Federal Signal - Earnings Call - Q3 2017
November 2, 2017
Transcript
Speaker 0
Good day, everyone, and welcome to the Federal Signal Corporation Third Quarter Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Jennifer Sherman, Chief Executive Officer. Please go ahead.
Speaker 1
Good morning and welcome to Federal Signal's third quarter twenty seventeen conference call. I'm Jennifer Sherman, the company's President and Chief Executive Officer. Also with me on the call today is Ian Hudson. As you may have seen, we recently announced that Ian has been promoted to the position of Chief Financial Officer. Ian has surged in that role in an interim capacity since March, and we are thrilled to have successfully transitioned the leadership of our financial function to a professional of his expertise and caliber.
A collaborative leader, he brings deep accounting and financial expertise, extensive knowledge of our company and pragmatic problem solving to the position. Ian is known to our internal and external stakeholders, including the investor community as an outstanding financial executive who has played a key role in our recent strategies. With that, I'd like to turn the call over to Ian.
Speaker 2
Thank you, Jennifer. I'm glad to be starting my new role talking about another strong quarter. Before we begin, there are a couple of housekeeping matters to address. Firstly, we will refer to some presentation slides on today's call as well as to the earnings news 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 and the news release under the Investor tab on our website. I'd also 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 the measures that are not in accordance with U. S.
Generally Accepted Accounting Principles. In our news release and filings, we reconcile these non GAAP measures to GAAP measures. In addition, we will file our Form 10 Q later today. I'm going to start today by addressing our third quarter financial results. Jennifer will then provide her perspective on our performance, our outlook for the remainder of this year and her thoughts on market conditions as we enter into 2018.
After our prepared comments, Jennifer and I will address your questions. Our consolidated third quarter financial results are provided in today's earnings news release. As a reminder, the third quarter of this year includes the operating results of Truck Bodies and Equipment International or TBEI, which we acquired on June. The results of TBEI have been included within our Environmental Solutions Group for the quarter. Overall, our third quarter results exceeded expectations.
Consolidated net sales for the quarter were 248,700,000 up $62,000,000 or 33% compared to the third quarter of last year. Excluding acquisition related effects, our organic sales growth for the quarter was about 8%. Operating income for the quarter of twenty two point two million dollars was up $8,700,000 or 64%, primarily driven by an $8,700,000 increase within our Environmental Solutions Group. Within our Safety and Security Systems Group, third quarter operating income decreased by $400,000 while corporate expenses decreased by a similar amount. Consolidated operating margin for the quarter was 8.9%, up from 7.2% in the prior year quarter.
Consolidated adjusted EBITDA for the quarter was $33,300,000 up $11,000,000 or 49% compared to Q3 last year. That translates to a consolidated adjusted EBITDA margin of 13.4% in Q3 this year compared to 11.9% last year. Income from continuing operations was $12,500,000 in Q3 this year compared to $7,500,000 last year. That translates to GAAP EPS of $0.21 per share,
Speaker 1
which compares to $0.12
Speaker 2
per share last year. On an adjusted basis, EPS for Q3 this year was $0.24 per share, which is up $07 or 41% compared to $0.17 per share last year. Order intake continued to be positive with total orders of $229,600,000 in Q3 this year, an increase of $43,500,000 or 23% compared to the prior year quarter. The improvement was largely driven by organic order growth of approximately $13,000,000 or 7% and the effects of the TBEI acquisition. We ended the quarter with a consolidated backlog of $2.00 $4,000,000 which was up $55,000,000 or 37% compared to last year.
At the group level, ESG sales of $198,500,000 were up $64,200,000 or 48% compared to last year. TVEI added $47,000,000 of sales to the quarter and higher domestic shipments of sewer cleaners, vacuum trucks and street sweepers contributed to a $17,000,000 organic sales improvement within ESG. ESG's operating income for the quarter was $21,200,000 up from $12,500,000 in Q3 last year and its operating margin for the quarter was 10.7%, up from 9.3% last year. ESG's adjusted EBITDA for the quarter was $30,700,000 up $10,900,000 or 55% from a year ago. That translates to an adjusted EBITDA margin of 15.5 in Q3 this year compared to 14.7% last year.
ESG reported total orders of $178,200,000 in Q3 this year, an increase of $42,200,000 or 31% compared to the prior year quarter. Excluding acquisition impacts, organic order growth was approximately $11,000,000 or 9% largely due to improved domestic orders for sewer cleaners, street sweepers and vacuum trucks. Within SSG, third quarter sales were down $2,200,000 or 4%, largely due to lower global sales of public safety products and its operating income in Q3 was $6,100,000 compared to $6,500,000 last year. SSG's adjusted EBITDA for the quarter was $7,300,000 down from $8,000,000 a year ago, partly due to incremental strategic investments made in support of new product development initiatives. SSG's adjusted EBITDA margin for Q3 was 14.5% this year compared to 15.3% last year.
SSG reported total orders of $51,400,000 an increase of $1,300,000 or 3 percent from last year, primarily due to improved international orders for industrial products. Corporate operating expenses for the quarter were $5,100,000 compared to $5,500,000 a year ago. The decrease was primarily driven by a net reduction in employee compensation expenses and lower pension costs, partially offset by higher acquisition and integration related expenses. Turning now to the consolidated income statement, where the increase in sales contributed to a $16,000,000 improvement in gross profit. Consolidated gross margin improved to 24.6% for the quarter, up from 24.3 last year.
Selling, engineering, general and administrative expenses of $38,300,000 were up 23% compared to the prior year quarter, largely due to the addition of expenses of businesses acquired in the current year and a $2,200,000 increase in amortization expense. We also incurred $400,000 more in acquisition and integration related expenses in Q3 this year, which was partially offset by lower restructuring charges. All of these factors roll into the company's $22,200,000 of operating income for the quarter. Other items affecting the results include a $2,100,000 increase in interest expense associated with higher average debt levels following the TVEI acquisition and a $200,000 increase in other income. Tax expense for the quarter was up $1,800,000 due to higher pre tax income levels and the effects of an increase in the state tax rate in Illinois, which was effective at the beginning of Q3.
The rate increase required us to re score our net deferred tax liabilities at the higher rate, which resulted in the recognition of 600,000 of additional tax expense as a discrete item in the quarter. As a result, the effective tax rate for Q3 was 37.5% compared to 43.2% in the prior year. We expect our full year effective tax rate for 2017, excluding discrete items, to be approximately 35%. Our cash tax rate for the year is expected to be approximately 30%. On an overall GAAP basis, we therefore earned $0.21 per share from continuing operations in Q3 this year compared with $0.12 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 restructuring charges, acquisition related expenses, purchase accounting expenses and the effects of the tax rate change that I just mentioned. On this basis, our adjusted EPS for the quarter was $0.24 per share compared with $0.17 per share in Q3 last year. We generated $6,300,000 of cash from continuing operations in Q3 this year compared to $13,200,000 last year. In the current year quarter, we funded tax payments of approximately $11,000,000 an increase of about $8,000,000 compared to Q3 last year.
Our total year to date operating cash flow was $52,100,000 up $35,000,000 compared to last year. During the quarter, we paid down an additional $9,000,000 of borrowings, bringing the total amount of debt paid down since we completed the TVEI transaction in June to almost $30,000,000 Our pro form a debt leverage ratio at the end of Q3 was 2.3 times, down from 2.4 times at the end of Q2 and down from 2.7 times at the closing of the acquisition in June. We ended the quarter with $255,000,000 of net debt and $99,000,000 of availability under our credit facility. With the healthy cash flows expected to be generated by our businesses, we continue to be focused on delevering in the short term. However, the long term priorities for our capital are unchanged.
And while maintaining strong liquidity and flexibility, we remain committed to investing in organic growth initiatives, considering additional M and A opportunities and returning value to shareholders. On that note, we paid a dividend of $07 a share during the third quarter, amounting to $4,200,000 and we recently announced a similar dividend for the fourth quarter. In October, we also launched a voluntary lump sum pension offering to certain participants of our frozen benefit plan. Because the lump sum payments will be made using assets of the pension plan, they will not impact the company's cash flow. In connection with the lump sum offering, we expect to incur a pretax non cash settlement charge of up to $7,000,000 in the fourth quarter of this year when payments are due to be made.
We also anticipate that the lump sum offering will help reduce our pension liabilities and related expenses going forward. That concludes my comments, and I would now like to turn the call over
Speaker 1
to Jennifer. Thank you, Ian. We are pleased to report another outstanding quarter with significant year over year growth in orders, sales and earnings. The 7% organic order growth was particularly encouraging. We also benefited from some earlier than expected shipments associated with changes in customer delivery requirements, which accelerated the recognition of about $01 of earnings from the fourth quarter into the third quarter.
Our strong third quarter performance was largely driven by continued momentum within our Environmental Solutions Group, which reported a $42,000,000 year over year improvement in orders. As we mentioned back in August, were not expecting the growth in orders from customers replenishing rental fleets to continue at the same pace in the second half of the year as in the first half. Despite this, continued strength in municipal demand for sewer cleaners in the third quarter as well as continued progress with our initiative to expand into the utility market contributed to organic growth of approximately $11,000,000 compared to the prior year quarter. On the utility initiative, our year to date sales have increased by almost 60%. We now have a dedicated sales team in place and are also exploring potential channel partnerships to accelerate our progress.
In addition, we are seeing high levels of utilization of our equipment in our rental fleet, which have been steadily increasing throughout the year. As a result, rental income during the third quarter of this year was up almost 40% compared to the prior year quarter. Given the high levels of utilization within our rental fleet and the higher demand for used equipment, we might consider making additional net investment of up to $20,000,000 over the next couple of quarters. Such investment will represent a combination of fleet replenishment as we sell units out of fleet and an increase in the number of Federal Signal products that have particularly high demand and attractive returns. Along with many other companies, our business was impacted by Hurricane Harvey during the quarter.
Our Environmental Solutions Group had three facilities in the Houston area. Fortunately, our operations suffered minimal damage. However, a number of our employees were affected with individuals losing possessions and having difficulty getting to work because of the flooding. Our operations were closed for about a week with it taking a couple more days before we were fully operational. The teams did an outstanding job in catching up on production and deliveries, recovering most of the activity to minimize the impact on the quarter.
It was heartening to see our dedicated teams rally and do what was necessary to take care of our customers and each other. Within our Safety and Security Systems group, we've seen some timing related deferrals of domestic orders from a couple of our larger municipal customers on the public safety side this year. Nonetheless, we believe we are continuing to gain market share in a generally flat market. As you might recall, one of our businesses within SSG, Vama has operations in the Catalunian capital Barcelona and services customers in Spain, Europe and South America. Vama contributes approximately 4% of our annual net sales on a consolidated basis.
We are currently monitoring the current political situation there. Although we have seen some order deferrals this year, it is too early to determine the potential longer term impact on the business because of the political unrest. It is something we are watching closely as we head into the fourth quarter and into next year. We have seen the benefits of the applications of our eightytwenty initiatives, including material and labor cost reduction actions implemented last year that have contributed to a two ten basis point improvement in our gross margin so far this year. And similar eightytwenty initiatives are ongoing at a number of our businesses.
Although SSG's EBITDA margin for the quarter was slightly below our target range, it was partly due to additional strategic investments made in support of new product development initiatives like the expansion of the G Series product line, a range of internationally certified industrial products. We also have a number of early stage initiatives that we are pursuing. Such investments are expected to benefit SSG over the longer term. Let me give you a couple of examples. Over the last year, we partnered with a company in Europe to provide a body worn video camera offering in The States that we can provide to our existing customers.
We now have a differentiated product and the sales team is preparing for its commercial launch. In addition, we are also working to develop products to support the next generation of law enforcement with a focus on streamlining the installation and maintenance of vehicles while reducing their weight and supporting interconnectivity between disparate software and hardware systems. We are currently field testing the products with one of our customers. I'd now like to spend a minute providing a brief update on the TBEI and JJE acquisitions. We are pleased with TBEI's contribution since we closed the acquisition at the June.
As a reminder, TBEI's results during the summer months tend to be stronger than other periods, while the fourth quarter tends to be its softest quarter. We are making significant progress with our integration efforts, which include recently moving two high potential employees from our Environmental Solutions Group into key management roles at TBEI. TBEI is still on track to deliver the accretion estimates previously communicated for 2017. With respect to the JJE acquisition, we are now approximately eighteen months in and we remain on track to deliver on the accretion estimates issued at the closing of the JJE transaction in June. From a strategic standpoint, the acquisition has allowed us to provide a more comprehensive suite of offerings to our customers as demonstrated by the increased rental activity I just talked about.
Application of our eightytwenty principles at JJE is ongoing as we consider optimizing the composition of product lines within the rental fleet. Overall, the acquisitions are performing within our expectations and are delivering on our strategic objectives. I would now like to move on to our outlook for 2017. Our North American municipal markets continue to be steady with particularly strong demand for sewer cleaners. As I mentioned earlier, we are monitoring the political situation in Catalonia, which may impact our Vama business, which historically has a strong fourth quarter.
Within our industrial markets, sales have improved and we continue to make progress with our initiative to expand in the utility market. And while still in early days, TDDI is off to a strong start. Taking all of this into account and after factoring in our third quarter performance and the growth in organic orders contributing to a strong backlog, particularly for vacuum trucks and sewer cleaners, we are raising our full year 2017 adjusted earnings outlook to a new range of $0.79 to $0.82 per share from a previous range of $0.77 to $0.80 per share. The updated earnings outlook excludes any non cash pension settlement charge that Ian alluded to earlier. As we began to look forward into 2018, we are encouraged with the growth in industrial orders that we've seen this year.
The number of used equipment units available at auctions appears to have stabilized at a more typical level than in recent years. Utilization levels within our rental fleet are strong, particularly relating to products serving industrial markets like vacuum trucks, hydro excavators and water blasting equipment. And again, I'm pleased with the progress we are making with our plan to expand into the utility market. We also now monitor industry data on new housing starts and activity within Class eight trucks, which we believe have a correlation to TBEI's business. Both of those have a generally positive outlook for next year.
On the municipal front, our U. S. Markets remain healthy overall with strong demand for sewer cleaners. In addition to the situation in Spain, we are also monitoring market conditions in The Middle East. During 2017, some larger fleet orders from customers in that region were deferred.
Although we do not believe these orders have been lost, the timing of receiving such orders remains uncertain. I'm encouraged by the strength of our backlog, the progress we've made to date on our acquisitions and the execution of our strategic initiatives. Our ongoing focus on eightytwenty principles has also led to operational improvements in several of our businesses that underperformed in 2016. As we demonstrated in 2017, including in the recent trial in Pittsburgh, we are committed to vigorously defending the company's position in its hearing loss litigation. With more trials currently expected to take place in 2018, our legal expenses may increase in comparison to 2017 levels.
In addition, for us to operate towards the higher end of our consolidated EBITDA target range, we would need our end markets, including oil and gas, to be strong. We continue to believe that M and A will be an important part of our growth in 2018 as we strive to achieve our goal of exceeding $1,000,000,000 in revenue. We will provide a more detailed view on 2018 at our next earnings call. With that, we are ready to open the line for questions. Operator?
Speaker 0
Thank Our first question is from Chris Moore from CJS Securities.
Speaker 2
Good morning, Chris. Good
Speaker 1
Good morning. Thank you.
Speaker 3
Just on a relative basis, looking at the industrial versus municipal market, sounds like the vacuum trucks and sewer cleaners are doing extremely well. From a momentum standpoint, I mean, the industrial looking stronger than the media at this point in time? And any reason to think that will shift at any point?
Speaker 1
Right now, we're seeing strong growth in the industrial markets, particularly on the utility business. We've been encouraged by the pull through that we've seen with respect to our Paradigm product, which has included both our Prodigy and our HXX product and marginal recovery in our demand for hydros. We've talked previously about we've launched some new products into that market, particularly our Wolf product out of our Westech acquisition, which has been performing in line with our expectations. We've also experienced kind of a positive pickup on water blasting. On the municipal side, we've talked a lot this quarter about the strong demand for sewer cleaners, but that's been offset by some deferrals that have affected our police business in The U.
S. We don't believe that we've lost those orders and we expect to pick them up either later next year later this year or into next year.
Speaker 3
Got you. That's helpful. Just in terms of again saying a little bit bigger picture that looking at the gross margins for ESG versus SSG, Move over the next year or two, where is it going to be easier to get some incremental margin?
Speaker 2
Yes, Chris, I think I would probably when we look at the gross margin, one of the things that we benefited from probably a couple of years ago was just the leverage from the high volumes we had when oil and gas markets were really growing and going. That's probably in terms of the two, ESG or SSG, I think the margin improvement could result from kind of the incremental volumes that we've seen this year. So that would be one factor. I think within SSG, we've seen, as Jennifer mentioned in the comments, the two ten basis point improvement in our gross margin year to date. That's really a function of some of the material and labor cost reduction initiatives that we've put in place in the last couple of periods, really applying our eightytwenty principles.
And so that's an important part of the story too and the margin improvement. Those eightytwenty principles, we're going to continue to apply those to try and squeeze a couple some more margin improvement from both of the businesses.
Speaker 3
Got you. One thing Jennifer had mentioned at the end was that it would require probably some improvement on the oil and gas side in order to meet target EBITDA margins. Are you seeing anything much significant improvement there?
Speaker 1
We talked about the improvement in utilization with respect to our rental fleet and we think some of that is coming from oil and gas. We're still we're starting to see, I'd say internally green shoots with respect to recovery. But we think that any kind of meaningful recovery in oil and glass to positively impact us, because we expect there to be some kind of lag before we would actually benefit from the improvements.
Speaker 3
Got you.
Speaker 4
All right. Appreciate it guys.
Speaker 1
Thanks, Chris. Thanks, Chris.
Speaker 0
Our next question comes from Ken Newman from KeyBanc Capital Markets.
Speaker 5
Hey, good morning, guys.
Speaker 1
Morning, Good morning, Ken.
Speaker 5
Just wanted to go back to the ESG orders. I'm curious, are you seeing big multi unit orders for ESG? Are those higher volume of small orders? Or is this different from what you've seen in the past order cycles?
Speaker 1
It really varies year to year. And during 2017, we haven't seen large fleet orders like we've typically seen in the past with the exception of Vactor Caltrain order, which was a large fleet order. We've also talked about The Middle East, which again typically are the large fleet orders. And although we haven't lost those opportunities, they've been moved out of 2017. So the answer is in general, no, it's been smaller orders that's been driving the increases.
Speaker 5
Got it. And I guess as a follow-up to that, can you maybe talk about what you have in backlog that is set for delivery in 2018, anything beyond 2018 within backlog?
Speaker 2
Yes, Steve, probably would say that because of the recent strength of the sewer cleaners, we have a pretty strong backlog right now for sewer cleaners as well as for vacuum trucks, just because of some of the momentum in the orders. Those will likely extend into the 2018, those deliveries. So that's probably the in terms of backlog, it's probably strongest for sewer cleaners and vacuum trucks.
Speaker 5
Got it. And then just one more for me and then I'll get back in queue. In terms of the acquisitions, can you maybe just talk a little bit about the number of deals you're looking at that might be considered realistic and maybe a little color on the revenue range of what you're seeing?
Speaker 1
Yes. Although we don't provide specifics, M and A pipeline continues to be robust. As we sit here right now, we are likely to take a brief pause as we focus on delevering. But we still believe that M and A will continue to be a significant driver of growth in 2018. And I'm pleased that we have a strong team in place to help us achieve those objectives.
Speaker 5
If you kind of look at that pipeline, is it geared more towards ESG versus the muni side?
Speaker 1
I think that right now the opportunities as you know really vary. Right now as we sit here, they probably gear more towards the ESG side.
Speaker 5
Got it. Thanks. I'll get back in line.
Speaker 0
And moving on, we have a question from Walter Liptak from Seaport Global.
Speaker 6
Morning, Good morning, Good morning, Congratulations on the good quarter. I wanted to ask about it sounds like the acquisitions, TDI and JJE are going well. And I wanted to ask, if you could just refresh our memories on the accretion that you're expecting in 2018 from TDI. And if I recall, JJE was a little bit of a because of the rental fleet that it became more accretive as time goes on even into 2019. But if you could just refresh us on what the accretion will be for 2018 or is expected to be?
Speaker 1
Yes. The first thing I'd probably point out is we closed both the TDDI transaction and the JJE transactions in June 2016 and June 2017. And the way we presented the accretion information was on the anniversary of the closing date. So what we said for JJE is with respect to year three, third year anniversary would be $0.10 to $0.15 and then TDDI in the second anniversary would be between $07 and $0.12 and we still feel very comfortable with those accretion estimates. Okay.
Speaker 6
All right. So if we just kind of round to the middle ground, sounds like maybe $0.10 for each one accretion in 2018. So working off of a base of $0.80 it looks like you're going to have a nice ramp in earnings from these acquisition accretion in 2018.
Speaker 1
Yes. Mean, what I would caution you is again, the $07 to $0.12 is really from June 2018 through June 2019 and will be in year three beginning in June 2018 for JJE will start year three. So again, 10 to fifteen you have to take that six months into account.
Speaker 6
Okay. All right. Fair enough. Want to just switch gears and ask about TBEI and just how that's doing? Some of the truck data that you referenced looks like it's picking up for truck orders and the economy is strong for housing as you pointed out.
How were their orders in or how did their orders grow year over year at TBEI?
Speaker 1
With respect to the third quarter, we talked about there was $47,000,000 of revenue in the third quarter and $3,000,000 of operating income. The orders for TBI were $41,000,000 It gets real noisy trying to do a year over year comparison because they acquired Travis during the third quarter of last year. So we're encouraged by where we are. I guess the other thing I would note is we talked previously about the 3,000,000 to $4,000,000 of synergies that we'll deliver by year three and we're on track to deliver those synergies. I talked to Nicole about we've taken two of our high potential employees from our legacy ESG businesses and now they're in key management roles at TDEI.
So to date, we're encouraged by where we are.
Speaker 6
Okay, great. So it sounds like TDDI is growing?
Speaker 1
Yes, we would expect through the cycle that TDDI would have GDP plus growth rates.
Speaker 6
Okay, great. And then maybe if I could ask one more just on material costs have been coming up and I wonder what your pricing strategies have been. Have you implemented a price increase during the quarter? And what do you have you announced anything for next year yet?
Speaker 2
Yes. Well, we typically have a price increase at the beginning of next beginning of the year. So we'll in most of our ESG businesses, the price increase will go into effect 01/01/2018.
Speaker 6
Okay. All right, great. Thank you. I'll get back in queue.
Speaker 2
Thanks, Walt.
Speaker 1
Thanks, Walt.
Speaker 0
And moving on, we have a question from Marco Rodriguez from Stonegate Capital Markets.
Speaker 6
Good morning, Marco. Good morning, Good morning.
Speaker 4
Hey, guys. Thanks for taking my questions.
Speaker 6
I kind of wanted to follow-up
Speaker 4
some of prior questions here. Just first kind of talking a little bit about the end market demand. It seems like if I understood you correctly, the muni is kind of pretty stable, but some good growth on the sewer side of the utility side. Industrial seems to be taking back up. Can you maybe parse those areas a little bit more and kind of talk a little bit about where the strength is coming from as far as especially on the industrial side, what sort of end markets?
Speaker 2
Yes. So Marco, if we look at just Q3 kind of quarter over quarter, Industrial is up pretty $47,000,000 in orders, 97%. Some of that's the addition of TBI, as Jennifer mentioned, that added $41,000,000 of orders to the quarter. But outside of that, as we think about kind of the organic improvement, where we're seeing strength in particular is on vacuum trucks, that would include our hydro products as well as the Paradigm in the utility markets. As we talked about previously, we launched that the Paradigm product in Q3 of last year.
Sales of that product are up year to date 60%. So we're seeing some real momentum in that market as we execute on our strategic initiatives to expand into that space, which is, as we've talked about, it's a new market for us. So we're really encouraged by that.
Speaker 4
Got you. And so the strength that you've seen in the utility market, I mean, I know you guys have talked about it in the last few quarters where you have seen some positive movements there, but it kind of seems like it's picked up here in this last quarter where you've now called out a dedicated sales team. Is that just the groundwork you've put in over the last year or so has finally started to kind of take shape or were there any other sort of circumstances that kind of drove that strength there?
Speaker 1
Yes. As we previously talked about, three years ago, we started the work with respect to entering the utility market because we wanted a suite of products. Paradigm is we launched last July. The sales force was not complete until the beginning of this year. In addition to that, where we've been encouraged is not only with respect to sales of the Paradigm, but the pull through of some of our other hydro products, particularly the Prodigy and our larger HXS.
So it's really a combination of all of those things that we're starting to see the momentum. And as we move forward, we continue to look for additional channel partners. So we think there's more opportunity as we go into 2018.
Speaker 4
Got you. And your movement to looking for these additional channel partners, I mean, how should we be thinking about that from a timing perspective?
Speaker 1
It's ongoing right now and it won't be one partner, it will be a series of partners as we move forward.
Speaker 4
Got you. And you had mentioned in your prepared remarks that you guys had some, I guess, some orders that pulled through in Q3 that, I guess, you were expecting for Q4. Were they in a particular segment or industry?
Speaker 1
Yes. On our SSG side of the business, we had a customer demand that pulled forward a series of orders from Q4 to Q3 that represented about $01 of
Speaker 6
earnings. Got
Speaker 4
And keeping on the ESG side, you mentioned adding or early thinking about adding an additional $20,000,000 in investments to rental fleet side. Can you maybe talk a little bit about the timing of that potential investments?
Speaker 2
Yes. I think, Mark, we say over the kind of next couple of quarters, one other thing obviously, it's not all adding units to the fleet. It's predicated on us selling units out of the fleet. We've seen some pretty strong demand for used equipment out of the fleet, as we sell that equipment. So it's going to somewhat be paced based on how we sell the units out of the fleet, the replenishment.
So it's not going to be in terms of the cash flow impact, it's not going to be one big slug of $20,000,000 It's going to be gradually paced over the next couple of quarters depending on when we sell the units out of the fleet.
Speaker 4
Got you. And last quick question, just kind of a housekeeping item. On your gross margins, I don't think I caught the gross margins by segment, but it looked like aggregate wise, you got about 100 basis point improvement if you add back in the inventory step up. Can you maybe talk a little bit about that as far as the buckets that helped improve that?
Speaker 2
Yes, yes, sure, Marco. So the gross margins, they'll be in the you'll be able to see them in the Q, but just to give you some idea of the improvement, ESG improved 22% versus 19% last quarter and SSG was up 39% this quarter versus 37% last year. We talked I talked a little bit about the benefits that we're seeing on the SSG side from the material and labor reduction actions we took in the prior year. And then on the ESG side, it's really kind of a mix and a volume impact that we're seeing that's helping drive that improvement in the margin on the ESG side.
Speaker 4
Got you. Thanks a lot guys. I appreciate your time.
Speaker 6
Thank Thank you.
Speaker 0
You. We'll take a follow-up question from Walter Liptak from Seaport Global.
Speaker 6
Hi, thanks. Just a couple of quick follow ups on SSG, the timing of the public safety orders. So you're expecting those in fourth quarter or is that something where it comes through in 2018?
Speaker 1
A couple of orders from our large U. S. Municipal customers have been deferred. Right now, it's unclear whether it be Q4 or early next year. And then the other thing I would add, as I mentioned on the call, although a small part of our business, as you know, our Vama business is located in Catalonia.
And typically, the fourth quarter is one of their strongest quarters. And we're currently monitoring the political situation to understand what impact if any it might have on the fourth quarter and going into 2018.
Speaker 6
Okay. Did you see some disruption with drama this quarter?
Speaker 1
We haven't seen a lot of disruption yet and but we're continuing to monitor it going forward.
Speaker 6
Okay, great. And then I wanted to ask about the body video camera that you referenced and it looks like you're making some investment into. I wonder if you could talk about just the timing of commercialization, how do you do that, what the market opportunity could be for this product?
Speaker 1
We're still in early days. We partnered with a company in Europe, AdeFix, who is a leading provider of body camera equipment in UK. We just got our channel in place in July. We think three years out this could be a 15,000,000 to $25,000,000 opportunity. But we're still in early days.
And this is typically a pretty long sales cycle. So it's something that we're encouraged by the product that we have. It's differentiated from our competitors. But we'll keep you updated as we go forward.
Speaker 6
Okay, sounds good. Thank you.
Speaker 0
And it appears there are no further questions at this time. Ms. Sherman, I'll turn the conference back to you for additional or closing remarks.
Speaker 1
Sure. Thank you. In closing, I'd like to reiterate that we are confident in the long term prospects for our business and our markets. I'd like to express our thanks to our stockholders, employees, distributors, dealers and customers for their continued support not only of the company, but during the recent Hurricane Harvey. Thank you for joining us today and we will talk to you next quarter.
Speaker 0
And that does conclude our conference today. Thank you for your participation. You may now disconnect.