Q3 2019 Earnings Call

October 24, 2019

Today's presentation, there will be an opportunity to ask questions to ask a question <unk> Press Star then one on a touchtone phone to withdraw your question. Please press Star then too. Please don't this event is being recorded.

Thank you drew good morning, everyone and welcome to M. assays third quarter 2019 earnings Conference call with me here today are nish, Vartanian, President and CEO and Kengreal Senior Vice President CFO and Treasurer before we begin I'd like to remind everyone that the matters discussed on this call excluding historical information.

We're looking statements within the meaning of the private Securities Litigation Reform Act of 1995 forward. Looking statements include but are not limited to all projections and anticipated levels of future performance forward looking statements involve risks uncertainties and other factors that may cause our actual results could differ materially from those discussed here. These risks uncertainties.

Thanks waste and good morning, everyone.

One thing innovative products and driving operational excellence 30, M.S.A. operating system.

Collectively these focus areas support our leadership position in business critical applications like worker safety and asset infrastructure protection.

These limiting situations have since been result, after you funds have been released and we began shipping our next generation G. One units upon receipt of certification at the end of September .

Not lost business, just a shift in timing of orders out into the next few months and into 2020.

Internationally, we had a tough FCB a comp due to a large order we shipped a year ago still we're seeing good order traction on the M. A C b a.

And well, let's see be a results were soft in the quarter.

When I think about what it takes to succeed and sophisticated safety products market I see product innovation and brand equity is to core competencies that enable market leadership.

That might I want to make just a few comments. This morning about our R&D investments that are fueling revenue growth by uniquely solving our customers' needs and driving safety first behaviors.

Those investments.

Our are complemented by M. assays brand strength as the safety company, which provides inroads with strategic end users and channel partners.

Sales vitality the percentage of sales from products developed over the last five years was more than 35% this quarter.

In the area, we're seeing the most notable improvement isn't fall protection with sales, increasing 27% from a year ago.

In 2018, we discuss the sizable NPD pipeline and fall protection and this included our V series brand the fall protection products.

We also invested in this area to expand our sales coverage and increased manufacturing capacity.

Those investments helped us convert competitive accounts and by doing so we're truly earning the right to win in fall protection.

We launched the the V. Gard, we also launched the V. Gard H, one safety held in a quarter leveraging the iconic V. Gard brand. The H one element is the latest and I'm essays full lineup high performance head protection.

Well the H one works across all industrial applications. This is a held it that's really suited for the rigorous conditions, such as power climbing confined space application and rescue activities.

But just like our V Gard hard hat, which is the market leader and industrial head protection.

From an h. one element to the 5000 series detectors, we're launching critical products across all of our core product line.

And from my perspective, the key takeaways from the SAR, one our NPD pipeline from R&D investments continues to grow into the MSC team is executing at a very high level with that I'll turn the call over to Ken for our financial review Ken.

Thanks, Nisshin good morning, everyone before I begin the piano review and discuss the quarter in more detail I'd like to start with a few highlights of our quarterly performance.

Good growth was 6% on a reported basis or 8% in constant currency. It is encouraging to see that level of growth in any quarter, but considering we could not ship NFP a compliant SCB a in the Americas for the entire month of September it's really a solid result, we leveraged that revenue growth into 11%.

Adjusted operating income growth with an incremental operating margin of more than 30%.

Adjusted operating margin of 18% increased 80 basis points from this time of year ago, and it's important to note that comparison includes 50 basis points of dilution related to this year and monitor acquisition.

Merrily related to noncash stock compensation charges and amortization associated with the purchase price allocation related to the inventory step up on the transaction.

Sierra was dilutive to adjusted EPS by two cents.

However, it was accretive to earnings on a cash basis by two cents and we are on track with our integration plans there.

In fact, we completed a major milestone to the integration plan. When we went live on Sep at Sierra at the beginning of October that positions us well to drive improvements in the business.

Adjusted earnings were flat in the quarter at $1.15 per share, but it's important to note that our higher tax rate impacted earnings per share by seven cents.

This step up in the tax rate was largely driven by cash repatriation in the quarter associated with the repatriation of more than $35 million from Europe and other nonrecurring adjustments.

Free cash flow conversion was about 95% of net income in the quarter showing nice improvement from the first half of this year, we deployed $16 million for dividends and reduced our debt balances by 24 million, while investing $10 million in capex.

Now I'd like to walk you through our third quarter financial results total revenue increased 8% in the quarter in constant currency, we had a 2% FX headwind on revenue in the quarter.

We continue to see solid results across our short and long cycle businesses.

Yes detection growth was strong across the board and both portable gas detection and the fix side and both of our reporting segments as our new products continued to be well accepted by the market.

As an issue had mentioned new products drove our business in industrial personal protective which was evidenced by our growth of 27% and fall protection and not only did we see strong revenue growth, but margins in Americas fall protection product sales, which was the main source of overall revenue growth in the probably in that product category were up.

Strongly in the quarter as well.

Emerging markets growth was a very healthy 8% in the quarter and we're seeing good results across these markets and continue to drive growth an important areas like China, which has had which has grown at a double digit rate year to date and built backlog in the quarter despite healthy shipping activity.

The comparable period analysis and international SCB, a will continue to be pressured in the fourth quarter related to that specific order.

Gross profit was up 40 basis points from last year on a reported basis.

Gross profit includes however, the purchase accounting oriented costs associated with our recent acquisition and excluding these gross profit was up a very healthy 70 basis points in the quarter.

The new products and pricing actions that we're executing continue to provide good leverage.

SGN expense was $83 million in the quarter or 23.6% themselves, which includes about $1 million of transaction related costs and $2 million of cost for Sears base business.

Excluding Sierra and all the related cost, we gained 40 basis points of leverage from SGN, a efficiencies compared to a year ago.

We also continue to focus on executing restructuring activities to streamline our business.

We're on track with our international restrict restructuring activities that we have been executing throughout the year.

It's good to see the expense control in the quarter in that segment, particularly in Europe , where SGN a is down 3% on revenue that is up 3%.

GAAP operating income was $60 million or 17% of sales in the quarter, excluding foreign exchange restructuring strategic transaction cost and product liability expense adjusted operating margin was 18% up 80 basis points from a year ago on incremental margins that are exceeding 30% in the quarter.

And 40% year to date.

Excluding the dilution from the see your acquisition, which is included in the Americas segment and was driven by purchase accounting and non stock noncash stock compensation related items operating margin expanded by 130 basis points in the quarter.

North of 30%, which indicates that our profitability profile continues to be helping our 2019 and long term expectations of growing earnings at a multiple cells is still very much intact.

If you recall, where if you recall, we had $58 million of insurance receivables inflows in the third quarter a year ago.

During the current quarter, we used cash for inventory to support our revenue growth and prepare for the fourth quarter deliveries, but receivables provided a source of cash and drove stronger cash flow conversion.

Free cash flow conversion was more than 95% in the quarter. Despite the strong revenue growth and order pace.

In summary, it was great to see 8% growth 130 basis points of margin expansion or in our organic business and improvements in free cash flow conversion. Despite the strong growth the incremental margin profile is intact that more than 30% in the quarter and the order pace with healthy as well in the quarter, we had a book to bill in excess of one.

And your conditions across our end markets headlines with certainly point to caution.

Industrial detection related revenue was healthy this quarter, but we also saw significant growth in short cycle businesses like portable gas detection at 14% and as mentioned fall protection of 27%.

And long cycle business like fixed gas flame detection revenue grew at 18% and our backlog in that area continues to be elevated from a year ago.

What we've seen some choppiness in the business throughout the year, our backlog is healthy and order pace indicates that we should deliver on our mid single digit revenue growth goal for 2019.

Thank you for your attention. This morning at this time, Ken and I would be glad to take any questions. You may have please remember that MSC does not give guidance, having said that we'll now open up the call for your questions.

We will now begin the question and answer session.

To ask a question you made press Star then one on your Touchtone phone.

If you're using these speakerphone, please pick up your handset before pressing the keys.

At this time, we will pause momentarily to assemble our roster.

Good morning, guys congratulations on nice quarter.

Thank you Sam.

Can you speak to some of the outgrowth in a little more detailed especially on the fall protection gas detection side. You is this more distribution, obviously have a lot of new products coming out trying to get a sense for how sustainable this trajectory, it's going to end up being given the large numbers that you guys are putting up right now.

Sure Stanley.

Fall protection story has been a really good one for us out a year ago, we at 13% I believe it was 13% revenue growth for the year in fall protection and as you know we've been investing in that area and really coming out with some a.

And that's really paid off for us. So we've penetrated the market really well we are winning accounts. We've we've worked hard to earn the right to win with fall protection.

Just.

We've done a real nice job in that area also with some unique solutions with what we've done with our our sensor capabilities and adding on safety I O. One while the safety Io isn't a big part of the revenue story customers are light light to buy their products that are capable of having those capabilities for future Signup for.

The Dale and you in the past you guys have had been a nice job of strategically using M&A to kind of build out parts of the portfolio yield no. You basically have number one number to market share position pretty much and everything would be my guess.

Sure inorganic pipeline for US is very active at this point, we have a lot of focus around that area and there's opportunities within the core product areas. There is there some nice opportunities within the core product lines to enhance our product position.

But as we did with global well look outside of those core areas within core markets, where we have a good understanding of the business to to broaden our core portfolio and we continue to evaluate those opportunities as we go forward as Ken mentioned the balance sheets in great shape.

But there are some opportunities out there and we continued to investigate.

Perfect and then lastly from me it sounds like the sensing acquisitions is kind of tracking very well I mean can you could you tell us what you've learned maybe its thus far hell, how that technologies can be transferable to some of your core products.

And then kind of how should we think about the ramp up profitability as has its all those businesses come together.

I think you might see or monitor and ceremony matching yes, correct me exactly where we expected it to be what's really interesting what that business and we bought that in part for some of the gateways that they provide for the internet of things and what we're we're finding is really helping us and progress with what we're doing.

Even outside of gas detection.

With what we're doing with lunar and that will help us with what we're trying to do around lunar and a protection of firefighters and developing our model around that connected firefighter. So it certainly helping us in areas beyond gas detection, which is a nice benefit for us.

Perfect. Thank you for time I'll hop back in Q.

The next question comes from Richard Eastman of Baird. Please go ahead.

Yes. Thank you.

Good morning this Ken.

But yeah it added.

Particularly by by North America in Europe .

I'd, just say rest of world maybe.

And then maybe what that looks like in North America price capture year over year.

Sure when we look at the business Rick we were really it was good to see the gross margin improvement of about 70 basis points in their underlying business. When we look at the Americas segment. We did see is nice amount of capture in price part of that was because we were we were quick and moving in.

As you know and as the investors that follow US Europe is an area, where we don't have that stronger position, but we are placing a lot of effort on channels development and improvement of our channels both in Europe as well as in the Middle East and with the plans to continue to improve that that pricing position in the net capture we have there what was good the safe.

For US was the the amount of reduction and SGN, a that we were saying in Europe , a lot of our effort. Thus far has been improving our business model and to see the results come through on the on the cost reduction were really really good to see.

Again, just trying to kind of sift through the numbers here a little bit.

Well, perhaps you know eight to eight to 10 million of revenue.

Delay you did ship in Q3 and pushed into Q4, I mean is that.

Sure. So citizens name recognition the well first of all your eight to 10 numbers a little bit heavy.

We'll also delay things slightly so you know that six $7 million whatever it may be I think that'll be pushed into the next couple of quarters.

As more realistic and then as far as margins are concerned no I don't see any impact whatsoever on margins in fact, I expect to margins to be as high or higher. This standard was not a significant change for MSC because the G. One was a fairly new unit has it was a couple of tweaks to the unit and actually the upgrade people who are in the G. One today.

They have a fairly simple upgrade to upgrade to the standard which is a real benefit to those customers purchase the unit earlier than the than the 18 standard.

Okay, and just last one I promise just.

And book to Bill commentary.

Curious when you speak to that backlog number building I presume, that's fixed gas and flame.

Also what to what are the product lines did you see you kind of that the book to bill exceed exceed one.

And it was small and a number of other areas. You know the business was was pretty healthy across the board, which has really encouraging.

The only thing JV like I would add niche there is as you know the fixed gas and flame detection is a bit of a long cycle business and so even though we might build backlog in a specific quarter. It may take one or two quarters to work that backlog out and so.

So just be aware that backlog doesn't always come in and ship. The next quarter. It may take a quarter or two to get out of the out of the backlog gotcha. Okay. Great. Thank you again.

Hey, guys morning, good morning.

Michelle I wanted to follow up on your on your.

Last comment was in your prepared remarks or your last topic.

I always thought of MSS.

Employment sensitive for front of industrial sensitivity.

And.

The description was positive.

Given the market given the industrial backdrop I just wanted to get a sense from you is how much is that really driven by what I must say is doing about new product introduction and so forth and then maybe what your customers might be telling you about where we are in an economic cycle.

I think a big part of it that is really what we're doing around our product pipeline. If you look across our core product pipeline.

We've introduced significant products and every single one of those core product area. So whether it's the X and as 5000 or you know we have health care I O 360, something coming down the pipeline, what we've done with safety Io and enhancing our position what portable gas detection. The H one elements coming out the door, we watch the fast correct.

The suspension of a couple of years ago is still doing well in the marketplace.

Yes, let Ics line of turnout gear for globe, the except one fire helmet North American I could go on it on on the on a product pipeline any investment we've made and we think we're gaining some market share we're performing well the longer cycle products, such as fixed gas and flame detection. We are doing well there were really well positioned what that X.

So really it's a combination and plus we're doing a pretty effective job around pricing and our marketing team has done a nice job and getting out and educating our salesforce and being a little little smarter in how we price our products in the marketplace and you're starting to see that through margin improvement. So it's just really good execution across.

Yes, the organization and really driven a lot through the MSC operating plan.

One thing that this to add onto what initiative there.

Add some really good comments around the product portfolio. The one thing to think about and I think you'll see it at our Investor Day on November 11 is the amount of technology that we're putting into our products today and what that probably what that technology is doing is offer an unparalleled levels of safety for our customers, but it's also providing an.

Pretty impressive.

But but any sense.

The normal was the normalized.

You know kind of Incrementals and maybe one that starts to kind of leak back into the model.

Yes, it's.

When we look at the.

The incrementals in the quarter around 39% on a constant currency basis year to date, there about 45% and our last Investor day on March of 18, I believe it was we gave a guide around 30% to 40% Incrementals and so we feel is still fairly until very much like that guide is.

Intact, we've continued to execute at those levels for the past couple of years, so 30% to 40% Incrementals are probably not out of the question as we think about the business going forward.

Got it I appreciate your help guys. Thanks very much.

Thank you Ed.

Again, if you have a question. Please press Star then one on the Touchtone phone.

The next question comes from Larry de Maria of William Blair. Please go ahead.

Thanks, Good morning, everybody.

First question, Hey, guys, you mentioned, obviously talk about orders and book to Bill.

On on what the orders were up and what the book to Bill actually is.

Yeah, the book to bills approaching a 1.05, it's in that 1.31 0.5 range.

Area. The world. So it's really it's really good to see that level of demand across the business not only here in the U.S., but but outside of the U.S.

Okay. Thank you.

Looking at Asia, and China strength.

I guess, obviously haven't really been impacted by would allow the company has been impacted by in terms of.

Trade stuff.

Just maybe in a little bit what's driving the strength there why you guys immune to it and do you have your.

We do we compete across all our product lines in China, we manufacture some products in China for China and.

One of the things to keep in mind with our business is fire service represents a good part of our business on a global basis, and then China. We've built a very nice brand with our fire service market as I mentioned in my comments of fire helmets, we're fairly strong in China, This past quarter, along with breathing apparatus our.

You to do a nice job and penetrating the fire service market business in China and that you know the fire service market on a global basis Doesnt run on the same economic cycles as the general industrial business and so when you look at our profile of that area, we've grown that nicely whether its breathing apparatus fire helmets third.

One imaging cameras, and even gas detection portable gas detection in the fire service.

Specifically to the Americas, the globe turn up your business and so and so the way. We built this portfolio is we're not tied to any one specific market or area. So as the industrial market might soften a bit for some of those short term products.

Such as head protection, you know head protection has not been robust.

We have products and other categories that'll that'll do well for us and that's what we're experiencing and some of those areas.

Great. Thank you.

Maybe.

Sure No. We're really excited about lunar I've I've sat through some customer feedback sessions on lunar with with fire departments. Just like you get a first hand view of what they're saying a reaction.

Lunar is we can go into competitive departments around the world and.

You know the size of the market or size at a price so to speak but we're pretty excited about the technology and very excited about how that may enhance some protect firefighters lives going forward.

Okay. Thanks, Thats really helpful and it sounds very exciting lasting I'll jump off anything in particular or specific high level numbers, we should be thinking about to expect not with the numbers are obviously, but what number we should expect to get from you guys et cetera in November two floor any kind of preparation.

Before that we should have.

So so we're we're working through and I think you're leaning towards 2020, I guess, you're right is that what you're asking about.

Yep.

Yes.

Term yeah.

We're working through our plans we continue to work through our plans for 2020, and and putting a finer point on that but as we've said in the past and I think I was pretty clear that you know we expect Mick mid single digit revenue growth for this business.

Through 19 and into 2020 in the future, we do pretty nice job and how we position ourselves from product standpoint, we continue to improve ourselves.

From a competitive position within the marketplace.

Great job with our tip talent pipeline, we've got some fantastic people in this organization. That's just rally around that are focused on the mission of this company of protecting People's lives and we think we can continue to do a nice job, an art and our topline and inefficiencies and profitability to company going forward. So we'll talk more about that November .

Thank you good luck.

Thanks, Thank you Eric.

Seeing that we have no more questions at this time I would like to turn the conference back over to lease Lawrence auto for any closing remarks.

Q3 2019 Earnings Call

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