Ian Hudson - SVP & CFO Jennifer Sherman - President & CEO.

Christopher Moore - CJS Securities Stephen Barger - KeyBanc Capital Markets Gregory Burns - Sidoti & Company Marco Rodriguez - Stonegate Capital Markets.

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

Good morning, and welcome to Federal Signal's First Quarter 2018 Conference Call. I am Ian Hudson, the company's Chief Financial Officer. Also with me on the call today, is Jennifer Sherman, our President and Chief Executive Officer. We will refer to some presentation slides today as well as to the earnings news release, which we issued this morning.

The slides can be followed online by going to our website, federalsignal.com, clicking on the Investor Call icon and signing into the webcast. We have also posted the slide presentation and the earnings release under the Investor tab on our website.

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

Our presentation also contains some measures that are not in accordance with U.S. Generally Accepted Accounting Principles. In our earnings release and filings, we reconcile these non-GAAP measures to GAAP measures. In addition, we will file our Form 10-Q later today.

I'm going to begin 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 2018. After our prepared comments, Jennifer and I will address your questions.

Our consolidated first quarter financial results are provided in today's earnings release. As a reminder, the first quarter this year includes the operating results of Truck Bodies and Equipment International or TBEI, which we acquired last year. The results of TBEI have been included within our Environmental Solutions Group for the quarter.

Our first quarter results reflect impressive increases in sales and orders, driven by both organic growth and contributions from TBEI. We delivered significant margin expansion with our adjusted EBITDA margin up 110 basis points year-over-year, strong cash flow generation and robust earnings per share growth.

Consolidated net sales for the quarter were $249.7 million, up $72 million or 40% compared to last year with approximately $21 million or 12% coming from organic growth. Consolidated operating income for the quarter was $19.6 million, up $8.2 million or 72%.

On an adjusted basis, consolidated operating margin for the quarter was 8.5%, up from 7.5% in Q1 last year. Consolidated adjusted EBITDA for the quarter was $29.5 million, up $10.5 million or 55%, which translates to a margin of 11.8% for the quarter, up from 10.7% last year.

Income from continued operations was a $12.9 million in Q1 this year, compared to $7.2 million last year. That equates the GAAP EPS of $0.21 per share, up from $0.12 per share last year. On an adjusted basis, EPS for Q1 this year was $0.23 per share, which compares to $0.14 per share last year.

As in the fourth quarter last year or as in the first quarter this year, we're up significantly in comparison to the prior-year period. Total orders for the quarter were $330 million, an increase of $115 million or 54%.

The improvement was largely driven by organic order growth of approximately $52 million or 24% and the effects of the TBEI acquisition. Jennifer will discuss some of the facts that's contributing to the order growth during her remarks.

The significant order intake contributed to a consolidated backlog at the end of the quarter of $337 million, which was up $79 million or 31% from the end of 2017, and up $163 million or 94% in comparison to the prior-year quarter.

The increase in sales contributed to an $18.3 million improvement in gross profit and consolidated gross margin improved to 24.8%, up from 24.5% last year. As the percentage of sales, our selling, engineering general and administrative expenses for the quarter were down 100 basis points from Q1 last year.

Compared to the prior-year quarter, they were up 33%, primarily due to the addition of expenses associated with TBEI, a $2 million increase in amortization expense and higher corporate operating expenses.

Other items affecting the quarterly results include a $300,000 decrease in restructuring charges, a $300,000 reduction in other income and a $1.9 million increase in interest expense associated with higher-average debt levels following the TBEI acquisition.

Tax expense for the quarter was up $300,000, largely due to higher pretax income levels offset by the impact of the low U.S. federal tax rate, following the enactment of tax reform in December last year.

Primarily due to the recognition of a nominal discrete benefit of the release of the tax reserves, our effective tax rate for the quarter was 24.1%, a little lower than the rate that we expect for the full year and down from 34.5% last year. The lower rate in comparison for the prior year reflects a reduction in the U.S. federal tax rate.

On an overall GAAP basis, we therefore earned $0.21 per share from continuing operations in Q1 this year, compared with $0.12 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 quarters.

In the current year quarter, we made adjustments to the GAAP earnings per share to execute acquisition-related expenses, purchase accounting expense effects and hearing loss settlement charges. On this basis, our adjusted earnings from continuing operations for Q1 this year were $0.23 per share compared with $0.14 per share in Q1 last year.

Turning now to our group results. Within ESG, each of our businesses are performing well across our key market segments. First quarter sales were $196.6 million, up $68.8 million or 54% compared to last year.

TBEI added $51.3 million of sales during the quarter and higher domestic shipments of sewer cleaners and vacuum trucks contributed to a $17.5 million organic sales improvement. ESG's operating income for the quarter was $20.6 million, double the $10.3 million generated in Q1 last year.

Adjusted EBITDA for the first quarter was $29 million, an improvement of $13.5 million or 87%, compared to $15.5 million a year ago. That translates to an adjusted EBITDA margin of 14.8% in Q1 this year, which compares to 12.1% last year.

The year-over-year margin improvement was realized in spite of the extended winter season in much of North America, which delayed the start of cleaning and maintenance projects for our street sweeping, parts and solution businesses.

ESG reported total orders of $274.4 million in Q1 this year, an increase of $107.8 million or 65% compared to the prior-year quarter. The improvement included organic growth of approximately $44.2 million or 27%, which largely consisted of improved domestic orders for vacuum trucks and sewer cleaners.

And what is typically the strongest quarter for bookings, TBEI also added almost $64 million of orders in Q4 -- in Q1 this year. Within SSG, first quarter sales were up $3.1 million or 6% largely due to higher global sales of public safety products and favorable foreign currency translation effects.

Operating income for the quarter was $6.1 million compared to $6.4 million in Q1 last year. Adjusted EBITDA for the first quarter was $7 million, down from $7.7 million a year ago, and SSG's adjusted EBITDA margin for Q1 was 13.2% compared to 15.4% last year.

Although unfavorable sales mix and a soft earnings quarter for our VAMA Public Safety business in Spain resulted in SSG's margin for the quarter being lower than the prior year, its margin was in line with our expectations. With the political situation in Spain appearing to have stabilized, our VAMA business reported stronger orders in Q1.

We anticipate that it will recover from a soft first quarter and contribute to SSG's margin improving over the balance of the year. SSG reported total orders at $55.3 million, an increase of $7.3 million or 15% from last year, primarily due to improved global orders of public safety products and domestic orders for warning systems.

Corporate operating expenses of $7.1 million, increased by $1.8 million from last year, primarily driven by higher expenses associated with hearing loss litigation and increased employee benefit-related costs. Looking now at cash flow, we generated $10.3 million of operating cash flow in Q1 this year, compared to $13.7 million last year.

During the quarter, we paid down an additional $9 million of borrowings, bringing the total amount of debt paid down since we completed the TBEI acquisition to approximately $44 million. Our pro forma debt leverage ratio at the end of March was 2.1x, down from 2.7x at the closing of the acquisition in June last year.

We ended the quarter with $232 million of net debt and availability under our credit facility of $121 million. With the healthy cash flows expected to be generated by our businesses, we continue to focus on delevering in the short-term.

However, the long-term priorities for our capital are unchanged and while maintaining strong liquidity and flexibility, we remain committed to investing in organic growth initiatives considering additional M&A opportunities and returning value to shareholders.

On that note, we paid a dividend of $0.07 per share during the first quarter amounting to $4.2 million, and we recently announced an increased dividend of $0.08 per share for the second quarter. 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. Our businesses are capitalizing on our leading niche positions and attractive markets are also benefiting on the strategic initiatives implemented in recent years and our acquisitions.

On the back of strong order growth, we saw in the second half of last year, orders in the first quarter, again, were outstanding with the $330 million representing the highest quarterly orders on record surpassing the previous high established last quarter.

With that, over the last few quarters, we have seen some changes in our customers' procurement strategies with some of them placing a significant portion of their full year orders late last year or early this year.

At our last earnings call, we indicated that approximately $15 million to $20 million of our fourth quarter orders were pulled forward from later in 2018.

This trend continued into the first quarter with customers placing orders earlier as they seek to secure availability of certain product lines like sewer cleaners and hydro-excavators, which currently have extended lead times or to manage the procurement of their related chassis, which also have extended lead times.

We estimate this -- that this resulted in the acceleration of an additional $25 million of orders into the first quarter that we would have previously expected to receive later this year. I'd like to take a minute to talk in more detail about some of the factors that we believe are contributing to this order acceleration.

First, the strength of conditions in our markets and the strong demand for our products that we experienced over the last year have resulted in lead times for certain of our product lines becoming extended. Earlier in the quarter, we started taking actions in response.

At some of our facilities, we added additional shifts and we have the ability to add more capacity. We have also added resources at key locations. For example, at our Vactor Streator plant, we have added 50 people since the beginning of the fourth quarter last year and are planning to add more as needed.

We are fortunate to have a dedicated group of employees and good access to skilled labor at most of our manufacturing locations. In addition, we have made incremental investments in new machinery, such as laser cutting tools and robotic welding. These capital investments have quick paybacks and are expected to improve our productivity.

We've also applied our flexible manufacturing model by moving production of certain low-volume product lines to some of our FS Solution centers. For example, we have moved production of our Guzzler products to our lead facility in Alabama, and our 3-yard smaller Vactor sewer cleaner to our service center in Illinois.

This has freed up valuable capacity as we seek to reduce lead time. The second factor relates to the increasing lead tightness and the availability of some chassis, and more specifically situations where the customer is supplying the chassis.

Because of concerns over the timing of chassis deliveries, we have seen some customers accelerate the placement of their orders, because of concerns of the timing of chassis deliveries so that they've had more time to manage their chassis procurement.

For our legacy ESG businesses, while it can vary year-to-year, typically customer supply about two-third of the chassis and Federal Signal supplies about one-third of the chassis.

In situations where Federal Signal is providing the chassis, we have performed a detailed analysis of chassis orders and lead time within each of our businesses, and we believe that we have secured adequate supply to cover our needs for the rest of 2018.

We have also made certain strategic decisions to prebuy chassis in order to take advantage of short-term customer demand.

In summary, the impact of this order acceleration will likely cause some distortion in our quarterly numbers -- order numbers in 2018, which might impact the comparability of our orders to prior periods and although we aren't expecting the same run rate in terms of organic order growth as in the first quarter, we are anticipating strong order inflow for the rest of the year.

I also wanted to address chassis availability in TBEI. For TBEI, the customer almost always supplies the chassis. On that note, we've actually seen chassis delivered increased year-over-year TBEI. What we're hearing is that OEMs are giving named customer orders priority over DOS stock inventory in terms of delivery.

So far this year, we have not seen any pressure from these constraints with very strong first quarter orders at TBEI, but it is something we will continue to monitor throughout the year. Similar to many industrial companies, we have noted the significant increase in the price of steel and other commodities since the beginning of the year.

However, to put this in context for Federal Signal, we have about $40 million of direct steel purchases each year, of which more than 50% relates to TBEI and about $10 million of direct aluminum purchases, which is all TBEI. It is all sourced from North America.

I have been impressed with how the teams have managed their procurement of steel faced with the challenges of the market. We locked pricing for the first half of the year at favorable rates, and we recently locked-in pricing for the second half of the year within some of our businesses, albeit at higher prices than in the first half of the year.

The decision was as much about securing availability of steel given increased demand for domestic steel, as it was about pricing. With the actions that we have taken, we feel confident that our supply of steel is sufficient to meet the increased production that we are anticipating at many of our facilities.

In addition, during the quarter, the majority of our businesses implemented price increases and we also have the ability to pass on surcharges where applicable.

By locking in pricing for the first half of the year at favorable rates and with the pricing actions we have taken, we expect the impact of material costs increases in the second quarter to be minimal, but there is some risk that the impact of higher material cost flow through the income statement starting in the third quarter, which has been factored into our updated outlook.

With that in mind, we are proactively addressing these challenges through our Eighty-Twenty Improvement or ETI program.

As we mentioned last quarter, as part of our ongoing commitment to maintaining and improving our competitiveness in the marketplace, each of our businesses have incorporated specific productivity improvement targets into their operating plans for 2018.

Utilizing Eighty-Twenty principles, these initiatives include a combination of material cost reductions, manufacturing efficiencies, refinement of pricing strategies and working capital optimization. While we aim to reduce the impact of material and wage inflation with these initiatives, we also seek to generate additional savings.

In addition to our flexible manufacturing model that I previously discussed, I'd like to give you another example of a specific initiative we have recently implemented.

We continue to make meaningful investment to improve our business performance and flexibility at our Vactor plant in Streator, Illinois, where recently replacement of our -- their laser machine centers used for cutting sheet and plate with a new laser utilizing fiber-optic technology.

This new machine has doubled the output versus the previous machine while reducing overall maintenance cost. The results for the Vactor plant is a 30% increase in total laser capacity, a primary work center that feeds all departments and a dramatic improvement in flexibility as we continue to respond to strong customer demand.

We are already starting to see the benefits with these productivity improvement with shipments in April out of our Vactor Streator facility at record level.

We've also been applying our ETI program at TBEI, for example, our Vactor team has been working with the TBEI team in Rugby, North Dakota, to share best practices to increase productivity through increased investment in laser technology.

We believe that the aggressive actions that we have taken will help us improve our full year adjusted EBITDA margin from 12.6% last year. As Ian mentioned, our pro forma debt leverage ratio at the end of the quarter is now down to a level that puts us in a solid position with significant flexibility to fund both organic growth initiatives and M&A.

Acquisitions remain a priority for the deployment of our free cash flow. Our deal pipeline remains active. With our healthy cash flow generation and strong financial position in addition to the flexibility provided by tax reform, we are well positioned to strategically pursue attractive acquisition candidates.

We are also relentless in our commitment to investing in organic growth through new product development. Our businesses continue to unveil new products and solutions that are solving our customers' greatest challenges.

One such example delivering innovative new products focusing on solving historical customer pain point for sewer cleaner operators is our new Vactor rapid deployment boom.

It has been a long desire of operators to be able to pull up to a job site and start cleaning without having to first set up 2 to 3 additional vacuum tubes on the end of a broom hose. This is a time-consuming procedure, that is also hard work, particularly in cold weather.

Our new boom has virtually eliminated the need to add vacuum tubes at the majority of sewer cleaner jobs. On a typical day, a customer averages 5 setups per day and each setup usually takes about 20 minutes. Without the need for this setup effort, the user can save up to 100 minutes per day.

We believe, this new patent cleansing technology will give us a competitive advantage for improved operator productivity by significantly reducing setup and teardown time over conventional boom design.

From a safety standpoint, the new unit will also allow users to work in areas with low overhead clearance without raising the boom and still reach needed depth.

The new unit will be available for delivery in the second half of this year, and we have already started receiving orders after demonstrating the product at a large trade show earlier this year. On the SSG side, we have recently introduced our new Allegiant product, a value line lightbar with increased features and functionality.

The Allegiant provides dual-color light head capability at a price point which is very competitive with less feature-rich lightbars. The Allegiant lightbar targets customers with tight budgets, plus who need better emergency warning equipment.

We estimate that this market segment represents about 35% of the total market in North America and creates an opportunity for us to grow our market share. New products such as these are key drivers to sustain organic growth and a long-term success of Federal Signal. I would now like to move on to our earnings outlook.

The strength of our backlog, the aggressive actions we have taken to minimize the impact of increased commodity cost and the favorable conditions in our end markets provide us with increased confidence for the rest of the year.

With that, we are raising our full year 2018 adjusted EPS outlook to a new range of $1.15 to $1.22 from a range of $1.10 to $1.20. In summary, we started off the year with outstanding performance. Our talented teams and the businesses have positioned the company for another year of growth.

Our foundation is strong, and we are focused on delivering profitable long-term growth through the execution of our strategic initiative. At this time, I think we're ready for questions.

Operator?.

[Operator Instructions] And your first question will come from Chris Moore with CJS Securities..

Maybe just quick on oil and gas.

Any kind of you're seeing much improvement on that front? Or I know had been mostly through TBEI before this, but I think -- excuse me, through Joe Johnson, but have you seen much in the last few months?.

We have previously stated that we're seeing signs of improvement in our parts and service businesses, and we're also seeing the used equipment coming back to work and strong utilization levels across our rental fleets. Based on that, some of our customers have placed orders to replenish their rental fleet.

And I would say there's growing optimism about improving conditions in the oil and gas market. So something we continue to monitor closely and we're encouraged by what we're seeing..

Maybe if you could just talk a little bit more about -- you touched on the SSG kind of action plan moving forward. I know that's a key focus of Mark Webber and maybe just provide a little more detail there..

Yes. A couple of things there. Mark is spending about 80% of his time out at SSG. We've made some changes in management. We've got a new General Manager that joined us in November, and we're bringing someone else -- another General Manager on the team to supplement the strong team that's currently in place.

And while it was down from last year, it really was in line with our expectations. We have previously talked about the political situation in Barcelona, where our VAMA business is. That has stabilized. And although VAMA had a kind of soft earnings quarter, we're encouraged by their Q1 orders. We expect that to benefit us beginning in Q2.

We also had some unfavorable sales mix in the quarter. And overall, we think that Q1 was a low point, and we're expecting it to improve throughout the year..

And then that -- that's on the margin side as well or....

Correct..

And just for Ian, in terms of the tax rate as you talked about is a little bit low this quarter. The effective rate is still somewhere between 26% and 27% for the year or....

Yes. It was a little low, Chris, in Q1. We had a -- the resolution of a tax audit, which meant that we had a tax reserve we could release, so that pulled down the rate for the quarter to just a tick over 24%.

We still think for the full year, it's going to be within that 26% to 27% range, but with this tax reserve release in Q1, it's probably closer to the low-end of that range.

The one caveat I'll probably put out there is that there is -- we're still looking at additional interpretive guidance that may be released about some of the provisions of tax reform so -- but right now our best estimate is the low-end of the previously issued tax rate range of like 26% to 27%..

And last question; just on the kind of acquisition pipeline, it sounds like it remains full. I kind of had looked at it, it is most likely would be something along the lines of TBEI.

Is that a fair statement? Or are there multiple areas that you're looking at?.

You know, I think that -- we're looking at both our ESG legacy business, the TBEI, there was a product line opportunity with SSG, we would also consider that. Our pipeline is very active right now in the market.

But again, it sets the right valuation and they have to advance the strategic initiative, so we've got a number of opportunities right now that we're exploring..

From KeyBank Capital Markets, Steve Barger..

Can you talk about the size of the price increases that you are pushing through? And what percentage of product lines have surcharge attached?.

Sure. Right now, we haven't seen -- outside the chassis, we really haven't seen a lot of surcharges from third-parties. We've addressed the situation in terms of price increases, and they really vary business-to-business. So they varied anywhere between 2% and 6% depending on the business. I think it's important to put all this in context.

I mentioned on the call that for Federal Signal, about $40 million -- we have about $40 million of steel purchases and another $10 million of aluminum purchases, the vast majority of that relates to TBEI. So it's about 5% to 6% of our total sales and about 10% of our material costs.

So in looking at this, we locked in on steel and aluminum prices for the first half of the year. For some of our businesses, we have locked in for the second half of the year. And we're able to, if necessary, have additional price increases as we go throughout the year.

For TBEI, for example, increased from 30 to 60 days, so if necessary, they can react very quickly to increase material cost changes and are prepared to do so. I would also mention our ETI program that we have in place that aims to offset the impact of material and labor costs and we have had some success on that this year.

So we are taking a look at it from a number of different perspectives depending on the market conditions really in terms of making sure that we cap on the increased cost where applicable. We're also critically focused on securing availability given the production levels that we expect in the second half of this year..

Yes. It sounds like you're being really proactive here.

Can you talk about what price realization will look like versus input cost increases in 2Q or the back half? I guess really would you expect to capture all price -- or sorry, costs increases in this fiscal year?.

Yes. I think, Steve, if you look at kind of the backlog that we had entering the year, the price increases went into effect really January 1 for most of our businesses. So with the size of the backlog entering the year, a lot of what would shift in Q1 reflected kind of the old pricing.

That's probably going to be -- and this isn't for our legacy ESG businesses. That's probably going to be pretty similar in the second quarter, because the pricing -- the incoming orders that we're receiving aren't really -- are probably going to start shipping, I would say, in the second half of the year.

But that's also when we are expecting to see the impact of the material costs as we locked in pricing really through the first half of the year. So expect the impact in Q2 to be minimal, I would say.

There will be some price realization, primarily on the TBEI side, which Jennifer just mentioned, they have shorter lead times so the incoming orders that we received post-price increase, some of those will shift in Q2.

But for the legacy ESG businesses, it's more -- the impact will likely be felt in the second quarter, but that's when we'll start seeing the price realization. So we think that, that'll largely offset in the second half of the year and that's reflected in our outlook..

So I guess as you think about the positive benefits you get from volume absorption and the dynamics from price costs as you get into the back half, would you expect stronger incremental margin in ESGs and what you see in one half?.

Yes. I certainly think we are expecting a strong second quarter. Q2 tends to be a strong quarter for TBEI. We're expecting that the rental and service activities kind of picked up with the improving weather conditions.

Jennifer mentioned we have also -- we -- our backlog -- we referenced on the year-end call that we had a number of deliveries that were scheduled for April and beyond in our backlog. As Jennifer mentioned, we're off to a strong start at Vactor with record shipments in April as we aim to reduce those lead times.

So I think Q2, we're certainly expecting improvement. As I mentioned, the impact of the material costs is largely going to be in the second half of the year. But overall, for the year, I think -- we are for the full year expecting improvement of the 2017 EBITDA margin, which was 12.6%..

Yes. I guess the only thing that I would add, Steve, is that the extended weather conditions in North America impacted our ESG business in the first quarter. We saw the street sweeping maintenance season that pushed out. And we'll see the benefits of that in the second quarter..

And I hear what you're seeing in terms of the change in customer procurement patterns, but can you talk about inquiry activity in April or May? Has that remained strong?.

one, because of our backlogs and two is customers wanted to make sure they can procure chassis..

Last question for me and I'll get back in line.

Do you think you have better access to chassis supply than your customers and competitors? And is there a benefit to you if you source the chassis?.

So we source the chassis in our ESG legacy businesses about 1/3, 30% to 40% of the time. And we -- we're looking at those issues very carefully and as I mentioned, we've secured the necessary chassis for 2018. We also have the ability to secure additional chassis, which we've done, so we have got stock and inventory available.

And that is really where it gives us the competitive advantage, is if somebody needs a truck quick, we have got it available. And in some cases depending on the model if a customer couldn't get a chassis, we could potentially supply it to them.

But we worked very closely with our customers in the ESG legacy side of the businesses to make sure that they've got the necessary chassis to support our production for 2018. On the TBEI side, the customers supply the chassis and yes, to date, we haven't seen an issue, but it's something we're continuing to monitor closely..

Yes. And Steve, I'll just add from the margin perspective, when we supply the chassis, it's less attractive from a margin standpoint, so that's one thing that -- to factor in, because we include the chassis in both the top line as well as our cost of sales, so it's less attractive from a gross margin standpoint..

But higher from a dollar standpoint, I would think, especially in this environment, can't you charge more for that chassis?.

Correct, correct, correct. That was more -- historically, that's been the case..

We'll hear from Greg Burns with Sidoti & Company..

In terms of the capacity you're bringing online, it doesn't sound like you're expecting it to have much of an impact on margins, but can you give us a sense of the incremental investments and capacity and how that might impact margins? And then longer term, obviously the business is strong now, but how flexible is this added capacity you're adding if we see a little bit of the downturn in the business? How -- what's your ability to adjust going forward?.

We can adjust up and down pretty quickly. And I can give you an example, the Vactor facility, which is our largest plant. We've added 50 employees starting in the fourth quarter of this year -- last year, sorry, and we're going to add another 30 to 40 employees.

And we're very fortunate that we're considered a preferred employer in that area and we're able to attract talent to fill that need, which puts us in a unique position. So we're able to flex up and flex down pretty quickly. And we do have capacity at most of our plants to support the increased demand.

And as the volume increases, for example, at our Vactor facility, we would see the margins also improve..

From Stonegate Capital Markets, Marco Rodriguez..

I was wondering if you could talk a little bit more about the pull-throughs.

Were there any sort of, I don't know, certain geographies or end-market segments that are sort of driving these pull-through that you're seeing in the last couple of quarters?.

I wouldn't say so much geographies, Marco, but what we saw with some of our dealers would have accelerate -- and I suppose that probably does translate to geographies. So there were certain states where our dealers may have placed their orders for the next 6 to 9 months in the first quarter and in the fourth quarter last year.

The other thing just to know is just as it relates to replenishment of the rental fleets, those would likely be orders that were placed in the first quarter that were essentially just replacing units that they may have sold out that fleet..

And you had in your prepared remarks and comments about expectations of continued strong orders through the rest of fiscal '18? Is there an assumption that you guys continue to see these sort of pull-throughs? Or is that kind of run its course? Any sort of color there?.

I think until some of our backlogs are extended right now and until we see those backlog numbers come down, we'll still see some advanced placement of orders, but we believe that majority of that has occurred in the first quarter, so we'll continue to monitor it closely..

And in terms of -- I know you guys published your gross margins by group in your filings, but do you by chance have those numbers offhand?.

Yes. So it's not -- Marco, it's not gross margin. We published the EBITDA margins by group and so for SSG, it's 15% to 17% is the target. For ESG, it's 15% to 18%. And overall for the corporation, it's 12% to 16%, but it's EBITDA margin not gross margin..

And then in terms of the acquisition landscape, just to kind of follow-up on a prior question, can you comment a little bit about as far as what the valuations kind of look like out there for you guys?.

Sure. With tax reform, there's more capital available and we see some of the valuations increase. We're continuing to work with a number of kind of private family companies, and so we're fortunate to have access to those opportunities.

In addition, we're looking at the larger acquisitions where there's more of a process and those acquisitions' values tend to be a little bit higher, but right now, we're very busy..

And last quick question and I'll jump back in the queue. Just on the updated guidance here. You sort of narrowed the range, didn't really necessarily pick up the high-end of the range. A little bit higher than the low-end.

Just kind of wondering, is that just being conservative? Or is there going to be perhaps some thinking through as far as the potential cost inflation as you may potentially see in the second half of the year?.

Yes. So in terms of -- we raised the bottom $0.05 and we raised the top $0.02. And we also factored in the impact of commodity price increases in -- which we believe will impact us more in the second half of the year. So we think that, that was a material move, particularly given some of the commodity price increases that we pay.

We are aggressively addressing them, but we'll move forward..

[Operator Instructions] And we'll take a follow-up from Steve Barger with KeyBanc Capital Markets..

Free cash flow conversion last year, if my model is right, was almost 130%.

I know working cap may be a drag this year given the growth, but how are you thinking about conversion if you have a target this year?.

Yes, it's -- we aim, Steve -- we always aim for like in excess of 100%. I think right now, it's probably -- it will hit our target. It may not be as high as the 130%, but that's -- we're expecting something north of 100%..

And if no acquisitions come through in the near term or it just takes a while, would you continue to delever or is there a leverage ratio, which you'd be more inclined to let the cash balance grow?.

I think we would continue to pay down debt in the short-term, but I think, as Jennifer mentioned, the acquisition pipeline is full; so -- but if -- anything can happen with acquisitions, so if they don't pan out, we would continue to pay down debt..

[Operator Instructions].

In closing, we recently posted our annual report video on our website, and I would encourage you to go on our website and review it. Finally, I would like to reiterate that we are confident of the long-term prospects for our businesses and our markets.

We would like to express our thanks to our stockholders, employees, distributors, dealers and customers for the continued support. Thank you for joining us today, and we will talk to you next quarter..

Ladies and gentlemen, that does conclude today's presentation. We do thank, everyone, for your participation, and you may now disconnect..