. But, you know, I think over time you will see with several of the initiatives that we have in place that the after markets business will continue to grow. And we can see that, you know, while still growing the denominator, we could see the aftermarket business getting up to 30%.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Dave Storms with StoneGate. Please proceed with your question.

Good morning, Dave. Morning. Just hoping we could get a breakout for the SSG margin performance similar to the ESG margin performance. Just curious if volumes are the main driver there as well.

Yeah. Yeah, Dave. Volumes were the main driver. So if you think of the 18% top line growth, about 14% was volume. And then the rest would have been, you know, price was about three as we talked about. And then there's some favorable mixed components. So The vast majority was the incremental volumes. And I think as we've talked about previously, all of our domestic operations within the SSG business are in one facility. And so the more we can push through that facility, that has some pretty attractive drop through. And so I think we saw some of that during the quarter.

Very helpful. Thank you. And then I know you mentioned on your prepared mark set, given your strong cash position, you're excited about some organic growth initiatives. Any sense of what your prioritized list of organic growth initiatives would be? Is that increasing capacity? Is that, you know, but just kind of what does that look like?

What point does that take? Kind of in our capex, you know, we typically, I think we guide to 35 to 40 million. That's typically about half maintenance, half growth. You know, we look at things like lasers, robots, things that can generate some operational efficiencies. So those would be the types of things that we look at across the organization.

Understood. That's very helpful. Thank you for taking my questions, and good luck in the next quarter.

Thank you.

Thank you. Our next question comes from the line of Steve Barger with Key Bank Capital Markets. Please proceed with your question.

Thanks. For the multi-year growth target of double-digit, do you expect organic growth in the future will run better than the historical 7% rate? Or are you just kind of counting on that same number?

You know, it can always vary quarter to quarter. But, you know, we expect there to be strong organic growth as we continue to execute on these strategic initiatives.

Well, I'm just thinking about that. Even if it is still 7%, I suggest you'll add maybe $60 million plus per year in acquired revenue. And of course, that number will have to grow over time. Does the pipeline have enough depth of deals and progress that you expect at least one deal per year?

I believe we will have no problem hitting the numbers that you just stated. The pipeline is very full.

As you think about the deals that are out there that you see, whether they close or not, what's the revenue average of those deals, and maybe the range? Is it from 10 to 100, or what do you see?

The majority of the deals are in the 50 to 100, but there are a number of smaller deals, and then there's always larger opportunities also. It's got a good...

pretty wide range but you know the majority of deals are in that you know 50 to 100 ish range and I know historically you don't like fixer-uppers is that still the philosophy going forward do you what's kind of the minimum margin profile that you would accept if you're doing a 50 or 100 million dollar deal

I think that for us, it is can this business operate within our target EBITDA margin range, and is there opportunity for further EBITDA margin range expansion through the cycle? So there are examples of businesses that we've bought that are below the target EBITDA margin range, but we believe in terms of the power of the platform and various synergies, on operational improvements that they can operate within the range and then there's opportunities to increase over time. So, you know, that has been, you know, several of the acquisitions we've done. The more recent acquisitions have operated within the EBITDA margin range and we've raised those ranges because of the synergies and operational improvements that we've executed.

Got it. And I think you addressed three ways that you can add new market adjacencies, adding to verticals, and I think there was one other. But what is the most likely outcome if you can handicap it, or do you have a preference for how you approach those?

Now, again, I think we have a pretty good mix right now in the pipeline across the three examples that I gave. And again, it really comes down to You know, what synergies do we bring? How do we improve performance? And how do we grow the business?

Got it. Okay, thanks. Thanks, Steve.

Thank you. Our next question comes from the line of Walt Liptack with Seaport Research. Please proceed with your question.

Hi, thanks for taking the follow-up. Hi. So the SSG part of the business, the orders I thought were on kind of a tough comp with last year, and they grew nicely, 7%. Can you give us a little bit of color on what's going on there? Were these international orders that you're taking in? Are they domestic? Is it market share wins, or is it growth in the market?

Okay. I'll start with the teams are just doing a super job on execution on their strategic initiative. I think that's a business in particular where we see strong new product development and we're seeing the benefits from that. They were able to secure several, particularly in police, we've been able to secure several orders. We talked about the one large order that we secured near the end of the quarter that we'll deliver next year. Our VAMA team in Europe has done a really nice job also. Our signaling and warning team has done a nice job. So, you know, what we're encouraged about is, you know, just excellent execution on strategic initiatives, including, as we've talked about with you many times, 80-20 and the results that we continue to see as that is part of our culture there.

Okay. Great. Thank you. Thank you.

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

Thank you. In closing, I'd like to reiterate that we are confident in the long-term prospects for our businesses and our markets. We remain focused on executing against our strategic framework. We would like to express our sincere 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 soon.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.