Q3 2024 Federal Signal Corp Earnings Call
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 a website federal signal dot com clicking on the investor call icon and signing into the webcast. We've also posted the slide presentation and the earnings release under the Investor Tab on our website before we begin.
I'd like to remind you that some of our comments made today may contain forward looking statements that are subject to the safe Harbor language found in today's news release and in federal 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.
And we will start today by providing details on our third quarter financial results. Jennifer will then provide her perspective on our performance and 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: Thank you Felix Consol.
Ian: 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 with $474 million, an increase of $28 million or 6% compared to last year.
Ian: 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.
Percent 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.
Ian: 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 pretax 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 around 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 GAAP earnings per share for unusual items recorded in the current or prior quarters in.
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 88 cents per share compared with 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.
Ian: Our current net debt leverage remains low even after taking into account, our recently announced acquisition of standard equipment.
Ian: With our financial position remains 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.
Ian: 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: 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% year over year net.
<unk> 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.
And what is typically a seasonally strong quarter esg's adjusted EBIDTA margin 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 chain normalizing our teams are laser focused.
Ian: On driving increased throughput across the enterprise.
And are gaining traction on our build more trucks initiative at our two largest manufacturing facility 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 reduced lead times for certain product lines, primarily our sewer cleaners and street sweepers from a capacity perspective or access to labor remains good and our long.
Ian: <unk> scaled capacity expansions that we completed between 2019 and 2020 to position us well to profitably absorb incremental volumes into our existing footprint shifting to aftermarket demand for our aftermarket products and services remained strong as revenues grew by approximately.
<unk>, 10% year over year strength was broad based across our aftermarket portfolio with rental income service run up the new 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.
Ian: 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 acquisition.
<unk> such as Tracklist are will fit parts initiative, and increasing parts capture and 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.
Ian: And our efforts to mute cyclicality in total aftermarket represented approximately 27% of ESG revenue in the third quarter of 2020 for our other vehicle based businesses also contributed positively to results with our dump truck body business, leading the charge with sale.
<unk> 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 presents a unique value proposition that is being recognized in the marketplace shift.
Shifting to our safety and security systems group the team delivered another impressive quarter with 4% topline 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 are 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.
Ian: 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, 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.
An ongoing strategic growth initiatives.
Ian: Although domestic industrial orders were down 8% year over year, there continued to be strong demand for the majority of our industrial products.
Ian: 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 are used equipment purchase.
Ian: Says 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 saved taking rental income and used equipment sales.
Ian: 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.
Ian: To capitalize on this multiyear 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.
Believed 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 bypass.
It is an infrastructure law spent a day our teams continue to strategically position our businesses to capitalize on what we see is rising demand in the form of greater parts consumption equipment sales opportunities and other aftermarket services over a multi year period, one such example.
Ian: Is there a road, marking and line removal services business has high Mark which in conjunction with MRO Blasters continues to enjoy strong demand for our suite of road, marking and stripe Klein removal product and services in summary demand for our product remains high our teams are focused on executing on our growth initiatives.
Ian: <unk> and building more trucks, while maintaining a healthy order intake.
Ian: I now want to provide an update on a number of internal initiatives that support our through the cycle target of double digit topline growth recall that these targets are consistent with our actual track record and a 14% revenue CAGR since 2016 similar to our actual experience.
Ian: 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 offer.
Ian: <unk>.
From a strategic perspective, our growing aftermarket ecosystem allows us to better serve our customer needs throughout the entire business cycle, all targeting historically underpenetrated cohorts of federal signal customers and muting cyclicality. We believe the addition of standard further.
Ian: <unk> 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 asset assets within verticals that we already operate in.
Ian: 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 margin expansion runway.
Ian: 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.
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.
Ian: Forrest and Tony Hall has grown net sales by more than 60% since the purchase of Tau in 2022, while expanding margins. This growth was primarily achieved through the identification of certain distribution synergy a targeted effort to increase aftermarket revenue capture material cost.
Reductions in other cross selling opportunities in fact, this quarter crown forests in Tahoe hosted their first joint Booth at mine Expo 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 produced 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.
Distributors ox bodies, 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.
Ian: <unk>.
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 assumes certain U S territories, including the Carolinas, which are direct team assumed in June of 2020 for an initial investment of <unk>.
Ian: Proximately $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 our recent dealer transition I would also like to thank this team for their <unk>.
<unk> to deliver critical supplies to citizens of North Carolina impacted by Hurricane Helene.
Ian: 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 reenter re invigoration of new product development efforts. These efforts have not only translate into higher sales and improved customer service, but that's S cheese.
EBITDA margins have also expanded by more than 800 basis points compared to 2016. Additionally, we've invested in capacity with a 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 in sourcing 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.
<unk> and inorganic growth opportunities at this time, we are also formally raising our SSG EBITA 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 are we have also aligned our compensation practices with margin targets.
Turning now to our outlook for the rest of the year.
Ian: Demand for our products and our aftermarket offerings remains high with our order intake this quarter contributing to our 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.
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 pass through revenue year over year, while the impact to EBITDA is immaterial and 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.
Speaker Change: Thank you.
Speaker Change: 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.
Speaker Change: 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 poll for questions.
Our first question today comes from Michael Slutsky 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 commentary on your rental fleet.
Your vacuum trucks and other assets that you put out for rent.
You may be update us on how that's been going and Hank any constraints no tailwind for that business and he said that he has had to do was affected regions.
And about your plans to invest in that going going going forward.
Speaker Change: Yeah, Mike I think it was part of the strength of the optimal kit business that we sold during the quarter everything 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 off market revenue streams that that would be.
<unk>, you know rental income used equipment sales and service.
Speaker Change: Specifically on rental income rental income was up 12% year over year, a lot of that was driven by the demand we're seeing for rentals of safe digging used equipment sales also they were up 15% year over year again safety was a piece there and I think we made reference in our comments to you.
A current.
You know the customers all favoring right now given the higher interest rate environment, and given the safe digging trucks new trucks.
Speaker Change: You know one of our highest price point items I think there is currently a preference to rental to buy us and them.
Speaker Change: And certainly that's what we saw during the quarter with the strength of the off market business.
Speaker Change: Okay.
Speaker Change: Alright.
Just kind of moving on here class eight vocational truck demand.
Oh, that's going to be up quite a bit as well from an industry perspective.
The the first or 125 their covenants seem to be really close to all time record numbers.
Speaker Change: I guess I guess first of all it's also not participating in any of that are you are you.
Pre buy any chassis is in advance of admissions changeovers and 27 already at this point.
Speaker Change: Do you just see some kind of giant blockbuster year ahead.
Or are all your customer order patterns in your order patterns really more normal in line with what you see for 25 and perhaps it's just somebody else's question. These very large early early orders here, just any kind of comments on <unk>.
Whether you're looking to secure class eight chassis wind events.
What's going on in the market here.
You know I'll start with you know demand for our product remains high.
We talked about our public funded product, which include you know our class eight sewer cleaners was up in Q3, 8%.
Speaker Change: Sewer cleaners, specifically were up 15% dump truck bodies were up 13%.
Speaker Change: So and you know we've talked about kind of a normalization of chassis buying patterns and so we typically purchased about 50%.
Of those chassis and you know we are in the right.
Right now we are purchasing chassis.
Speaker Change: For next year.
With respect to the 27 the chassis aren't available at this particular point.
But 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 Library, 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.
Speaker Change: Forward.
Speaker Change: Okay.
Maybe one last one for me you know broke.
Speaker Change: There's always talk about you'll see margin in those cases coming upward in the ER.
Speaker Change: Quarters guidance, but it was actually yesterday actually hit an all time record for margins in the quarter is there anything seasonal or anything you've seen the pipeline that would suggest that in the fourth quarter. There's a step sequentially downward and she margins or is where you're seeing the last few quarters, it's kind of a great big crowd here.
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.
Speaker Change: The projects take place during the summer months when the weather is it's it is.
Nicer and suddenly 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 which tends.
<unk> tends to have a slightly more attractive margin profile of that tends to slow down a little bit but as we sit here today, you know yesterday the weather was in the eighties and.
Speaker Change: In us in Chicago, So you know.
Hopefully that will continue further into Q4.
Speaker Change: Okay.
The color I'll leave it there thanks so much.
Speaker Change: You.
Speaker Change: The next question is from Jacob more of Keybanc capital markets. Please proceed with your question.
Speaker Change: Good morning Jacob.
Jacob more: Hi, good morning, I'm on for Steve Barger today, Thanks for taking our questions.
Jacob: First for me Jennifer Thanks for the color on the industrial versus municipal order trends, if I could dig in a little better 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 has already been ordered and how long do you think this current order trend could run forward.
Yeah, I don't know, whether we've seen any dramatic shifts necessarily in the municipal backlog, obviously, we talked about the lead times for sure.
Sewer cleaners and street sweepers, being you know longer than we'd like and quite frankly.
Those are both municipal products, we haven't really seen.
<unk> 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 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.
Jacob: By Us all of us as provided by the customers.
And I think we mentioned in our prepared remarks that can have some impact on a year over year comparisons both on orders as well as revenue. So that's probably the one thing is 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.
Jacob: 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.
Jacob: You know, which we believe is a critical part of our strategy in terms of new meeting cyclicality, we were pleased with orders.
As we move forward and it gives us really good visibility into 25 and even into 'twenty six in terms of the strength of the demand for our products.
Speaker Change: Okay got it that's helpful. Thank you second for me you've posted a really impressive incremental margins. This year, 48% this quarter averaged 44% for the year or is.
Speaker Change: Is it mix, that's driving that or do you have a better price in the backlog that you're producing and secondary to that should we be thinking that you can maintain a structurally higher level of incremental margin going forward.
Speaker Change: Yeah. I think makes was was it was a piece of it again, we talked about the aftermarket mix.
Speaker Change: And I think you know that wasn't that sounds like 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 you know the leverage we had in this quarter. It was it was probably higher than <unk>.
What we would typically expect over the long term and I think over the long term. If you go back and look at you know how we've progressed really since 2016, its really been in the.
Incrementals have been north of 20% again, there is some seasonality to the business doing during Q3 with the strength of the aftermarket business. You know 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 I'll ask related one to two two at answer I know youre not guiding to 2025, yet, but given those capacity expansions you just mentioned in 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 there is seasonality and if you look at the last couple of quarters Q2, and Q3 tend to be higher.
Higher because of that strength in the aftermarket business, but you.
Jacob: Yeah.
Jacob: We have.
Our goal internally is to go build more trucks and so our primary objective is to increase production, while maintaining a healthy order intake too to really reduce lead times and as we as we go into 2025, given where the backlogs are I think that's going to continue to be our objective.
Made some great progress I think are those the two primary.
Manufacturing facilities on the ESG side, you know we talked about 12.
12% production increase year over year. So we are seeing the benefits of of that initiative.
We haven't necessarily made as much progress to reduce lead times as we would have hoped in it 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 dollar headwind from two large fleet orders, we had on the SSG side and there's also an 8 million dollar headwind from last year's orders, including trackless. So if you. If you think about all of those things.
Jacob: Increasing production, while maintaining healthy orders, that's really what our objective is and that will continue as we go into 2025.
Just you know.
Looking at our backlog its up 3% year over year. It does as I mentioned earlier it gives us good visibility into 'twenty.
24 million to 25, and even into the beginning of 'twenty six.
Speaker Change: Okay got it that's all very helpful. Thank you predicting my questions. Thank you Jacob.
Speaker Change: The next question is from Ross <unk> of William Blair. Please proceed with your question.
Good morning Ross.
Speaker Change: Good morning, Jennifer This is Sam carload volumes for Ross Thanks for taking my question.
I just wanted to get.
Some color I appreciate the color on lead times I was wondering if you could just give us some color on what the remaining hurdles are to kind of get those lead times down whether those are internal or external.
Yeah, I would say a couple of critical things. One is you know continued.
Ply chain is much better today than it was a year ago.
But we need that supply chain to continue as we've 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 in factor in Alger and because I think we've done a pretty good job, but the majority of the rest of our businesses you know where we have both maintained high demand and reduce lead times, but because our orders have continued to be strong.
Despite the fact that production at Allergan factor was up Q3, 12%.
We are very focused on increasing building more trucks, we've engaged a third party at Allergan, we talked about as part of our federal single operating model.
You know we're in the middle of that process.
And yeah, we are laser focused on ink.
Increasing production, while maintaining a healthy order intake.
Got it that's super helpful. And then kind of switching over to standard equipment, because you have to give a kind of quantify what the revenue of that acquisition would look like.
No just just to give you some telephone set of standards for the last couple of years standards revenues that run in the $40 million 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 with our aftermarket team you know we.
With that we're going to apply our 80 20 models. So there could be changes to the revenue dynamics that obviously, we sold units to standard equipment as as a matter of fact or so there will be some kind of balance that but we expect the incremental revenue contribution in 2020 five to.
In the in the range of about $20 million and we expect that to build over time.
Speaker Change: As we look to grow that aftermarket business, but and also then push additional federal signal products through that channel.
Speaker Change: But overall, we expect the acquisition to be accretive to both earnings as well as cash flow in 'twenty five.
Got it that makes a lot of sense. So seasonally should we think about you said $20 million and 25 so.
Speaker Change: <unk> 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 that primarily in Illinois, and Indiana. So you know with with weather and being an impact primarily in Q4 and in Q1.
That's typically some seasonality with Q2 and Q3 being typically being stronger for them.
Got it and then the <unk>.
<unk> million revenue benefit should we how should we think about the split between aftermarket and new equipment, how that flows through.
Yes, it's roughly 50 50, I mean, they do a really nice job on the pop side of the business as well as service. They so so it's a fairly even split between between the two.
Got it that's super helpful. I will leave it there.
Speaker Change: Thanks Sam.
The next question is from Chris Moore of CJS Securities. Please proceed with your question.
Good morning, Good morning, guys. Good morning.
Right, Yeah, maybe stay with aftermarket for a moment. So obviously lots of companies talk about aftermarket sales you.
Chris Moore: You know one thing Jennifer that you've referenced a few times is kind of growing ecosystem within federal signal that that kind of positions you uniquely I. Just wondering if maybe you could go into that a little bit cheaper.
Speaker Change: Yeah absolutely.
So we think of it is important to look at kind of all of the revenue streams of aftermarket revenue need the rental the service parts.
And the used equipment.
Chris Moore: 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.
Or having a more challenging time affording new equipment that hydro equipment in some of our most expensive equipment that we sell.
Speaker Change: 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 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.
Ment of their parts of their service and their used equipment think about it the same people that buy municipal three 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 aftermarket ecosystem.
And as we acquire companies, we will 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.
Speaker Change: And you know we tried to 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 and Chris I'll, just kind of give some data points on kind of the growth that we've seen in the after market business really between 2018 and 2023, if you look at our POS sales, it's grown 83% and our rental revenue.
Speaker Change: <unk> 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.
Speaker Change: Yeah.
Got it very high and.
Since from 18 to 23 from a kind of geographic penetration.
Speaker Change: Penetration.
Speaker Change: Looks much different.
Speaker Change: Yeah, absolutely absolutely yeah.
And again as we talked about it could mute cyclicality of earning streams. So again that hydro excavation example.
I can't afford new equipment, and we've got rental and used equipment, either through us or our valued dealer partners.
Got it very helpful switch gears. So order cancellations can be you know 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.
Speaker Change: Worse today.
It's typically not something in our history that we've seen in our business as you know 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 nobody's selling we've seen Montreal.
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 off.
Speaker Change: 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 E D.
Speaker Change: Sweeper products E V dump truck products, we've done our 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 E V Street sweeper product.
And so you know 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.
Fair enough I will leave it there thanks guys congrats.
The next question is from Greg Burns of Sidoti and company. Please proceed with your question.
Good morning, Greg.
Good morning, I'm, just staying on the the aftermarket.
Given the strong demand for rental or are you constrained in any way on that side of the business there needs to maybe.
Greg Burns: Invest more into your own fleet of vehicles, and how do you balance that against the need to kind of reduce lead times and like you say build more trucks.
Yeah, I think Greg we its obviously something we monitor closely and we can you know we monitor utilization levels with we're making decisions about whether to add to the fleet.
Speaker Change: We talked earlier in the year about an incremental investment of about $20 million going into the fleet.
Speaker Change: The used and rental that is you know that we're at a 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 facilities, but doesn't necessarily get the revenue on the income immediately on those that comes up more over time and so so I think with you know where are we.
We sit today I think that's 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 the fleet size remains the same.
Speaker Change: But as we you know I think for the for that.
For this year for 2024, I think we're in good shape and as we head into the planning process for 2025, that's why I will make make decisions about how much we need to add to the fleet, but again, our our approach really is a multipronged approach, where we rely on several valuable.
Speaker Change: He had rental partners.
On the rental side of the business as well.
Okay, and then did you have any production disruptions from the hurricane the.
The Hurricane season, and then also I was just wondering.
Speaker Change: If theres been any.
Changing 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.
Let's start with the Hurricane we had our service center in Tampa was down for a couple of days.
Speaker Change: But the teams did a nice job.
Speaker Change: In terms of getting them back up and running again our teams in the Carolinas just did a fantastic job assisting in aiding many citizens and delivering supplies in North Carolina.
Speaker Change: Hmm.
Speaker Change: With respect to going forward.
To date, we haven't seen any impact regarding the election.
You know we did you know there's a lot of discussion around tariffs.
Speaker Change: 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.
Speaker Change: So we think we're well positioned regardless of who wins the election.
Speaker Change: And you know, we often get asked about kind of infrastructure spending.
Speaker Change: You know to date it has had a minimal impact and we still remain in a strong order patterns. You know it was it was bipartisan support for that a piece of legislation.
So let's move forward, we feel pretty good.
Alright, thank you.
The next question is from Dave storms of Stonegate. Please proceed with your question.
Speaker Change: Good morning, Dave.
Speaker Change: Morning.
Dave: Just wanted to start with a strong cash position are there any growth initiatives that may have been outside of your plants are scope at the beginning of the year.
Dave: That may be becoming more feasible given the strong cash growth from a year.
Yeah, I think Dave. The you know we went I think we went into the year with a capex range of about 35 to 40 million and we still think that's appropriate.
Dave: As we go into 2025, there are probably you know with each of our businesses.
Dave: Present, there their requests almost of a capsule and the different organic initiatives that they might need some funding. So we will take a look at that as we go through our planning purposes, you know again that $35 million to $40 million about half of that's about half capex or maintenance capex and half is growth.
As 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 that hasn't necessarily been a change in in our priorities or in the projects that we don't invest in during this year, but as we go into 2025, it's something we'll take a look at.
Yes, 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.
Tween labor and square footage of.
Dave:
Speaker Change: Bob.
Processing lines, and maybe how that fits with the comfort of your backlog.
Speaker Change: So you know between the period of 2019 and 2022, we added significant capacity.
You know, 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 to purchase the University Park facility and we highlighted some of the benefits of that in our prepared remarks, but we also made capacity expansions at rugby like 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 Capex.
That gross 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 and 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.
Speaker Change: 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.
Speaker Change: This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Speaker Change: [music].