FSS - NYSE

Greetings, and welcome to the Federal Signal Corporation's Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Felix Boeschen, Vice President, Strategy, Investor Relations. Thank you, Felix. You may begin.

Good morning and welcome to Federal Signal's Second Quarter 2024 Conference Call. I'm Felix Boeschen, the company's Vice President of Corporate Strategy and Investor Relations. Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer; and Ian Hudson, our Chief Financial Officer. We will refer to some presentation slides today as well as to the earnings release, which we issued this morning. The slides can be followed online by going to our website, federalsignal.com, clicking on the Investor Call icon and signing into the webcast. We have also posted the slide presentation 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 US GAAP accounting principles. In our earnings release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will File our Form 10-Q later today. Ian will start today by providing details on our second quarter financial results. Jennifer will then provide her perspective on our performance and update on our multi-year growth outlook and our updated guidance 2024. After our prepared comments, we will open the line for any questions. With that, I’d now like to turn the call over to Ian.

Thank you Felix. Our consolidated second quarter financial results are provided in today's earnings release. In summary, we delivered strong financial results for the quarter with double-digit year-over-year organic net sales and earnings growth, gross margin expansion and a 280 basis point improvement in EBITDA margin. Consolidated net sales for the quarter were $490 million a record high for the company, and an increase of $48 million or 11% compared to last year. All of the growth this quarter was organic. Consolidated operating income for the quarter was $81.1 million, up $21.7 million or 37% compared to last year. Consolidated adjusted EBITDA for the quarter was $97.7 million, up $22.2 million or 29% compared to last year. That translates to a margin of 19.9% in Q2 this year up from 16.1% in Q2 last year. GAAP EPS for the quarter was $0.99 per share, up $0.33 per share or 50% from last year. On an adjusted basis, EPS for the quarter was $0.95 per share, up $0.28 per share or 42% from last year. Order intake for the quarter is again strong with second quarter orders of $473 million, contributing to a backlog of $1.08 billion at the end of the quarter, an increase of $73 million or 7% compared to Q2 last year. In terms of our group results, ESG's net sales for the quarter were $409 million up $36 million or 10% compared to last year. ESG's operating income for the quarter was $72.9 million up $16.7 million or 30% compared to last year. ESG's adjusted EBITDA for the quarter was $88.2 million up $17.5 million or 25% compared to last year. That translates to an adjusted EBITDA margin for the quarter of 21.6%, an improvement of 260 basis points compared to last year, and performance towards the upper end of our current target range. ESG reported total orders of $396 million in Q2 this year compared to $409 million last year. SSG’s net sales for the quarter were $82 million this year up $12 million or 18%. SSG’s operating income for the quarter was $18.3 million, up $4.2 million or 30% compared to last year. SSG's adjusted EBITDA for the quarter was $19.3 million, up $4.1 million or 27%. That translates to a margin of 23.7% above SSG's current target range and up 180 basis points compared to last year. SSG's orders for the quarter were $77 million, an increase of $5 million or 7% compared to last year. Corporate operating expenses for the quarter were $10.1 million down from $10.9 million last year. Turning now to the consolidated income statement, where the increase in sales contributed to a $26.7 million improvement in gross profit. Consolidated gross margin for the quarter was 29.4% a 290 basis point increase over last year. As a percentage of sales, our selling, engineering, general and administrative expenses for the quarter were down 20 basis points from Q2 last year. Other items affecting the quarterly results include a $200,000 increase in acquisition-related expenses a $100,000 reduction in amortization spend, a $700,000 decrease in other expense and a $2.4 million reduction in interest expense. Tax expense for the quarter was $16.7 million, up $4.3 million from the prior year. Our effective tax rate in Q2 this year was 21.5% compared to 23.5% last year with the reduction primarily due to a $2.6 million discrete tax benefit recognized in action with the amendment of certain state tax returns to claim a worthless stock deduction. At this time, we expect our effective tax rate for the remaining half of the year to be between 25% and 26%, excluding any additional discrete tax benefits. On an overall GAAP basis, we therefore earned $0.99 per share in Q2 this year compared with $0.60 per share -- $0.66 per share in Q2 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 quarter, we made adjustments to GAAP earnings per share to exclude acquisition-related expenses and the discrete tax benefits I previously mentioned. On this basis, our adjusted earnings for the quarter were $0.95 per share compared with $0.67 per share last year. Looking now at cash flow. We generated $41 million of cash from operations during the quarter, an increase of $5 million from Q2 last year. That brings the total cash generated from operations in the first half of this year to $72 million an increase of 67% over the first half of last year. We ended the quarter with $207 million of net debt and availability under our credit facility of $533 million. Our current net debt leverage ratio remains low. With our financial position remaining strong, we have significant flexibility to invest in organic growth initiatives, pursue strategic acquisitions and return cash to stockholders through dividends and opportunities to stick share repurchases. On that note, we paid dividends of $7.4 million during the quarter, reflecting a dividend of $0.12 per share. And we recently announced a similar dividend for the third quarter. That concludes my comments, and I would now like to turn the call over to Jennifer.

Thank you, Ian. Our second quarter results represent another outstanding quarter as our team sent quarterly performance records across many metrics in the net sales, EBITDA margins and adjusted EPS, all while maintaining a healthy order intake. Within our Environmental Solutions Group, we were able to deliver 10% year-over-year net sales growth and a 25% increase in adjusted EBITDA with increased production at several of our businesses and continued price realization representing meaningful year-over-year drivers. Overall, in what is typically a seasonally strong quarter, ESG's adjusted EBITDA margin was up 260 basis points year-over-year. We were particularly encouraged with the progress we have made across the enterprise on our Build more Trucks initiative this quarter. Our dump truck body businesses had another strong quarter with sales up 22% on the back of improving chassis availability and higher build rates. The increased dump truck body production, coupled with our ongoing 80-20 initiatives at several key facilities, was again a contributing factor in our year-over-year margin improvement within our ESG segment. In fact, monthly chassis receipts at our Ox-Bodies facility grew sequentially throughout the quarter, with June chassis deliveries the highest experienced since the first quarter of 2021. We remain focused on maintaining our industry-leading lead times in this space as we raise our production levels. Our strategic dump truck growth initiatives are also gaining momentum. Ox Bodies is broadening its geographic reach in key states such as Texas. The Rugby team is progressing along its 80-20 journey in the form of product and SKU simplification. And Switch & Go is on track to start production of its new Class III interchangeable multibody product in August. The Switch & Go Class III product launch provides customers additional flexibility in what remains a constrained medium-duty chassis environment. At our largest manufacturing facility in Streator, production increased by 15% year-over-year, including the $13 million of sewer cleaner shipments that were affected by the third-party component supply issue that we experienced in March. MRL, our road marking and line removal business, is also benefiting from improving supply chain conditions and a constructive demand backdrop as the team was able to drive a 29% year-over-year increase in sales. In addition to anticipated multi-year benefits stemming from the infrastructure bill, we are also seeing ongoing shift towards early autonomous vehicle functionality and the addition of smart features for passenger cars, as a key long-term driver of road striping demand. Big picture, while supply chain performance has not yet fully recovered to pre-pandemic levels, supply chains are consistently improving for our family of specialty vehicle businesses. This improvement in supply chain should, over time, allow us to drive additional output and gain manufacturing efficiencies as we aim to reduce lead times for certain products, including vacuum trucks and street sweepers. From a capacity perspective, our access to labor remains good and our large-scale capacity expansions that we completed between 2019 and 2022 position us well to profitably absorb incremental volumes into the current facility footprint. Shifting to aftermarkets, activity levels remained strong across our offerings. Performance was led by increase in part sales, service rental and rental income, partially offset by lower used equipment sales, as our teams are working diligently to balance rental unit availability and used equipment sales to best serve our customers. In short, rental utilization and demand for our rent-to-own equipment offerings remains high. From a strategic perspective, our growing aftermarket ecosystem allows us to better serve our customer needs throughout the entire business cycle especially in the higher interest rate environment that we are experiencing today, the option to rent new or acquire used pieces of equipment represents an important alternative for many of our industrial customers to access equipment in a timely and affordable manner. As we continue to scale our aftermarket business, we see additional long-term growth opportunities. As acquired businesses are integrated into the platform, we further increased our parts capture rate, optimize underserved regions and address nontraditional Federal Signal customer cohorts through our rent-to-own service offerings. In total, aftermarket represented approximately 25% of ESG revenue in the second quarter of 2024. Shifting to our Safety and Security Systems Group. The team delivered another quarter of outstanding results with 18% top-line growth, a 27% increase in adjusted EBITDA and a 180 basis point improvement in adjusted EBITDA margin on the back of sales volume increases and price realization. Sales of public safety equipment paved the way with 25% year-over-year growth as our [indiscernible] and Cyren products are resonating in the marketplace. This strong underlying demand for our products, coupled with the insourcing investments we have made in recent years and our ongoing 80-20 efforts, have contributed to achieving a mid-teens year-over-year improvement in volumes. Going forward, our teams remain energized to continue to execute on a robust NPD pipeline across all of our SSG businesses, as we aim to fortify and grow our position as the industry leader of audible and visual safety equipment. We have also been pleased with our cash generation through the first half of the year as cash generated from operations rose 67% compared to last year. On an annual basis, we continue to target 100% cash conversion levels. Another highlight of the quarter included the publication of our latest sustainability report. In the report, we highlight the ways in which we make a difference to our customers, our communities and our environment. We know that as a global manufacturer of critical infrastructure and safety products, we have the responsibility to operate sustainably with a long-term positive at our employees, customers, partners and stakeholders at large. These efforts also position us well in the communities in which we operate and serve, as a differentiating factor in our ability to attract labor at most of our facilities. The report also highlights the progress we have made against our sustainability goals that were initially established in 2018. And having achieved our electricity, water and CO2 intensity reduction goals early, we have announced our new 2030 energy intensity reduction goals. Shifting now to current market conditions. Demand for our product offerings and services remains high, with our second quarter order intake of $473 million just falling short of last year's record second quarter orders of $480 million. For comparison purposes, please note that last year's orders included approximately $8 million of acquired backlog from the Trackless acquisition. In recent years, we have supplied a higher concentration of chassis than our customers. But as chassis availability has improved, customer buying patterns have started to revert to the more typical 50-50 split that we have historically experienced. This shift resulted in 9 million fewer chassis orders in Q2 this year compared to last year. This trend is also expected to represent a year-over-year net sales headwind of approximately $10 million in the second half of the year, but should have some nominal margin benefits. The composition of orders remains balanced between our publicly funded and industrial end-markets, as contribution from both subsets were similar on a year-over-year basis. On the publicly funded side demand for our flagship sewer cleaners has remained consistently high throughout 2024 on the back of solid core funding mechanisms. Our SSG business is experiencing a similarly stable growth pattern as orders increased 7% in the quarter. This includes a $6 million public safety equipment order from a major municipality slated for delivery in 2025. Lastly resulting from our ongoing end-customer and market diversification efforts, our dump truck body business enjoyed double-digit order growth with municipal customers in the second quarter. On the industrial side, orders for dump truck bodies continue to lead the charge with orders up 32% year-over-year. Similar to last quarter, we believe this to be driven by a combination of pent-up replacement demand execution on our strategic initiatives across different end-markets and high current equipment utilization levels. We are also seeing strong demand for our metal extraction support equipment as we are starting to reap distribution benefits from the combined Ground Force and Toho platform. Lastly, our teams remain laser-focused on positioning our business to be able to capitalize on projects resulting from the $550 billion Bipartisan Infrastructure bill. Although we believe the opportunity still remains in its early stages today, we anticipate many of our special vehicle offerings to participate in an array of projects and importantly at different stage of projects. As an illustrative example, while we expect use of dump trucks to be fairly consistent throughout the life of a project, we expect road marking or street sweeping demand to be weighted more heavily towards the end of a project when a new road is marked for projects are cleaned. In fact, we have seen some examples of dump truck orders tied to early infrastructure projects, including a multi-unit order for a highway construction project in the Southwest that we booked this quarter. We are also encouraged with early feedback we've received on our Guzzler micro-trenching vacuum truck, which is ideally suited for the installation of broadband infrastructure. Our teams will be showcasing our Guzzler micro trencher at the upcoming Fiber Broadband Association show. In summary demand for our products remain strong, and our teams are focused on executing our growth initiatives and build more trucks, while continuing to maintain a healthy order intake. I now want to take a few minutes to provide an update on our through-cycle revenue targets and growth initiatives. While we have historically talked about a high single-digit annual revenue growth target, we are officially raising the bar to a low double-digit annual growth target which is roughly consistent with our actual track-record since 2016. Achieving that growth will be multifaceted, as we expect low to mid-single-digit base level and market growth to be supplemented by outsized growth from our organic initiatives and contribution from M&A. In fact, we see opportunities for several businesses to expand their geographic reach as we start to harness the increasing benefits of the power of our growing specialty vehicle platform with our aftermarket operations at the heart of that value proposition. An excellent example of that platform power is the 30% year-over-year growth we achieved at Trackless in the first year of Federal Signal ownership. We also see these platform benefits fueling other strategic growth initiatives, including new product development, aftermarket support, sales channel and procurement optimization. Shifting to inorganic growth. Our M&A pipeline remains active with several opportunities currently under evaluation. In-line with our M&A strategy set forth in 2016, we are primarily focused on three types of acquisition opportunities. First, identifying new market adjacencies to penetrate within our ESG and SSG segment. Second, opportunistically adding to verticals in which we already operate. And finally, acquisitions to further accelerate our aftermarket growth. We remain rigorous, and vigorous, in our due diligence processes as we aim to identify the right strategic additions for Federal Signal. But we believe our track record integration process, modest debt profile and strong free cash flow generation all position us as an acquirer of choice in our markets. Lastly, as we indicated we were pleased with our margin performance in the quarter with performance towards the upper-end of our current target range. Recall, our stated margin targets are meant to be annual and through-the-cycle targets. When we last raised our targets on our third quarter 2023 earnings call, we outlined four foundations supporting the rate, including leveraging our capacity expansions, the rollout of our codified Federal Signal operating system, continued growth in our aftermarket business and value-added M&A. At Elgin, our pilot plant for the rollout of our recently codified Federal Single operating system, we saw some initial productivity and cost optimization benefits associated with this initiative in Q2. We are pleased with the progress we've made on a number of these foundations through the year at many of our businesses, but we are not done here. We see ourselves as being in the early innings is what we view as a multiyear opportunity to drive structural improvement. Turning now to our outlook for the rest of the year. Demand for our products and our aftermarket offerings remains high, with our strong order intake this quarter contributing to a backlog which provides us with excellent visibility into the second half of the year. With our second 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 $3.20 to $3.35 from the prior range of $2.95 to $3.15. We also reaffirming our full year net sales outlook of between $1.85 billion and $1.9 billion. This outlook, which does not assume any M&A, reflects our view of continued healthy demand for our new equipment parts and aftermarket services and also assumes a continuation of daily build rate increases at several key facilities somewhat offset by fewer production days in the second half of the year. We also continue to expect double-digit improvement in pre-tax earnings and EBITDA margin performance in the upper half of our target range. 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?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question.

Thanks good morning.

Good morning Steve.

Really strong quarter. I wanted to start with the ESG --.

We agree.

Yes. I want to start with the ESG incremental margin of 46%, following 40% in the first quarter. Can you talk through volume, mix and price? And just what do you expect for incrementals in the back half?

Yes. So Steve, I think as we look kind of the breakdown on the top-line volume, that was 8% of the 10% growth. Price was about 2.5%. We had a little bit of a headwind from fewer chassis, I think Jennifer talked about that impact. So that was about a 1% drag on the top-line there. So as we think about kind of the drivers of the margin improvement, volume was the biggest driver of that and just the efficiencies that we get from ramping up production in several of our facilities. We did have favorable price cost dynamics in the quarter. So that was also a factor. And then the other thing is we have the aftermarket business, as well as some of our recent acquisitions, which have a slightly more attractive margin profile. As those businesses have grown, that's pulled up kind of the overall average and so that's had some margin benefits as well. As we think about kind of the back half of the year, I think the guidance that we've given would indicate that we are still expecting incrementals for ESG to be kind of north of 30%. So that's kind of what's implied in the outlook.

Yes. For sure. If I model to the high-end of the new guidance the quarters in the back half will certainly have good margins but will run maybe $0.07 to $0.08 lower than what you just put up. Is mix getting worse? Is it holidays? Can you talk about why $0.95 isn't a sustainable run rate given the backlog and the capacity you have?

Yes. A couple of things that I think Jennifer alluded to, the fewer production days that we have in the second half of the year versus the first half of the year, that's kind of always something that we face in the second half of the year. There is a couple of other -- we talked about the chassis impact, the $10 million that will impact the top-line. That won't be much of an earnings impact because it's typically passed through. So that should have a little bit of a lag benefit there. And then just the other thing to remember, as we talked on our last earnings call about some incremental rental fleet investment that we were making, most of that is in the second half of the year. So that will also be a factor.

And sorry, if I missed this, what's the dips in production days between the first half and the back half?

I think we can kind of the six to seven range.

And did you say what the incremental investment in rental is?

So this was on our first quarter call, we talked about a $20 million incremental fleet investment. So that will have some impact, with most of that being in the second half of the year. That's nothing new. That's the same as what we talked about in Q1.

Understood. Yeah. Thank you.

Thank you.

Our next question comes from the line of Walt Liptak with Seaport Research. Please proceed with your question.

Hi, good morning guys. Great quarter.

Good morning.

I wanted to ask about the dump truck orders were very strong. It's nice to see that recovery happening. I think, that's the second or third quarter in a row. I wonder if you could talk a little bit about the cadence of orders. And I think you kind of alluded to some of this in your – Jennifer in your presented comments. Are those -- I mean at what point do you start getting into tough comps? Do you see sort of this pent-up demand giving way to sort of a normalized growth rate? How should we think about the second half for dump-truck ordering?

Yes, it is me. First of all, we were pleased with orders overall. And as we noted on the call, some truck orders were strong. I think that was -- it is a combination of execution on strategic initiatives particularly some of the geographic expansion issues initiatives. The teams have done a really nice job. There is pent-up demand. Chassis improvement we talked about during this quarter. Ox Bodies we saw kind of the highest number of Chassis available that we've seen for several years. And then finally there is pent-up demand. And then we're starting -- we have some examples that we cited one on the call of benefits from infrastructure. And their lead times are much shorter than for example, right now, sewer cleaners and certain street sweepers. So we're able to for many of those orders, slip those orders with the order comes in and we are able to deliver it within the quarter. The other thing that was encouraging on the dump truck order side was pretty balanced between municipal and industrial.

Okay. Great. So it sounds like the order activity was good and kind of consistent during the quarter, and your you're feeling good going into the third quarter for order activity?

Yes, the order activity was consistent throughout the quarter. And really accolades to the team for just strong performance and continued execution on the strategic initiatives.

Okay. Thanks for that. And okay, going back to the production question. And what are the pluses and minuses around you guys increasing the production in the second half? Because you got the backlog, that is there. It sounds like the orders are coming in strong. Is it supply chain that's the biggest risk? Is it factory productivity? And what could help you build more trucks in the second half?

So I will start with again we were really encouraged by what we saw in Q2. So I'll start there. The teams did a really nice job in terms of building more trucks in many of our facilities. It can always vary business to business, but some of the critical considerations are we need to ramp and train labor. We generally have pretty good access to labor, we could hire and train them. Supply chain, always remains a factor. We've talked about chassis availability is pretty good. The medium-duty chassis market continues to be tight. It represents a pretty small percentage of our overall business. We -- the fewer production days in the second half of the year. But again, I want to emphasize, we would expect kind of gradual continued improvement as we work our way through the year because this is -- the teams are razor-focused on reducing lead times at several of our facilities and increasing production rates.

Okay. Great. And sticking with ESG, you made a comment that I hadn't heard before about autonomous vehicles and the MRL road striping. Is there something that's changed in that market? Or are there like regulations or something or some funding for that? Or is it just the product development that you are working on?

Yes. I think as more and more people have smart features on their cars that notify you for example, when you are changing lanes and alert you. You need road striping, solid road striping to utilize those features. And if our teams are talking to customers and talking to agencies, having the ability to utilize those features that are in many of the automobiles we drive, continues to be an important part of the driver for our products.

Okay, great. Okay, I will get back in the queue. Thanks.

Thanks Walt.

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

Good morning guys. Another terrific quarter. No surprises.

Thanks, Chris.

Right. So you've discussed rental. In many cases, the rent-to-own strategy really been helpful in this high rate environment, a differentiator. If rates come down a little this year, more in '25, is that going to have a meaningful impact on the aftermarket mix?

We believe with the infrastructure bill, there is going to continue to be demand for rental products. This is particularly important to our industrial customers particularly around safe digging. And product adoption of that particular product line increases, rental is often a format to try before you buy. So I think again part of our strategy that we've talked a lot about is we're very flexible in terms of whether you want to buy new equipment, you want to rent equipment, you want to buy a used equipment at different price points, we can respond to all those various needs. The other thing I'd point out is, as you know, 50% of our business is publicly funded, which is really kind of immune to the interest rate environment.

Got it. Very helpful. You guys have done a really good job leveraging acquisitions into new geographies. You talked about [Mark Wright] (ph) and Trackless as an example. Are there any meaningfully underpenetrated geographies for any of your product lines at this point in time?

Yes.

Will you --.

Well Chris, did that answer it?

That's fair enough. I was hoping you get more specific, but I also understand from a competitive standpoint --.

No, I'm more than happy to give some examples. Like this room is cringing. Specifically, let's talk about dump trucks. So we have geographic areas where we're the Number #1 market provider, and part of the strategic initiatives of several of those dumb truck businesses to extend that geographic reach. Number two is Trackless would be a good example. We have -- it's not fully optimized, our go-to-market strategy. There are several geographies where Trackless doesn't really -- nominal sales of any. And we are in the process by either leveraging our JJE footprint or pairing with other dealers to expand their geographic reach and it creates opportunities. We believe that Ground Force and Total Haul and the optimization we've done our distribution has allowed us to penetrate new geographies and we think we're at early stages there. So geographic expansion for many of our product lines is a critical strategic initiative.

Perfect. I will leave it there. I appreciate it guys.

Thanks Chris.

Our next question comes from the line of Ross Sparenblek with William Blair. Please proceed with your question.

Hi, good morning. This is Sam calling on for Ross. Thanks for taking my question.

Good morning Sam.

Good morning.

So the ESG segment backlog declined 1% from the first quarter. Can you talk about what this means for top line growth? Kind of at the ESG book-to-bill is less than one for the quarter, is there a possibility that once you work through this backlog that sales could be pressured?

Yes. I think Sam, we've talked for several quarters now about trying to reduce lead times by increasing production while maintaining the healthy order intake level. And I think that's really what we did this quarter. We were pleased with the order levels that we saw. Jennifer alluded to some of the comparisons and the fact that go into kind of the comparisons on the fact that it was down about 1% year-over-year. There was a Trackless backlog that was in last year's numbers that was about $8 million. And then there was also the chassis dynamics, which was down $9 million year-over-year. On a full year basis, we are expecting that chassis impact to have about a $25 million impact on orders. So that is something to consider as we go forward. But I think this was the first time that our sales had outpaced orders since the fourth quarter of 2020. And so that's resulted in some long lead times. And so that's why there is such a focus there on reducing those lead times while maintaining the healthy order intake level. Just on the chassis, even though it is a $25 million impact, that's largely past through revenue. So from an earnings standpoint, it doesn't have much of an impact. It actually would likely have some margin benefits.

Got it. That makes sense. And then kind of one follow-up. At 25% of ESG -- or 25% of revenue, kind of implies that aftermarket revenue was flat from the second quarter of '23. Is that right? Am I thinking about it correctly?

It was up a little bit. Almost -- it was about 1.5%. It was up and this kind of the factors. In that, parts were up about 1%. They are up 6% year-to-date. Rental income was up 4% in the quarter, that is up 6% year-to-date. And then service was up 11%, and that's about the same year-to-date. What was down is the used equipment sales. And the issue there is because there is strong demand for used equipment and we saw strong sales in the fourth quarter of last year, there is a need to kind of replenish that fleet, because -- but the timing of it is a factor. Because we are going into -- or we're in the middle of kind of peak rental season right now. So we want to make sure we hold -- we're balancing, holding on to the units for the rental fleet as well as satisfying customer demand for used equipment. And so that's one of the factors in that incremental fleet investment we talked about last quarter.

And I will just add, particularly in this higher interest rate environment for our industrial customers, rental for safe digging equipment in particular, is a critical option. So we want to make sure we are in a position to be able to satisfy that strong rental demand.

Got it. That make sense. I will leave it there.

Thank you.

Our next question comes from the line of Mike Shlisky with D.A. Davidson. Please proceed with your question.

Yes, hi. Good morning and thanks for taking my question.

Good morning Mike.

Good morning Mike.

The backlog growth looks very, very solid here. But you get the sense that even with the growth you're already seeing, are there folks who are waiting on the sidelines until after the election to kind of make any big decisions? And maybe be in the private sector, people in the oil and gas world, are they holding off and there could be an additional slug of orders to start 2025 here?

We haven't heard that. With respect to -- we've seen only nominal benefits as we talked about, from the infrastructure bill thus far. We would expect -- it was bipartisan legislation. We would expect many of the projects over 60,000 projects have been announced. We would expect those projects to continue regardless of the outcome in November. So as we sit here right now, we haven't heard anything meaningful about the impact of the Presidential election on our orders.

Okay. I also certainly appreciate that you're bringing up your top line growth rate outlook for the long term through the cycle. Does that also -- when you go into double-digit growth for top line, does that also kind of introduce on the margin side that you'll remain towards the upper end of that -- of your 2023 announced target? Or even potentially pull forward an increase in the margin targets in the not too distant future?

Yes. I think that we were pleased with the performance in Q2. We meaningfully increased the guidance range for the rest of the year. We believe that, as we've talked about before, the EBITDA margin targets we set are long term through the cycle. We'll continue to revisit those targets. And with the various strategic initiatives, including our Federal Signal operating system and value-added M&A, we believe that there is further opportunity in the long run to increase those EBITDA margin targets as part of our planning. So we are pretty bullish about the opportunities as we move forward.

All right. Can you comment on the orders and backlogs as well for the quarter? How much pricing has driven the growth in each of those? It could just be on the full company basis, not by segment.

Yes. Price, Mike, is anywhere from 2% to 3%. And that's kind of what we -- I think we -- at the beginning of the year, we guided to that on the top-line, so that's also reflective of kind of the orders and the backlog. So yes, that's Q3.

Great. I leave it there. Thanks so much.

Thanks Mike.

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

Good morning. When you look across your brand or product portfolio from an aftermarket perspective, are there some brands maybe particularly with some of the newer acquisitions, that have a lower percentage of aftermarket sales? And is there an opportunity there with maybe some particular brands to increase that? And then longer-term, do you have a target on where you want to take aftermarket sales to as a percent of revenue? I know it was that about 25% this quarter but do you have a targeted goal that you are hoping to achieve in terms of mix? Thanks.

Yes. So depending on the timing of the acquisition, we continue to on stage the parts optimization throughout the FS Solution and JJE platform, and that's an important part of the synergies and the growth story. I think a really good example is the TowHaul and Ground Force acquisition. They've done a really nice job of collectively growing that particular businesses. Our intention, as we just announced, is to both grow the overall business and aftermarket as a percentage of that business. Said another way, we want to grow both the numerator and the denominator. But I think over time, you will see with several of the initiatives that we have in place that the aftermarkets business will continue to grow. And we could see that -- while still growing the denominator, we could see the aftermarket business getting up to 30%.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Dave Storms with Stonegate. Please proceed with your question.

Good morning Dave.

Good morning and congrats in the quarter. Just hoping we could get a breakout for the SSG margin performance similar to the ESG margin performance. Just curious if volumes are the main driver there as well.

Yes. Yes, Dave. Volumes were the main driver. So if you think of the 18% top-line growth, about 14% was volume. And then the rest would have been -- price was about 3% as we talked about, and then there is some favorable mix components. So the vast majority was the incremental volumes. And I think as we've talked about previously, all of our domestic operations within the SSG business are in one facility. And so the more we can push through that facility, that has some pretty attractive drop-through. And so I think we saw some of that during the quarter.

Very helpful. Thank you. And then I know you mentioned in your prepared remarks that given your strong cash position, you are excited about some organic growth initiatives. Any sense of what your prioritized list of organic growth initiatives would be? Is that capacity? Is that -- just kind of what does that look like, like performance uptake?

I mean kind of in our CapEx, we typically -- I think we guided to $35 million to $40 million. That's typically about half maintenance, half growth. We look at things like lasers, robots. Things that can generate some operational efficiencies. So those would be the types of things that we look at across the organization.

Understood. That’s very helpful. Thank you for taking my questions and good luck for the next quarter.

Thank you.

Thank you. Our next question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question.

Thanks. The multiyear growth target of double digit, do you expect organic growth in the future will run better than the historical 7% rate? Or are you just kind of counting on that same number?

It can always vary quarter-to-quarter, but we expect there to be strong organic growth as we continue to execute on these strategic initiatives.

Well, I'm just thinking about that, even if it is still 7%, it suggests you'll add maybe $60 million plus per year in acquired revenue. And of course that number will have to grow over time. Does the pipeline have enough depth of deals and progress that you expect at least one deal per year?

I believe we will have no problem hitting the numbers that you just stated. That pipeline is very full.

As you think about the deals that are out there that you see, whether they close or not what's the revenue average of those deals? And maybe the range? Is it from $10 million to $100 million? Or what do you see?

Yes. The majority of the deals are in the $50 million to $100 million. But there are a number of smaller deals and then there is always larger opportunities also. So it's got a good -- a pretty wide range, but the majority of deals are in that $50 million to $100-ish million range.

And I know historically, you don't like fixer-uppers. Is that still the philosophy going forward? Do you -- what's kind of the minimum margin profile that you would accept if you're doing a $50 million or $100 million deal?

Yes. I think that, for us it is can this business operate within our target EBITDA margin range, and is there opportunity for further EBITDA margin range expansion through the cycle. So there are examples of businesses that we bought that are below the target EBITDA margin range, but we believe in terms of the power of the platform and various synergies on operational improvements, that they can operate within the range and then there's opportunities to increase over time. So that has been several of the acquisitions we've done. The more recent acquisitions have operated within the EBITDA margin range, and we've raised those ranges because of the synergies and operational improvements that we've executed.

Got it. And I think you addressed three ways that you can add new market adjacencies, adding to verticals, and I think there was one other. But what is the most likely outcome if you can handicap it? Or do you have a preference for how you approach those?

No. Again, it is -- I think we have a good mix right now in the pipeline across the three examples that I gave. And again, it really comes down to what synergies do we bring, how do we improve performance and how do we grow the business.

Got it. Okay thanks.

Thanks Steve.

Our next question comes from the line of Walt Liptak with Seaport Research. Please proceed with your question.

Hi, thanks for taking the follow-up. So the SSG part of the business, the orders, I thought were on kind of a tough comp with last year, and they grew nicely, 7%. Can you give us a little bit of color on what's going on there? Were these international orders that you're taking in? Are they domestic? Is it market share wins? Or is it growth in the market?

I'll start with the teams are just doing a super job on execution, their strategic initiatives. And I think that's a business in particular, where we see strong new product development, and we're seeing the benefits from that. They were able to secure several -- particularly in [police] (ph), we've been able to secure several orders. We talked about the one large order that we secured near the end of the quarter that will deliver next year. Our Vama team in Europe has done a really nice job also. Our signaling and warning team has done a nice job. So what we're encouraged about is just excellent execution on strategic initiatives, including, as we've talked about many times, 80/20 and the results that we continue to see as that is part of our culture there.

Okay. Great. Thank you.

There are no further questions at this time. I would like to turn the floor back over to Jennifer Sherman for closing comments.

Thank you. In closing I'd like to reiterate that we are confident in the long-term prospects for our businesses and our markets. We remain focused on executing against our strategic framework. We would like to express our sincere thanks to our stockholders, employees, distributors, dealers and customers for their continued support. Thank you for joining us today, and we'll talk to you soon.