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. 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 an update on our multi-year growth outlook and our updated guidance for 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 $0.66 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 repurchase shares. 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 set quarterly performance records across many metrics in 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 being the highest we 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 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 an 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 the 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 an 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 remain 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 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 increase 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 products resonated 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 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 impact on 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. 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 was 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, as a result of 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 is 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. Our teams remain laser-focused on positioning our business 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 stages of projects. As an illustrative example, while we expect the 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 or 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 by 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 remains strong, and our teams are focused on executing our growth initiatives and building 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 contributions 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 Signal 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 throughout the year at many of our businesses, but we are not done here. We see ourselves as being in the early innings of what we view as a multi-year 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 that 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 reaffirm 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.

Thank you. We will now be conducting a question-and-answer session. 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.

It was a 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, they 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. There are a few points that Jennifer mentioned regarding the reduced production days in the second half of the year compared to the first half, which is a challenge we always encounter. Additionally, we discussed the $10 million chassis impact on our top line; however, this will not significantly affect earnings since it’s typically passed through, resulting in a slight lag benefit. Lastly, as mentioned in our previous earnings call, most of the incremental investment in our rental fleet is planned for the second half of the year, which will also be a contributing 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 strong orders for dump trucks. It's encouraging to see this recovery. I believe this is the second or third consecutive quarter showing such strength. Could you share more about the order trends? I think you hinted at some of this in your comments, Jennifer. At what point do you anticipate facing tougher comparisons? Do you see this pent-up demand transitioning into a normalized growth rate? How should we approach expectations for dump truck orders in the second half of the year?

Yes, it is me. First of all, we were pleased with the overall orders. As we mentioned on the call, some dump truck orders were strong. This reflects a combination of execution on strategic initiatives, especially regarding geographic expansion. The teams have performed exceptionally well. We are seeing pent-up demand, and there have been improvements in chassis availability that we discussed this quarter. The availability of Ox Bodies reached its highest level in several years. Furthermore, we have examples, including one mentioned on the call, where infrastructure investments are yielding benefits. The lead times are much shorter for certain products compared to others, allowing us to fulfill orders within the same quarter. Additionally, it was encouraging that the dump truck orders were fairly balanced between municipal and industrial sectors.

Okay. Great. So it sounds like the order activity was good and kind of consistent during the quarter, and 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. What are the pluses and minuses around you guys increasing the production in the second half? Because you've 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?

I want to start by expressing our optimism about Q2. The teams performed excellently in ramping up truck production across many of our facilities. While results can differ from one business to another, a few critical factors must be addressed, including the need to enhance and train our workforce. We typically have reliable access to labor, allowing us to hire and train effectively. The supply chain always plays a role, and while chassis availability is relatively good, the medium-duty chassis market remains constrained, although it constitutes a small portion of our overall business. We anticipate fewer production days in the latter half of the year. Nevertheless, I want to underline that we expect to see gradual improvement as the year progresses because our teams are focused on minimizing 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 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. 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, especially around safe digging. 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 we've talked a lot about is we're very flexible in terms of whether you want to buy new equipment, rent equipment, or buy 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 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 would be 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. We have geographic areas where we're the Number 1 market provider, and part of the strategic initiatives of several of those dump truck businesses is to extend that geographic reach. Number two is Trackless would be a good example. Our go-to-market strategy is not fully optimized. There are several geographies where Trackless doesn't really have nominal sales of any. We are in the process of leveraging our distribution to expand their geographic reach and it creates opportunities. We believe that Ground Force and Total Haul and the optimization we've done in 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. 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 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. The chassis dynamics were 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. 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. That's resulted in some long lead times. That's why there is such a focus 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 pass-through revenue. 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, this kind of implies that aftermarket revenue was flat from the second quarter of '23. Is that right? Am I thinking about it correctly?

It increased slightly, approximately 1.5%. Several factors contributed to this, with certain parts rising about 1%. They are up 6% for the year so far. Rental income grew by 4% in the quarter, also reflecting a 6% increase year-to-date. Service revenue rose by 11%, which remains consistent year-to-date. However, there was a decline in used equipment sales. This is due to strong demand for used equipment following robust sales in the fourth quarter of last year, creating a need to refresh our inventory. Timing is a critical consideration as we are currently in the peak rental season. We need to balance retaining our units for the rental fleet while also meeting customer demand for used equipment. This is part of the additional fleet investment we discussed last quarter.

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. We want to make sure we are in a position to be able to satisfy that strong rental demand.

Got it. That makes 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 solid here. But do 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? Maybe 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 received that information. So far, we have only observed minor benefits from the infrastructure bill. Since it was bipartisan legislation, we anticipate the continuation of many of the announced projects, with over 60,000 in total, irrespective of the election results in November. At this moment, we haven't seen any significant impact of the Presidential election on our orders.

I appreciate you mentioning your long-term outlook for top line growth rate. When you reach double-digit growth for the top line, does that suggest you will stay toward the upper end of your 2023 target? Or might it even lead to an earlier revision in your margin targets?

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 and through the cycle. We'll continue to revisit those targets. 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, the price increase is between 2% and 3%. That's what we indicated at the beginning of the year for the top line, and it also reflects the orders and backlog. So, that's the situation for Q3.

Great. I'll 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? 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 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 stage the parts optimization throughout the FS Solution and JJE platform. 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 business. 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 we have in place, that aftermarkets business will continue to grow. While still growing the denominator, we could see the aftermarket business getting up to 30%.

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 on 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, Dave. Volumes were the primary factor. In considering the 18% top-line growth, approximately 14% came from volume. The remainder was about 3% from price, as we previously discussed, along with some favorable mix elements. The significant portion was due to the increased volumes. As we have noted before, all of our domestic operations within the SSG business are located in one facility. The more we can process through that facility, the more attractive the drop-through becomes. I believe we observed some of that during the quarter.

Very helpful. Thank you. 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? Just kind of what does that look like, like performance uptake?

In our capital expenditures, we typically forecast between $35 million to $40 million. This is generally split between maintenance and growth. We focus on investments like lasers and robots that can help us achieve operational efficiencies. These are the types of projects we prioritize 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 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?

The majority of the deals are in the $50 million to $100 million range, but there are also several smaller deals and some larger opportunities. Overall, there's a wide range, though most deals fall within the $50 million to $100 million range.

And I know historically, you don't like fixer-uppers. Is that still the philosophy going forward? 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? 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. 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. I believe we currently have a strong mix in our pipeline based on the three examples I mentioned. It ultimately depends on the synergies we create, the ways we enhance performance, and how we expand 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 want to start by acknowledging the exceptional work the teams are doing on execution. Their strategic initiatives are particularly strong, especially in new product development, and we are seeing positive results from that effort. We have secured multiple orders, especially in the police market, including a significant order we acquired towards the end of the quarter that will be delivered next year. Our team in Europe has performed very well, as has our signaling and warning team. We are encouraged by the excellent execution of our strategic initiatives, which includes the 80/20 approach that has become part of our culture.

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.

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