Ian Hudson - Principal Financial Officer Jennifer Sherman - President, CEO & Director.

Christopher Moore - CJS Securities Gregory Burns - Sidoti & Company Walter Liptak - Seaport Global Securities Kenneth Newman - KeyBanc Capital Markets Marco Rodriguez - Stonegate Capital Markets.

Good day, and welcome to the Federal Signal Corporation Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ian Hudson, Chief Financial Officer. Please go ahead, sir..

Good morning, and welcome to Federal Signal's Third Quarter 2018 Conference Call. I am 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 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've also posted the slide presentation and the earnings release under the Investor tab on our website.

Before we begin, I'd like to remind you that some of our comments made today may contain forward-looking statements that are subject to the safe harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website.

Our presentation also contains some measures that are not in accordance with the 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 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 conditions in our markets as we look into next year. After our prepared comments, Jennifer and I will address your questions. Our consolidated third quarter financial results are provided in today's earnings release.

Overall, our third quarter results exceeded expectations with significant increases in both sales and income. Consolidated net sales for the quarter were $269.4 million, up $20.7 million or 8% compared to last year.

Consolidated operating income for the quarter was $30.4 million, up $8.1 million or 36%, primarily driven by a $7.1 million increase within our Environmental Solutions Group. Within our Safety and Security Systems Group, operating income increased by $1.9 million, while corporate expenses increased by $900,000.

On an adjusted basis, consolidated operating margin for the quarter was 11.5%, up from 9.8% in Q3 last year. Consolidated adjusted EBITDA for the quarter was $40.2 million, up $6.8 million or 20%. That translates to a margin of 14.9%, towards the high end of our target range and up from 13.4% last year.

Net income was $21.7 million in Q3 this year compared to $12.5 million last year. That translates to GAAP earnings of $0.36 per share, which compares to $0.21 per share last year. On an adjusted basis, EPS for Q3 this year was also $0.36 per share, up from the $0.24 per share in Q3 last year.

Order intake in the first - third quarter was outstanding, with total reported orders of $268 million in Q3 this year, up $38.5 million or 17% compared to last year. We ended the quarter with a consolidated backlog of $321 million, which was up $117 million or 57% compared to last year.

Turning now to the consolidated income statement, where the increase in sales contributed to a $7.7 million improvement in gross profit.

Consolidated gross margin for the quarter improved to 25.6%, up from 24.6% last year, with both of our groups reporting meaningful year-over-year gross margin improvement despite anticipated headwinds associated with higher material costs.

Selling, engineering, general and administrative expenses for the quarter were largely unchanged compared to the prior year, but as a percentage of sales, were down 120 basis points.

Other items affecting the quarterly results include a $300,000 reduction in acquisition-related expenses, a $400,000 decrease in other income and a $500,000 decrease in interest expense. Tax expense for the quarter was down $1 million, largely due to the impact of the lower U.S.

tax rate, albeit on higher pretax income levels, and the absence of $600,000 of discrete tax expense recognized in the prior year quarter in connection with state tax rate changes. The effective tax rate in Q3 this year was 23% compared to 37.5% last year, reflecting the lower U.S.

tax rate and nominal benefit from releases of tax reserves and stock option exercises. We currently expect the full year effective tax rate of approximately 24%. On an overall GAAP basis, we therefore earned $0.36 per share in Q3 this year compared with $0.21 per share in Q3 last year.

To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items. In both the current and prior year quarters, we made adjustments to GAAP earnings per share to exclude acquisition-related expenses and purchase accounting expense effect.

On this basis, our adjusted earnings for the third quarter was $0.36 per share compared with $0.24 per share in Q3 last year. Now turning to our group results. Within ESG, each of our businesses delivered strong results with solid revenue growth across all of our key market segments.

Third quarter sales of $216.3 million were up $17.8 million or 9% compared to last year. This organic growth was largely due to increases in shipments of vacuum trucks, sewer cleaners and dump truck bodies as well as higher aftermarket revenue represented by increases in rental income, used equipment sales and parts and service revenues.

ESG's gross margin improved to 22.7% in Q3 this year, up 110 basis points from Q3 last year. The gross margin improvement was primarily due to improved operating leverage, pricing actions taken in response to higher material cost in comparison to the prior year and lower purchase accounting expenses.

ESG's operating income for the quarter was $28.3 million, up from $21.2 million in Q3 last year, and its operating margin for the quarter was 13.1%, up from the 10.7% reported last year. Adjusted EBITDA for the quarter was $37 million, an improvement of $6.3 million or 21% compared to $30.7 million a year ago.

That translates to an adjusted EBITDA margin of 17.1% in Q3 this year, which is up from 15.5% last year. ESG reported orders of $214.5 million, an increase of $36.3 million or 20% compared to the prior year quarter.

The improvement was primarily due to increases in orders of vacuum trucks, sewer cleaners, street sweepers and dump truck bodies, in addition to higher aftermarket demand. You may recall that beginning in the fourth quarter of last year, we saw some acceleration of orders with lead times for certain product lines extended.

With no significant changes in the underlying market dynamics, we noted a limited amount of pre-ordering in the third quarter, but we may see more of this in the fourth quarter this year.

Within SSG, third quarter sales were up $2.9 million or 6%, largely due to increased global sales of public safety products and improved international sales of warning systems. The higher sales volumes helped drive a 60 basis point year-over-year improvement in gross margin.

Operating income for the quarter was $8 million, up $1.9 million or 31% compared to Q3 last year. SSG's adjusted EBITDA for the third quarter was $8.9 million, up $1.6 million or 22% from a year ago. And its adjusted EBITDA margin for Q3 was 16.8% this year, up from 14.5% last year.

SSG reported orders of $53.6 million, an increase of $2.2 million or 4% from last year, primarily due to improved domestic orders for public safety products and industrial signaling equipment. Corporate operating expenses were $5.9 million compared to $5 million in the prior year quarter.

The increase was primarily driven by higher stock compensation and employee incentive costs, which were partially offset by lower acquisition-related expenses. Looking now at cash flow. We generated $34.1 million of operating cash flow in Q3 this year compared to $6.3 million last year.

That brings the total amount of operating cash flow in the first 9 months of the year to approximately $72 million, an improvement of almost $20 million or 38% compared to the same period of last year.

The improved cash flow facilitated additional debt repayment of $27 million in the quarter, which brings the total amount of debt paid down since we completed the TBEI transaction in June last year to approximately $88 million.

While we expected that the cash flows generated by TBEI and our other businesses would help us to delever quickly, the pace of our post-acquisition debt repayment has exceeded our initial expectations. Our pro forma debt leverage ratio at the end of September was 1.5x adjusted EBITDA, down from 2.7x at the closing of the acquisition.

We ended the quarter with $187 million of net debt and availability under our credit facility of $166 million. With the healthy cash flows expected to be generated by our businesses, we remain committed to investing in organic growth initiatives, considering additional M&A opportunities and returning value to shareholders.

On that note, we paid a dividend of $0.08 per share during the third quarter, amounting to $4.8 million. And we recently announced a similar dividend for the fourth quarter. I'd now like to briefly highlight an upcoming change in the way that we account for our leases.

As with most public companies, at the beginning of 2019, we will be required to adopt a new lease accounting standard. Under these new rules, the company's operating leases will be reflected on our balance sheet as a right-of-use asset with a corresponding lease liability.

In addition, we will also see a change to the historical recognition of the deferred gain related to - relating to the sale and leaseback of our Elgin and University Park facilities, which was completed back in 2008.

The gain on sale, which originally totaled $29 million, is currently being recognized ratably over the lease term, which expires in 2023. On an annual basis, the gain recognition has represented approximately $2 million a year since 2008.

Upon adoption of the new rules, the remaining deferred gain of approximately $8.5 million will be recognized as an adjustment to retained earnings, and we will no longer recognize any portion of the gain through the income statement. That concludes my comments, and I will now turn the call over to Jennifer..

Thank you, Ian. We delivered another outstanding quarter with both of our groups reporting excellent results reflecting significant improvements in both the top and bottom line. Our 8% organic sales growth include the effects of continued momentum on our safe-digging initiative, new product introductions and higher aftermarket demand.

The execution against these strategic goals also contributed to a 17% year-over-year organic order improvement.

The teams did an outstanding job growing sales and improving margin on a year-over-year basis despite the current climate of increasing uncertainty around commodity cost and concerns of the impact of tariffs facing many industrial companies.

Last quarter, we referenced the impact of higher material costs in the second half of the year, estimating that after accounting for price increases implemented by our businesses throughout the year, this might represent a net headwind of up to $0.03 per share in comparison to the first half of the year.

Our review - our view remains unchanged with about half of that impact being absorbed in the third quarter. The remainder has been factored into our increased outlook for the year. Despite these headwinds in the second half of the year, both groups reported third quarter EBITDA margin towards the higher end of their target range.

That impressive performance contributed to a consolidated EBITDA margin for the quarter of almost 15%. Within SSG, we are continuing to see the benefits from adding sales resources and expanding our engineering team in support of new product development.

Through the first 9 months of the year, SSG sales were up organically by 9%, largely driven by improved demand for public safety equipment both domestically and in Europe. With a series of new products added to our suite of offerings, we have won a number of new conquest accounts in both geographies.

SSG's adjusted third quarter EBITDA margin was 16.8%, a 230 basis point improvement over last year as we saw benefits from the increased sales volume, pricing actions taken in response to increased commodity cost and recovery in our license hiring business in Southern Europe. I remain very encouraged with the trajectory that SSG is on.

Sales were up 9% organically in comparison to a strong third quarter of last year when we reported organic growth of 13%. The continued improvement was largely due to increases in shipments of vacuum trucks, sewer cleaners and dump truck bodies as well as higher aftermarket revenue.

These improvements were partially offset by fewer sales of products manufactured by other OEM, the Joe Johnson Equipment. The reduction in sales, which tend to have lower margins, was a direct result of the continued application of our 80-20 initiative at Joe Johnson Equipment.

Within ESG, higher sales volume, increased aftermarket demand and operating leverage drove an adjusted EBITDA margin of 17.1%, towards the higher end of our target range. As I noted, we have been proactive in taking actions in response to anticipated increases in material costs.

As we mentioned last quarter, the ESG team has effectively managed their procurement of steel and aluminum faced with the challenges in the market. As a reminder, in most of our businesses, we have previously locked pricing for the second half of the year, albeit at higher rates than the first half of the year.

In addition, the majority of our businesses have implemented one or more price increases so far this year, which appear to have been accepted by the marketplace.

Over the course of the year, the teams have done an outstanding job in an increasingly challenging environment in managing material costs, raising prices and continuing to focus on the ongoing execution of our 80/20 or ETI initiatives. These factors contributed to ESG's third quarter EBITDA margin improving by 160 basis points compared to last year.

I'd like to spend a few minutes talking about our safe-digging initiative, one of our larger strategic initiatives that we launched a couple of years ago.

Safe-digging, which can also be referred to as vacuum or hydro-excavation, involves the use of pressurized air-water along with vacuum technology to dig as an alternative to the use of traditional equipment such as backhoes or mechanical excavators, or in some situations, shovel.

In many circumstances, this type of excavation is a safer and more efficient means for digging in comparison to traditional excavation. From a safety aspect, this technology also significantly reduces the risk of damaging underground infrastructure during the digging process.

This type of technology has been widely used in Canada for a number of years, and we're starting to see growing acceptance in the U.S. We have recently seen an uptick in the number of U.S.

states that are promoting the safety features of vacuum excavation technology with 16 states and OSHA now including hydro or vacuum excavation as part of their published safe excavation practices. As an organization, we are well positioned to establish a leading position in this emerging application for safe-digging technology.

The suite of our truck-mounted, safe-digging offerings is comprehensive with application that target many different end markets. For example, the ParaDIGm hydro-excavator, which was launched in the latter part of 2016, was custom-built for customers serving utility markets.

In addition, we have recently launched a new excavator truck offering in the Ontario market that provides maximum payload while meeting the applicable weight restrictions. We have almost 30 years of experience manufacturing hydro-excavation products. In addition, we have a broad network to support the needs of our growing customer base.

Between our FS Solutions centers and our dealers, we have approximately 65 service locations across North America. To complement our comprehensive product offering, we have a dedicated sales team in place. They have been increasingly active in demonstrating the efficiency and safety benefits of our equipment.

So far this year, our sales teams have completed approximately 2,500 demonstrations and presentations to potential new customers. This compares to about 1,000 by the same time a year ago. Our year-to-date sales of vacuum excavation trucks are up approximately 70% compared to the same period of last year.

This has been achieved through penetrating new end markets like utility as well as growth in our other industrial markets, including some nominal recovery and the direct sales of new equipment into oil and gas markets.

We believe that the application of this technology may also have benefits in other end markets like construction and infrastructure maintenance. With the traction we have seen to date on this strategic initiative, we are excited about the longer-term opportunity that increased awareness of this technology may bring.

And while we've taken some short-term measures to free up capacity in our Streator, Illinois facility this year, we are currently evaluating whether expansion of our existing manufacturing footprint is necessary to support further growth on this initiative over the longer term.

We are fortunate to have a dedicated group of employees and good access to skilled labor at this location. Now turning to our outlook.

With the outstanding performance in the third quarter, our current backlog, favorable conditions in our end markets and continued traction on our organic growth initiatives, we are increasing our full year adjusted EPS outlook to a new range of between $1.33 and $1.36. This would represent an improvement of between 56% and 60% over last year.

We have previously set a goal of profitably growing our revenues in excess of $1 billion by 2020. We crossed this milestone during the second quarter, achieving our target 18 months early. We will be updating our longer-term revenue goal when we issue our outlook for 2019 on our year-end earnings call.

As we begin to look forward into next year, we are encouraged with the conditions in our end markets, which have contributed to a healthy backlog, particularly for sewer cleaners and vacuum trucks. The strength of our backlog provides us with good visibility into the first half of next year.

Within our industrial markets, the number of used equipment units available at auction continues to be at normal levels, supporting healthy used equipment demand in the market. During 2018, that has helped with the flow of sales out of and into the fleets of our rental partners.

Utilization levels within our own rental fleet are strong, particularly relating to products serving industrial markets like vacuum trucks, hydro-excavators and water-blasting equipment. And as I just mentioned, I'm bullish on our prospects with respect to our safe-digging initiative.

We also now track industry data on new housing starts and activity within Class A trucks, which we believe has a strong correlation to TBEI's businesses.

Both of those have a generally positive outlook for next year, although we are monitoring the availability of chassis at certain of TBEI's locations given our broader alliance of customer-supplied chassis at TBEI and some recent tightness. On the municipal front, our U.S.

markets remained healthy overall with particularly strong demand for sewer cleaners, aided by a number of new product introductions that we recently introduced.

In SSG's police business, we expect to see continued traction on the new product introductions, which may be partially offset by a scheduled model year changeover at Ford, which may cause a temporary delay in the number of Ford police vehicles available in the first half of next year.

Our ongoing focus on our ETI principles or 80/20 has also led to operational improvements in several businesses that underperformed in 2017. ETI is, and will continue to be, an important part of our culture as we continue to educate our people on its principles. In fact, during the third quarter, over 70 employees attended a training event on ETI.

The acquisitions completed over the last years are performing well and remain on track to deliver on their previously announced accretion estimate. As we've previously stated, acquisitions remain a priority for the deployment of our free cash flow. Our deal pipeline remains active.

With our healthy cash flow generation and strong financial position, we are well positioned to pursue strategic acquisition candidates. We have looked at a number of acquisition opportunities. The value expectations have been high, and we are committed to maintaining a disciplined approach.

Our pro forma debt leverage ratio at the end of the quarter is now down to a level that gives us significant flexibility to fund both organic growth initiatives and M&A. We will provide a more detailed view on 2019 on our next earnings call. With that, we are ready to open the line for questions.

Operator?.

[Operator Instructions]. We'll take our first question from Chris Moore of CJS Securities..

I know it's a very dynamic conversation, but just in terms of kind of your current thoughts with respect to steel and tariffs moving into 2019.

Are you starting to lock in steel for the first half? Or kind of just big picture how are you looking at it at this point in time?.

Chris, it's Ian. So we are - it's something we are monitoring closely as you saw in the first half of this year. The teams did an outstanding job monitoring the purchase of steel and the pricing. They're continuing to apply that same approach this year.

As we look into 2019, we have seen kind of steel and aluminum prices stabilize, I would say, recently. We're continuing kind of to track it pretty closely before we make any decisions on 2019. So it's something that the teams do a great job monitoring, and they'll continue to do so..

Got it. If we look at the - it looks like SSG continues to make real significant progress. I mean if you look at SSG versus ESG on a relative basis, obviously SSG is a much smaller base. From an organic growth perspective in 2019 - I know Jennifer had mentioned it looks like the headwind on the forward side for SSG.

Is there - do you look at the potential organic growth between the two as reasonably similar? Or kind of how do you look at it at this point in time?.

Yes, I think what I'm really - the SSG team has just done a super job this year, and we're really seeing the benefits of some of the new product introductions that we started last year. And we expect that to continue into 2019. And that's making a significant difference. We've also seen some recovery in Southern Europe for our VAMA business.

As we move forward, I think, in terms of organic growth, the biggest opportunities across Federal Signal really on our ESG side of the business, particularly with respect to the safe-digging initiative. And that's why I spent some time really outlining why we're so bullish about that particular initiative and why we're investing in safe digging.

But again, we expect to continue to see the benefits of the investments that we've made on the new product development side for SSG..

Got it. Just a couple of things on the cost side. Transportation costs don't seem to be - they're a real issue for many industrials. It's not something I remember that you guys specifically calling out.

Or are those impacting you much at this point in time?.

Overall, they're off for the company. But for our largest business, we work specifically through - with our dealer network. So in some situations, our dealers pick up the vehicles. And in some situations, we actually have our own employees that we utilize for driveaway.

So in many situations, we are also able to pass through those costs to the end customer. So it really varies business to business, but it's something that, given the tightness in the market, we've been monitoring closely, particularly at our TBEI businesses, where we tend to use more driveaway services at some of them..

Got it. And with respect - you talked a little bit about this, in terms of ability to - challenges of hiring necessary labor. I know that you have some kind of geographic plant concentration that would perhaps - gives you a little bit of advantage there. Again, it's an area of real concern for less industrials.

It sounds like you're in pretty good shape on that front..

Yes, absolutely. We have felt the tightening labor market at a couple of our smaller facilities, particularly one of our TBEI facilities. But our largest facility, which is in Streator, Illinois, our Vactor's facility, which manufactures our sewer cleaners and our hydro-excavation trucks, they've added over 50 people in the last 9 months.

And their ability to continue to add people is an important part of our decision to look at expanding their manufacturing footprint. And we're really pleased with the 20-year-plus relationships that the teams in that area have had with the local area high schools. Our - many of our welders actually are instructors in the high schools.

And that's been an important source of new labor for that business. We're in pretty good shape..

We'll now take our next question from Greg Burns of Sidoti & Company..

Just wanted to follow up on the steel and aluminum question.

If we look into the first half of 2019, are steel and aluminum higher levels than what you locked in for the second half of this year?.

They're about in line, Greg. The prices, where they are right now, is highly consistent with the lot for the second half year..

Okay.

So it won't be much more of an incremental headwind at the current price range?.

Correct..

All right.

And in terms of the chassis shortages we're seeing industry-wide, can you just talk about kind of your view on that? How you've been able to mitigate some of those headwind, and kind of what your view is going into 2019 if this alleviates or persists into next year?.

Sure, absolutely. So first, I want to talk about - it's really - impacts our ESG business. So for our legacy ESG businesses, and we define those as Vactor and Elgin that utilize chassis, about 50% of the time, the customer supplies the chassis, and 50% of the time we supply chassis. And that would also include - which include our JJE business.

And we've gone through VIN number by VIN number, and we've secured all the chassis we need for the fourth quarter. We've also gone through this exercise into 2019. In some situations, where our customer might not have a chassis, we're able to substitute one of our chassis. So we're in pretty good shape there.

And in - for example, in one of our lines, our Pelican Street Sweeper, we actually manufacture the chassis, so we don't have any issues. So we feel very confident about our ability to supply chassis for those businesses through the remainder of 2018 and into the first quarter of 2019.

With respect to our TBEI businesses, in their situation, we never own the chassis. The customer supplies the chassis, and we have seen some tightness of chassis supply in certain of those businesses, and we're looking through it..

Okay, great. And then lastly, in terms of the safe-digging initiatives, you now - you mentioned revenue is up 75% year-over-year.

Do you have the actual revenue contribution from safe digging this quarter? And when you look at the total market opportunity, how would you size the addressable market for safe digging for you?.

I'll start with the total market opportunity. It's a difficult question because in some - it's replacing, in some situations, not all situations, backhoes and shovel-type equipment. We've looked at a $300-million-plus market opportunity, but there's a lot of assumptions that go into that TAM. I'll defer to Ian for the other question..

Yes, Greg. We don't break it out at that level of detail by product line, but it's encaptured in the vacuum truck. If you look in our 10-Q, you'll see in the MD&A some of the description of the year-over-year improvement in sales we had in the U.S.

We had a $9.3 million increase in vacuum truck sales, and a substantial portion of that is going to be related to safe digging..

Yes. What I'm really encouraged by is one of the things we monitor, our sales to new customers, and we continue to see that increase..

We'll now take our next question from Walter Liptak of Seaport Global..

Just a - to sort of a follow-up on the safe digging. I wonder if - as you talked about just a second ago, new customers, you have been working on some utility customers. I wonder if some of the site the brand expansion because some of those are big customers in the utility space. I wonder if you could talk about that utility commercialization..

Sure, absolutely. As we talked about on the call, one of the first products that came out of our revamped innovation initiative was the ParaDIGm, which is a purpose-built product for the utility market. We introduced that into - late 2016. So 2017 was the first full year.

We go to market through a combination of a direct sales model then we also utilized our dealer network. And we continue on to get traction on the utility initiative in terms of sales to utilities, both the large ones and small ones. We really had kind of pretty consistent success in all the major regions in North America.

So we are continuing to add sales resources. We're adding sales resources. I've met with a number of our dealers that are adding sales resources to support this market. I think one of the things that distinguishes us is our service centers has a high degree need for service for this type of sales.

And we have 60-plus service centers between FS Solutions and our dealers. We are also seeing, with respect to contractors, and that's an important part of this market. And often, we go in because of the breadth of the suite of products that we offer.

We'll go into a customer with the ParaDIGm, and they'll end up buying a bigger hydro-excavation piece of equipment like a Prodigy or a larger HXX. And as I mentioned on the phone, we also introduced this year a new lighter version of the product to comply with regulations in Ontario. And we're looking at introducing that product in the United States.

So a lot of good work there and a really kind of cross-section of customers across North America..

Okay, all right. Great. Makes sense. It's nice to see the leverage on some of the safe digging - I guess, it's excavation practices in those 16 states and with OSHA. But I wonder if there's a new - there's another level of regulation beyond just best practices that could evolve.

Because I know in some other industrial spaces or industrial products, especially when safety is involved, there's other levels of regulation..

Yes, a great question. So the first thing we look at, as I mentioned in my comments, is Canada and the practices in Canada. So for example, in Ontario, it is - safe digging is required by statute in certain applications.

So as we move forward, we're encouraged by the guidelines, particularly the OSHA guidelines that were introduced about a month ago because often guidelines predate regulation. So it's something we're going to continue to monitor closely. In addition to the productivity benefits of safe digging, there's tremendous safety benefits.

And we're encouraged by the feedback that we're getting from our customers who are starting to utilize this equipment and the - both, as I mentioned, both the productivity and safety benefits that they're experiencing..

Okay. Great. And then switching gears over to the orders. The strong orders, can you just remind us, was that all organic order growth? And sorry, and then I wondered if - if I look - the volume growth would look like versus how much price versus volume was in that order of number..

So it was all organic, Walt. And so in the third quarter, everything is apples and apples now with the acquisition of TBEI. So we owned them - we owned TBEI for a full quarter of '17, so that's purely an organic comparison.

In terms of the mix between - if you take the 17% growth, there's probably, I would say, between 4% or 5% - probably between 3% to 5% on the pricing side depending on the product line. The rest would be pure volume..

Okay. Great. Okay. And then one last one for me, just skipping around to the SSG. As you have pointed out, I think there was another question about the profits which really good there. And I think you called out the VAMA business in Europe and pricing as well as a mix of public safety products. I wonder if you could talk about those.

Is it really a mix issue? Or can we expect this level of profitability going forward? Is this - there's still more that you can get on profit margins?.

As you know, mix can vary quarter-to-quarter depending on kind of the number of large projects that, that particular - that SSG does. But where we're really seeing a sea change is the benefits that we've seen as a result of the new product introductions and new customers. So let me give you an example.

Historically, our police business, if you look at a good, better, best product strategy, has focused more on the better and best. We've now developed a number of products that are very solid products, particularly our Legend lightbar to address new market opportunity, so highway patrols in particular.

So with the introduction of this product earlier this year, we've been able to convert the Florida highway patrol, so that was a big important customer win for that business. And they have a pretty aggressive new product development map both in our public safety systems side of the business and our industrial side of the business.

And we should continue to see benefits from that as we go into 2019..

We'll now take our next question from Steve Freiberg of KeyBanc..

This is Ken Newman on for Steve. Just wanted to go back and ask the organic order growth number question in a different way. Just thinking about that 17% growth, you mentioned it was driven by aftermarket, the safe-digging and new product introductions.

Can you help us quantify the magnitude of those 3 buckets within that consolidated order number and any other significant drivers?.

So if you kind of - if you break the 17% down into the thesis, I think $36 million was within SSG. And that's primarily the vacuum - so on the vacuum trucks side. There's also - was also the higher demand for the street sweepers and sewer cleaners. We also had an uptick in orders on the dump trucks side.

Aftermarket revenue - sorry, aftermarket orders were up about $6 million, and that would encompass rentals, used equipment sales and parts and services. But the bulk of it on ESG was on the vacuum trucks side. Within SSG, the orders were up about 4%. So just over $2 million.

And that was really on the public safety side as well as on the industrial signaling equipment..

Got it. Just digging deeper into those ESG orders. You have a pretty tough comp going into the fourth quarter and the first quarter of '19. Do you think you can keep ESG orders above that $200 million mark? Just trying to think about order growth for the next couple of quarters and cadence of order growth..

Yes, I think you're right, Ken. Where the comps are going to be a little complicated because of the pull forward that we saw both in the fourth quarter of '17 and the first quarter of '18, we estimate, so I think, about $45 million of pull-forward.

We saw a limited amount of that in Q3, but we are expecting the - to see some of that in the fourth quarter as well. We tend to have some pricing increases at some of our businesses that go into effect at the beginning of the year. So there is some pull-forward of orders that's from customers trying to get ahead of the price increase.

So yes, it's going to be a tougher comparison, but I still think, based on what we've seen, I would say so far in October, the order flow seems pretty encouraging..

Great.

For the top line in the next year, and I know you don't want to get into guidance, but can you help give us a general framework for how you see 2019 on an organic basis? I mean, just given current trends and where you see the backlog today, is it reasonable to expect a mid-single-digit type of number on an organic basis?.

I think, at this point in time, we have good visibility into '19 with the backlogs that we have. But with this - and we are committed in terms of kind of year-over-year improvement, but we'll update our view on 2019 at our year-end earnings call..

Understood. And then just last question for me. The leverage profile looks great here. I think the free cash flow generation you had in the quarter was very impressive. You did talk about reinvesting into organic initiatives as well as returning capital back to shareholders. But I just wanted to touch on the M&A pipeline.

And what are you seeing in terms of deals crossing your desk? And where is - where are the opportunities for additional M&A?.

Yes. So we've been very active in the M&A market this year. We've looked at a number of deals. Our pipeline continues to be robust. We've seen some high valuations, and we will continue to be disciplined with respect to our acquisition practices as you mentioned. We're in a pretty good position from financial perspective, given that we're 1.5x levered.

So we have sufficient liquidity and a lot of flexibility to be able to fund acquisitions. And we'll continue to move forward with a disciplined approach, where we think that the valuations make sense..

We'll now take our next question from Marco Rodriguez of Stonegate Capital Markets..

A couple quick follow-ups here, just kind of coming back to the steel and tariffs and pricing into '19. Kind of sounds like there's not a necessarily - a need to push through a pricing increase as of the moment. And it sounds like you'll reevaluate that in your budgeting process.

Just kind of curious as far as how quickly do you think you can move, if you do need to implement any sort of price increases based on what the market might do..

I think, Marco, it depends on the business. Within the kind of legacy ESG businesses, and that would be all of the Vactor, the Elgin. The backlogs are pretty strong right now. And so putting through pricing on a backlog that - you can - in some respects, you can put through some surcharges for those and also certain orders within that backlog.

Certain more on the municipal side, where it's more tricky to pass through any surcharges or pricing adjustments. But on the TBEI side, which is the - where the lion's share of our steel purchases and aluminum purchases are, those lead times are really only between 3 to 6 weeks.

And so it's a lot easier to react to increasing costs on the material side by issuing new quotes. I think we talked on the second quarter call that of roughly our $50 million spend a year on steel and aluminum, about 70% of that is TBEI.

And so that - in that business, it's a lot easier - not easy necessarily, but it's - we can react a lot faster to push through any price adjustments..

Got it. And then coming back to the chassis, it sounds like you're pretty confident with obtaining as much chassis you need for your clients for the next couple quarters.

Just trying to kind of understand, is that mainly a function of the fact that a lot of the customers are already coming to you with their chassis? Or do you guys have some sort of special relationships or leverage that allows you to remain that confident?.

Yes. So it really depends again on the business unit. So with respect to Vactor, which produces our sewer cleaners and our hydro-excavation trucks, about 50% of the time, we supply the chassis and 50% of the time the customer supplies the chassis. But you did touch on an important issue.

We've had long-term relationships with the local chassis suppliers. The thing that's important is we're chassis-agnostic, so we have the ability to use a number of different types of chassis. So we have gone and procured - either procured the chassis or procured optionality for additional chassis going forward.

So if our customers didn't have a chassis, we could sub one of our chassis. And as I mentioned for our Elgin business, our largest product line, we probably can actually manufacture the chassis. With TBEI, it's different. Because in TBEI, we never own the chassis. So we're more dependent with respect to customer-supplied chassis.

And we have seen some tightness at a couple of those businesses, which we're continuing to monitor closely. But again, it is a relatively smaller portion of our business. And it's one of the - as we look to diversify our end markets with the acquisition of TBEI, our exposure then has been more limited than some of our competitors..

Got it. And then I was wondering if you can maybe talk a little bit more about the safe-digging. And you mentioned here in Ontario that certain applications that it's required for them to use this sort of technology.

Can you just kind of maybe talk about the types of situations where it's required to have a safe-digging type application versus your typical backhoe?.

Yes, absolutely. So it really depends on the specific jurisdiction. So I won't get into a 16-state survey here on the call. But with respect to Ontario, where there are underwater - I'm sorry, underground gas line, in certain applications, then you're required to use safe digging.

So we're encouraged by what we're seeing now in the state with safe digging being acknowledged as an important alternative. And again, the OSHA guidelines that came out last month, in many situations, the guidelines can predate regulation.

So it's something we'll continue to monitor closely, and we believe that this is an important alternative both in terms of the productivity benefits and the safety benefits in some applications..

And are there any sort of specific potential regulations that you might be monitoring? That obviously, like you said, the OSHA guidelines are predating regulation somewhere in the states..

Again, we're looking at those regulations that would either suggest that safe digging through hydro-excavation or vacuum equipment is an accepted or preferred technology. Or if you took the next step and it was a required technology. This again is something we'll continue to monitor closely and something our customers monitor also..

Got you.

And aside from the 16 states that you've mentioned here that are looking at these safe or better practices for you in safe digging, are there any other states or regions that you're thinking that might turn a little bit more towards using this?.

It's really the 16 states have really been across the board. So we will continue to monitor the legislation that occurs across 50 - all 50 states and in Canada..

[Operator Instructions]. It appears there are no further questions at this time. Ms. Sherman, I'd like to turn the call back to you for any additional or closing remarks..

Great. In closing, I'd like to reiterate that we are confident in the long-term prospects for our businesses and our markets. Our teams are performing at a very high level and remain 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 including ETI. We would like to express our 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 again next quarter..

This concludes today's call. Thank you for your participation. You may now disconnect..