Federal Signal - Earnings Call - Q3 2019

Transcript

Speaker 0

Greetings, and welcome to the Federal Signal Corporation Third Quarter twenty nineteen Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Ian Hudson, Chief Financial Officer for Federal Signal Corporation. Thank you. You may begin.

Speaker 1

Good morning, and welcome to Federal Signal's third quarter twenty nineteen conference call. I'm Ian Hudson, the company's Chief Financial Officer. Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer. We will refer to some presentation slides today as well as to the earnings release which we issued this morning. The slides can be followed online by going to our website, federalsignal.com, clicking on the Investor Call icon and signing in to the webcast.

We have 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 earnings 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. I'm going to begin today by providing some detail on our third quarter results before turning the call over to Jennifer to provide her perspective on our 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 results are provided in today's earnings release. As a reminder, the financial results for the quarter include Mark Wright Lines Equipment, or MRL, which we acquired on July 1. The results of MRL 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 were $308,800,000 up $39,400,000 or 15% from last year. Consolidated operating income for the quarter was $38,600,000 up $8,200,000 or 27%. On an adjusted basis, consolidated operating margin was 12.7%, up from 11.5% in Q3 last year. Consolidated adjusted EBITDA for the quarter was $49,800,000 up $10,100,000 or 25% from Q3 last year. That translates to a margin of 16.1%, exceeding our target range and up from 14.7% last year.

Net income in Q3 this year was $28,400,000 compared to $21,700,000 last year. That equates to GAAP earnings of $0.46 per share, up from $0.36 per share last year. On an adjusted basis, EPS for Q3 this year was $0.47 per share, which compares to $0.36 per share last year. Order intake in Q3 this year continued to be strong with total orders of $329,000,000 an increase of $61,000,000 or 23% compared to the prior year quarter. We ended the quarter with a consolidated backlog of three sixty seven million dollars which was up $46,000,000 or 14% compared to last year.

Turning now to our group results, where both of our groups delivered significant year over year EBITDA margin improvement. ESG reported third quarter sales of $254,000,000 up 37,700,000 or 17% compared to last year. The revenue growth was largely driven by increases in shipments of safe digging vehicles, dump truck bodies and street sweepers, as well as a $22,600,000 contribution from MRL. ESG's operating income Q3 this year was $35,900,000 up $7,600,000 or 27% from last year. Adjusted EBITDA for the quarter was $46,000,000 an improvement of $9,300,000 or 25% from a year ago.

That translates 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. ESG's orders in Q3 this year were $270,200,000 up $55,700,000 or 26% from last year, with orders from the MRL acquisition accounting for approximately $40,000,000 of that growth. Organically, ESG's orders were up $16,000,000 or 8%. SSG reported third quarter sales of $54,800,000 up 1,700,000 or 3% from last year. SSG's operating income in Q3 this year was $8,600,000 up 8%.

Its adjusted EBITDA for the quarter was $9,400,000 up from $8,700,000 a year ago and adjusted EBITDA margin was 17.2%, up 80 basis points from 16.4% in Q3 last year. SSG's orders for Q3 this year were $58,600,000 up $5,000,000 or 9% compared to last year, with the increase largely due to higher global orders for public safety products. Corporate operating expenses for the quarter were $5,900,000 essentially unchanged from Q3 last year. On a consolidated basis, the increase in sales contributed to an improvement in gross profit of $13,000,000 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, our 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 $200,000 increase in other expense and a $100,000 reduction in interest expense. Although tax expense for the quarter was up $1,400,000 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 recognized a $600,000 tax benefit following the completion of a tax audit in Spain and an additional $600,000 excess tax benefit from stock compensation activity. With the lower rate in Q3, we are 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 earned $0.46 per share in Q3 this year compared with $0.36 per share in Q3 last year. To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior year quarters. In the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition related expenses and purchase accounting expense effects. On this basis, our adjusted earnings for the quarter were $0.47 per share compared with $0.36 per share in Q3 last year. Looking now at cash flow, where we generated $32,800,000 of cash from operations in Q3 this year, bringing the total amount of year to date operating cash generation to almost $60,000,000 So far this year, we have increased our capital expenditures to $21,200,000 as we made strategic investments in new machinery and equipment and other organic growth initiatives like the expansion of our manufacturing facilities in Streator, Illinois and Rugby, North Dakota.

For the full year, we are currently expecting total CapEx of up to $35,000,000 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 July for an initial payment of approximately $50,000,000 In addition, during the quarter, we paid an aggregate sum of $13,400,000 to settle the earn out and fund the deferred payment associated with the acquisition of JJE. Despite these large cash outflows, our net debt leverage remains at a comfortable level and at the end of the quarter, we had around $240,000,000 of availability under our new upsized credit facility, which we executed at the

Speaker 2

July. The

Speaker 1

terms of the new facility are more favorable for the company, reflecting the strength of our performance, cash flow, and balance sheet. Our strong financial position allows us to continue to invest in organic growth initiatives, pursue strategic acquisitions like MRL, and fund cash returns to shareholders. On that note, we paid a dividend of $08 per share during the third quarter amounting to $4,900,000 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.

Speaker 3

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 $02 to our EPS and better than expected accretion from our recent MRL acquisition. With the team's intense focus on execution of our strategic initiatives and contributions from MRL, 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 EBITDA margins, translating to a consolidated adjusted EBITDA margin in excess of 16, which represents a 140 basis point improvement from Q3 last year.

Within ESG, in addition to the seasonally strong performance from several of our businesses, including increased aftermarket demand, we continued to realize operational efficiencies relating to increased production. At our facility in Streator, Illinois, where we manufacture sewer cleaners and safe digging vehicles, we are continuing our efforts to increase production and reduce lead times, an initiative we internally call BMT or build more trucks. Since the third quarter of last year, we have added more than 100 employees to the plant. And in the first nine months of this year, our unit production at the Streator facility is up 17% compared to the same period of last year. In addition, we have made substantial progress in increasing the number of units produced at our solution centers in Leeds, Alabama.

TBEI also had a strong quarter with shipments of dump truck bodies up 16% year over year. Now that we fully integrated TBEI, 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 up sitting center for Oxbodies 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 at that location. We have 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 TBEI, we've also noted improvements in some of our production processes. For example, at certain of the TBEI 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 production of their dump truck bodies to us, which they would have previously manufactured in house. Overall, order intake in the third quarter of this year remains strong, reflecting continued strength in our end markets, contributions from MRL and ongoing momentum with our strategic initiatives like safe digging and aftermarket. These initiatives contributed to our year over year organic order growth of $21,000,000 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 place orders earlier than we anticipated, and we also received a couple of larger fleet orders for StreetSweepers from customers in The Middle East. So far this year, orders for our safe digging trucks are up $21,000,000 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 safe digging offerings. In addition, rental demand for our safe digging 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 TRUVAC branded safe digging vehicles, including signing the majority of the related agreements.

We also continue to focus on expanding our suite of safe digging offerings. During the quarter, we launched the TRUVAC Coyote, a compact hydro excavator for utility, municipal and contractor customers, which maximizes payload and productivity while complying with regional weight regulations. I wanna 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 we're able to see firsthand the noticeable progress that's been made thus far. The construction work is well underway with the external structure largely in place and the roof almost complete.

The teams have been working hard to try to make up time that was lost earlier in the year with the 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 and siren controller. The 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 two seventy 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 eightytwenty or ETI initiative. I'd like to now give an update on the MRL acquisition, which we completed the July. As a reminder, MRL is a leading U.

S. Manufacturer of truck mounted and ride on road marking equipment. The acquisition also included the operations of Highmark Traffic Services, a wholly owned subsidiary of MRL, which provides road marking 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 MRL into 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 are also encouraged with MRL's financial performance in the first quarter since the acquisition completed. As a reminder, primarily due to weather related factors, MRL's results during the summer months tend to be stronger than other periods, while the first 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 MRL exceeded our expectations by adding about $02 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 are raising our 2019 adjusted EPS outlook to a new range of 1.7 to $1.76 from a previous range of $1.64 to $1.72 The new range equates to year over year improvement of between 2125%. I would like to start by reiterating that our current market conditions remain strong as demonstrated by our third quarter intake. In terms of the outlook for 2020, I want to reiterate that the impact from tariffs on federal signal that were imposed during the last eighteen months or so is nominal. We source an insignificant percentage of our components that are affected by the tariffs that were introduced. As we began 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 are monitoring further developments 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 and rental demand in our market. Utilization levels within our own rental fleet are strong, particularly for products serving industrial markets like safe digging 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 and geographic 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 monitor market conditions closely.

We expect our financial position heading into 2020 to be very strong with low debt leverage and ample liquidity, us to remain true to our capital allocation priorities. New product introductions will continue to be a focus with a series of new product offerings scheduled for commercial launch in 2020. Looking further ahead, our innovation teams are working on several other longer term projects. For example, we have recently designed, built and tested a plug in hybrid electric sweeper that is now being evaluated by customers. We will also have a full year of MRL 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 know, our ongoing focus on eightytwenty or ETI principles is an important part of our culture, and we continue to educate our people on its principles. Over the last eighteen months, over 200 employees have attended various ETI training events. 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 earning call. With that, we are ready to open the line for questions. Operator?

Speaker 0

Thank you. At this time, we'll be conducting a question and answer session. Our first question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Speaker 3

Good morning, Chris.

Speaker 2

Good morning. Maybe we can start with TVI. It sounds like the integration there has gone extremely well. One of the things you talked about when you acquired them is that it was a very regional business. The 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?

Speaker 3

Yes, great question. So as I mentioned on the call, we've opened up a new facility in High Point, North Carolina that we believe geographically is well positioned to We've serve that important also announced a new partnership in Texas. We think there are a number of other opportunities for geographic expansion. What we really try to do is we previously talked about that our dump truck businesses serve a region of around 800 miles. So we're pushing the fringes of those regions with these expansions.

We also believe that there's opportunity for acquisition in several geographies across North America. So as we go forward, we believe the growth will come from both a combination of acquisitions and geographic expansion.

Speaker 2

Got it. That's helpful. If I am looking at Q4 twenty nineteen versus 2018, obviously Q4 is seasonally both QBI is a little slower, as you talked about mark rates, a little bit slower. Anything else that we should be keeping in mind kind of a year over year comparison between Q4 twenty nineteen and 2018?

Speaker 1

Yes, Chris. I think Jennifer mentioned that we expect MRL to be neutral to Q4. As you touched on, the seasonal aspects of the business really mean that the fourth quarter tends to be one of the softer quarters, primarily in the Service business where weather is a factor in Montana there. So that's one thing we would mention. The other thing, I think, as we think about the fourth quarter of last year, SSG just had an outstanding fourth quarter last year where they shipped a number of large warning systems orders.

So so they had a 20 roughly 21% EBITDA margin in q four last year. So that that that's a pretty high bar to meet. I mean, the teams are working hard to to to get that, but it's a it's a pretty tough comparison. And then the other thing I would just remind you is that in q four last year within our corporate expenses, we had about a 2 a 2¢ benefit from some fair value adjustments of certain reserves that we had in the fourth quarter. So that's that's another thing to factor in because they were essentially nonrecurring items that were in the fourth quarter of last year.

But even with all of that, Chris, I think we're still expecting year over year improvement in the fourth quarter.

Speaker 2

That's extremely helpful. I'll jump back in line and I appreciate it. Thanks.

Speaker 0

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

Speaker 4

Hi, thanks. Good morning. Great quarter.

Speaker 3

Great morning, Walt.

Speaker 4

Wanted to ask with a lot of our industrial companies, we're seeing slowdowns, inventory corrections and things. And with the strong order growth and the strong revenue in the quarter, it doesn't look like you're being impacted by anything kind of industrial slowing related. I wonder if you'd just comment on that. Are you seeing any pockets or niches, product lines that are fueling the effects of some of the industrial slowdown?

Speaker 0

Yes.

Speaker 3

So again, we were really encouraged by the growth that we saw in the quarter. So we talked about organic quarters were up 8%. Rentals, our aftermarket business was up 19% versus Q3 of last year. So and again, safe digging also. Our orders were up 31% over Q3 of last year.

Some really good growth in the quarter. In terms of slowness, about 20% of our TBI business is trailers. And those trailers, there's a correlation between those trailers and Class eight chassis. We have seen some softness in that market. As we go into 2020, Class eight chassis 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 as 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 TBEI, we're encouraged by what we're seeing in October so far in dump truck orders. So again, we talk about this all the time, but we really rather quarter to quarter, we 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.

Speaker 4

Okay, great. And just looking at some of the order trends, in the ESG, did you get overall you called out the sweeper business doing well, so it sounds like that grew at least high single digits as well as called out, I think, a street a couple of other orders. But I wondered, did TVEI grow during the quarter in terms of orders?

Speaker 1

The orders were pretty much in line well with where they were last year for the on the dump trucks. Trailers were as Jennifer mentioned, trailers were a little softer than they were last year. But as Jennifer mentioned, what we've seen so far in October has been encouraging.

Speaker 4

Okay, great. And you mentioned that ESG dealers placed some orders early in the quarter. Yes, I wonder why that timing was there. Was there a price increase that they were getting in front of? Or why those orders came in?

Was there sell through to end customers? Was there a customer attached to those orders?

Speaker 3

Yeah. So we had, one of our major dealers placed a large order for Pelican in the quarter. And, you know, it can vary quarter to quarter depending on, you know, 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 queue. We also saw, as I mentioned on the call, a couple, large orders out of The Middle East.

So that was what really what I was referring to, And it's primarily customer driven.

Speaker 4

Okay. Alright. Sounds good. In the safe digging markets, the the 28% growth, I mean, that continues to support, you know, the capacity expansions that you're doing and and strong growth in that market.

Speaker 1

I wonder if

Speaker 3

Our board was down there, I mentioned on the call earlier this week. And just really encouraged by what we're seeing. 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.

Speaker 1

And and while at that location, we produce both the safe digging vehicles as well as the sewer cleaners that run now, orders for safe digging were up about $6,500,000 in the quarter, but sewer cleaners were also up. The orders were up about $7,000,000 as well. So it's the combination of the demand for those two product lines that will really support the growth of the expansion.

Speaker 4

Okay, great. And the timing of when that capacity comes online, is there your comments about second quarter, is it second quarter will be at 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?

Speaker 3

The ramp will start

Speaker 2

in the second quarter.

Speaker 4

Okay. So the Streator facility will be complete by the end of the first quarter, and then you start ramping trucks out of that plant after that?

Speaker 3

It's more complex than that because there's there's a sequence of moves that have to occur. So we'll move into the new we'll start moving into the new area in the first quarter, but then we're tearing down some parts of the current buildings. And that will begin and in Q1 of next year. So we'll start to see the benefits in Q2 of next year of the new space, but then we need to go back and finish on the existing space. 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.

Speaker 4

Okay. Got it. Okay. Thanks again.

Speaker 0

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

Speaker 3

Good morning, Greg.

Speaker 2

Hi, Craig.

Speaker 5

So, Jennifer, you mentioned finalizing your distribution strategy for the TRUVAC line. Can you just let us know what that is? Is it going through your existing distribution? Do you have to set up new distributors? How are you going to market with that those products?

Speaker 3

It's really a combination of all three. So in certain markets, we go direct. In certain markets, we have retained our existing Vactor and Elgin dealers will carry the TRUVAC line. And in some markets, we will have new distributors. It was a combination of all three.

The teams did a very careful and thorough analysis of the market opportunities in each specific region. And then they identified, you know, what was the optimum way to go to market in that particular region.

Speaker 5

And then in terms of margins, obviously, they've been very strong first part of this year. What would maybe bring the margins back into your targeted range? And is it maybe time to start thinking about reassessing your longer term target given how strong the margins have been? Yes.

Speaker 1

I think, Greg, when you look at the margin targets that we've put out there, they're intended to be you know, they're not aspirational stretch goals. They're really intended to be ranges where we wanna operate kinda quarter in, quarter out through through the cycle, really. And, you know, we've we've not while, you know, 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 we adjust the ranges, almost like what we saw with SSG in the second quarter where we raised the high end of the range to 18% there. So we're still not at the 16% high of the range, end of the range on a consolidated basis. If you look at the first nine months of the year, we're at 15.7.

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 of the range before we increase them. So but we're we're we're obviously very happy with the performance and the margin performance that we've seen this year.

Speaker 3

But to be I wanna be clear is if we do see that consistent performance, we'll increase them.

Speaker 6

Mhmm.

Speaker 5

Okay. And then how how should we think about the the new capacity that's coming online next year? What the impact that will have maybe on margins? Or does it create some other efficiency offsets? Just wanted to get a sense of any impact that would have on the margins once that comes online.

Speaker 3

Yeah. When it's fully operational, we should see some positive efficiency benefits. The teams have done a careful analysis in terms of where there's opportunity to improve flow. And as we move forward and we're fully operational, our expectation is that we'll see benefits from that initiative.

Speaker 5

Okay. And lastly, on the the MRL seasonality, Iain, could you just maybe give us what like I understand first and fourth are the weakest, but could you just maybe give us historically percentage wise what percent of revenue kind of falls in each quarter just so we could

Speaker 1

It's it's a little tricky, Greg, because historically, you know, as a private company, they've never really had to focus on quarterly results. And so that's been you know, 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, you know, quarterly results and forecasting. So they they they really only had kind of full year. We'd we'd almost have to go back and, you know, do do some more work to find the actual numbers. But for the most part, we know that new equipment sales, you know, they're they're fairly fairly stable.

But from the the service piece of the business, which is about it's about 15% of the overall results. It's almost all of the income is going to be generated in the second and third quarters. I mean, you can probably imagine with the weather factors, there's not much road marking or line removal services being performed in Montana in December, for example.

Speaker 3

And it's also a business too that given the value of the equipment, you know, if a couple's trucks shift quarter to quarter, I mean, these can be 500, $600,000 pieces of equipment. So as Ian mentioned, you know, we're working with the teams, and it's new for them of the cadence of a quarterly close. But if three or four trucks move from one quarter to another, that also has an impact.

Speaker 1

Okay, great. Thank you.

Speaker 0

Thank you. Our next question comes from the line of Marco Rodriguez with Stonegate Capital Markets. Please proceed with your question.

Speaker 6

Good morning. Thanks for taking my questions.

Speaker 3

Good morning. Hey,

Speaker 6

I was wondering if maybe you could talk a little bit more about your gross margins. I know that obviously the EBITDA margin is the main focus, but it sounds like that's been a real big help in driving you guys towards the upper end of your EBITDA range. And it seems like a lot of strength is coming in the ESG side, especially this particular quarter year over year, 100 basis point improvement. Can you talk a little bit more about what's sort of driving that? I think you brought out pricing in some of your comments, but if you can just provide some more color, that'd be real helpful.

Speaker 1

Yes. There's a couple of things, Marco, I'd say. Overall, we had 100 basis point improvement. If you look at each of the groups, ESG, their improvement was 100 basis points coincidentally as well. But SSG had their gross margin was about up by about two fifty basis points.

So SSG has really seen some of the benefits from the eightytwenty initiatives that we've implemented there over recent years. They've had some favorable price benefits, but also mix has been favorable this time around in terms of the geographic mix, in terms of where a number of those shipments are going internationally, which tends to have a more favorable sales mix. The other thing I would point towards is really the aftermarket business and as that has grown that tends to carry stronger margins. So, with the growth that we've seen in aftermarket that carried some gross margin improvement both at FSG and overall.

Speaker 6

Got it. Very helpful. Then shifting here to TBI and the regional growth strategy that you mentioned in the call, obviously pointing out North Carolina and I forget the area in Texas. But can you talk a little bit about what is special about those two particular areas 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 expansion is concerned?

Speaker 3

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 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 mile 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, you know, availability of labor, which is important. We're really encouraged by, you know, it's 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 if there's opportunities to leverage our own FS solution centers as we talked about previously. And then again, M and A is gonna play an important part in the growth of this particular business.

Speaker 6

Gotcha. And so if I'm understanding correctly here, so the expansion is more about maybe pushing out your existing footprint from your your existing areas rather than maybe not necessarily purchasing something that is in a completely different area or or geographic location. Is that fair?

Speaker 3

It could be either.

Speaker 1

It it could be either. The the the high point expansion, Marco, that is really intended to, extend the reach of our Oxbodies brand that's located right now. It's located in Fayette, Alabama, which near Birmingham. High point is going to focus on doing the upfitting of the Oxbodies, the brand. So that's the intention for that location.

But as Jennifer said, in terms of a geographic expansion in other states through M and A, it could be the acquisition of a different brand of dump truck.

Speaker 6

Okay. Got it. Another quick question here, just on the SG and A line item, roughly $43,000,000, Is that a fair or rather normalized number here now that MRL is in the picture?

Speaker 1

It's yes, it should. Mean, there's obviously from quarter quarter, there's things that can cause deviation in that number. I mentioned in Q4 last year, we had about $02 of a benefit, and that would have all I think that all flowed through the SG and A line. But there isn't really anything unusual in terms of MRL that would change significantly from Q3 to Q4.

Speaker 6

Got it. Thanks a lot, guys. Appreciate your time.

Speaker 0

Thank you. Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to Ms. Sherman for any final comments.

Speaker 3

Sure. Thank you. In closing, I would like to reiterate that we are confident in the long term prospects for our business and our markets. Our teams are performing at a very high level and we are focused on delivering high quality results. We remain committed to investing in our businesses and our people to generate sustained long term success for our shareholders.

Our foundation is strong and we are focused on delivering profitable long term growth through the execution of our strategic initiatives. 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 to thank our many valued dealer partners, including Jack Doheny Companies, who continue to demonstrate their ongoing commitment to distributing Federal Signal products, including the Vactor Elgin and our TRUVAC brand of vehicles. Thank you for joining us today, and we will talk to you next year.

Speaker 0

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