Federal Signal - Earnings Call - Q1 2019

Transcript

Speaker 0

Greetings. Welcome to the Federal Signal Corporation First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

I will now turn the conference over to your host, Ian Hudson, Chief Financial Officer. Mr. Hudson, you may begin. Good morning, and welcome to Federal Signal's first quarter twenty nineteen conference call. I'm Ian Hudson, the company's Chief Financial Officer.

Also with me on the call today is Jennifer Sherman, our President and Chief Executive Officer. We will refer to some presentation slides today as well as to the earnings news release, which we issued this morning. Slides can be followed online by going to our website, federalsignal.com, clicking on the Investor Call icon and signing in for 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 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 first quarter results before turning the call over to Jennifer to provide her perspective on our performance, market conditions and our outlook for the remainder of 2019. After our prepared comments, Jennifer and I will address your questions. Our consolidated first quarter financial results are provided in today's earnings release. We had another strong quarter with results reflecting impressive increases in sales and income, driven by strong broad based organic growth.

We delivered significant margin expansion and a 30% improvement in adjusted earnings per share. Consolidated net sales were $273,800,000 up $24,000,000 or 10% compared to last year. Consolidated operating income was $25,800,000 up $6,200,000 or 32% from Q1 last year. On an adjusted basis, consolidated operating margin was 9.7%, up from 8.5% in Q1 last year. Consolidated adjusted EBITDA was $35,900,000 up $6,900,000 or 24% from Q1 last year.

That translates to a margin of 13.1% in Q1 this year, up from 11.6% last year. Net income in Q1 this year was $17,500,000 compared to $12,900,000 last year. That equates to GAAP EPS of zero two nine dollars per share, up 38% from $0.21 per share last year. On an adjusted basis, EPS for Q1 this year was $0.30 per share, which compared to $0.23 per share last year. Order intake in the first quarter of this year continued to be strong at approximately $300,000,000 That was up sequentially from the fourth quarter of last year and down in comparison to the record levels in Q1 last year, which included approximately $25,000,000 of sewer cleaner and vacuum truck orders, which were accelerated from subsequent quarters in 2018.

With a significant order intake in the first quarter of this year, our consolidated backlog at the end of the quarter was at a record level of $364,000,000 That represents an increase of $26,000,000 or 8% from the 2019 and an increase of $27,000,000 or 8% compared to Q1 last year. In terms of our first quarter group results, ESG reported first quarter sales of $219,500,000 up 22,900,000 or 12% compared to last year. All of that growth was organic. ESG's operating income for the quarter was $25,700,000 up $5,100,000 or 25% from Q1 last year. Adjusted EBITDA for the quarter was 34,700,000 an improvement of $6,000,000 or 21% from a year ago.

That translates to an adjusted EBITDA increase was largely driven by improved operating leverage and benefits from pricing actions that were realized in spite of higher material costs compared to Q1 last year. We also had to overcome several days of production disruption at certain of our facilities caused by the polar vortex and other severe weather conditions. ESG reported total orders of $243,700,000 in Q1 this year, up $4,100,000 and 2% sequentially, down in comparison to the record order intake of $274,400,000 in Q1 last year, with the majority of the reduction attributed to the order deceleration that we just referenced. SSG delivered another strong quarter with sales up $1,200,000 or 2%, largely due to increases in global sales of public safety products and industrial signaling equipment in The U. S, partially offset by lower domestic warning system sales, which tend to be lumpy.

Operating income for the quarter was much improved at $8,700,000 compared to $6,100,000 in Q1 last year. Adjusted EBITDA for the quarter was $9,600,000 up from $800,000 a year ago, and adjusted EBITDA margin for Q1 this year was 17.7% compared to 12.8% last year. The four ninety basis point improvement was largely the result of our pricing actions, improved sales mix and a much improved first quarter for our Valmer Public Safety business in Spain. SSG's orders of $55,300,000 were consistent with its order intake in Q1 last year. Corporate operating expenses of $8,600,000 increased by $1,500,000 from last year, primarily due to higher employee related costs, which were partially offset by lower expenses associated with hearing loss litigation.

Turning now to the income statement, where the increase in sales contributed to an $8,400,000 improvement in gross profit. Consolidated gross margin improved to 25.7% for the quarter, up from 24.8% last year. As a percentage of sales, our selling, engineering, general and administrative expenses for the quarter were down 70 basis points from Q1 last year. Other items affecting the quarterly results include a $300,000 increase in other expense and a $500,000 reduction in interest expense associated with lower average debt levels. Tax expense for the quarter was up $1,800,000 largely due to higher pretax income levels.

Our effective tax rate for the quarter was 25.2%, in line with expectations and up slightly from Q1 last year when a nominal dispute benefit from the release of tax reserves was recognized. On an overall GAAP basis, we therefore earned $0.29 per share in Q1 this year compared with $0.21 per share in Q1 last year. To facilitate earnings comparisons, we typically adjust our GAAP earnings per share for unusual items recorded in the current or prior year quarter. In the current year quarter, we made adjustments to GAAP earnings per share to exclude acquisition related expenses and purchase accounting expense effects. On this basis, our adjusted earnings for Q1 this year were $0.30 per share, up 30% compared with zero two three dollars per share in Q1 last year.

Looking now at cash flow where we used $8,800,000 of cash in operations in the quarter. The first quarter is typically a period in which our businesses add working capital. In addition, in Q1 this year, we funded higher incentive compensation and tax payments and additional rental fleet investments in comparison to last year's Q1. We are expecting our operating cash flow to improve in the second quarter and continue to target similar cash conversion as in 2018. We ended the quarter with $194,000,000 of net debt and availability under our credit facility of $123,000,000 Our debt leverage ratio remains at a comfortable level and unchanged from year end.

Our strong financial position allows us to continue to invest in organic growth initiatives like ongoing new product development and the expansion of our Vaca facility. At the same time, we remain committed to pursuing strategic acquisitions and funding cash returns to shareholders. On that note, we paid a dividend of $08 per share during the first quarter amounting to $4,800,000 and we recently announced a similar dividend for the second quarter. We also funded opportunistic share repurchases during the first quarter, ending $1,000,000 to buy back shares at an average price of $19.84 We have about $29,000,000 remaining under our share repurchase authorization at the end of Q1. That concludes my comments, and I would now like to turn the call over to Jennifer.

Speaker 1

Thank you, Ian. I would like to reiterate Ian's comments on the outstanding quarter. Each of our groups reported top line growth and margin improvement, and on a consolidated basis, our adjusted EBITDA margin was up 150 basis points. We were expecting year over year improvement in our first quarter results, and our actual results did not disappoint. Within ESG, we saw stronger aftermarket demand in certain parts of North America with rental activity starting slightly earlier this year as well as some earlier than expected deliveries.

Within SSG, our police business in Europe successfully delivered on a number of projects to satisfy accelerated customer requirements. We also saw some customers in The U. S. Which orders for public safety equipment earlier expected in anticipation of the Ford model year changeover scheduled for the 2019. This changeover may cause a temporary delay in the number of Ford's leased vehicles available beginning in Q2.

Collectively, we estimate that these factors resulted in the acceleration of about $02 in earnings from the second quarter into Q1. Our first quarter orders are generally in line our expectations with higher than expected orders for vacuum trucks resulting from continued momentum on our safe digging initiative being partially offset by slightly lower than expected orders from dump truck bodies and trailers. Orders in the first quarter of this year were our third highest on record, surpassed only by the 2017 and the first quarter of last year, which collectively included an estimated $40,000,000 to $45,000,000 of accelerated orders as customers placed orders earlier as they sought to secure availability of certain product lines like sewer cleaners and vacuum trucks are to manage the procurement of their related chassis. We expect this order acceleration, which we believe has now normalized, may cause some short term distortion in the comparability of our quarterly orders and can't let us consider comparisons of backlog levels to be a more reasonable indication of the strength of our market. At the March, our backlog was at a record level and was up over $25,000,000 or 8% compared to both year end and the prior year quarter.

As we look forward, we continue to feel good about conditions in our end markets. I recently attended our biannual ESG dealer meeting with a sentiment among our visible dealer network relating to market conditions in 2019 was very positive. However, with current lead times continuing to be extended to sewer clearance and vacuum trucks, orders received in the second quarter and beyond may not translate to revenue and income during 2019. I am excited to share that during the first quarter, we launched our new TRUVAC brand, a dedicated line of industrial vacuum excavation trucks designed specifically to satisfy the safety requirements of organizations that locate and verify underground utility lines and pipes. TRUVAC vacuum excavators use high pressure air or water to loosen soil, providing a nondestructive means to safely locate, excavate and uncover underground utilities.

The loosened soil is removed from a vacuum hose and may be deposited into a debris tank for disposal or backfilling. The TRUVAC brand will focus on vacuum excavation, while the Vaxxer brand will continue to focus on equipment solutions for cleaning and maintaining sewers and catch basins. A separate brand, TRUVAC, for our safe digging products will allow us to continue to focus and distinguish ourselves in the marketplace in this critical growth area for the company. TRUVAC has been established to address the need for safe digging in The United States and Canada. Our safe digging equipment can be used in markets with strong growth potential given the increased need to address both AV infrastructure that is currently in place and support new infrastructure that would be needed for next generation technologies like five gs.

In addition, with more than 19,000,000 miles of buried utilities in The United States alone, the risks of utility strikes caused by poor excavator digging practices are too great to ignore and incidents of gas line explosions, power outages and burst water lines causing injuries, fatalities and property damage continue to occur at an alarming rate. While the TRUEDAC brand is new, the products, technology and quality are well established by the Doctor brand, which brings more than one hundred years of operator focused innovation excellence, more than fifty years of experience building equipment that combines high pressure water and vacuum technology and more than twenty years of experience manufacturing vacuum The current TRUVAC product line includes versatile Paradigm subcompact vacuum excavator, the Prodigy vacuum excavator that offers power and performance in a smaller footprint and the HXX series of full size vacuum excavators designed to tackle the biggest digging projects. We continue to invest in new product development relating to face digging and recently kicked off a project to further enhance our safe digging product portfolio. TRUVAC will serve to differentiate our position in the marketplace with a complete range of truck mounted safety equipment and a dedicated aftermarket infrastructure.

We believe that these factors, along with our deep expertise and our history of delivering exceptional value to a growing customer base, give us a strong competitive advantage. In response to this growth potential we see for safe digging, we recently announced plans to invest up to $25,000,000 to expand our Streator, Illinois manufacturing facility. This project is now underway and is expected to be completed by the 2019. As Ian mentioned, our debt leverage ratio at the end of the quarter is at a level that puts us in a solid position with significant flexibility to fund both organic growth initiatives and M and A. While we will remain disciplined in our approach as we were in 2018, acquisitions remain a key priority for the deployment of our free cash flow and the company's growth.

We target companies to accelerate our current strategic initiatives or provide a platform for growth in adjacent markets for new geographies. We also seek niche market leaders that have a sustainable competitive advantage and have strong management team. We look for companies that have solid growth potential and operate within our target EBITDA ranges in the currently or active application of our ETI principles. Our deal pipeline remains active, and we expect future strategic acquisitions to be a meaningful part of our growth. Finally, as you may have heard earlier this week, there were some positive developments relating to a potential infrastructure bill.

This infrastructure legislation works with our various businesses which support maintenance and infrastructure markets, Federal Signal is going to benefit. We will continue to monitor any additional developments. I would now like to move on to our earnings outlook. With the better than expected performance in the first quarter and the strength of our backlog, we have greater confidence in the year and are raising the low end of our 2019 adjusted EPS outlook range by $02 establishing a new range of 1.5 to $1.6 In summary, we started the year with outstanding performance. Our talented and dedicated team and their businesses have positioned the company for another year of growth.

During Q1, we faced some unusually tough weather conditions at several of our northern locations, and the team did a super job navigating through these challenges to deliver our strong results. At this time, we are ready for questions. Operator?

Speaker 0

Our first question comes from the line of Chris Moore from CJS Securities. You touched on, but maybe we could just talk a little bit about some of the things that are likely to affect kind of the revenue and earnings gains over the next three quarters. The Ford model year changeover, which looks like you saw a little bit of Q2 earnings perhaps. And there is and you talked about the extended lead times on the sewer cleaners and back trucks. Some of those orders came out happening in 'nineteen.

But maybe can you just touch on the key elements that we should be considering?

Speaker 1

Sure. Absolutely, Chris. First of all, we saw, as we mentioned, 2002 move from q two to q one, and that was really driven by strong aftermarket in certain parts of The US, some pre buying that occurred in our Public Safety Systems business in advance of the four year model changeover and acceleration of customer orders and deliveries in our business in Spain. But I think what we're really encouraged by, even with that $02 shift and the Ford model year changeover, we expect q two that will do nominally better than we did last year. And you might recall that last year was a really strong quarter for q two.

Speaker 0

Absolutely. Okay. That's helpful. And then in terms of the I guess, two questions. So the the lead times with the sewer cleaners and and that's part of of why the Streator facility is being expanded.

So is there likely much order flow that's going to revenue is not going to get recognized this year? And then secondly, after Cedar is completed, are there any other areas that likely need to be expanded to allow for continued growth?

Speaker 1

Yes. Good question. First of all, last year, we made some investments in our service center in Leeds, Alabama, and we should start to see the benefits of that in the second half of the year for our Gardner product line. We'll be building more trucks there this year versus last year. As you know, we continue to believe that the growth opportunities for safe digging are significant.

Early in the quarter, we announced up to a $25,000,000 expansion of our Baxter facility. I'm pleased to report that we're on track with that expansion. We purchased the land, are waiting for some zoning permits, and we expect that to be completed at the end of this year. We're looking within our TDDI facilities. There's some growth that we will be expanding our Rugby facility up in Rugby, North Dakota.

And we expect again to have that completed this year. And these expansions in large part are driven by the success that we're having with respect to introduction of new products.

Speaker 0

Got it. Very helpful. So it's only a small number, the 600,000 acquisition integration related, anything that we should read into that? Nothing really, Chris. It's it's really just kind of a standard, you know, we have the the JD earn out payment that is coming due in the second quarter.

And a lot of that is really just accreting that liability. It's it's recorded at present value right now, and a lot of that is just the accretion as we get closer to the payment when we'll actually make the cash payment. Got it. Alright. Appreciate it, guys.

Let me jump back in. Thanks, Chris. Thank you. Our next question comes from the line of Greg Burns from Sidoti and Company. Please proceed with your question.

Speaker 1

Good morning, Greg.

Speaker 0

I'm sorry. Something was put in the queue. One moment. Running at or above the the high end of your Greg, your line your line Hello?

Yes. Okay. So the SSG margins, you probably benefited a little bit from pull forward from Q2 this quarter, but you have been running at or above the high end of your target range. How should we think about the margin profile of that business? Is this do you see do you think you know, this is kind of a new normal sort of the higher end, more like a 16% to 18% range as opposed to what you've previously targeted?

Thanks. Yes, Greg. I think we've we've all seen over the last couple of quarters, we've benefited from, you know I think the margin has exceeded, you know, our target range of 15 to 17% range for 30 to the last two quarters. That business, you know, that it it can be pretty lumpy. There can be systems orders that have, you know the mix can can be a factor in that equation.

I think, you know, the 15 to 17% range is is where we feel comfortable, you know, quarter in, quarter out. We wanna be within that range. I think if you look back to the first quarter of last year, you know, we were we were lower than that, and that was really just a function of a soft quarter in our on our business in Spain. Really, the residual effect of the political uncertainty that was in place in that location kind of just throughout 02/2017. It's not limited into the '18.

So that business has recovered very nicely. Had a had a very strong q one of of this year. So I I think, you know, as we go forward, we still feel pretty comfortable with that 15 to 17% range.

Speaker 1

Yes. Because the other thing I think I'd add to what Ian said is that, again, we're really seeing the benefits of the increased volume as a result of our new product development initiatives at SSG and continued application of our ETI or eightytwenty principle.

Speaker 0

Okay. And Jennifer, you had mentioned your orders some folks and body orders were down a little bit. I know housing data has been a little bit soft over the last couple of months. So what's your outlook for that business? Are you seeing a little bit of a slowdown given what we're seeing in the housing market?

Yes.

Speaker 1

I guess I'd say a couple of things. First of all, it's both dump trucks and trailers. We saw weather played a factor there because of kind of some of the severe weather conditions across North America. The construction work was delayed. We also saw that chassis, some of the chassis challenges that we there weren't as many stock orders placed at some of our distributors.

And with that business, orders tends to be a less relevant metric than, for example, Baxter Elgin because because we often get the order and ship it within the quarter. You know, looking forward, we're expecting top line year over year revenue growth for that business. So, you know, I continue to be encouraged by we've got a number of new customers. We're expanding our rugby's facility to accommodate growth. So overall, I'm focused on the year over year top line growth.

Speaker 0

Okay. Great. And obviously, you mentioned the benefit that you got from some of the pull forward from the SSG, but you also had some weather related issues. So what was the offset How much does that detract from from earnings in the quarter?

Well, I I think, Greg, when we when we talked at the February, we gave our we gave our full year outlook. And at that time, I was right in the midst of some really certainly in Chicago, some really unfavorable weather, the polar vortex. And so at that time, we've kind of signaled that but it was all factored into our outlook that we gave. I think what we found is that in March, the businesses just did a great job kind of overcoming those effects. You know, certain of our facilities were shut down for a couple of days.

And I I think we recovered the recovery was better than what we expected. So I think, you know, q one, we talked about it being slightly better than expected. And I think the the quicker than expected recovery from those effects were were the factor in in our strong results in the first quarter. Great. Thank you.

Speaker 2

Our next question comes from line

Speaker 0

of Michael Ruskin from Capital Partners. Please proceed with your question.

Speaker 1

Good morning.

Speaker 0

Good morning. Hey, good morning. Thank you for taking my questions. I was wondering if maybe you can talk a little bit more about the your safe digging. If you can maybe help provide any sort of framework in terms of maybe what sort of percentage of revenue is coming from that new line?

And then also, in the past, you've talked about some regulatory shifts to kind of help spur that market. I was wondering if you can maybe talk to that, if you've seen any other additional regulatory shifts that are driving demand or more of just the end market kind of recognizing the application a little bit more readily.

Speaker 1

Yes. A couple of things. One is that we're continuing to see traction and back in truck orders were up just even compared to q four and compared to q one of last year, even despite the pull forward. So that to me is a really important indicator of the continuing success of that initiative. As I mentioned in my prepared remarks, we launched a separate brand, TRUVAC this quarter for our safety products.

I was with at our dealer meeting a month ago, and there's a lot of energy around this particular product. And we're watching we're now seeing our dealers invest in rental equipment, which we previously talked about. Demos are so important to introducing, in many cases, this new technology to end customers. We're much more active in the trade show world. We've spent a lot of time Q1 out of utility type trade show, and we're seeing traction there.

So overall, we believe with the new brand, TRUVAC and the strong channel, that this will continue to be a growth area for us. And as I previously mentioned, that was really the driver of the $25,000,000 plant expansion factor because, ultimately, we believe that our safe digging product line will be as big as fluid cleaners, and we're preparing for that. The final thing I'd mention is we're continuing to invest in new product development, and we kicked off a project in q one to enhance our safekeeping portfolio of products. So this is a critical area, and we're encouraged by what we're seeing.

Speaker 0

Got you. And given the strength that you're seeing there on the safekeeping side, can you talk a little bit about your ability to kind of push prices a little bit higher there?

Speaker 1

Sure. It depends in terms of what region we're in, but it is product that typically are able to command a premium price because of the quality and durability of our products.

Speaker 0

Yeah. Yeah. I I'd also add, Marco, that it's that the nature of the product, it's it's a it's a it's a nice play on the rental side as well. So we have a number of safety vehicles in our rental fleet, and those are in pretty high demand. And and, you know, we monitor both time utilization and financial utilization.

And both of those rates have been in excess of our target range for the certainly for the for the last couple of quarters. And so that's where when you have the demand for the product, you start you start to see some of that through the rental rate. So it's also a a a part of the reason that you you may have seen we made some additional investment in the rental fleet during the first quarter, certainly in comparison to q one of last year. So that's really a function. It's just the continued strength that we see in the safekeeping market.

Got it. That's helpful. And and then kind of in the same line of upfitting here just on on the cash flow operation aspects. The changes in working capital were relatively significant here in q one, driving a usage. Am I to assume that that's mainly a function of the investments in the rental fleet?

Just kind of looking at comparisons to your historical q ones, not normally down, but it has happened in the past. Just trying to get a better feel for that. Yeah. I mean, q one is typically you know, we build working capital in the first quarter as we ramp up production. So it's not unusual for us to use cash in the first quarter.

As we mentioned, you know, the biggest part of the change year over year was was really the the additional rental fleet investment compared to q one last year. That was about $10,000,000. That really is kind of a strategic move, really, because you want to be adding to the rental fleet prior to the peak season for rental and aftermarket, which is typically the q two and q three when a lot of the activity is taking place. So that was that was really, you know, a a shift in in timing of the investment. Other other than that, we had higher tax payments that was there about $3,000,000 higher than they were in q one last year, and incentive compensation payments in q one this year were higher than they were in in 2018.

So those are the primary drivers. Some of the working capital changes are are timing related. And I think we'll be expect, you know, operating cash flow in q two to improve. And, you know, as we said on the call, I think that we're targeting the same cash conversion as we had in 2018. Gotcha.

And last quick question, I'll jump back in the queue. Maybe if you guys can talk a little bit more about the m and a landscape. Is your pipeline increasing, decreasing? And then if you can maybe talk a bit about the the valuations you're seeing out there.

Speaker 1

Yes. Our pipeline is full. We continue to be active in the M and A market, and we believe that long term, this is going to be an important part of our growth. I said last year and I reiterated in the shareholder letter that we are committed to being disciplined with shareholders' money and paying a fair valuation. And, you know, that, unfortunately, during 02/2018, there were couple deals that didn't work out for us because in our opinion, the valuation is kept too high.

As we sit here right now, and we are encouraged by what we're seeing.

Speaker 2

Our next question comes from

Speaker 0

the of Steve Arthur from KeyBanc. Please proceed with your question. Hey. Good morning.

Speaker 1

Good morning, Steve.

Speaker 0

How are you marketing TRUVAC? Is that a corporate function or is it do the dealers do that?

Speaker 1

It's really a combination. Certain of our dealers have the right to do that in in other areas. Particularly, have service centers who've gone direct. And the marketing, so it's been coordinated out of our ESG group. And it's a pretty significant effort.

Speaker 0

Yeah. And do do you expect to see more traction for TRUVAC in direct sales or through the the rental channel, whether it's dealer based or your captive fleet?

Speaker 1

Again, orders were up for vacuum trucks both from Q1 of last year and Q4. So I think it's gonna be a combination. What makes the sale different than anything we've done before is that the sales often contingent upon to a successful demo of the equipment. That's why we measure those demos because it's new technology for many people, not all. And we need to show them both the productivity benefits of the equipment and the safety features of the equipment.

So we believe that we're in a unique position because we've got our TruDeck dealers are making their own investments in rental fleet and the sale of new equipment. We're in a position with our asset solution centers and our aftermarket group to support that direct where we need to. And we really can offer the customer either new equipment, rental, or used equipment. And then between us and our dealers, we have over 60 service centers in North America to support that equipment.

Speaker 0

Got it. And can you remind us how you view current market size for safe digging in 2019 and 2020? And then guess what your market share is right now?

Speaker 1

Yeah. With respect to market share, there's a lot of good data out there. I do know that in terms of the breadth of our product offering, we've got, you know, a small version, Paradigm, and medium version of Prodigy, the large version, HXS. We've also introduced lighter version and a quieter version. And as I mentioned, we're kicked off another project during q one to continue to invest.

We have the in terms of the wide breadth of equipment. With respect to market size, we're still working on it. We talked about 250,000,000. We think that's very conservative because what makes it challenging here is the and shovels. And so that's you know, we're still working through that, but, you know, we're really encouraged by the growth that we're seeing.

And I know the TrueVac dealers are also in the first time.

Speaker 0

When you say two fifty million dollars are you talking about potential for 2020? Or is that kind of a multiyear target out there?

Speaker 1

Really potential for the market size, potential for 2020.

Speaker 0

Okay. That's impressive. Can you talk about the gross margin expansion you saw in the quarter? Yes.

Speaker 1

But I wanna be clear, Steve. I'm talking about market size potential.

Speaker 0

Size. Yeah. But when you look at your product category, I mean, you you would think you are the market share leader right now. Right? Yes.

Although we don't have

Speaker 1

any third party data to support that.

Speaker 0

Like, when you go to trade shows or whatever, do you see other really sizable credible competitors out there in the space?

Speaker 1

In niche areas, yes, but nobody has the rest of our product offering.

Speaker 0

Right. Gross margin expansion, what drove that? And do you have a target for gross margin expansion for the year? So what drove it, Steve, on kind of was primarily within the SSG business. If you look at SSG and then their gross margin went from 35.8 to 39%.

So that was the primary driver of kind of the overall improvement in in the margin. That was driven in part by the the benefits from the pricing actions that we took both last year as well as at the beginning of this year. It it some of it's also a a mixed factor. And then, as I mentioned, the the pharma business in Spain had a much better first quarter than it did in the q q one of last year. So it was primarily driven by SSG.

We don't specifically have a slight hit gross margin target. We really focus on offering within those EBITDA margin ranges, certainly, obviously, at which gross margin is really a factor. But there isn't anything that we've published in terms of an an external goal that we manage to. We have our we have our internal metrics, and and that would be factored into kind of

Speaker 1

the the overall EBITDA margin ranges. That's just the other thing I'd the other thing I'd add, Steve, is last year was the first year that we added to all salaried employees' short term compensation, a metric around EBITDA margins. And, you know, we really believe that drove some great behavior to our team.

Speaker 0

Good to hear. And and just last one for me. Thinking about free cash flow and the 45,000,000 in combined CapEx, just round numbers, if you hit your target, you could have 80,000,000 to 90,000,000 of free cash flow this year. So do you have a debt reduction target beyond saying less than last year and ex potential m and a? Is that your first priority?

Speaker 1

Yeah. I I think we're,

Speaker 0

you know, as Jim mentioned, Steve, we're encouraged with what we see on the m and a pipeline. So, you know, at the leverage range we're at right now, we're at 1.3 times. I think that's a very comfortable range for us. So I I think, you know, our focus, obviously, TDI acquisition was really to to pay down debt and delever quickly. I think we're now at a point where we you know, organic growth, clearly, with the back of expansion, and as Jennifer mentioned, we are looking to expand the Roanoke facility as well.

Organic would be the number one priority, but then, you know, number two would be M and A, and, you know, we're encouraged with what we see there. So I don't think we don't have a stated debt reduction target for the year, but we're we're clearly we're we're very comfortable with the leverage we're at right now. Got it. Thank you.

Speaker 2

Our next question comes from the line

Speaker 0

of Walter Liptak from Seaport Global Securities. Congratulations on a nice quarter. I wonder, I got on the call a little bit late. I wanted to ask about TruVac, and I apologize if you went through this already. But so going forward, TruVac is the same thing as Safe Haven.

Is that right? So I throw that that are used for safe haven. Okay. Correct. Okay.

And last year, you talked about orders being up $60,000,000 incrementally for TrueVac. Is that right? Total vacuum truckload is well, at least, you know, that would that would primarily be the TRUVAC brand. Yes. They were up $60,000,000 year over year for the for the for 02/2019.

Okay. And and then what I heard from one of the answers was that your orders for TruVac trucks, or is it or did you include sewer cleaners in there, were up quarter over quarter and year over year. And so I guess that's right. The question is that you would be expecting that you'd have incremental orders you'd grow orders faster in 2019 for the TrueVac. I think what what we said so if you if you think about q one of last year, we had we had some of the effects with the pull forward, which was a combination of both European and in fact, in fact, fact, we said was despite the effect of that $2,025,000,000 dollars pull forward in the first quarter, the first quarter orders for vacuum trucks was was up even notwithstanding the effect of that pull forward.

So so purity orders were down largely because of the effect of the pull forward in the prior quarter. The vacuum truck were up despite those effects. So that's where we continue to be encouraged with what we're seeing on trade savings, And and we we still saw the growth in q one, and as Jennifer said, in comparison to q four, it's order growth sequentially as well. So we we continue to be bullish on safe saving. As Jennifer mentioned, it's it's it's the reason, primarily the reason that we're expanding the street to stop it.

Yeah. And and

Speaker 1

I you know, I I've spent a lot of time in q one with TrueVac dealers, Walt. I was just recently down in Atlanta with our dealers from Atlanta from Georgia and Florida. I was there last month on a meeting many of our TruVac dealers. And, you know, what I'm encouraged to see is the investments that they're making both in terms of people to support this brand, rental fleets, demos, because of the opportunities that they're also seeing. So, you know, not only through our direct sales force, but through the new TrueJack dealers, we continue to be encouraged and believe that we're in early innings here.

Speaker 0

Okay. Great. Yes. I think we all realize that. Thanks, Jennifer.

I'm just trying to triangulate the growth rate, though, for the vacuum trucks and maybe around crew back. So is it does this math work if we take this $25,000,000 pull forward and annualize that, so you're now looking at vacuum trucks paying up incremental 100,000,000 for orders for 2019. Is that what you're tracking for? Well well, the 25,000,000 was just a combination of sewer cleaners and vacuum trucks. So probably the majority of it would would have been on the sewer cleaner side.

So I I wouldn't necessarily annualize the $4.25, but most of that was on the sewer cleaner side. Okay. All right. Fair enough. If you think about the industrial trucks excluding truck bodies or TRUVAC, was that weaker in the quarter too?

And I wonder why this week, I know you mentioned weather might have been an impact for the truck body, but how was the industrial part of the

Speaker 1

business trending? The industrial part of the business was good. It was in line with our expectations. You know? And I wanna also state that our orders were aligned with our expectations.

They were the third highest on record, and we said a couple million dollars was second highest on record, and there was sequential improvement between q four and q one. So we're seeing, you know, strong reaction on the industrial market. And, the municipal markets, we're continuing to see very stable growth opportunities.

Speaker 0

Okay, great. And on a previous question, you said that truck body was down, but it was impacted by weather. So the outlook for the year is that will firm up starting in the second quarter and

Speaker 1

the second half? Yes. We're for our TDDI truck body business, we're expecting top line year over year revenue growth.

Speaker 0

Okay. And how about orders?

Speaker 1

You know, orders are a lot of relevant metrics because often, you know, received and shipped during the same quarter. But, we're as we've talked about before, with respect to eightytwenty, we already started our first year of acquisition. We're getting the company's compliant with Fox and public company and all that fun stuff. And now we're really working with our TDI businesses, applying our 8020 principles, and focused on improving the bottom line. And that's you know, we're we're expecting success.

Speaker 0

Okay. All right. Great. And just thinking about the Streator plant expansion, what I heard you say is that you're on track. But I wonder if we should be concerned at all about weather delays.

It has been it was a really cold winter, I mean, snow weather or spring. Have you broke ground on the project yet? Whether it's just the timing of that project?

Speaker 1

Yes. Right now, the delay has really been around getting some final permitting. We purchased the land. I talked to the team last week, and there are still believe that we'll hit the end of the year target to complete the building, and they're moving forward. The teams I was talking to, we had a sewer cleaner at a board meeting earlier this year to show some of the new features of that, our rapid deployment too and then our control panel.

And the operators that was there said, you know, it's the most exciting Chinese career in terms of being advanced. So a lot of good growth activities going on, and we think we're on time with them. So

Speaker 0

Okay. And if the building is complete by the end of the year, when do you think you could have the first production starting? Would it happen should it happen in the fourth quarter or first quarter you would start?

Speaker 1

I don't think we'll see any meaningful benefit from q four, but we do believe q one, should start to see the benefit of that. And I also earlier mentioned that we did some expansion of our Leeds Alabama FS Solutions Center, and we

Speaker 0

will be

Speaker 1

producing more gauze loops there this year versus last year, and we expect to see that benefit in Q3 and Q4. Okay. Okay.

Speaker 0

And then just one last one for me. Thinking about the operating leverage, which was great in safety. I think you called out mix and predominantly Brahma, but was there other mix that was going on there besides just Brahma? There was there was also some acceleration, well, on the domestic police business in in in anticipation really of that forward model year changeover that we talked about the schedule for the second quarter. So there was some incremental benefit there, but there was also some benefits that we saw from pricing actions that we took both towards the end of last year and the beginning of the year of this year.

So the pricing actions really were also a factor in in some of that improvement. Okay. Great. Yeah. I missed the beginning of the call.

Okay. Alright. Thanks, guys. Thank you all. We have reached the end of the question and answer session, and I will now turn the call over to Jennifer Sherman for closing remarks.

Speaker 1

Before we wrap up, I'd like to call our attention to our annual report video that recaps our key accomplishments in '20 and our plans for the future growth. We previewed this video at our annual meeting of stockholders earlier this week. It will be posted on our website under the investors tab shortly. In closing, I would like to reiterate that we are confident in the long term prospects for our business and our markets. Our foundation is strong, and we are focused on delivering profitable long term growth through the execution of our strategic initiatives.

We'd 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 at the end of the second quarter.

Speaker 0

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.