Federal Signal Corp /De/ Q3 FY2022 Earnings Call

Good morning, and welcome to Federal Signal's Third Quarter 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 news release, which we issued this morning. The slides can be followed online by going to our website, federalsignal.com, clicking on the Investor Call icon and signing into the webcast. We have also posted the slide presentation and the earnings release under the Investor tab on our website. Before we begin, I'd like to remind you that some of our comments made today may contain forward-looking statements that are subject to the safe harbor language found in today's news release and in Federal Signal's filings with the Securities and Exchange Commission. These documents are available on our website. Our presentation also contains some measures that are not in accordance with U.S. generally accepted accounting principles. In our earnings release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-Q later today. I'm going to begin today by providing some detail on our third-quarter results before turning the call over to Jennifer to provide an update on our performance, current market conditions, recent acquisition activity, and our outlook for the remainder of the 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. In summary, our businesses were able to deliver another solid quarter with double-digit growth in net sales and earnings, gross margin improvement, and an adjusted EBITDA margin towards the upper end of our target range. Consolidated net sales for the quarter were $346 million, up $48 million or 16% compared to last year despite a $3 million unfavorable foreign currency translation impact. Organic revenue growth for the quarter was $27 million or 9%. Consolidated operating income for the quarter was $39.5 million, up $5.2 million or 15% compared to last year. Consolidated adjusted EBITDA for the quarter was $53.5 million, up $6.1 million or 13% compared to last year. That translates to a margin of 15.4% in Q3 this year compared to 15.9% last year. Net income for the quarter was $31.8 million, up $2.6 million or 9% from last year. That equates to GAAP EPS for the quarter of $0.52 per share, up $0.05 per share or 11% from last year. On an adjusted basis, EPS for the quarter was $0.53 per share, an improvement of $0.05 per share or 10% compared to last year. Our third quarter GAAP and adjusted EPS in both the current and prior year included certain discrete tax benefits, primarily related to tax planning strategies. In the current year quarter, these benefits totaled $3.8 million, which was $700,000 less than the amount recognized in the prior year quarter. Order intake for the quarter was again strong with orders of $382 million, representing an increase of $32 million or 9% compared to Q3 last year. Consolidated backlog at the end of the quarter set another new company record at $824 million. That represents an increase of $337 million or 69% from last year. In terms of our group results, ESG's net sales for the quarter were $285 million, an increase of $36 million or 14% compared to last year. ESG's operating income for the quarter was $33.9 million, up $3.1 million or 10% compared to last year. ESG's adjusted EBITDA for the quarter was $46.5 million, up $3.8 million or 9% compared to last year. That translates to an adjusted EBITDA margin of 16.3% in Q3 this year compared to 17.1% last year. ESG reported total orders of $321 million in Q3 this year, an improvement of $29 million or 10% compared to last year. SSG's net sales for the quarter were $62 million, up $12 million or 25% compared to last year. SSG's operating income for the quarter was $10.5 million, up $2.9 million or 38% from last year. SSG's adjusted EBITDA for the quarter was $11.5 million, up $3 million or 35% from last year. SSG's adjusted EBITDA margin for the quarter was 18.7%, up 140 basis points from Q3 last year. SSG's orders for the quarter were $61 million, up $2 million or 4% compared to last year. Corporate operating expenses for the quarter were $4.9 million compared to $4.1 million last year. Turning now to the consolidated income statement, where the increase in sales contributed to an $11.9 million improvement in gross profit. Consolidated gross margin for the quarter was 23.9%, up 10 basis points compared to last year. As a percentage of sales, our selling, engineering, general and administrative expenses for the quarter were up 30 basis points from Q3 last year. Other items affecting the quarterly results include a $300,000 increase in amortization expense, a $400,000 reduction in other income and a $1.6 million increase in interest expense. Tax expense for the quarter was $4.9 million compared to $4.3 million last year, with the increase primarily due to the recognition of fewer discrete tax benefits in the current year quarter compared to the prior year. Our effective tax rate for the quarter was 13.4% compared to 12.8% last year. At this time, we expect our full-year effective tax rate to be approximately 22%. On an overall GAAP basis, we therefore earned $0.52 per share in Q3 this year compared with $0.47 per share in Q3 last year. To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior quarters. In the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition-related expenses. On this basis, our adjusted earnings for the quarter were $0.53 per share compared with $0.48 per share last year. Looking now at cash flow, where we generated $10 million of cash from operations during the quarter, bringing the total year-to-date operating cash generation to $32 million. We ended the quarter with $296 million of net debt and availability under our prior credit facility of $160 million. We recently increased our borrowing capacity by executing a new 5-year $800 million credit facility, replacing the $500 million credit facility that was previously in place. The new credit facility provides greater financial flexibility to invest in internal growth initiatives and pursue additional strategic acquisitions like TowHaul Corporation, which we acquired shortly after the end of the quarter for an initial payment of $43 million. The terms of the new facility are more favorable to the company, reflecting our strong cash flow and balance sheet. This marks another important milestone for the company as we continue to execute on our strategic long-term growth objectives. We also remain committed to investing in organic growth initiatives and returning cash to stockholders through dividends and opportunistic share repurchases. On that note, we paid dividends of $5.5 million during the quarter, reflecting a dividend of $0.09 per share, and we recently announced a similar dividend for the fourth quarter.

Thank you, Ian. We benefited from pricing actions, strong aftermarket demand, and contributions from recent acquisitions, allowing our businesses to achieve double-digit year-over-year growth in net sales and earnings, alongside improvements in gross margin and EBITDA margin, despite supply chain disruptions affecting production and shipments at some facilities in our Environmental Solutions Group early in the quarter. We observed increased demand for rentals, parts, and used equipment within our Environmental Solutions group, partially driven by extended lead times for new equipment. Overall, our aftermarket revenues in Q3 increased by 10% compared to last year, with particularly strong demand for rentals and parts sales. The growth of our aftermarket business is a key strategic initiative, and with benefits from pricing actions, geographic expansion, and leveraged acquisitions, we were pleased to report the highest aftermarket revenues ever recorded in a third quarter. Aftermarket revenues accounted for about 30% of ESG's revenues in the quarter. The volatile supply chain environment poses ongoing challenges, forcing us to continuously adjust production schedules and impacting our shipping capability. During the quarter, production at our Streator and Elgin facilities was affected by supply chain disruptions, chiefly due to intermittent shortages of hydraulics and specialty control components. We are partially assembling trucks and completing them as parts arrive. For example, in July, 30% of the units scheduled to be assembled at Streator were awaiting parts at the end of the month. Our teams worked hard to secure additional parts and qualify alternative suppliers. Fortunately, as the quarter progressed, we saw monthly improvements in production, with September marking our highest weekly production rate at both facilities this year, achieving a 35% increase since January. Street Sweeper production also faced a planned decline in July as our LGIM facility implemented a lean manufacturing initiative to reconfigure a production line, but production rebounded in August and September. Towards the end of the quarter, we encountered delays in customer pickups due to Hurricane Ian, particularly in our dump body business. Thankfully, our facilities and employees were not directly affected by this extreme weather event, and we are proud that our equipment is aiding in the recovery and rebuilding efforts in the impacted regions. In our Safety and Security Systems Group, the supply chain improvements we began to notice towards the end of the last quarter continued through Q3. Our procurement and engineering teams have worked diligently over the past few months to add alternative suppliers for components like LEDs and wire harnesses and redesigned printed circuit boards to replace hard-to-source or obsolete electronic components. We have also brought some production in-house to alleviate some of the pressure on our key suppliers, adding capacity to offset demand shortages for printed circuit boards used in our products. As these efforts gained traction, inventory availability improved, and the supply chain became more reliable as the quarter went on. Our operations team developed a solid plan to build out the increasing backlog by adapting the workforce to include overtime and hiring additional resources. These efforts contributed to SSG's record performance in Q3, which featured a 25% increase in revenue and an EBITDA margin exceeding its target range. In summary, while the supply chain continues to be challenging, we have seen improvements in SSG and are optimistic about the production levels observed in Streator and Elgin facilities. As production increased, we also noted sequential monthly sales improvements. Despite the ongoing supply chain volatility this year, we are on track for a record year in sales and earnings, with strong demand for our product offerings evidenced by exceptional Q3 order intake of $380 million, contributing to another record backlog and reflecting strength across our end markets. Our dealers and customers share this sentiment, which seems further supported by the economic stimulus package approved in March 2021. Approximately $350 billion was allocated for state and local governments, which includes funding for maintaining essential infrastructure like sewer systems and streets. As a provider of equipment for essential services, we stand to benefit significantly from additional aid to state and local sources for these initiatives. The treasury started distributing the first $175 billion installment in spring 2021, and indications suggest that the second installment is anticipated this year. Dealer sentiment remains positive, as municipalities continue to place orders at historically high levels, partially due to this public funding. This is complemented by strong U.S. municipal order growth, with a 20% increase for both the quarter and year-to-date period, highlighted by a significant demand for street sweepers and sewer cleaners. This year alone, U.S. municipal street sweeper orders rose by around $40 million or 40%, and sewer cleaning orders saw a $25 million or 22% increase in the same period. Additionally, we are encountering robust domestic municipal demand within SSG, with a 9% year-to-date improvement in orders driven by increased need for public safety equipment. After several years of hesitation from major urban municipalities in investing in public safety equipment like police vehicles, it appears this trend is reversing. During Q3, we received a notable order from a major metropolitan police department, the first in over three years, and we are hopeful that others will follow suit with renewed investments in public safety gear. In our industrial end markets, we’ve observed a 15% year-over-year improvement in domestic orders, primarily for our TRUVAC safe digging trucks and Guzzler industrial vacuum loaders, which together increased by $41 million or 66% year-over-year. While industrial orders remain strong, we have witnessed some softness in dump body orders, as the availability of stock chassis continues to be a key limitation. However, as chassis availability improves, we anticipate an increase in orders due to pent-up demand. Regarding the $1.2 trillion infrastructure bill, which allocates $550 billion for new investments in roads, bridges, power, water, and broadband infrastructure, public transportation, and airports, we are beginning to see demand rise in inquiries from contractors working with state transportation agencies on various projects. Conversations within our dealer network reveal that contractors are planning projects through 2024 and starting to initiate large equipment inquiries linked to these infrastructure funds. I would also like to briefly highlight our acquisition of TowHaul, which we completed in early October. Located in Belgrade, Montana, TowHaul is a leading manufacturer of off-road towing and hauling equipment. For over a decade, TowHaul has focused on creating reliable, efficient, and adaptable heavy-duty off-road equipment, including its signature trailers. The innovative designs, extensive product knowledge, and strong customer service of TowHaul have established its industry-leading status. TowHaul also meets ongoing aftermarket needs through parts and service offerings, which account for about 35% of its annual revenue. This acquisition enhances our position as a diversified industrial manufacturer of specialty vehicles for maintenance and infrastructure markets, complemented by leading brands and a strong aftermarket platform. The integration of TowHaul with Ground Force Worldwide, which we acquired last October, allows us to provide our global customers with a broader range of top-tier products and solutions. This also establishes a platform poised to leverage anticipated trends in the metal extraction industry, driven by robust industrial activity and increasing demand for precious metals tied to vehicle electrification and green initiatives. Last year, TowHaul generated approximately $23 million in revenues, and we expect it to perform within ESG's target EBITDA margin range and positively impact earnings in 2023. This acquisition reinforces our belief that M&A will play a significant role in our future growth. Now, looking ahead to the rest of the year, overall demand for our products and aftermarket offerings remains strong. Our Q3 orders increased by 9% compared to the previous year, setting a new company record for our backlog. While we anticipate sporadic supply chain interruptions in the coming quarters, our teams are addressing these challenges, and we are encouraged by the recent improvements. Based on our performance thus far, record backlog, and expectations for component availability, we are raising the midpoint of our full-year adjusted EPS outlook to a new range of $1.91 to $2, up from the previous range of $1.85 to $2, and we are also increasing the midpoint of our full-year net sales outlook to $1.41 billion to $1.44 billion, up from $1.38 billion to $1.45 billion. We are optimistic about the long-term opportunities for all our businesses, which will benefit from the bipartisan infrastructure legislation passed by Congress. We are already witnessing the advantages from economic stimulus packages that have become available to municipalities and anticipate that the infrastructure bill will likely spur capital equipment demand for essential investments in areas such as roads, bridges, electrification, broadband, clean energy, and public transportation development. As a leading manufacturer of specialty infrastructure and maintenance equipment, we expect to see increased demand for most of our product offerings, including equipment sales and rentals of dump trucks and trailers, safe-digging trucks, road marking equipment, sewer cleaners, and street sweepers. We foresee sustained positive momentum from these stimulus packages. Given our robust demand and record backlog, we currently see no indicators of a recession. Our pricing initiatives have been generally well-received, and we have not experienced significant order cancellations. In fact, cancellations remain rare within our businesses. While no company is entirely shielded from a macroeconomic downturn, our backlog provides good visibility into 2023 and partially protects us from the immediate effects of an economic slowdown. Our focus on revenue diversification over the last several years has enabled us to adapt to changing market conditions. With this strategy and our ongoing emphasis on ETI principles, Federal Signal has evolved into a more resilient enterprise, consistently delivering EBITDA margins superior to those of most peers. As Ian mentioned, our financial stability and liquidity are strong, and the recent expansion of our credit facility will further empower us to pursue strategic acquisitions like TowHaul. Our current M&A pipeline remains very active. We are committed to our vehicle electrification initiatives, which include integrating our acquisitions into our electrification strategy. For instance, the Switch and Go product line, part of the Dice acquisition last December, has entered an agreement with an EV chassis manufacturer to create a prototype vehicle featuring the Switch and Go body system. This value proposition enhances the EV chassis benefits by providing a multi-use body system not achievable with standard fixed body applications. Essentially, Switch and Go's interchangeable body solution enables a user to accomplish the work of two to three trucks with a single vehicle. Our dealer network also continues to show strong demand for demonstrations of our plug-in hybrid electric street sweeper products, particularly the Broom Bear and three-wheeled Pelican models, resulting in additional order intake. Our continuous commitment to environmental, social, and governance initiatives also enhances our standing in the communities where we operate and serves as a differentiator in attracting labor at many of our facilities. For instance, at our Streator facility, where TRUVAC and user equipment are produced, we currently have fewer than 20 hourly job openings, representing less than 4% of our workforce. Our strong ties to the Streator community continue to facilitate access to high-quality employees, exemplified by our successful recruitment of welders through partnerships with local community colleges. In October, we hosted an open house at the facility, attended by over 1,400 employees and family members, further underscoring the solid connections our team has cultivated with local employees. We are also thrilled to share that our chat stream business was recognized as a top workplace in Houston for the second consecutive year. Additionally, we recently held our annual leadership off-site meeting, attended by over 60 executives, where our leadership team engaged in interactive sessions focused on macroeconomic topics, DE&I initiatives, and strategic planning, alongside sessions dedicated to our strategic goals. Welcoming leaders from our recent acquisitions reinforced my pride in the culture we’ve developed at Federal Signal, and I feel fortunate to collaborate with so many talented leaders. We all returned from the event feeling energized and excited about the future. Although we have navigated a challenging supply chain environment for over a year, we believe that the measures we have implemented in response will yield long-term benefits for Federal Signal, positioning us as a stronger company. We have reorganized our supply chain group to enhance material availability and drive cost-reduction initiatives while leveraging our scale and integrating acquired companies. Additionally, we have broadened our supply base and expanded our in-house manufacturing capabilities. For example, we are now producing parts at some FS solution centers for our dump body business, and our SSG and ESG teams have successfully collaborated to redesign certain equipment to address electrical component shortages. We have also increased our inventory levels to secure safety stock that supports production as we aim to reduce lead times. With strong demand, incentives from infrastructure stimulus, effective labor access, and recent capacity expansions, we are well-positioned for growth as the supply chain environment improves. I believe we are now ready for questions.

Your updated guidance implies a record Q4 revenue performance. Is that coming more from the line to already-built product that you can ship on top of planned production? Or do you just expect fewer constraints in Q4?

Yes. I think, Steve, what we've seen in the last couple of months, certainly in Q3 with the improvement in production. We're expecting some of that to continue. Now we have some seasonality there where aftermarket tends to taper off a little bit. But I think the combination of the size of our backlog and the production improvements we've seen in the recent months gives us confidence that the revenue will certainly be up over Q3. And so that's what's implied in the outlook.

Also, we expect our margins in Q4 to be up year-over-year.

I just want to gauge your confidence that nothing has really changed on your ability to convert higher sales to higher margin as you get past some of these supply chain constraints.

Yes. The most encouraging fact that I saw is we track pretty carefully our production levels at Elgin and Streator. And as I talked about in my prepared remarks, as we move through July, August, and September, we saw a sequential improvement each month. And in September, we were up 35% over January. So although there's still some pockets of supply chain, overall, we're moving in the right direction, and we're encouraged by that. And that was baked into the guidance.

In an unconstrained environment, how much of the $765 million of ESG backlog is shippable in 2023?

All of it would be, yes.

All of it.

So nothing scheduled for '24. That all represents orders that people want right now, if they could get it.

Correct.

Correct.

And I think I've asked this before, but just to remind us, given the capacity expansions, what do you think quarterly revenue capacity is at ESG? Again, unconstrained.

I think unconstrained, Steve, I think we've obviously added a couple of companies into the mix over the last couple of years. But I think unconstrained. I think if you looked at some of our order cadence within SSG, it's certainly been in the $300 million, if not in excess of the $300 million range. So I think north of $300 million plus the impact of acquisitions.

Can you hear me okay?

Yes.

Great. Can I first touch on the new facility that you've got out there? Can you just give us a couple of points as to some of the changes that might be in terms of spreads or any ticking fees or other fees that may be involved just to make sure our model is properly calibrated?

Yes, there hasn't been a real change in the pricing terms. The spreads are quite similar to what was in the previous agreement. We have transitioned from LIBOR to the new SOFR rate, which means interest expenses will be higher due to the rate increase. However, there are some more favorable terms in the agreement regarding covenant calculations that benefit us. Additionally, the overall size of the facility has increased. There is also the option to expand it further for acquisitions if necessary. Overall, with the original credit agreement set to expire in 2024, we found it to be a good opportunity to refinance for another five years and increase the facility size, and we are very pleased with the results.

Obviously, one thing to reiterate what Ian said in these challenging credit markets, we were extremely pleased with the response that we got and the terms that we got. And we feel like it well positions us going forward in terms of optionality for both organic growth and inorganic growth.

Excellent. And Jennifer, I wanted to just get some more color on the dump body order comments you made during your prepared remarks. I wasn't sure I quite followed it. Did you say that dump bodies get a little bit lower priority in times of chassis shortages? And that seems like a somewhat new comment? Is that a new development in the industry? Or is that the way it's always been, we just haven't heard about it since?

Yes. No. That's the way it's always been. And when chassis are on allocation, many dealers won't want to commit to necessarily dump truck fleet. They want to keep their options open. So we've seen some of that over the last several quarters. As we move forward, we believe that a couple of things, one, there's pent-up demand. Number two is we've diversified the end markets of that business pretty significantly since we purchased TBI in 2017. OSW Switch & Go both have strong municipal exposures. So we'll start to see the benefits of that. And then infrastructure bill, it's very difficult to imagine an infrastructure project that doesn't need a dump body. So as we move forward, we're encouraged by the opportunity, particularly around the infrastructure funds, and we wanted to just point out in perhaps a clearer way. One of the drivers of the softness in orders is just the prioritization of the dump truck in the queue for chassis.

Yes, maybe just back to the September highest production rates this year. Was that follow-up? And how did it look in October?

Yes, we are still receiving updates for October. So there will be more information on that soon. Overall, we noticed the initial signs of supply chain improvement in our SSG group during the second quarter, which continued into the third quarter. Specifically, at our Streator and Elgin facilities, we observed ongoing improvements, which is encouraging. Additionally, we've now qualified more suppliers, which will benefit the company in the long term. We've also streamlined some of our product offerings due to the supply chain challenges, making us more agile in our response. I believe this will position us better in the long run.

Got it. Very helpful. Regarding the adjusted EPS range, is the tax rate of 22% a lower assumption compared to after Q2, or is it the same?

It is, Chris, because I think we talked about the discrete benefits that we had in Q3. So it is slightly lower than what we've previously signaled in Q2, but 22% would be the full-year effective rate that we're expecting.

Got it. And that wouldn't necessarily be a new normalized level moving forward to just desperate to...

Sorry, Chris. Not necessarily. The 22% includes the discrete benefits we recognized in Q3, which we discussed in the prepared remarks. We also had significant discrete benefits in Q3 last year. When comparing year-over-year for Q3, our effective rate was similar, at about 13% this year and in the high 12s last year. We had a fairly comparable amount of discrete benefits in Q3 for both years. However, the 22% for the full year accounts for the impact of the discrete benefits in the third quarter.

Got it. I appreciate that. And just from a volume/price discussion, the midpoint of current revenue guidance, 17.5%, something like that. What's the rough split between volume and price?

Yes. In terms of organic growth, in Q3, we achieved organic growth of approximately $27 million, or about 9%, with roughly half of that attributed to pricing. We expect to see similar trends as we enter the fourth quarter.

Is there any way you could quantify how much revenue the disruptions in the ESG side of the business cost?

It's a little tough to quantify the pinpoint an exact number, Greg, because it had some knock-on effect because as we talked about in July, we were impacted more than in August and September. So there is some catch-up effect that we had. But if I were to ballpark an estimate, we're talking $20 million-ish would be a high-level estimate, but as I said, it's a fairly difficult number to pinpoint.

Okay. Regarding the TowHaul acquisition, can you share how much revenue Ground Force generates as a reseller of TowHaul, or is that not a significant figure? Additionally, are there any further revenue synergies anticipated between the two acquisitions?

Yes. It's not really about being a reseller, but rather what they can accomplish together, which is where we see opportunities. They can collaborate in the market. There are situations where Ground Force has a strong foothold in certain geographical areas where TowHaul may not be as strong, and vice versa. I believe that the combination of both teams can effectively target all the geographical markets they serve. That's where we identify significant synergy opportunities. Regarding the TowHaul deal, we are aiming for synergies of approximately $3 million by the end of year three, with most of these being revenue synergies from utilizing both distribution channels.

Congratulations on the successful quarter. I have a couple of follow-up questions for you. First, regarding TowHaul, you mentioned it as a platform in your prepared remarks, and I assume that’s in relation to Ground Force. Could you elaborate on that? Additionally, are there any other mergers and acquisitions you are considering in the metal distractions or middle distraction sector?

Yes. So Ground Force and TowHaul sell to the same customers, and they support the equipment that's in the mine. So they basically transport to and from the mine is a way to think about it. They're the leading providers in the world. TowHaul has certain geographic areas that it focuses on that Ground Force doesn't, and Ground Force is focused on certain areas and certain customers that TowHaul is not. So we're very excited about putting the two together under the same management team and leveraging the same sales channel because, as we mentioned, we think there's synergies there. There could be one more deal that completes that platform. But we're still right now very focused on integrating the two companies that we purchased. But as we previously talked about, Ground Force is off to a strong start. And both of those companies operate within our target EBITDA margin ranges. There's an opportunity for improvement. So very solid businesses. And what we really like about them also is their parts business. We talked about TowHaul has a 30% plus parts business. And so as we move forward, it does a really nice job with some proprietary parts in this particular market.

It's encouraging to see that the supply chain has started to improve and production levels are increasing. Regarding the previous question about delayed shipments, can you provide some insight into your current lead times, measured in months or another format? Additionally, what were those lead times during normal circumstances? How much have supply chains improved, and how quickly can you address the ESG backlog?

Yes. So for several of our product lines, I’ll start with they’re too long. And we have very focused efforts to reduce those lead times. Particularly Vactor, we've seen very strong orders for many of our products, including our Vactor and Elgin products. So that's an area where we will be focused on reducing those lead times moving forward. Particularly, we're encouraged because we've got the capacity, and we've got the people. And so as we move forward, we should easily be able to reduce lead times, and we should be able to increase throughput.

Okay. Fair enough. And then just a new question, I guess, is that we're in this rise, the interest rate environment, it's right that you've got all the government spending for infrastructure and other things. But how do you think the rising interest environment impacts your customers' purchases of your products?

On the municipal side, we don't anticipate a significant impact, especially since sewer cleaners are typically funded by water taxes. Additionally, multiple layers of government spending will benefit the purchase of our products. On the industrial side, we see our aftermarkets business as essential because we offer rentals. As I noted in my earlier comments, our customers are beginning to plan for major infrastructure projects. We have programs through our aftermarkets group for those who may not be able to afford new equipment, allowing them to use the equipment and purchase it over time if needed. We believe we are in a strong position by providing new, used, and rental options in this increasing interest rate environment.

Ian, I was hoping just to follow up on something real quick, and I'm not sure if I missed it, but can you provide how much chassis pass-through revenue was in the quarter and how that compares to last year?

Yes, it was a little higher. It was about GBP 6 million higher. So it was about 1% of the overall revenue increase was higher chassis revenue. It was about a drag on our margin of around about 15 basis points this period. So not as much of a drag as it was in Q2, but still a slight drag on gross margin.

Okay, super helpful. And then I wanted to follow up on the September build rate commentary being the highest of the year. I think you said up 35% versus January. And I think there was a comment across both Streator and Elgin. A, I was hoping, could you confirm that it was across both of those? And then B, any idea or any color for us on how volumes at this point compare to sort of pre-COVID, pre-after expansion levels?

Yes. So I will confirm, yes, it was for Streator and Elgin. Number two is with respect to pre-COVID levels, we're not there.

Yes.

Okay. Still lower than pre-COVID. And then just my last one. I understand you're not giving guidance for 2023. But I am kind of curious if you could directionally talk about maybe what you're hearing out of the OEMs on chassis allocation into next year. Any directional color on maybe how you're thinking about that specifically in the municipal part of your book?

Sure. So we received initial allocations from the chassis OEMs. And the messaging is about the same as 2022 with potential upside for the second half of the year. However, all that being said, as we've talked about several times, we have programs that are in place with our dealers where we encourage them to go out and secure chassis outside of our allocations. And then in addition to that, we also go out and try to secure chassis. We call it the onesie-twosie program for various distributors across North America. And I know we've started that. So as we move into '23, we have several programs in place where we're trying to increase the number of chassis that are available to us, either through our dealers, our customers, or going out and trying to procure them on an individual basis.

Just a quick follow-up. Sorry if I missed this. Operating cash flow is running below prior year. I know Q4 is typically a cash release period. Do you have a forecast for operating cash flow for either Q4 or the year?

We don't have a forecast necessarily, Steve. But I think one thing we would say is that we would expect our cash conversion in Q4, obviously, to improve from where it's been. I think as you can probably see, we've had some strategic inventory build really to serve the backlog that we have. There is some, obviously, increase in our receivables that is primarily timing related. I think we started to see some of that turn in the early part of October. The encouraging thing that we see in terms of our receivables is that we haven't seen any deterioration in terms of the aging profile of our receivables, even though it's up significantly at the end of September versus where it was at the end of December. So I think the receivables will start to turn as we enter Q4, and that's where we're expecting to see some of the cash conversions start to improve in Q4.

In closing, I would like to reiterate that we are confident in the long-term opportunities for our businesses and the prospects for our recent acquisitions. Our portfolio of businesses includes many market-leading brands with solid fundamentals. Our foundation is strong, and we are focused on delivering profitable long-term growth through the execution of our strategic initiatives. I'd like to give a public thank you to all of our employees for their commitment, creativity, and dedication addressing this challenging supply chain environment. I would also like to express our thanks to our stockholders, distributors, dealers, and customers for their continued support. Thank you for joining us today, and we'll talk to you soon.