Federal Signal Corporation

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. I would now like to turn the conference over to your host, Felix Bochen, vice president, Corporate Strategy and Investor Relations. Please go ahead.

Good morning and welcome to Federal Signals third quarter of 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 at 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 US 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 third quarter financial results. Jennifer will then provide her perspective on our performance, an update on our internal initiatives and provide an update on our 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 third quarter financial results are provided in today's earnings release. In summary, we deliver strong financial results for the quarter with 6% -over-year organic net sales growth, double-digit earnings improvement, gross margin expansion, and a 200 basis point increase in adjusted EBITDA margin. Consolidated net sales for the quarter were $474 million, an increase of $28 million, or 6% compared to last year. All of the growth this quarter was organic. Consolidated operating income for the quarter was $75.9 million, up $13.4 million, or 21% compared to last year. Consolidated adjusted EBITDA for the quarter was $93 million, up $14.5 million, or 18% compared to last year. That translates to a margin of .6% in Q3 this year, up 200 basis points compared to last year. Gap diluted EPS for the quarter was $0.87 per share, up $0.16 per share, or 23% from last year. On an adjusted basis, EPS for the quarter was $0.88 per share, up $0.17 per share, or 24% from last year. Order intake for the quarter was again strong, with third quarter orders of $426 million contributing to a backlog of $1.03 billion at the end of the quarter, an increase of $27 million, or 3% compared to Q3 last year. In terms of our group results, ESG's net sales for the quarter were $398 million, an increase of $25 million, or 7% compared to last year. ESG's operating income for the quarter was $71.5 million, up $14.3 million, or 25% compared to last year. ESG's adjusted EBITDA for the quarter was $87.2 million, up $15.2 million, or 21% compared to last year. That translates to an adjusted EBITDA margin of .9% in Q3 this year, up 260 basis points compared to last year and performance at the upper end of our current target range. ESG reported total orders of $353 million in Q3 this year, compared to $375 million last year. ESG's net sales for the quarter were $76 million this year, up $3 million, or 4% compared to last year. ESG's operating income for the quarter was $16.8 million, up $3.1 million, or 23% from last year. ESG's adjusted EBITDA for the quarter was $17.8 million, up $3.2 million, or 22% from last year. That translates to an adjusted EBITDA margin for the quarter of 23.4%, an increase of 350 basis points compared to last year. ESG's orders for the quarter was $73 million, down 3% in comparison to order intake in Q3 last year, which included a $7 million fleet order from a customer in Europe. Corporate operating expenses for the quarter were $12.4 million, compared to $8.4 million last year, with about half of the EBITDA variance resulting from unfavorable changes in fair value adjustments of post-retirement reserves. Turning now to the consolidated income statement, where the increase in sales contributed to a $22.7 million improvement in gross profit. Consolidated gross margin for the quarter was 29.6%, up 320 basis points compared to last year. As a percentage of net sales of selling, engineering, general, and administrative expenses for the quarter were up 140 basis points from Q3 last year. Other items affecting the quarterly results included a $2.1 million reduction in interest expense, associated with lower average debt levels. Tax expense for the quarter was $18.7 million, up $4.9 million from the prior year, with the increase primarily due to higher pre-tax income levels. Our effective tax rate for the quarter was 25.8%, compared to .2% last year. At this time, we expect our fourth quarter effective tax rate to be approximately 26%, excluding any discrete items. On an overall gap basis, we therefore earned 87 cents per share in Q3 this year, compared with 71 cents per share in Q3 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 quarters, we made adjustments to gap earnings per share to exclude acquisition-related expenses. On this basis, our adjusted earnings for the quarter were 88 cents per share, compared with 71 cents per share last year. Looking now at cash flow, we generated $69 million of cash from operations during the quarter, an increase of $21 million from last year, primarily due to higher net income and working capital improvements. That brings our -to-date operating cash generation to $141 million, an increase of 55% compared to the first nine months of last year. With the improved cash flow, we paid down approximately $25 million of debt during the quarter, ending the quarter with $158 million of net debt, an availability under our credit facility of $557 million. Our current net debt leverage remains low, even after taking into account our recently announced acquisition of standard equipment. 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 $7.3 million during the quarter, reflecting a dividend of 12 cents per share, and we recently announced a similar dividend for the fourth quarter. We also funded $4.4 million of share repurchases during the quarter. That concludes my comments, and I would now like to turn the call over to Jennifer.

Thank you, Ian. We reported another strong quarter of results, which included third quarter records across consolidated net sales, adjusted EPS, and adjusted EBITDA margin, thanks to outstanding contributions from both our groups. Within our environmental solutions group, we delivered 7% -over-year net sales growth and a 21% increase in adjusted EBITDA with higher production levels, strong demand for our aftermarket offerings, and continued price realization, representing meaningful -over-year contributors. In what is typically a seasonally strong quarter, ESG's adjusted EBITDA margins expanded by 260 basis points -over-year to approximately 22%, a new quarterly record, and the upper end of our current target range. With supply chains normalizing, our teams are laser-focused on driving increased throughput across the enterprise and are gaining traction on our Build More Trucks initiative. At our two largest manufacturing facilities in Streeter and Elgin, Illinois, combined third quarter unit production increased 12% -over-year. Positively, we are seeing both supply chain fluidity and quality improve across our ESG segment, which should allow for further production increases and reduce lead times for certain product lines, primarily our sewer cleaners 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 our existing footprint. Shifting to aftermarkets. Demand for our aftermarket products and services remains strong as revenues grew by approximately 10% -over-year. Strength was broad-based across our aftermarket portfolio with rental income, service revenue, and used equipment sales all up by more than 10% compared to Q3 of last year, while part sales were also up 6% -over-year. Given the high demand for our equipment and -to-own offerings, our teams are diligently working to optimally balance equipment availability and used equipment sales to best serve our customers' needs. Additionally, we are growing our parts businesses on numerous fronts, including the further integration of recent acquisitions such as Tracklist, our Will Fit Parts initiative, and increasing parts capture in our existing population base. Importantly, given the essential nature of our products and associated high utilization levels through business cycles, the growth in the aftermarket business has been an important strategic pillar in our efforts to mute cyclicality. In total, aftermarket represented approximately 27% of ESG revenue in the third quarter of 2024. Our other vehicle-based businesses also contributed positively to results. With our dump truck body business leading the charge with sales up 18% -over-year, the quality of our products, industry-leading lead times, and geographic expansion efforts at our ox body's dump truck business present a unique value proposition that is being recognized in the marketplace. Shifting to our safety and security systems group, the team delivered another impressive quarter with 4% top line growth, a 22% increase in adjusted EBITDA, and a 350 basis point improvement in adjusted EBITDA margin. This improvement was primarily driven by a combination of volume growth, favorable sales mix, price realization, and efficiency gains. As I will address in more detail later on, we believe our numerous investments over the last decade have structurally strengthened the SSG segment, setting the stage for future profitable growth. Lastly, we are particularly pleased with our cash conversion in the quarter, having generated 69 million of cash from operations, representing 120% of net income. On an annual basis, we continue to target 100% cash conversion levels, providing dry powder for organic and inorganic capital deployment opportunities. Shifting now to current market conditions, demand for our products and service offerings remains high with our third quarter order intake of 426 million, representing the second highest third quarter on record. To provide more detail on the composition of orders, domestic publicly funded orders were up 8% year over year, primarily driven by strength in orders for sewer cleaners, which rose 15% compared to prior year. Resilient core funding mechanisms, high equipment utilization, and our ongoing market leadership position continue to drive high demand. Similarly, demand for our domestic public safety equipment remains at healthy levels with orders up 12% year over year, driven by robust end market demand and ongoing strategic growth initiatives. Although domestic industrial orders were down 8% year over year, there continued to be strong demand for the majority of our industrial products. In fact, the lower industrial orders in Q3 this year was almost entirely due to a $19 million reduction in orders for our new safe digging products. To be clear, we continue to believe that the adoption of safe digging across North America will prove a meaningful long-term growth driver. However, given the predominantly industrial contractor base and the fact that safe digging trucks represent one of our more expensive products, it is also one of our most interest rate sensitive new equipment purchases. As such, we have seen customers favor rentals or used equipment purchases to serve their safe digging needs as opposed to buying a new unit. In fact, in Q3, we saw that thesis materialized in our aftermarket business in the form of double digit increases in our combined safe digging rental income and used equipment sales. As one of the largest manufacturers of hydro excavation trucks in North America, we believe our multi-prong approach between new, used, rental and -to-own availability offers our customer base important flexibility in accessing equipment. We also believe it sets the foundation for Federal Signal to capitalize on this multi-year adoption tailwind while decreasing the cyclicality of our safe digging business. In fact, approximately 80% of our sewer cleaners are now equipped with hydro excavation packages, and we continue to see strong customer demand for these multi-use products. We believe this enables another avenue for Federal Signal to capitalize on the rising adoption of safe digging across North America. Excluding safe digging, our other domestic industrial orders increased 4% year over year. Dump truck body orders rose 13% year over year, driven in part by ongoing execution on our strategic growth initiatives and high demand for public road construction equipment. With approximately $100 billion of the $840 billion of funds authorized under the bipartisan infrastructure law spent today, our teams continue to strategically position our businesses to capitalize on what we see as rising demand in the form of greater parts consumption, equipment sales opportunities, and other aftermarket services over a multi-year period. One such example is our road marking and line removal services business, Highmark, which in conjunction with MRL and Blasters, continues to enjoy strong demand for our suite of road marking and striped line removal product and services. In summary, demand for our product remains high. Our teams are focused on executing on our growth initiatives and building more trucks while maintaining a healthy order intake. I now want to provide an update on a number of internal initiatives that support our through the cycle target of double-digit top-line growth. Recall that these targets are consistent with our actual track record of a 14% revenue CAGR since 2016. Similar to our actual experience over that timeframe, we expect a fairly even contribution over the long term between organic and inorganic growth as part of these targets. First, we are pleased to announce that we closed the acquisition of standard equipment earlier this month. Similar to other acquisitions in this arena, the addition of standard further builds upon our aftermarket growth strategy that was originally put into action in 2016 as we expand our parts, services, and -to-own offerings. From a strategic perspective, our growing aftermarket ecosystem allows us to better serve our customer needs throughout the entire business cycle while targeting historically under-penetrated cohorts of federal signal customers and muting cyclicality. We believe the addition of standard further accelerates those efforts with integration efforts already well underway. More broadly, our M&A pipeline remains active with numerous opportunities currently under evaluation spanning new OEM equipment adjacencies within our ESG and SSG segments, further aftermarket growth opportunities, and strategic assets within verticals that we already operate in. Second, we are identifying new opportunities to harness the power of our growing specialty vehicle platform, which we ultimately believe will yield incremental market share and margin expansion runway. One such initiative is the optimization of our -to-market strategy, which has been critical to the sales growth of the products that we manufacture. We go to market through three primary channels, resulting in a balanced distribution mix between direct, third-party distributors, and exclusive dealers. Although it can vary, for context, last year, our direct channel represented approximately approximately 40% of our net sales, whereas the remaining 60% of our net sales was fairly evenly split between third-party distributors and our exclusive dealer network. Within each of these channels, we are actively looking to optimize cross-selling opportunities and other distributives and synergies that allow us to best serve our customers. As an example, within our direct channel, our combined metal extraction support platform of Ground Force and Toll Hall has grown net sales by more than 60% since the purchase of Toll Hall in 2022 while expanding margins. This growth was primarily achieved to the identification of certain distribution synergies, a targeted effort to increase aftermarket revenue capture, material cost reductions, and other cross-selling opportunities. In fact, this quarter, Ground Force and Toll Hall hosted their first joint booth at MineExpo Trade Show in Las Vegas and received excellent customer feedback. We are also growing through our valued third-party dealers and distributors. Great examples of this are our ox body and Travis businesses which produce dump truck bodies and specialty dump trailers. In both instances, our teams have been actively expanding our geographic reach with the addition of new third-party dealers and distributors. Ox body specifically continues to make strides in expanding into key strategic geographies such as Texas and Florida. Our exclusive dealer channel primarily serves certain municipal product lines, including sewer cleaners and street sweepers. Many of our dealers have been valued partners for decades and consequently have intimate knowledge of our products, strong relationships with end users, and provide outstanding service to our customers. As a reminder, this exclusive dealer network is comprised of a combination of private, family-owned businesses and private equity-backed operations. As certain dealers have worked through natural succession planning, we have been proactively addressing areas of share opportunities in conjunction with our dealer partners and our direct team. As part of that process, in recent years, some of our existing high-performing dealers have assumed the rights to sell our products in certain states, while in other situations, our direct team has assumed certain U.S. territories, including the Carolinas, which our direct team assumed in June of 2020 for an initial investment of approximately $6 million. Four years into assuming the Carolinas territory, the team has grown combined sales of new sewer cleaners and street sweepers by more than 80%. The team is now working on opportunities to sell incremental federal signal products like track lists and dump truck parts. With this strong performance in the Carolinas, this team has also expanded into neighboring Virginia as part of a recent dealer transition. I would also like to thank this team for their efforts to deliver critical supplies to citizens of North Carolina impacted by Hurricane Helene. Looking ahead, while we believe we're in the later innings of large-scale territory assumptions, we continue to see runway for further share expansion through -to-market optimization as we capitalize on our growing specialty vehicle platform. Lastly, we have structurally strengthened our safety and security systems group over the past years, setting a renewed foundation for the next leg of profitable growth. As many of you know, federal signals origin dates back to the SSG segment, which has undergone a slew of transformations history over 120 years. Since 2016, our focus is centered around a couple of critical aspects, including a rigorous 80-20 approach and reinvigoration of new product development efforts. These efforts have not only translated to higher sales and improved customer service, but SSG's EBITDA margins have also expanded by more than 800 basis points compared to 2016. Additionally, we've invested in capacity with the purchase of our production facility in University Park, Illinois in 2022, and with the addition of several printed circuit board lines as part of our insourcing efforts. These investments have expanded available capacity, increased internal efficiencies, and reduced our reliance on Asian suppliers. In fact, across all of federal signal, less than 5% of our direct material purchases come from outside North America. With ample capacity at the University Park facility, we believe we are well positioned to profitably grow within our footprint in coming years. As we approach the next phase of growth at SSG, we will look to build upon the strengthened formation in the form of both organic market share and inorganic growth opportunities. At this time, we are also formally raising our SSG EBITDA margin targets to a range of 18 to 24% from 17 to 21%. Consistent with our prior approach to margin targets, these targets are meant to be annual and through the cycle targets. Internally, these targets present the guideposts through which we intend to operate, and we have also aligned our compensation practices with margin targets. Turning now to our outlook for the rest of the year. Demand for our products and our aftermarket offerings remains high, with our order intake this quarter contributing to a backlog which provides us with excellent visibility well into 2025. With our third 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 $3.30 to $3.40 from the prior range of $3.20 to $3.35. We are also narrowing our full year net sales outlook to a new range of 1.86 billion to 1.88 billion from the previous range of between 1.85 billion and 1.9 billion. Our updated net sales outlook takes into account the normalizing chassis procurement patterns that we have previously discussed, which is resulting in lower chassis pass-through revenue year over year. While the impact EBITDA is immaterial, we expect that fewer chassis sales will represent a full year over year net sales headwind of approximately 20 million, with over half of that headwind expected in the fourth quarter. This outlook reflects our view of continued healthy demand for our new equipment, parts, and aftermarket services. 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. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 pull for questions. Our first question today comes from Mike Schliskey of D.A. Davidson. Please proceed with your question. Good morning, Mike.

Good morning, Jennifer. Thanks for taking my questions, everybody. I didn't hear much comment on your rental fleet, your vacuum trucks, and other assets that you put out for rent. Can you maybe update us on how that's been going and have the recent storms been a tailwind for that business? Have you sent any assets to those affected regions and maybe a little bit about your plans to invest in that going forward?

Yeah, Mike, I think it was part of the strength of the aftermarket business that we saw during the quarter. I think overall aftermarket revenues were up 10% year over year. That really was driven by growth that we saw in really all four components of our aftermarket revenue streams. That would be parts, rental income, used equipment sales, and service. Specifically on rental income, rental income was up 12% year over year. A lot of that was driven by the demand that we're seeing for rentals of safe digging. Used equipment sales also, they were up 15% year over year. Again, safe digging was a piece there. And I think we made reference in our comments to a current, the customers are favoring right now given the higher interest rate environment and given that safe digging trucks, new trucks are one of our higher price point items. I think there is currently a preference to rent or to buy use. And certainly that's what we saw during the quarter with the strength of the aftermarket business.

All right, just kind of moving on here. Class A vocational truck demand. That seems to be up quite a bit as well. From an industry perspective, the first order for 2025, the other company seems to be really close to all time record numbers. I guess, first of all, it's fairly certain they'll be participating in any of that. Are you pre-buying any chassis in advance of emissions changeovers in 27 already at this point? Or do you just see some kind of giant black boost a year ahead? Or are your customer order patterns and your order patterns really more normal in line with the demand you're seeing for 2025? And perhaps it's just somebody else who's placing these very large early orders here. Just any kind of comments on whether you're looking to secure class A chassis way in advance given what's going on in the market here.

You know, I'll start with, demand for our product remains high. We talked about our public funded product, which should include our class A sewer cleaners was up in Q3 8%. Sewer cleaners specifically were up 15%. Dump truck bodies were up 13%. So in, you know, we've talked about kind of the normalization of chassis buying patterns. And so we typically, you know, purchased about 50% of those chassis. And, you know, we are in the, right now we are purchasing chassis for next year. With respect to the 27, the chassis aren't available at this particular point. But, you know, could we see, you know, pre-buying based on past patterns? Yes. And we are currently working closely. We have a team that's led by Mark Weber that's working closely with the OEM and the chassis partners in anticipation of these regulation changes. So we feel like we're very well positioned as we move forward.

Okay. Maybe one last one for me, you know, for if there's all this talk of SSG margin and expectations coming upward in the, in this quarter's guidance, but it was actually ESG that actually, they actually hit an all time record for margins in the quarter. Is there anything seasonal or anything you've seen in the pipeline that would suggest that in the fourth quarter, there's a step sequentially downward in ESG margins? Or is what you've seen the last few quarters kind of a great baseline here?

Yeah, I think, Mike, some of it goes back to the strength that we saw in the aftermarket business during the quarter. You know, a lot of the projects take place during the summer months when the weather is, you know, is nicer in certainly the northern parts of the US and up in Canada, which is a really important market for us. So as the weather starts to kind of deteriorate, later into the fourth quarter and into Q1, that business, which tends to have a slightly more attractive margin profile, that tends to slow down a little bit. But as we sit here today, you know, yesterday, the weather was in the 80s in Chicago. So, you know, hopefully that will continue further into Q4.

Okay, thanks for that, Coler. I'll leave it there. Thank you so much.

Thank

you.

The next question is from Jacob Moore of KeyBank Capital Market. Please proceed with your question.

Morning, Jacob. Hi, good morning.

I'm on for Steve Barger today. Thanks for taking our questions. First for me, Jennifer, thanks for the Coler on the industrial versus municipal order trends. If I could dig in a little there, can you help us understand what's in the current backlog from those customers where demand is weak versus the rest of the backlog? Has there been any shifts in the backlog for what's already been ordered? And how long do you think this current order trend could run for?

Yeah, I don't know that we've seen any dramatic shifts necessarily in the municipal backlog. Obviously, we talked about the lead times for sewer cleaners and street sweepers being, you know, longer than we'd like, quite frankly. Those are both municipal products. We haven't really seen a shift, you know, with the extent of that backlog. It gives us a really good visibility for those product lines into 2025 and even into the early part of 2026. So I don't think we've seen much of a change. We did. We have talked a little bit about a shift in the mix of the chassis provided by us or versus provided by the customers. And I think we mentioned in our prepared remarks that can have some impact on our -over-year comparisons, both on orders as well as revenue. So that's probably the one thing that we think about a change in kind of what's in the backlog. I would say the mix of chassis is probably the biggest change.

And I guess I would add there that, you know, with the exception of the shift from purchasing new hydro-excavation equipment to customers now renting and buying used equipment, you know, which we believe is a critical part of our strategy in terms of muting cyclicality, we were pleased with orders as we moved forward. And it gives us really good visibility into 25 and even into 26 in terms of the strength of the demand for our products.

Okay, got it. That's helpful. Thank you. Second, for me, you've

posted really impressive incremental margins this year. 48% this quarter, average 44% for the year. Is it mix that's driving that, or do you have better price in the backlog that you're producing? And secondly to that, should we be thinking that you can maintain the structurally higher level of incremental margin going forward?

Yeah, I think mix was a piece, again, we talked about the aftermarket mix, and I think, you know, that was a slightly higher margin profile, so that was a component. We saw some normalization of material costs on the SSG side, and that was a factor of the margin improvement. But I think if you look at the leverage we had in this quarter, it was probably higher than what we would typically expect over the long term, and I think over the long term, if you go back and look at how we've progressed really since 2016, it's really been in the incrementals have been north of 20%. Again, there is some seasonality to the business during Q3 with the strength of the aftermarket business. Remember, we've also added a lot of capacity in the last couple of years, so as we grow into that, we think that's where there is some potential

from a margin standpoint as we go forward.

That's helpful, thanks. And then maybe a last related one to

that answer. I know you're not guiding to 2025 yet, but given those capacity expansions you just mentioned, and your backlog visibility, can we think about the average of the last three quarters this year as the baseline from which you'll grow in 2025, or are there any reasons that you'd be running revenue lower than the 485 to 490 range?

Yeah, I think again,

if you think about

the

averaging, that there is seasonality, and if you look at the last couple of quarters, Q2 and Q3 tend to be higher because of that strength of the aftermarket business. But we have a goal internally, it's called build more trucks, and so our primary objective is to increase production while maintaining that healthy order intake to really reduce lead times. And as we go into 2025, given where the backlogs are, I think that's gonna continue to be our objective. We've made some great progress, I think, at those two primary manufacturing facilities on the ESG side. We talked about 12% production increase year over year, so we are seeing the benefits of that initiative. We haven't necessarily made as much progress to reduce lead times as we'd have hoped, but that's primarily because orders have been coming in. I mean, for the first nine months of this year, our book to build is still an excessive one, and that's with some pretty significant headwinds. We talked about the $17 million -to-date chassis headwinds. There's about a $17 million headwind from two large fleet orders we had on the ESG side, and there's also an $8 million headwind from last year's orders, including trackless. So if you think about all of those things, increasing production while maintaining healthy orders, that's really what our objective is, and that will continue as we go into 2025.

And just looking at our backlog, it's up 3% year over year. It does, if I mentioned earlier, give us good visibility into 24, meaning into 25, even into the beginning of 26.

Okay, got it. That's all very helpful. Thank you for taking the questions.

Thank you, Jacob.

The next question is from Ross Steranock of William Blair. Please proceed with your question.

Good morning, Ross.

Good morning, Jennifer. This is Sam Carlovon for Ross. Thanks for taking my question. I just wanted to get some color on, or appreciate the color on lead times. I was wondering if you'd just give us some color on what the remaining hurdles are to kind of get those lead times down, whether those are kind of internal or external.

Yeah, I would say a couple of critical things. One is, you know, continued, you know, supply chain is much better today than it was a year ago. But we need that supply chain to continue. As we talked about, for example, in Q1, we had a quality issue with one of our suppliers. We worked through that. So we need not only to get the parts, we need quality parts. Number two is we have a number of internal initiatives, particularly at Vactor and Elgin, because I think we've done a pretty good job at the majority of the rest of our businesses, you know, where we have both maintained high demand and reduced lead times. But because our orders have continued to be strong, despite the fact that production at Elgin and Vactor was up Q3 12%, we are very focused on increasing, building more trucks. We've engaged a third party at Elgin, as we talked about as part of our federal signal operating model. You know, we're in the middle of that process. And, you know, we are laser focused on, you know, increasing production while maintaining a healthy order and tech.

Got it, that's super helpful. And then kind of switching over to standard equipment. Did you guys give or kind of quantify what their revenue of that acquisition would look like?

No, just to give you some color sense, so standards for the last couple of years, standards revenues have run in the 40 to 50 million range. The majority of that is from federal signal municipal products. As we are, you know, we're working through integration with our after markets team. You know, we're gonna apply our 80-20 model so there could be changes to the revenue dynamics there. Obviously, we sold units to standard equipment as a manufacturer, so there will be some kind of balance there, but we expect the incremental revenue contribution in 2025 to be in the range of about $20 million. And we expect that to build over time, particularly as we look to grow that after markets business, and also then push additional federal signal products through that channel. But overall, you know, we expect that position to be accretive to both earnings as well as cash flow in 2025.

Got it, that makes a lot of sense. So, I mean, seasonally, should we think about, you said $20 million in 2025, so

about

$5 million in the

fourth quarter, or is there some seasonal variation there? There's some seasonal variation, again. You know, I think it's somewhat weather-impacted because they're primarily in Illinois and Indiana. So, you know, with weather and being an impact primarily in Q4 and in Q1, there's typically some seasonality with Q2 and Q3 typically being stronger for them.

Got it, and then that $20 million revenue benefit, how should we think about the split between after market and new equipment, how that flows through?

Yeah, it's roughly 50-50. I mean, they do a really nice job on the pop side of the business as well as service, so it's a fairly even split between the two.

Got it, that's super helpful. I will

leave it there.

Thanks, Dan. Thanks,

Dan. The next question is from Chris Moore of CJS Securities. Please proceed with your question.

Good morning, Chris. Hey, good morning, guys. Good morning. Right, yeah, maybe we'll stay with after market for a moment. So, obviously, lots of companies talk about after market sales. You know, one thing, Jennifer, that you referenced a few times is this kind of growing ecosystem within Federal Signal that positions you uniquely. I just wonder if maybe you could go into that a little bit deeper.

Yeah, absolutely. So, you know, we think of it's important to look at kind of all of the revenue streams of after market, the revenue, you need the rental, the service, the parts, and the used equipment. And, you know, the hydro example is a good one. Interest rates are higher, and so we've seen a shift in terms of customers, you know, are having a more challenging time affording new equipment, that, you know, hydro equipment is some of our most expensive equipment that we sell, so they will favor rentals or used equipment. As we go forward, I think what's also really unique about Federal Signal and after markets is our ability to kind of leverage and optimize that ecosystem. So, you know, as we acquire new companies like Trackless, we have the existing bricks and mortar and distribution channels to increase the sales of their new equipment, of their parts, of their service, and their used equipment. Think about it. The same people that buy municipal street sweepers are also buying Trackless equipment. So, it is what is unique, and I think will give us an advantage going forward because, you know, we're going to continue to organically grow and introduce new products that we can push through that after market ecosystem. And as we acquire companies, we'll be able to leverage that ecosystem. And at the end of the day, we're looking at how do we best serve our customers? How do we have that stickiness with customers? And, you know, we tried on the call, on the prepare remarks, we gave some specific examples of successes that we've had leveraging this ecosystem. And again, I'd reiterate, it really is what distinguishes Federal Signal is the ability that we have this ecosystem and we have common end customers for many of our products.

And Chris, I'll just kind of give some data points on kind of the growth that we've seen in the aftermarket business, really, between 2018 and 2023. If you look at our parts sales, it's grown 83 percent. And our rental revenue has grown by about 32 percent. That just gives you an indication of kind of the fraction that we've been getting on this initiative.

Got it. Very helpful. And since from 18 to 23, from a kind of geographic penetration, looks much different.

Yeah, absolutely. Absolutely. And again, as we talked about, it's mute cyclicality of earning streams. So again, the hydro excavation example, if they can't afford new equipment, then we've got rental and used equipment, either through us or our value dealer partners.

Got it. Very helpful. Switch gears. So order cancellations can be kind of a helpful sign in judging demand and lead times, just trying to get a sense of what you're seeing on that front.

Yeah, we haven't really seen anything

significant for us to date. It's typically not something in our history that we've seen. In our businesses, a lot of times on the municipal side of the business, it's part of a public bid situation. So that's typically not been something we've seen much of.

Got it. And maybe the last one for me, I mean, we talked about this a few quarters ago. Cost looks to be the biggest hurdle for a significant move customers going towards electrification. Just curious, you know, kind of what you're seeing on the EV side these days.

Sure. So as you know, we've got our EV street sweeper products, EV dump truck products. We've done teams have done a nice job. They've got a good working prototype with respect our track list product. And we saw a large order that started in Q2 of seven pieces of equipment out of New York and continued into Q3 for EV street sweeper product. So, you know, we're continuing to demonstrate that product. We get very positive feedback from the field. The question often is affordability. But, you know, we believe as we move forward, this is an important product offering for our customers.

So I think that's a good question. Fair

enough. I will leave

it

there. Thanks, guys.

The next question is from Greg Burns of Sudodi and Company. Please proceed with your question.

Good morning, Greg.

Morning. Just staying on the aftermarket. Given the strong demand for rental, are you constrained in any way on that side of the business? Is there a need to maybe invest more into your own fleet of vehicles? And how do you balance that maybe against the need to kind of reduce lead times and, like you say, build more trucks?

Yeah, I think, Greg, it's obviously something we monitor closely. And we monitor utilization levels before making decisions about whether to add to the fleet. We talked earlier in the year about an incremental investment of about $20 million going into the fleet for use and rental. That is, you know, at the time that was going to be second half weighted. And so I think you saw some of that during Q3, and that will likely continue into Q4. So we are using production at our facilities, but we don't necessarily get the revenue or the income immediately on those. That comes at more over time. So I think with where we sit today, I think that we feel comfortable at that level, particularly as you think about the strength of the used equipment. So as we saw, used equipment sales were up 15% year over year in the quarter. That creates a need, obviously, to then replenish so the fleet size remains the same. But as we, you know, I think for this year, for 2024, I think we're in good shape. And as we head into the planning process for 2025, that's where we'll make decisions about how much we need to add to the fleet. But again, our approach really is a multi-pronged approach where we rely on several valuable value rental partners on the rental side of the business as well.

Okay. And then did you have any production disruptions from the hurricane season? And then also I was just wondering if there's been any change in demand patterns because of the election or maybe any uncertainty going into the back half of the year? Have you seen any kind of pause in the business?

Yeah, we'll start with the hurricane. We had our service center in Tampa was down for a couple days, but the teams did a nice job in terms of getting back up and running. Again, our teams in the Carolinas just did a fantastic job assisting and aiding many citizens and delivering supplies in North Carolina. With respect to going forward, you know, today we haven't seen any impact regarding the election. You know, we did, you know, there's a lot of discussion around tariffs. You know, we called out in our prepared remarks that, you know, less than 5% of our direct purchases are outside of North America. So we think we're well positioned regardless of who wins the election. And, you know, we often get asked about kind of infrastructure spending, you know, to date. It has had minimal impact. We still remain in strong order patterns. You know, there was bipartisan support for that piece of legislation. So as we move forward,

we feel pretty good. All right. Thank you.

The next question is from Dave Storms of Stonegate. Please proceed with your question.

Good morning, Dave.

Morning. Just wanted to start with the strong cash position. Are there any growth initiatives that may have been outside of your plans or scope at the beginning of the year that may be becoming more feasible given the strong cash growth over the year?

Yeah, I think,

Dave, you know, we went into the year with a capex range of about 35 to 40 million, and we still think that's appropriate. As we go into 2025, there are probably, you know, present their requests almost for capital and the different organic initiatives that they might need for some funding. So we'll take a look at that as we go through our planning purposes. You know, again, that's 35 to 40 million, about half of that's about half capex of maintenance capex and half is growth. You know, organic investments continue to be a priority for the use of our capital. So we want to keep investing in those businesses. But I would say there hasn't necessarily been a change in our priorities or in the projects that we want to invest in during this year. But as we go into 2025, it's something we'll take a look at, you know, depending on the business season, depending on the strategic initiative.

Understood. Very helpful. Thank you. And then just one more. How do you feel about your current capacity levels between labor and square footage of of processing lines and maybe how that fits with the current burden rate of your backlog?

So, you know, between the period of 2019 and 2022, we added significant capacity. You know, we made the $25 million investment at our facility in Strait Air, but we also made a number of other investments. We purchased the Elgin facility, we purchased the University Park facility, we highlighted some of the benefits of that and our prepared remarks. We also made capacity expansions at Rugby Lake Crystal for our dump truck businesses. So we believe right now that we have sufficient capacity to support us going forward. I'd also highlight that, you know, with respect to our capbacks, that growth capbacks, a lot of it's been focused on efficiencies and how do we build more trucks. And we've had good success there. So as we move forward, we're very well positioned to be able to leverage the capacity investments that we've made, both in terms of additional space and the equipment investments that we've made

to increase our production.

That's very helpful. Thanks for taking my questions and good luck in the fourth

quarter. Thank

you. There are no additional questions at this

time. I'll now turn the conference back over to Jennifer L. Sherman for closing remarks.

Thank you. In closing, as we enter this Thanksgiving season, I want to spend a moment to thank our dedicated employees and loyal customers and our dealers and distributors. Thank you for joining us today and we'll talk to you soon. Bye-bye.

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