Federal Signal Corporation (NYSE:FSS) Q3 2024 Earnings Call Transcript

Federal Signal Corporation (NYSE:FSS) Q3 2024 Earnings Call Transcript October 31, 2024

Federal Signal Corporation beats earnings expectations. Reported EPS is $0.88, expectations were $0.84.

Operator: Greetings and welcome to Federal Signal Corporation’s Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Felix Boeschen, Vice President, Corporate Strategy and Investor Relations. Please go ahead.

Felix Boeschen: Good morning. And welcome to Federal Signal’s third quarter 2024 conference call. I am Felix Boeschen, 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 have 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 Signal’s filings with the Securities and Exchange Commission.

These documents are available on our website. Our presentation also contains some measures that are not in accordance with U.S. generally accepted accounting principles. In our earnings release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-Q later today. Ian will start today by providing details on our first 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.

Ian Hudson: Thank you, Felix. Our consolidated third quarter financial results are provided in today’s earnings release. In summary, we delivered strong financial results for the quarter with 6% year-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 19.6% in Q3 this year, up 200 basis points compared to last year.

GAAP 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 was $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 21.9% 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. SSG’s net sales for the quarter were $76 million this year, up $3 million or 4% compared to last year. SSG’s operating income for the quarter was $16.8 million, up $3.1 million or 23% from last year. SSG’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. SSG’s orders for the quarter were $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 year-over-year 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, our 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 24.2% last year. At this time, we expect our fourth quarter effective tax rate to be approximately 26% excluding any discrete items. On an overall GAAP basis, we therefore earned $0.87 per share in Q3 this year compared with $0.71 per share in Q3 last year. To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior year quarters. In the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition-related expenses. On this basis, our adjusted earnings for the quarter were $0.88 per share compared with $0.71 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 year-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 and 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 $0.12 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.

Jennifer Sherman: Thank you, Ian. We reported another strong quarter 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% year-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 year-over-year contributors. In what is typically a seasonally strong quarter, ESG’s adjusted EBITDA margins expanded by 260 basis points year-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 Streator and Elgin, Illinois, combined third quarter unit production increased 12% year-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 remained strong as revenues grew by approximately 10% year-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% year-over-year. Given the high demand for our equipment and rent-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 Trackless, 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% year-over-year. The quality of our products, industry leading lead times and geographic expansion efforts at our Ox Bodies 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 continued 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 materialize in our aftermarket business in the form of double digit increases in our combined safe taking rental income and used equipment sales. As one of the largest manufacturers of hydro excavation trucks in North America, we believe our multi-pronged approach between new, used, rental and rent-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 businesses HighMark, which in conjunction with MRL and Blasters, continues to enjoy strong demand for our suite of road-marking and stripe 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 rent-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 underpenetrated 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 go 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 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 distribution 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 TowHaul has grown net sales by more than 60% since the purchase of TowHaul in 2022 while expanding margins. This growth was primarily achieved through 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 TowHaul hosted their first joint booth at MINExpo 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 trackless 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 are in the later innings of large scale territory assumptions, we continue to see runway for further share expansion through go 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 Signal’s 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 have 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 to 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?

Q&A Session

Operator: Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question today comes from Mike Shlisky of D.A. Davidson. Please proceed with your question.

Jennifer Sherman: Good morning, Mike.

Mike Shlisky: 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?

Ian Hudson: Yes. 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 used. And certainly, that’s what we saw during the quarter with the strength of the aftermarket business.

Mike Shlisky: Okay, all right. Just kind of moving on here. Class 8 vocational truck demand, that seems to be up quite a bit as well from an industry perspective. The first orders, which 1 in 25, they’re coming in, seem to be really close to all-time record numbers. I guess, first of all, is Federal Signal 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 block post a year ahead? Or are your customer order patterns and your order patterns really more normal and 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 8 chassis way in advance, given what’s going on in the market here?

Jennifer Sherman: I’ll start with demand for our product remains high. We talked about our public funded product, which include our Class 8 sewer cleaners was up in Q3, 8%. Sewer cleaners specifically were up 15%, dump truck bodies were up 13%. So, in – we’ve talked about kind of the normalization of chassis buying patterns. And so, we typically, purchase about 50% of those chassis. And we are in the – right now, we are purchasing chassis for next year. With respect to the 2027, the chassis aren’t available at this particular point. But could we see 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 their chassis partners in anticipation of these regulation changes. So, we feel like we’re very well positioned as we move forward.

Mike Shlisky: Okay. Maybe one last one for me, there’s all this talk of ESG margin and SSG expectations coming upward in this quarter’s guidance, but it was actually ESG that actually hit an all-time record for margins in the quarter. Is there anything seasonal or anything you see in the pipeline that would suggest that in the fourth quarter? There’s a step sequentially downward in ESG margins or is – where you’re seeing the last few quarters kind of a great baseline here?

Ian Hudson: Yes. I think, Mike, some of it goes back to the strength that we saw in the aftermarket business during the quarter. A lot of the projects take place during the summer months, when the weather is nicer in certainly the northern parts of the U.S. 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, yesterday the weather was in the 80s in Chicago. So hopefully that will continue further into Q4.

Mike Shlisky: Okay, thanks for that color. I’ll leave it there. Thank you so much.

Jennifer Sherman: Thank you.

Operator: The next question is from Jacob Moore of KeyBanc Capital Markets. Please proceed with your question.

Jennifer Sherman: Good morning, Jacob.

Jacob Moore: Hi, good morning. I’m on for Steve Barger today. Thanks for taking our questions. First for me, Jennifer, thanks for the color 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?

Ian Hudson: 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 longer than we’d like, quite frankly. Those are both municipal products. We haven’t really seen a shift with the extent of that backlog. It gives us 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 year-over-year comparisons both on orders as well as revenue. So that’s probably the one thing as 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.

Jennifer Sherman: And I guess, I would add there. With the exception of the shift from purchasing new hydro excavation equipment to customers now renting and buying used equipment, which we believe is a critical part of our strategy in terms of muting cyclicality. We were pleased with orders as we move forward and it gives us really good visibility into 2025 and even into 2026 in terms of the strength of the demand for our products.

Jacob Moore: 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?

Ian Hudson: Yes. I think mix was a piece. Again, we talked about the aftermarket mix and I think that’s obviously 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 as 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.

Jacob Moore: That’s helpful. Thanks. And then maybe a last related one to that. So, 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?

Ian Hudson: Yes. 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 going to continue to be our objective. We’ve made some great progress, I think at the 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-bill is still in excess of one, and that’s with some pretty significant headwinds. We talked about the $17 million year-to-date chassis headwind. There’s about a $17 million headwind from two large fleet orders we had on the SSG side. And there’s also an $8 million headwind from last year’s orders, including Trackless. So, if you think about all those things, increasing production, while maintaining healthy orders, that’s really what our objective is. And that will continue as we go into 2025.

Jennifer Sherman: And just looking at our backlog, it’s up 3% year-over-year. It does, as I mentioned earlier, give us good visibility into 2024, into 2025, and even into the beginning of 2026.

Jacob Moore: Okay, got it. That’s all, very helpful. Thank you for taking the questions.

Jennifer Sherman: Thank you, Jacob.

Operator: The next question is from [indiscernible] of William Blair. Please proceed with your question.

Jennifer Sherman: Good morning, Ross.

Sam Karlov: Good morning, Jennifer. This is Sam Karlov on for Ross. Thanks for taking my question. I just wanted to get some color on or I appreciate the color on lead times. I was wondering if you 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.

Jennifer Sherman: Yes. I would say, a couple of critical things. One is, continued 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 business, where we have both maintained high demand and reduced lead times. 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, we talked about as part of our Federal Signal operating model. We’re in the middle of that process and we are laser focused on increasing production while maintaining a healthy order intake.

Sam Karlov: Got it. That’s super helpful. And then kind of switching over to standard equipment. Did you guys give or kind of quantify what the revenue of that acquisition would look like.

Ian Hudson: No, but just to give you some color, Sam. So, standards for the last couple of years, standards revenues have run in the $40 million to $50 million range. The majority of that is from Federal Signal municipal products. As we are – we’re working through integration with our aftermarkets team. We’re going to apply our 80-20 models, so there could be changes to the revenue dynamics there. Obviously, we sold units to standard equipment as the manufacturer, so that 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 aftermarkets business and also then push additional Federal Signal products through that channel. But overall, we expect the acquisition to be accretive to both earnings as well as cash flow in 2025.

Sam Karlov: 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?

Ian Hudson: There’s some seasonal variation. Again, I think it’s somewhat weather impacted because they’re primarily in Illinois and Indiana. So, 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.

Sam Karlov: Got it. And in that $20 million revenue benefit, how should we think about the split between aftermarket and new equipment, how that flows through?

Ian Hudson: Yes, it’s roughly 50/50. I mean, they do a really nice job on the part side of the business as well as service. So, it’s a fairly even split between the two.

Sam Karlov: Got it. That’s super helpful. I will leave it there.

Ian Hudson: Thanks, Sam.

Jennifer Sherman: Thanks, Sam.

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

Jennifer Sherman: Good morning.

Chris Moore: Hey. Good morning, guys. Good morning. Right. Yes. Maybe we’ll stay with aftermarket for a moment. So, obviously, lots of companies talk about aftermarket sales. One thing, Jennifer that you’ve referenced a few times is this kind of growing ecosystem within Federal Signal that kind of positions you uniquely. I just wonder if maybe you could go into that a little bit deeper.

Jennifer Sherman: Yes, absolutely. So, we think of – it’s important to look at kind of all of the revenue streams of aftermarket. The revenue you need, the rental, the service, the parts and the used equipment. And the hydro example is a good one. Interest rates are higher and so we’ve seen a shift in terms of customers are having a more challenging time affording new equipment that 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 aftermarket is our ability to kind of leverage and optimize that ecosystem. So, 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 we’re going to continue to organically grow and introduce new products that we can push through that aftermarket 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 we tried on the call, in the prepared 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.

Ian Hudson: And Chris, I’ll just kind of give some data points on kind of the growth that we’ve seen in the aftermarkets business, really between 2018 and 2023. If you look at our parts sales, it’s grown 83% and our rental revenue has grown by about 32%. So that just gives you an indication of kind of the traction that we’ve been getting on this initiative.

Chris Moore: Got it. Very helpful. And since from 2018 to 2023, from a kind of geographic penetration, looks much different?

Ian Hudson: Yes absolutely.

Jennifer Sherman: Absolutely. And again, as we talked about, it mutes cyclicality of earning streams. So again, that hydro-excavation example, if they can’t afford new equipment then we’ve got rental and used equipment either through us or our valued-dealer partners.

Chris Moore: 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?

Ian Hudson: Yes, we haven’t really seen anything significant, Chris, 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 – not been something we’ve seen much of.

Chris Moore: 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 from customers going towards electrification. Just curious, kind of what you’re seeing on the EV side these days?

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

Chris Moore: Fair enough. I will leave it there. Thanks, guys.

Jennifer Sherman: Thank you, Chris.

Operator: The next question is from Greg Burns of Sidoti & Co. Please proceed with your question.

Jennifer Sherman: Good morning, Greg.

Greg Burns: Good 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 said, build more trucks?

Ian Hudson: Yes, I think, Greg, it’s obviously something we monitor closely and we can – 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 used and rental. That is – that at the time that was going to be second half – 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 up more over time. And 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 I think for this year, for 2024, I think, we are 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 valued rental partners on the rental side of the business as well.

Greg Burns: Okay. And then did you have any production disruptions from the hurricane, the hurricane season? And then also I was just wondering if there has 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 start with a hurricane?

Jennifer Sherman: I will start with the hurricane. 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, to date we haven’t seen any impact regarding the election. We did – there is a lot of discussion around tariffs. 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 we often get asked about kind of infrastructure spending. To date it has had minimal impact. We still remain in strong order patterns. There was bipartisan support for that piece of legislation. So, as we move forward, we feel pretty good.

Greg Burns: Great, thank you.

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

Dave Storms: Good morning.

Jennifer Sherman: Good morning Dave.

Dave Storms: Good 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 on the year?

Ian Hudson: Yes, I think, Dave, I think we went into the year with a CapEx range of about $35 million to $40 million and we still think that support appropriate. As we go into 2025 there are probably, with each of our businesses, 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. Again, that $35 million to $40 million, about – about half of that CapEx of maintenance CapEx and half is growth. 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, depending on the business season, depending on the strategic initiative.

Dave Storms: 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 processing lines? And maybe how that fits with the current burn rate of your backlog?

Jennifer Sherman: So, between the period of 2019 and 2022, we added significant capacity. We made a $25 million investment at our facility in Streator, 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 in 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 with respect to our CapEx, that growth CapEx, 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 are very well positioned to be able to leverage the capacity investment that we have made, both in terms of additional space and the equipment investments that we’ve made to increase our production.

Dave Storms: That’s very helpful. Thank you for taking my questions and good luck in the fourth quarter.

Jennifer Sherman: Thank you.

Felix Boeschen: There are no additional questions at this time. I will now turn the conference back over to Jennifer L. Sherman for closing remarks.

Jennifer Sherman: 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.

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