Q3 2019 Earnings Call

Greetings and welcome to the Federal Signal Corporation third quarter 2019 earnings Conference call. At this time all participants are in listen only mode. A question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Mr. in Hudson Chief Financial Officer for Federal Signal Corporation. Thank you you may begin.

Good morning, and welcome to federal signal that well into 2019 conference call.

I'm in Hudson, the company's Chief Financial Officer.

Also with me on the call today, as Jennifer Sherman, our President and Chief Executive Officer.

We refer to some presentation slides today as well as did the earnings release, which we issued this morning.

Slides can be followed online by going through our website federal signal dotcom clicking on the investor call icon and signing into the webcast. We've also posted a slide presentation and the earnings release under the Investor tab on our website.

Before we begin I'd like to remind you that some of our comments made today may contain forward looking statements that are subject to the safe Harbor language found in today's earnings release and in Federal Signal's filings with the Securities and Exchange Commission.

These documents are available on our website.

A presentation also contains done matches that I know in accordance with U.S. generally accepted accounting principle.

Earnings release, then filings we reconcile these non-GAAP measures to GAAP measures. In addition, we will file Form 10-Q liked it today.

I'm going to begin today by providing some detail Arnaud third quarter results before turning the call I went to Jennifer to provide her perspective on all performance our outlook for the remainder of this year and preliminary thoughts as we head into 2020.

After our prepared comments, Jennifer and I will address your questions.

Our consolidated third quarter financial result, I provided in todays earnings release.

As a reminder of the financial results. The quota include Mark Wright lines equipment, all round morale, which we acquired on July 1st of this year.

The results of that morale have been included within our environmental solutions group for the quarter.

Overall, we had another strong quarter with impressive results, reflecting double digit increases in sales income and orders, we delivered significant margin expansion and a 31% improvement in adjusted earnings per share.

Consolidated net sales for the quarter with $308.8 million up $39.4 million or 15% from last year.

Consolidated operating income for the quarter was $38.6 million up $8.2 million or 27%.

On an adjusted basis consolidated operating margin was 12.7 cents up from 11.5% in Q3 last year.

Consolidated adjusted EBITDA for the quarter was $49.8 million up $10.1 million or 25 cent from Q3 last year.

That translates to a margin of 16.1% exceeding our target range and up from 14.7% last year.

Huh.

Net income in Q3, this year was $28.4 million compared to $21.7 million last year that equates to GAAP earnings of 46 cents per share up from 36 cents per share last year on an adjusted basis EPS for Q3. This year was 47 cents per share, which compares to 36 cents.

The share last year.

Order intake in Q3. This year continued to be strong with total orders of $329 million, an increase of $61 million or 23% compared to the prior quarter.

We ended the quarter with the consolidated backlog of $367 million, which was up $46 million or 14% compared to last year.

Turning now to our group results were both about groups delivered significant year over year EBITDA margin improvement.

Yes, you reported third quarter sales of $254 million up $37.7 million or 17% compared to last year.

Revenue growth was largely driven by increases in shipments of safe digging vehicles dump truck bodies and street sweepers as well as a 22.6 million dollar contribution from MRL.

Yes. She is operating income in Q3, this year was $35.9 million up $7.6 million or 27% from last year.

Adjusted EBITDA for the quarter was $46 million, an improvement of $9.3 million or 25% from a year ago.

Translates to an end to an adjusted EBITDA margin of 18.1% in Q3, this year above our target range and up 110 basis points from 17% last year.

Yes, she's orders in Q3, this year with $270.2 million up $55.7 million below 26% from last year with orders from the NRL acquisition accounting for approximately $14 million of that growth.

Organically SGS orders were up $16 million or 8%.

SSG reported third quarter sales at $54.8 million up $1.7 million or 3% from last year.

Ssds operating income in Q3, this year was $8.6 million up 8%.

Its adjusted EBITDA for the quarter was $9.4 million up from $8.7 million, a year ago, and adjusted EBITDA margin was 17.2% up 80 basis points from 16.4% in Q3 last year.

SSG Zoetis for Q3, this year with $58.6 million up $5 million on 9% compared to last year with the increased largely due to higher global orders for public safety products.

Corporate operating expenses for the quarter with $5.9 million essentially unchanged from Q3 last year.

On a consolidated basis the increase in sales contributed to an improvement in gross profit of 13.9 $13 million or 19% consolidated gross margin for the quarter was 26.6% up 100 basis points from 25.6% last year.

As a percentage of sales selling engineering general and administrative expenses for the quarter were down 30 basis points from Q3 last year.

Other items affecting the quarterly results include a 200000 dollar increase in other expense and a 100000 dollar reduction in interest expense.

Although tax expense for the quarter was up $1.4 million largely due to higher pretax income levels, our effective tax rate for the quarter was lower than usual at around 22%.

During the quarter, we recognize the 600000 dollar tax benefit following the completion of a tax audit in Spain, and an additional 600000 dollar excess tax benefit from stock compensation activity.

With the lower rate in Q3, we're currently expecting our effective tax rate for the full year to be down to a range of 24% to 25%.

On an overall GAAP basis, we therefore around 46 cents per share in Q3, this year compared with 36 cents 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 oil prior quarters in the current year quota, we made adjustments to GAAP earnings per share to exclude acquisition related expenses and purchase accounting expense effect.

On this basis, our adjusted earnings for the quarter with 47 cents per share compared with 36 cents per share in Q3 last year.

Looking now at cash flow why we generated $32.8 million of cash from operations in Q3. This year, bringing the total amount of yesterday operating cash generation to almost $60 million.

So far this year, we've increased our capital expenditures to $21.2 million as we make strategic investments in new machinery and equipment and other organic growth initiatives like the expansion of our manufacturing facilities in street to Illinois, and rugby North Dakota.

For the full year, we're currently expecting total capex of up to $35 million.

As anticipated. We also had a couple of other significant cash outflows in the quarter.

The first related to the acquisition of MRL, which we completed at the beginning of July for an initial payment of approximately $50 million.

In addition, during the quarter, we paid an aggregate some a $13.4 million to settle the other now and fund the deferred payment associated with the acquisition of JJ.

Despite these large cash outflows on net debt leverage remains at a comfortable level and at the end of the quarter, we had around $240 million availability under our new Upsized credit facility, which we executed at the end of July .

The tons of the new facility a more favorable so the company, reflecting the strength of outperformance cash flow and balance sheet.

Our strong financial position allows us to continue to invest inorganic growth initiatives pursue strategic acquisitions like MRL and fund cash returns to shareholders on that note. We paid a dividend of eight cents per share during third quarter amounting to $4.9 million and we recently announced a similar dividend for the fourth.

Quarter.

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

Thank you Ian our third quarter operating results benefited from seasonally strong performance at many of our businesses. Our earnings also included the effects of a low tax rate, which added approximately two cents to our S and better than expected accretion from our recent MRO acquisition.

With the teams intense focus on execution of our strategic initiative and contributions from MRO, we reported double digit growth in both net sales and orders and our operating income was up 27% year over year each of our groups delivered improved adjusted EBIT.

Don margins translating to a consolidated adjusted EBITDA margin in excess of 16%, which represents 140 basis point improvement from Q3 last year.

With any SG. In addition to the seasonally strong performance from several of our businesses, including increased aftermarket demand, we continued to realize operational efficiencies relating to increase production.

At our facility in Streeter, Illinois, where we manufacture sewer cleaners and safe digging vehicles, we are continuing our efforts to increase production and reduce lead times and initiative, we internally call B M T or build more trucks since the third quarter of last year, we have added more than a hub.

Third employee plant and the first nine months of this year our unit production at the Streeter facility is up 17% compared to same period of last year.

In addition, we have made substantial progress increasing the number of units produced at our solution centers in Leeds, Alabama.

TB <unk> also had a strong quarter with shipments of dump truck bodies up 16% year over year now that we fully integrated TB I. Our focus has shifted to some of the geographic expansion initiatives, we talked about at the time of the acquisition.

I recently visited our new location in North Carolina that will serve as an upsetting center for Aucs bodies brand of dump trucks as we aim to grow our regional presence in this important market I'm pleased to report that last week. We saw the first unit completed that location. We've also recently entered into a new partnership.

With a local installer in Texas as we aim to expand our footprint in that region as well.

With some of the Capex investments, we have made since acquiring TB.

We've also noted improvements in some of our production processes for example at certain of the TB I'd facilities, we have invested in laser cutting technology, which has improved both product quality and overall efficiency. This has contributed to an increase in the number of third party Oems that have outsourced pro.

Production of their dump truck bodies to us, which they would have previously manufactured in house.

Overall order intake in the third quarter. This year remained strong reflecting continued strength in our end markets contributions from MRO and ongoing momentum with our strategic initiatives like safe digging in aftermarket. These initiatives contributed to our year over year organic order growth of $21 million.

Or 8% in the quarter.

As a reminder, our orders in any given quarter can vary due to a number of factors, including the timing of receiving large orders, including fleet orders from both domestic and international customers the availability of customer supply chassis, our own lead times and the timing of price increases for example, during the third.

Quarter, we saw certain of our ESG dealers placed orders earlier than we anticipated and we also received a couple of larger fleet orders for street sweepers from customers in the Middle East.

So far this year orders for our safe digging trucks are up 21 million or 28% from the first nine months of last year with most of that growth coming from the continued education of our customers on the safety and efficiency benefits of our range of safety offerings. In addition, right.

Until demand for our safety equipment, the largest component of our rental fleet remains high with both time and financial utilization levels exceeding our target level.

As an important milestone we have recently finalized our distribution strategy for our true back branded safety vehicles, including citing the majority of the related agreements. We also continue to focus on expanding our suite of sake digging offerings during the quarter, we launched the true back higher.

City, a compact hydro excavator for utility municipal and contractor customers, which maximizes payload and productivity, while complying with regional weight regulations.

I want to give a quick update on the status of the expansion of our Vactor facility in Streeter earlier. This week, we held our board meeting at Vactor and were able to see first hand. The notable noticeable progress that's been made thus far the construction work is well underway with the external structured largely in place and the roof almost complete.

The teams have been working hard to try to make up time was lost earlier in the year with a record rainfall in Illinois, while we continue to expect the building to be substantially complete by the end of the year, we do not expect to see any benefits from the expansion until Q2 of next year.

Within SSG, despite some lingering effects of the Ford model year change, which has impacted the availability of new vehicles in the U.S., our third quarter sales into public safety markets were up 6% from last year.

With the introduction of a series of new products. The teams have been able to further penetrate overseas markets and secure orders from several new municipal customers in the U.S.

Last Sunday I attended the International Association of Chiefs of Police conference in Chicago, where we showcased the features and functionality of our new Pathfinder system, a feature rich light inspiring controller reaction of the customers in attendance at the show was overwhelmingly positive.

We also saw a continuation in the strength of industrial signaling equipment sales with both third quarter and year to date sales increasing by around 11%. This improvement has resulted from expanding into new global markets optimizing our sales channel and enhancing our marketing efforts.

As in both the first and second quarters SSG also significantly expanded its margins in the third quarter. So far this year SSG has increased its adjusted EBITDA margin by 270 basis points consistently performing at the upper end of our EBITDA margin target range, which we raised last quarter.

The improvement has largely resulted from our pricing actions improved sales mix and ongoing execution of our 80 20 or 80, Hi initiative.

I'd like to now give an update on the MRO acquisition, which we completed the beginning of July as a reminder, morale is a leading us manufacturer of truck mounted and ride on road, marking equipment. The acquisition also included the operations of Highmark traffic services, a wholly owned subsidiary.

MRO, which provides road marquee application and line removal services.

Since closing the transaction our collective teams have been focused on integration efforts as part of our efforts to integrate our Allen to a public company. We've made some nominal investments in the form of adding resources or reporting tools, which should provide benefits down the road.

While we recognize that there's more work ahead. We are pleased with the progress. We've made so far we're also encouraged with our Morales financial performance in the first quarter since the acquisition completed as a reminder, primarily due to weather related factors Mrls results during the summer months tend to be stronger than other period.

While the first and fourth quarters of the year tend to be softer most notably within its service business, which predominantly operates in the state of Montana.

And while amaral exceeded our expectations by adding about two cents to our third quarter earnings. The acquisition is expected to be neutral to our fourth quarter earnings.

Turning now to our outlook for the rest of the year with our impressive third quarter results and the strength of our backlog, we're raising our 2019 adjusted EPS outlook to a new range of $1.70 to $1.76 from a previous range of $1.64 to $1.72 the new.

Range equates to year over year improvement of between 21 in 25%.

I would like to start.

By reiterating that our current market conditions remained strong as demonstrated by our third quarter intake.

In terms of the outlook for 2020, I want to reiterate that the impact on from tariff on federal signal that we're imposed during the last 18 months or so is nominal we sourced in significant percentage of our components that are affected by the tariffs that were introduced.

As we begin to look forward into next year, the strength of our backlog, particularly for sewer cleaners and safe digging trucks provides us with good visibility into the first half of next year within our industrial markets. We continue to be bullish about our prospects with respect to our safe digging initiative and our monitoring further down.

Evolvement on the regulatory front.

In addition, as I just mentioned, we expect to start seeing benefits from the capacity expansion in the second quarter of next year.

The amount of used equipment available at auction continues to be at normal levels supporting healthy used equipment in rental demand in our market utilization levels within our own rental fleet, our strong, particularly for products, serving industrial markets like safe, taking trucks and water blasting equipment.

On the municipal front, our U.S. markets remain healthy overall with continued strong demand for sewer cleaners within public safety markets. We are hopeful that the lingering effects from the Ford model year change will be substantially resolved and SSG will continue to target market share gains through new product introductions.

Traffic expansion.

With the upcoming presidential election, and general global economic uncertainty much of which is outside our control. We do not have good visibility into the second half of next year. At this time, we will continue to moderate term market conditions closely.

We expect our financial position heading into 2020 to be very strong with Doe low debt leverage and ample liquidity, allowing us to remain true to our capital allocation priorities.

New product introductions will continue to be a focus with the series of new product offering scheduled for commercial launch in 2020 looking further ahead. Our innovation teams are working on several other lar longer term projects. For example, we have recently design build and tested a plug in high.

Brit electric sweeper that is now being evaluated by customers.

We will also have a full year of MRO activity in 2020 compared to six months. This year. The acquisition is performing well so far and remains on track to deliver on the previously announced accretion estimate.

As many of you now our ongoing focus on 80 20 for each API principle is an important part of our culture and we continue to educate our people on its principal over the last 18 months over 200 employees have attended various EBI training event.

Lastly, acquisitions will remain important part of our growth our deal pipeline is active with our healthy cash flow generation and enhanced financial position, we are well positioned to pursue additional strategic acquisition candidates. We will provide a more detailed view on 2020 on our next earnings call with that we are ready to.

Open the line for questions operator.

Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your lines in the question Q.

You mean prestart too if you like to remove your question from the Q.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Our first question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Morning, Craig Good morning.

Yeah, maybe start with TV it sounds like the integration there is no.

Has gone extremely well.

One of the things you talked about when you acquired them as it it was a very regional business potential to do more acquisitions in that space certainly existed given the expansion that you just talked about in North Carolina does that.

How much additional geographic expansion can you do from the kind of existing infrastructure you have and.

How much would require additional acquisitions.

Yes, great question, So as I mentioned on the call. We've opened up our new facility in high point, North Carolina that we believe geographically as well positioned to serve that important area. We've also announced a new partnership and taxes.

We think there are number of other opportunities for geographic expansion.

What we really try to do as we previously talked about that are dump truck businesses serve a region.

Around 800 miles.

So we're pushing the fringes of those regions with these expansions.

We also believed that there is opportunity for acquisition.

In several geographies across North America. So as we go forward, we believe that growth will come from both a combination of acquisitions and geographic expansion.

Got it that's helpful.

If I am looking at a.

Q4, 19 versus 18.

Obviously Q4 is seasonally both.

It's a little slower.

As you talked about Mark right, a little bit slower.

Anything else that that we should be keeping in mind kind of in year over year comparison between.

Q4, 1918, Yeah, Chris I think I mean, I think Jenniffer mentioned that we expect a morale to be neutral to Q4 as you as you touched on the seasonal aspects.

Of the business really mean that the fourth quarter is tends to be one of the softer quarters.

Primarily in the service business, where whether as a factor in Montana there.

So thats one thing we would we would mentioned the other thing I think as we think about the fourth quarter of last year.

SSD just had an outstanding fourth quarter last year, where they they shipped a number of large warning systems orders.

So so they had a 20 roughly 21% EBITDA margin in Q4 last year. So.

That's a pretty high bar to meet naming the teams are working hard to to get that but it's a pretty tough comparison and then the other thing I would just remind you is in Q4 last year with corporate expenses, we had about a two a two cents benefit.

From some adjust fair value adjustments of certain reserves that we had in the fourth quarter. So that's that's another thing to to factor in.

Because they did they were essentially nonrecurring items that were in the fourth quarter of last year, but even with all even with all of that Chris I think we're still expecting year over year improvement in the fourth quarter.

Thats extremely helpful I'll jump back in line and I appreciate it.

Thanks.

Thank you. Our next question comes from the line of Walter Liptak with Seaport Global Securities. Please proceed with your question.

Hi, Thanks, good morning, great quarter guys.

Great morning wall.

One day.

To ask.

With all of our industrial companies were seeing slowdowns inventory corrections and things and with the strong order growth and strong revenue in the quarter doesn't look like you are being impacted by anything.

Kind of industrial slowing relate I wonder if you just comment on that are you seeing any pockets or.

Niches product lines.

Are feeling the effects and some of the industrial slowdown.

So again, we really encouraged by the growth that we saw encore in the quarter. So we talked about organic orders were up 8%.

Rentals, our aftermarket business.

Was up 19% first as Q3 or last year, so over and then again safe digging also.

Our orders were up 31% over Q3 last year, some some really good growth in the quarter.

In terms of slowness.

About 20% of our TB business is trailers and those trailers are there is a correlation between those trailers in class H assay, we have seen some softness in that market as we go into 2020 class eight.

Yes. These are supposed to be down I'd remind you, though that the trailers that we manufacture only a subsection of those class eight chassis and those vocational work trucks are not supposed to be is down as much as class eight chassis, but that is an area that we're seeing some softness pretty small part of our business.

As we look at TB I, we're encouraged by we're encouraged by what we're seeing in October so far and dump truck quarters.

So.

You know again, we talked about this all the time, but we really rather quarter to quarter, we'd like to look back over the previous nine month period, but again as the metrics that we cited on our call. We're encouraged by what we're seeing but it's something like every other industrial company, we're continuing to monitor closely.

Okay, Great and just looking at some of the order trends.

In the in the Us G.

Did you get overall.

Yes, so you'd called out the other sweeper business doing well so it sounds like that crew at least high single digits.

As was called out I think a.

Street.

A couple of other orders, but I wondered did TV I grow during the quarter.

In terms of orders.

Deal at the orders were pretty much in align well with where they were lost share for the done the dump trucks trailers, what was as Jennifer mentioned trailers were a little softer than they were last year, but it but as as Jennifer mentioned, what we've seen so far in October .

He is been has been encouraging.

Okay great.

And you mentioned that a U.S.G. dealers play some orders early in the quarter, Yeah, I Wonder why why that timing was there was there a price increase that they were getting in front of or why why those orders came in was or sell through two and customers are customer attached to those orders.

Yeah. So we had one of our major dealers plays to large order for pelicans in the quarter.

And it can vary quarter to quarter, depending on their delivery needs and when the customer needs them. So I think it was critical for them to make sure that they got into our Q.

We also saw as I mentioned on the call a couple large orders are the middle East.

So that was what really when I was referring to and the primarily customer driven.

Okay, Alright sounds good in the safe dig in markets. The the 28% growth I mean that continues to support.

Yes, the expansions that you're doing and had strong growth in that market.

I Wonder if I like our board was down there I mentioned on the call earlier this week and just really encouraged by what we're saying the teams are making good progress both in terms of the sales side of things on the capacity expansion.

In terms of new product development, we talked about we introduced the Coyote a lot of great energy around our efforts in that market and well at that location. We produced both the state digging vehicles as well as the sewer cleaners that right now.

Orders for safe digging were up six six and a half million in the quarter, but sewer cleaners were also up the orders were up about 7 million as well so.

It's the combination of the demand for those two product lines that will really support the growth the expansion.

Okay, great and that the timing of when that capacity comes online.

Is there.

Your comments about second quarter is in second quarter will be.

Full production starting early in the quarter.

Is there a ramp period in the first quarter or are we talking about the ramp starting in the second quarter the ramp will start to second quarter.

Okay. So the streeter facility will be complete by the end of the first quarter and then you start ramping trucks.

Plant after that it's more complex than that because there's a.

There is a sequence of moves that have to occur.

So we'll move into the new.

We will start moving into the new area in the first quarter, but then will have where tearing down some parts of the current buildings and that will begin and will.

In Q1 of next year. So we'll start to see the benefit in Q2 of next year, the new space, but then we need to go back and finish on the existing space you know I'd remind you that.

We were negatively impacted by the weather in the first half of the year.

So we got pushed back a quarter as I reported on the last call. We're still on track to the schedule that I reported in the last call.

Okay got it okay.

Thanks again.

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

Morning, Greg.

Good morning.

Jennifer you mentioned.

Finalizing your your distribution strategy for that to the true back line.

Can you just let us know what that is going through existing distribution.

Sort of new distributors, how are you going to market.

It's a really a combination of all three so uncertain market we go direct.

In certain markets.

We have retained our existing vactor and Elgin dealers will carry the true backline and in some markets.

We will have new distributors, so as a combination of othree. The teams did a very careful and thorough analysis of the market opportunities in each specific region.

And then.

They identified.

What was the optimum way to go to market in that particular reason region.

Terms and margins obviously.

Very strong.

The first part of this year.

What would maybe bring the margins back.

And to your targeted range and is it maybe time to start thinking about.

Reassessing your your longer term target given how strong the margins have been thanks.

Yes, I think Greg when you look at the margin target. So without that are intended to be you know that now aspirationally stretch goals are really intended to be ranges, where we want to operate kind of quarter in quarter out through through the cycle early and.

You know weve.

We've not.

While from quarter to quarter, we may exceed the high end of the range, we really need to see that consistent level of performance before we adjust the ranges almost like what we saw it with SSG and the second quarter, where we raised the high end of the range to 18% in that so.

We will still.

Not at the 16% high the range ended the range on a consolidated basis. If you look at the first nine months of the ever a 15 seven.

That's that's up 140 basis points from where we were the same time last year. So we still haven't hit that high end of the range. So I think.

We would want to see a consistent level of meeting or exceeding the high end arranged before we increased them but.

But we were obviously very happy with the performance in the margin performance that we've seen this year, but to be I want to be clear is if we do see that consistent performance will increase.

Yes.

And then how much how should we think about the new capacity.

Coming on line next year.

The impact that we'll have maybe margins or does it create some other efficiency offsets to just wanted to get a sense of.

Any impact that would have on the margins once that comes on line. Thanks.

Yes, well when it's fully operational we should see some positive efficiency benefits. The teams have done on the careful analysis.

In terms of where there is opportunity to improve flow.

And as we move forward.

And we're fully operational our expectations that we'll see benefits from that initiative.

Okay.

And lastly on the morale seasonality.

And could you just maybe give us.

I understand first and fourth of the weakest. So could you just maybe give us historically percentage wise.

What percent of revenue kind of falls in each quarter just so we.

It's it's a little tricky, Greg because historically as a private company they've never really had to focus on quarterly results and so that's been since we've acquired them. That's been one of the things that we've been working with the teams is trying to get them into the cadence of quarterly results in forecasting so they they really.

Only had kind of full year, we'd almost have to go back end.

You know do it do some more work to find to the actual numbers, but for the most part.

We know that new equipment sales.

That fairly fairly stable, but from the service piece of the business, which is about is about 15% of the overall results.

It's it's almost all of the income is going to be generated in the second and third quarters.

You can probably imagine with the weather factors does not much road road marketing align removal services being performed in Montana in December for example.

It's it also business.

Given the.

Value of the equipment, you know if a couple of truck shift quarter to quarter Meanies can be 500, 600000, our pieces of equipment.

So as Ian mentioned, we're working with the teams in his new for them of the cadence of a quarterly closed, but if three or four trucks move from one quarter to another that also has an impact.

Okay, great. Thank you.

Thank you, ladies and gentlemen, as a reminder, if you'd like to during the question Q. Please press star one at this time.

Next question comes from line as Marco Rodriguez with Stonegate capital markets. Please proceed with your question.

Good morning, Thanks for taking my questions.

Good morning, wondered Hey, I was wondering if maybe you could talk a little bit more about your your gross margins I I know that obviously, the EBITDA margins the main focus but it sounds like.

That's been a real big helping driving you guys towards the upper end of your of your EBITDA range and it seems like a lot of strength is coming in the E.S.G. side.

She this this particular quarter year over year, a 100 100 basis point improvement.

Can you talk a little bit more about what sort of driving that I think you brought up pricing in some of your comments, but if you can just tried some more color would be real helpful.

Yes, there's a couple of things Mark I'd say overall, we had a 100 basis points improvement. If you look at each of the groups SG their improvement was 100 basis points coincidently as well, but SSG had you know that that gross margin was about up by about 250 basis points. So ssds really seeing some of the benefit.

It's from the 80 20 initiatives that we we've implemented there over recent years, they they've they've had some favorable price benefits, but also mix has been favorable. This this time around in terms of that your geographic.

Mix in terms of where a number those shipments are going internationally, which tends to have a more favorable sales mix. So.

The other thing I would point towards is really the aftermarket business and as that has grown that tends to carry.

Strong stronger margins, so with the growth that we've seen in aftermarket thats carry some gross margin improvement boasted SSG and overall.

Got it very helpful. Then should come here to TB and the regional growth strategy that you mentioned in the call.

Just pointing out in North Carolina and.

Forget that deliver the area in Texas, but.

Can you talk a little bit about what is especially but those two particular areas that that you're expanding into and if so can you. Then also share what might be kind of a blueprint that we think through as far as the the expansion is concerned.

Yes. The teams have done a couple of things one is they've obviously done a competitive analysis of the territories.

Which is important in terms of evaluating the opportunities.

The other critical factor is the proximity to our current facilities.

So again as we look to expand that reach kind of beyond that 800 miles circle around our particular facilities.

That's an important component we're pushing it out.

Another 500 plus miles.

We're also looking at in terms of availability of labor.

Which is important we're really encouraged by small, but we're getting started in high point the quality of the workforce.

So as we move forward, we'll continue we're getting you know we've got.

Two opportunities a little bit different that we're moving forward with and we're refining our model. We're also looking at other opportunities to leverage our own NFS solution centers as we talked about previously and then again M&A is going to play an important part in the growth This particular business.

Gotcha and so.

If I'm understanding correctly here so to the expansion is more about maybe pushing out your existing footprint from your existing areas rather than maybe not necessarily purchasing something that isn't a completely different area or <unk> or geographical location is that fair it could be either it could.

Either at the high point expansion Marco that is really intended to extend the reach of ALKS bodies brand. That's that's located right now it's.

Located in fact, Alabama, which is near our Birmingham.

Yes, Hi point is going to focused on doing the outfitting of the Alcs bodies. The brands. So that that's the intention for that location, but as Jennifer said in terms of a geographic expansion in other states through through M&A. It could be a you know we could be the acquisition of a different brand have done truck.

Okay got it.

In another quick question here just on the X gene a line item rough of 43 million.

Is that a fair or rather normalized number here now that emeralds and the picture.

Hey suit I mean, there's obviously from quarter to quarter Thats things that can cause deviation in that number I mentioned in Q4 last year, we had about two two cents of a benefit.

And that would have full nothing else fluid flow through the EPS DNA line, but.

There isn't really anything unusual in terms of morale that would change significantly from Q3 to Q4.

Got it thanks, guys appreciate your time.

Thank you.

Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. I'm in for any final comment.

Sure. Thank you in closing I would like to reiterate that we are confident in the long term prospects for our business in our markets. Our teams are performing at a very high level and we are focused on delivering high quality result.

We remain committed to investing in our businesses and our people to generate specific sustained long term success for our shareholders.

Our foundation is strong and we're focused on delivering profitable long term growth through the execution of our strategic initiative.

We would like to express our thanks to our stockholders employees distributors and customers for their continued support I also want to take this opportunity you think are many value dealer partners, including Jaktwo Hany companies, who continue to demonstrate their ongoing commitment to distributing federal signal products include.

And the Vactor Elgin in our true back brand of vehicles. Thank you for joining us today, and we will talk to you next year.

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