Greetings. Welcome to the Federal Signal Corporation first quarter earnings conference call. At this time, all participants are in a listen only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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. Welcome to Federal Signal's first quarter 2019 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 in to 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 $273.8 million, up $24 million or 10% compared to last year. Consolidated operating income was $25.8 million, up $6.2 million 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 $35.9 million, up $6.9 million 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 $17.5 million compared to $12.9 million last year. That equates to GAAP EPS of $0.29 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 $0.22 per share last year.
Order intake in the first quarter of this year continued to be strong at approximately $300 million. That was up sequentially from the fourth quarter of last year, but down in comparison to the record levels in Q1 last year, which included approximately $25 million 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 million. That represents an increase of $26 million or 8% from the end of 2018, and an increase of $27 million or 8% compared to Q1 last year. In terms of our first quarter group results, ESG reported first quarter sales of $219.5 million, up $22.9 million or 12% compared to last year. All of that growth was organic.
ESG's operating income for the quarter was $25.7 million, up $5.1 million or 25% from Q1 last year. Adjusted EBITDA for the quarter was $34.7 million, an improvement of $6 million or 21% from a year ago. That translates to an adjusted EBITDA margin of 15.8% in Q1 this year as compared to 14.6% last year. The 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 $243.7 million in Q1 this year, up $4.1 million or 2% sequentially, but down in comparison to the record order intake of $274.4 million in Q1 last year, with the majority of the reduction attributed to the order deceleration that I just referenced. SSG delivered another strong quarter, with sales up $1.2 million 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 $8.7 million compared to $6.1 million in Q1 last year. Adjusted EBITDA for the quarter was $9.6 million, up from $6.8 million a year ago. Adjusted EBITDA margin for Q1 this year was 17.7% compared to 12.8% last year.
The 490 basis point improvement was largely the result of our price increases, improved sales mix, and a much-improved first quarter for our Vama public safety business in Spain. SSG's orders of $55.3 million were consistent with its order intake in Q1 last year. Corporate operating expenses of $8.6 million increased by $1.5 million 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 $8.4 million improvement in gross profit. Consolidated gross margin improved to 25.7% this 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 in Q1 last year.
Other items affecting the company 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 $1.8 million, largely due to higher pre-tax 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 discrete 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 $0.23 per share in Q1 last year. Looking now at cash flow, where we used $8.8 million 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 million of net debt and availability under our credit facility of $122 million. 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 Bagdad 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 $0.08 per share during the first quarter, amounting to $4.8 million. We recently announced a similar dividend for the second quarter. We also funded opportunistic share purchases during the first quarter, spending $1 million to buy back shares at an average price of $19.84. We had about $29 million 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.
Thank you, Ian. I would like to reiterate Ian's comments on the outstanding quarter. Each of our groups has had 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. place orders for public safety equipment earlier than expected in anticipation of the Ford model year changeover scheduled for the second quarter of 2019.
This changeover may cause a temporary delay in the number of Ford police vehicles available beginning in Q2. Collectively, we estimate that these factors resulted in the acceleration of about $0.02 of earnings from the second quarter into Q1. Our first quarter orders were generally in line with our expectations, with higher-than-expected orders for Vactor trucks resulting from continued momentum on our safety initiative being partially offset by slightly lower-than-expected orders to dump truck bodies and trailers. Orders in the first quarter of this year were our third highest on record, surpassed only by the fourth quarter of 2017 and the first quarter of last year, which collectively included an estimated $40 million-$45 million of accelerated orders as customers placed orders earlier as they sought to secure availability of certain product lines like sewer cleaners and vacuum trucks or to manage the procurement of their related chassis.
We expect that this order acceleration, which we believe has now normalized, may cause some short-term distortion in the comparability of our quarterly orders and therefore consider comparisons of backlog levels to be a more reasonable indication of the strength of our markets. At the end of March, our backlog was at a record level and was up over $25 million 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 Environmental Solutions Group dealer meeting with a sentiment among our global dealer network relating to market conditions in 2019 were very positive. With current lead times continuing to be extended for sewer cleaners and vacuum trucks, order receipts 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 safe digging 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 non-destructive 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 Vactor 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 to 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 U.S. and Canada. Our safe digging equipment can be used in markets with strong growth potential, given the increased need to address both aging infrastructure that is currently in place and support new infrastructure that will be needed for next-generation technologies like 5G. With more than 19 million miles of buried utilities in the U.S. alone, the risks of utility strikes caused by poor excavator digging practices are too great to ignore. The incidence 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 TRUVAC brand is new, the products, technology, and quality are well established by the Vactor brand, which brings more than 100 years of operator-focused innovation excellence, more than 50 years of experience building equipment that combines high-pressure water and vacuum technology, and more than 20 years of experience manufacturing vacuum excavators. The current TRUVAC product line includes the versatile Paradigm sub-compact 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 safe 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 safe digging 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 million to expand our Pekin, Illinois, manufacturing facility. This project is now underway and is expected to be completed by the end of 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&A. While we will remain disciplined in our approach, as we were in 2018, acquisitions remain a key priority in the deployment of our free cash flow and the company's growth.
We target companies that accelerate our current strategic initiatives or provide a platform for growth in adjacent markets or new geographies. We also seek niche market leaders that have a sustainable competitive advantage and have strong management teams. We look for companies that have solid growth potential and operate within our target geographic ranges and are currently or actively applications of our EPI 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. If infrastructure legislation were to pass, with our various businesses which support maintenance and infrastructure markets, Federal Signal would stand 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 $0.02, establishing a new range of $1.50 to $1.60. In summary, we started the year with outstanding performance. Our talented and dedicated teams 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 teams did a super job navigating through these challenges to deliver our strong results. At this time, I think we are ready for questions. Operator?
At this time, we'll be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from the line of Chris Moore from CJS Securities. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my call.
Good morning, Chris.
Good morning. Yeah, maybe we could just talk a little bit about some of the things that are likely to affect the revenue and earnings streams over the next three quarters. There's the Ford model year changeover, which looks like it slow a little bit of Q2 earnings perhaps. You talked about the extended lead times on the sewer cleaners and vac trucks. Some of those orders may not happen in 2019. Maybe can you just touch on the key elements that we should be considering?
Sure. Absolutely, Chris. First of all, we saw, as we mentioned, $0.02 move from Q2 to Q1. That was really driven by strong aftermarket in certain parts of the U.S. Some pre-buying that occurred in our Public Safety Systems business in advance of the Ford year model changeover, acceleration of customer orders and deliveries in our business in Spain. I think what we're really encouraged by is even with that $0.02 shift and the Ford's model year changeover, we expect Q2 that we'll do not only better than we did last year, and you might recall that last year was a really strong quarter for Q2.
Absolutely. Okay. That's helpful. In terms of Just a two-part question. The lead times with the sewer cleaners and vacuum trucks, that's part of why the Streator facility is being expanded. Is there likely much order flow that's going to Revenue's not going to get recognized this year? Secondly, after Streator is completed, are there any other areas that logically need to be expanded to allow for continued growth?
Yeah. Good question. First of all, last year we made some investments in our service center in Leeds, Alabama. 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 million expansion of our Vactor facility. Pleased to report that we're on track with that expansion. We purchased the land. We're waiting for some zoning permits. We expect that to be completed at the end of this year. We're looking within our TBEI facilities. There is some growth that we will be expanding our Rugby facility up in Rugby, North Dakota.
We expect again to have that completed this year. These expansions in large part are driven by the success that we're having with this introduction of new products.
Got it. Very helpful. Okay, it's only a small number, the $600,000 acquisition integration related item. Can we read into that?
Nothing really, Chris. It's really just a standard. We have the JJE earn-out payment that is coming due in the second quarter. A lot of that is really just decreasing that liability. It's recorded at current value right now, and a lot of that is just decreasing as we get closer to the payment when we'll actually make the cash payment.
Got it. All right. Appreciate it, guys. Let me jump back in line.
Thank you.
Our next question comes from the line of Greg Burns from Sidoti & Company. Please proceed with your question.
Good morning, Greg.
I'm sorry. Something was bumped in the queue. One moment.
Running at or above the high end of your-
Greg, your line is now live.
Hello?
Hi, Greg.
Okay. Just to two margins, you probably benefited a little bit from the pull forward from Q2 this quarter, but is it absolutely running at or above the high end of your target range? How should we think about the margin profile of that business? Do you think your margins, this is kind of the new normal, sort of the higher end, more like a 16%-18% range as opposed to what you've previously targeted?
Yeah. Greg, I think we've obviously, over the last couple of quarters, we've benefited from changing the margin as it's cheated our target range to 15%-17% range for each of the last two quarters. That business, it can be pretty lumpy. There can be systems orders that have the mix can be a factor in that equation. I think the 15%-17% range is where we feel comfortable quarter in, quarter out. We want to be within that range. I think if you look back to the first quarter of last year, we were lower than that, and that was really just a function of a soft quarter in our business in Spain. Really the residual effect of the political uncertainty that was in place in that location kind of throughout 2017, and that limited into the first quarter of 2018.
That business has recovered very nicely, had a very strong Q1 of this year. I think going forward, we still feel pretty comfortable with that 15%-17% range.
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 with SSG and continued application of our ETI 80/20 principle.
Jennifer, you'd mentioned your dump truck and body orders are down a little bit. I know housing data has been a little bit soft over the last couple of months. 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 today?
I guess I'd say a couple things. First of all, both dump trucks and trailers. We saw weather play a factor there because of some of the severe weather conditions across North America, the construction work was delayed. We also saw that with some of the chassis challenges, that we weren't as many stock orders placed at some of our distributors. With that business, orders tends to be a less relevant metric than, for example, Vactor or Elgin, because we often get the order and ship it within the quarter. Looking forward, we're expecting top line year-over-year revenue growth for that business. I continue to be encouraged by a number of new customers. We're expanding our Rugby facility to accommodate growth. Overall, I'm focused on the year-over-year top line growth.
Okay, great. Thanks. 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. What was the offset in terms of the weather? How much did it detract from earnings in the quarter?
Well, I think, Greg, when we talked at the end of February, we gave our full year outlook. At that time, that was right in the midst of some really, certainly in Chicago, some really unfavorable weather, the polar vortex. At that time, we kind of signaled that that was all factored into our outlook we gave. What we found is that in March, the business has just did a great job kind of overcoming those effects. Certain of our facilities were shut down for a couple of days. We recovered. The recovery was better than what we expected. Q1, we talked about it being quite invested and unexpected, and the quicker-than-expected recovery from those effects were the factor in our strong results in the first quarter.
Great. Thank you.
Our next question comes from the line of Marco Rodriguez from Stonegate Capital Markets . Please proceed with your question.
Good morning.
Good morning. Hey, good morning. Thank you for taking my questions. I was wondering if maybe you could talk a little bit more about your safe digging. If you can maybe help providing sort of a framework in terms of maybe what sort of percentage of revenues is coming from that new line. Also, in the past, you've talked about some regulatory shifts that kind of helped 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 if more of just the end market kind of recognizing the application a little bit more readily.
Yeah. A couple things. One is that we're continuing to see traction, and Vactor and truck orders were up even compared to Q4 and compared to Q1 of last year, even despite the pull forward. 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 safe digging products. I was at our dealer meeting a month ago, and there's a lot of energy around this particular product. We're now seeing our dealers invest in rental equipment, which we've 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 in Q1 at utility-type trade shows, and we're seeing traction there.
Overall, we believe with the new brand, TRUVAC, and the strong channel, that this will continue to be a growth area for us. As I previously mentioned, that was really the driver of the $25 million plant expansion in Vactor. Because ultimately, we believe that our safe digging product line will be as big as sewer 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 Q1 to enhance our safe digging portfolio of products. This is a critical area, and we're encouraged by what we're seeing.
Got you. Given the strength that you're seeing around the safe digging side, can you talk a little bit about your ability to push prices a little bit higher there?
Sure. It depends in terms of what region we're in, but it is a product that typically we're able to command premium prices because of the quality and durability of our products.
Yeah. I'd also add, Marco, that the nature of the product, it's a nice play on the rental side as well. We have a number of safe digging vehicles in our rental fleet, and those are in pretty high demand. 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 last couple of quarters. That's where, when you have the demand for the product, you start to see some of that through the rental rates. It's also a part of the reason that you may have seen that we made some additional investment in the rental fleet during the first quarter of, certainly in comparison to Q1 of last year. That's really a function, it's just the continued strength that we see in the safe digging market.
Got it. That's helpful. In the same line of thinking here, just on the cash flow from operation aspects, the changes in working capital were relatively significant here in Q1, driving our usage. Am I to assume that that's mainly a function of the investments in the rental fleet? Just looking at comparisons to your historical Q1s, they're not normally down, but it has happened in the past. Just trying to get a better feel for that.
Yeah. I mean, Q1 is typically, we build working capital in the first quarter as we ramp up production. It's not unusual for us to use cash in the first quarter. As we mentioned, the biggest part of the change year-over-year was really the additional rental fleet investment compared to Q1 last year. That was about $10 million. That really is a strategic move, really, because we want to be adding to the rental fleet prior to the peak season for rental in our market, which is typically the Q2 and Q3 when a lot of the activity is taking place. That was really a shift in timing of the investment. Other than that, we had higher tax payments, about $3 million higher than they were in Q1 last year.
Incentive compensation payments in Q1 this year were higher than they were in 2018. Those are the primary drivers. Some of the working capital changes are timing related, and I think we'll see operating cash flow in Q2 will improve. We've said on the call, I think that we're targeting the same cash conversion as we had in 2018.
Got you. Last quick question, I'll jump back into queue. Maybe if you guys can talk a little bit more about the M&A landscape. Is your pipeline increasing, decreasing? If you can maybe talk a bit about the valuations you're seeing out there.
Yeah. Our pipeline is full. We continue to be active in the M&A markets, and we believe that long term, this is going to be an important part of our growth. Like I said last year, and I reiterated in the shareholder letter, we are committed to being disciplined with shareholders' money and paying a fair valuation. Unfortunately during 2018, there were a couple deals that didn't work out for us because in our opinion, the valuations got too high. As we sit here right now, we are encouraged by what we're seeing.
Got it. Thanks a lot, guys. I appreciate your time.
Thanks, Marco.
As a reminder, if you'd like to join the queue, simply press star one on your telephone keypad. Our next question comes from the line of Steve Barger from KeyBanc. Please proceed with your question.
Hey, good morning.
Morning, Steve.
How are you marketing TRUVAC? Is that a corporate function or does each of the dealers do that?
It's really a combination. Certain of our dealers have the rights to TRUVAC, and in other areas, particularly, we have service centers do call direct. The marketing itself has been coordinated out of our ESG group. It's a pretty significant effort.
Yeah. Do you expect to see more traction for TRUVAC in direct sales or through the rental channel, whether it's dealer-based or your captive fleet?
Orders were up for vacuum trucks, both from Q1 of last year and Q4. I think it's going to be a combination. What makes the sale different than anything we've done before is that the sale is often contingent upon a successful demo of the equipment. That's why we measure those demos, because it's new technology for many people, not all. We need to show them both the productivity benefits of the equipment and the safety features of the equipment. We believe that we're in a unique position because we've got our TRUVAC dealers are making their own investments in rental fleets and the sale of new equipment. We're in a position with our FS Solutions centers and our aftermarket group to support that direct where we need to, and we really can offer this customer either new equipment, rental, or used equipment.
Between us and our dealers, we have over 60 service centers in North America to support that equipment.
Got it. Can you remind us how you view current market size for safe digging in 2019 and 2020, and any guess what your market share is right now?
Yeah. With respect to market share, there isn't a lot of good data out there. I do know that in terms of the breadth of our product offering, we've got a small version Paradigm, a medium version Prodigy, the large version, HXX. We've also introduced a lighter version, a quieter version. As I mentioned, we've kicked off another project during Q1 to continue to invest. We have in terms of the broadest breadth of equipment. With respect to market size, we're still working on it. We talk about $250 million. We think that's very conservative because what makes it challenging here is we basically backhoes and shovels. We're still working through that. We're really encouraged by the growth that we're seeing. I know the TRUVAC dealers are also encouraged by it.
When you say $250 million, are you talking about potential for 2020, or is that kind of a multi-year target out there?
Really potential for the market size potential for 2020.
Okay. That's impressive. Can you talk about the gross margin expansion you saw in the quarter?
Yeah, I want to be clear, Steve, I'm talking about market size potential.
Market size. Yeah.
Yeah.
When you look at your product category, you would think you are the market share leader right now, right?
Yes. Although we don't have any third-party data to support that.
When you go to trade shows or whatever, do you see other really sizable, credible competitors out there in the safe digging space?
In niche areas, yes, but nobody with the breadth of our product offering.
Right. Gross margin expansion, what drove that? Do you have a target for gross margin expansion for the year?
What drove it, Steve, was primarily within the SSG business. If you look through SSG, their gross margin went from 35.8%-39%. That was the primary driver of the overall improvement in the margin. That was driven in part by the benefits from the pricing actions that we took both last year as well as at the beginning of this year. Some of it's also a mix factor in them. As I mentioned, the Vama business in Spain had a much better first quarter than it did in the Q1 of last year. It was primarily driven by SSG. We don't specifically have a cited gross margin target. We really focus on operating within those EBITDA margin ranges. Obviously, at which gross margin is clearly a factor. There isn't anything that we've published in terms of an external goal that we measure to.
We have our internal metrics, that would be factored into the overall EBITDA margin ranges.
The other thing I'd add, Steve, is last year was the first year that we added through all salaried employees, short-term compensation, a metric around EBITDA margins. We really believe that drove some great behavior in our team.
Good to hear. Just the last one from me, thinking about the free cash flow and the $45 million in combined CapEx. Just round numbers, if you hit your target, you could have $80 million-$90 million of free cash flow this year. Do you have a debt reduction target beyond saying less than last year? As it relates to M&A, is that your first priority?
I think as Jennifer mentioned, Steve, we're encouraged with what we see on the M&A pipeline. 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. I think our focus, obviously, post TBEI acquisition was really to pay down debt and do that quickly. I think we're now at a point where organic growth clearly with the factory expansion, as Jennifer mentioned, we are looking to expand the Rugby facility as well. Organic would be the number 1 priority, then, number 2 would be M&A, and we're very encouraged with what we see there. I don't think we don't have a stated debt reduction target for the year. We clearly we're very comfortable with the levers we're at right now.
Got it. Thank you.
Thank you.
Our next question comes from the line of Walt Liptak from Seaport Global Securities . Please proceed with your question.
Morning, Walt.
Thanks. Morning. Congratulations on a nice quarter.
Thank you.
I got on the call a little bit late. I wanted to ask about TRUVAC. I apologize if you went through this already, going forward, TRUVAC is the same thing as safe digging, is that right?
Yes.
micro vacs that are used for safe digging.
Correct.
Okay. Last year you talked about orders being up, $16 million incrementally for TRUVAC. Is that right?
Total vacuum truck orders, Walt, of which that would primarily be the TRUVAC brand, yeah. They were up $16 million year-over-year for 2019.
Okay. What I heard from one of the answers was that your orders for TRUVAC trucks, or did you include sewer cleaners in there, were up, quarter-over-quarter and year-over-year. I guess if that's right, the question is you would be expecting that you'd have incremental orders or you'd grow orders faster in 2019 for the TRUVAC?
I think what we said, so if you think about Q1 of last year, when you had some of the effects of the pull forward, which was a combination of both sewer cleaners and vacuum trucks. What we said was despite the effect of that $25 million pull forward in the first quarter, orders for vacuum trucks was up even notwithstanding the effect of that pull forward. Sewer clean orders were down, largely because of the effect of the pull forward in the prior quarter. Vacuum trucks were up despite those effects. That's where we continue to be encouraged with what we're seeing on safe digging. We still saw the growth in Q1 and as Jennifer said, in comparison to Q4, orders were up sequentially as well. We continue to be bullish on safe digging.
As Jennifer mentioned, it's the primary reason that we're expanding the TRUVAC facility.
Yeah.
Okay.
I've spent a lot of time in Q1 with TRUVAC dealers, Walt. I was just recently down in Atlanta with our dealers from Atlanta, from Georgia and Florida. I was there last month for our meeting of many of our TRUVAC dealers. What I'm encouraged to see is the investment 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. Not only through our direct sales force, but through the new TRUVAC dealers. We continue to be encouraged and believe that we're in early innings here.
Okay, great. Yeah, I think we all realize that, Jennifer. I'm just trying to triangulate the growth rate, though, for the vacuum trucks and around TRUVAC. Does this math work if we take this $25 million pull forward and annualize this, so you're now looking at vacuum trucks bringing up incremental $100 million for orders for 2019? Is that what you're tracking for?
Well, the $25 million, Walt, is a combination of sewer cleaners and vacuum trucks. Probably the majority of it would've been on the sewer cleaner side. I wouldn't necessarily annualize the full 25, because most of that was on the sewer cleaner side.
Okay. All right. Fair enough. If you just note industrial trucks excluding truck bodies or TRUVAC, was that weaker in the quarter, too? I wonder why that would be. I know you mentioned the weather might have been an impact for the truck body, but how was the industrial part of the business trending?
The industrial part of the business was good. It was in line with our expectations. I want to also state that our orders were in line with our expectations. They were the third highest on record, and we set a couple billion dollars of second highest on record, and there was sequential improvement between Q4 and Q1. We're seeing strong reaction out of the industrial markets and the municipal markets. We're continuing to see very stable growth opportunities.
Okay, great. On a previous question, you said that truck body was down, but it was impacted by weather. The outlook for the year is that that'll firm up starting in the second quarter and the second half.
Yeah. For our TBEI truck body business, we're expecting top line year-over-year revenue growth.
Okay. How about orders?
Orders are a less relevant metric because often, the season shifts during the same quarter. As we've talked about before with respect to 80/20. We always talk about our first year of acquisition was getting the companies compliant with SOX and a public company and all that fun stuff. Now we're really working with our TBEI businesses, applying our 80/20 principles, and focused on improving the bottom line. We're expecting success.
Okay. All right, great. Just thinking about the Streator plant expansion, what I heard you say was that you're on track. I wonder if we should be concerned at all about weather delays. It was a really cold winter, and you still wet spring. Have you broke ground on the project yet? With respect to the timing of that project.
Yeah. Right now the delay has really been around getting some final permitting. We purchased the land. I was just talking to the team last week, and they 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 our board meeting earlier this year to show some of the new features of that, our rapid deployment unit and our control panel. The operators that were there said, it's the most exciting time in his career in terms of being at Vactor. A lot of good progress for these going on, and we think we're on time with them.
Okay. If the building's complete by the end of the year, when do you think you could have the first production starting? Could it happen in the fourth quarter or first quarter it would start?
I don't think we'll see any meaningful benefit from Q4, but we do believe Q1, we should start to see the benefit of that. I also, earlier, mentioned that we did some expansion of our Leeds, Alabama FS Solutions center, and we will be producing more Guzzler there this year versus last year. We expect to see that benefit in Q3 and Q4.
Okay. Just one last one for me. Thinking about the operating leverage, which was great in Taiji, I think you called out mix and predominantly TRUVAC. Was there other mix that was going on there besides just TRUVAC?
There was also some acceleration on the domestic fleet business in anticipation, really, of that forward model year changeover that we talked about that's scheduled for the second quarter. There was some incremental benefit there. There was also some benefit that we saw from the pricing actions that we took both towards the end of last year and beginning of this year. The pricing actions really were also a factor in some of that improvement.
Okay, great. Yeah, I missed the beginning of the call. Okay. All right, thanks, guys.
Thank you all.
We have reached the end of the question and answer session. I will now turn the call over to Jennifer Sherman for closing remarks.
Before we wrap up, I'd like to call our attention to our annual report video that recaps our key accomplishments in 2018 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 market. Our foundation is strong. 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. We'll talk to you at the end of the second quarter.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.