Q1 2020 Earnings Call

[music].

Yeah.

Good day and welcome to the M.S. say Q1 2020 earnings conference call.

All participants will be in listen only mode.

Would you need assistance. Please ignore conference specialist I personally starkey followed by zero.

After today's presentation, there will be an opportunity to ask questions to ask the question. You May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then too. Please note. This event is being recorded.

I would now like turn the conference over to lease learns auto. Please go ahead.

Thank you Brenda and good morning, everyone and welcome to emphasize first quarter earnings Conference call for 2020, joining me on the call today are niche vartanian, President and CEO and Ken crowd Senior Vice President CFO and Treasurer before we begin I'd like to remind everyone that the matters discussed on this call exclude.

Didn't historical information are forward 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 to differ materially from those.

Discussed here these risks uncertainties and other factors are detailed in our filings with the FCC, including our most recent form 10-K filed in February of this year I must say undertakes no duty to publicly update any forward looking statements made on this call except as required by law. We've included certain non-GAAP financial measures as part of our discussion.

And this morning, and the non-GAAP reconciliations as well as our Q1 press releases are available on our Investor Relations website at investors Dot and I'd say safety dotcom with that I'll turn the call over to our president and CEO Nish Vartanian.

Thanks, Lisa and good morning, everyone.

Since our last earnings call in February the Cobot 19 pandemic has impacted our families are communities are workplaces are economy and our world.

Like you we all hope are beginning to move toward the downside of this crisis.

As we navigate through this environment I want to start off by expressing my deep appreciation to the associates I must say.

As I've said many times before our mission is the foundation of our success the importance of our mission and our employees dedication to it is today more relevant and more clearer than it's ever been.

The reaction by our people working with speed and agility across the enterprise has been a reflection of a highly engaged workforce ensuring operations continued through the crisis with minimal disruptions to providing essential product service and support for our customers.

As a leader in safety M.S.A. is in the central business, each and every day that our associates come to work in our plants around the world with great Pride, they're making equipment that is helping to protect the world's first responders energy and utility workers and so many others who are on the front lines of this code at 19 outbreak.

During our investors conference last year I highlighted.

With the world's increasing focused on environmental and social issues, including safety.

Protecting workers will become an even greater priority for our four businesses.

The situation with cobot, 19 sharply underscores that living and working safely as a profound impact on business conditions and that there's a very basic human desire to protect the world's workers that is msas mission and it's never been more important.

The Sam proud of our entire MSC team would be an understatement I would also like to thank our supply chain partners were also a central stakeholders and protecting the world's workers.

And just a moment I will provide insight into how we're managing our business through this crisis in the near term priorities we've set.

This effort dates back to January when our team in China began to assess and address the situation and we're in active communication with our corporate headquarters.

On issues like employee protection protocols business continuity and supply chain as well as potential mitigations. After that we expanded our Ur Cobot 19 rapid response team to be global in scope.

Our early start had a clear and positive impact on our first quarter results in positioned us to better respond to the situation.

For the first quarter, our revenue grew by 7%.

Air Purifying respirators were key source of growth in the quarter.

Which is largely reflective of the global pp shortage for cobot 19.

Fixed gas and flame detection was a strong performer in the quarter and our SCB, a portable instruments and head protection lines also performed well with low single digit growth.

I'm also pleased that that the international segment margins continue to expand and reflect the great progress we've made on commercial excellence and cost structure programs.

Against those highlights I'll now provide more texture.

On how we're managing through the code at 19 situation and the priorities we have rallied around it.

Let me begin by saying that we're seeing the benefits of having a seasoned executive team in place and leaders at all levels of the organization with steered the company through a number of macro economic downturns before such as the recession of 2009 in 2015. Our teams also responded in the wake up the tragic events of 911.

For many of our associates were directly involved in helping first responders at ground zero and the ramp up effort to help fortify national stacked stockpiles with gas masks.

With those experiences a mine we are responding to this pandemic and operating our business around four key priorities.

First the health and safety of our workforce is our top priority.

Our second priority is business continuity.

Third we're focused on expanding manufacturing capacity of our existing year, purifying respirator products and our fourth priority, which Ken will cover in greater detail, we're focused focusing on managing our capital structure and expenses, we prepared cost levers to respond to various potential scenarios in the business while still.

Investing at planned levels for new product development.

Focusing first on the health and safety of our workforce.

No that tens of millions of workers rely on MSC products every day and were dedicated to safely getting our products into the hands of those who need them most.

Consistent with our mission and internal safety culture, we've taken a number of steps to provide a safe environment for our associates, who are continuing to central work.

And our factories and work sites, we continue to follow CDC recommendations for social distancing and disinfecting.

We've enhanced cleaning protocols instituted temperature monitoring.

Modified work cells to ensure a proper distancing our back office and administrative teams have been working from home since mid March and are leveraging technology to effectively drive productivity.

Despite the distance our people are staying connected with each other and with our customers I'm heartened by the fact that the number of interactions with customer service of actually increased and our level of customer support is at the same levels pre cobot 19.

This is a real complement to our customer service management and his teams.

We've also taken proactive steps to protect the health and safety in our local communities through the scrubbers.

To support this effort MSA donated or is in the process of donating more than 140000 disposable masks source from third parties to hospitals and health care systems and communities, where we operate around the world.

Regarding our second priority business continuity our teams around the world have been hard at work to keep our factories running and our supply chains moving.

All MSC factories throughout the world are open and running.

We continue to work closely with our suppliers and supplier disruptions have been handle on a case by case basis as needed.

Our corporate and local teams have done an excellent job and managing through these challenges and our focus is ongoing in this area.

The third area I want to discuss is MSS manufacturing response regard to air purifying respirators.

While the disposable and 90 fives that are mention so often a news are not manufactured by an essay we produce advanced air purifying respirators, such as Elastomeric half mask full face piece respirators and powered air purifying respirators with full complement the filtration capability.

These products have been part of MSR portfolio for many years and they've been used and industrial applications.

These are air Purifier. These air purifying respirator products reflected 8% of total sales in the first quarter and increased by more than 60% in dollar terms from a year ago.

Later in the quarter, we saw higher levels of demand for respiratory products largely from our existing industrial and first responder customer base.

With the urgent market needs and related surge in respiratory orders that we seen in March and in April we've made the decision to invest $11 million to $13 million of Capex to expand manufacturing capacity for respiratory products at the Jacksonville, North Carolina plant.

We've started to make investments and have already hired and trained dozens of workers to support this project.

We're doing everything we can reach our goal levels of capacity later this year.

While the PR backlog is strong and growing the fulfillment will shake out over the next several quarters.

I've, often said and essays portfolio has a defensive element to it based on our diversified exposure across many end markets and geographies I.

I think this attribute is evident again, particularly against the backdrop of this challenging environment.

For example in April incoming orders are up more than 10% overall as strengthen and our respiratory business and fire service.

Has more than enough to offset declines in industrial products.

Accordingly, we intend to invest in our respiratory business and increase our output substantially there we've lowered our near term growth expectations for industrial and energy based pp products that are tied to employment and protecting the individual worker like gas at portable gas detection.

Head protection and fall protection.

April orders for fire service products were healthy and we built some backlog so far in Q2.

As always with the fire service these products going to have longer lead times and take a couple of quarters that deliver.

So when you look at the business from a high level April orders were healthy we built backlogs in areas that have typically have longer lead times or what were crop Rick will require manufacturing investment to deliver wall employment, driven pp business has weakened.

The extent of economic damage from the virus and timing of recovery is unclear. However.

Our first quarter was reflective of a highly engaged workforce that has a clear connection with our purpose in mission.

And looking forward, it's encouraging to see our diversified portfolio supporting our overall business. Despite the downturn in certain end markets.

With that I'll now turn the call over to Ken to continue to review, our coated 19 priority areas and provide more insight into the impacts on our business in the near term.

Thanks niche and good morning, everyone before I begin the piano review and discuss this cost structure and liquidity aspects of our Cove and 19 response plans I want to step back and provide a few performance highlights.

First we started the year very strong with 7% revenue growth in constant currency, we had a good growth across a substantial portion of the portfolio driven by a very strong finish in March while we've seen a shift in product mix within the order book late in the quarter and into April orders in April were healthy in total and we have a sizable backlog of business to stay.

The second quarter.

We remain favorable and the price cost equation and saw healthy product margins in the quarter.

Coupled with diligent cost control, we realized the incremental margins of 37% adjusted operating income was up 10% on a reported basis or two times the revenue growth rate.

We continued to execute around the balanced capital allocation strategy. During the first quarter, we funded $16 million of dividends to shareholders and deployed $20 million, the repurchased 175000 shares to offset dilution.

Leverage remains very manageable at 1.3 times, EBITDA or less than one times on a net debt basis. Our efforts in responsible approach to leverage as we finished 2019 and started 2020 has positioned us well to maintain a very balanced approach to capital allocation.

Now I'd like to walk you through our first quarter results and provide more insight into how we are managing our cost structure and balance sheet through these uncertain times.

Total revenue increased 7% on a constant currency basis on growth across much of the core product portfolio as well as strong growth and air purifying respirators or a PR, which are complimentary to our core offering and include included in what is defined as noncore in our public filings.

In the fire service, we realize realized solid growth in the Americas as CBVA area as we work down our backlog from the pent up demand associated with the approval delays last fall, we hit indicated that revenue would shake out over a couple of quarters and that's exactly what happened demand rate demand remains relatively.

Healthy in this area in April.

Fixed gas and flame detection had a strong quarter with good momentum on our new products across the us in the middle East.

Yes, GFT line is a very global line with strong market share in both the us and in the middle East as well as a sizable recurring revenue stream on the installed base and those qualities continued to help us navigate a challenging energy market. This business continues to hold up well and has held up well and pass slowdown.

Yes.

Emerging market revenue was up 12% in the quarter, while China had a slow start due to the cobot 19 outbreak, we realized very strong growth in the middle East FD and Latin American fire service and head protection product lines.

China has started to rebound in March and we're seeing improved results in April in that area of our business.

From an FX perspective, we had at 2% headwind on revenue related to the weaker euro and Brazilian real compared to this time a year ago.

Gross profit increased 10 basis points in the quarter as pricing held up nicely and offset higher indirect cost such as co. Good related expenses of about $800000.

It was particularly encouraging to see strong product margins in our international segment. This quarter as we discussed at Investor Day back in November strategic pricing has been a major focus for our European business. It's good to see the traction there in both the second half of 2019 and again here in the first quarter, it's good to see pricing.

Holding up well as we continue to provide customers a cost of ownership advantage.

SG inexpensive $80 million was up 2% on a reported basis or 3% in constant currency organic turns on the mid single digit revenue growth.

We continue to realize the expected returns from previously executed restructuring programs, particularly in international we're operating margin is up 170 basis points.

And that area of our business constant currency SGN, a was down 4% in the segment on revenue growth of 1% and we continued to see solid leverage in the Americas segment as well.

As we had discussed in our year end call in February we entered 2020 with a focus on productivity and back office cost rationalization based on the uneven environment. When we started to see the economic downturn in March related the Corona virus weak became even more active and identifying a number of short term cost reduction measures and.

In addition to savings from reduced travel cost we implemented a hiring freeze with very minimal exceptions. We also have expense controls in place around professional service engagements and other discretionary costs controlling our cost structure is a key priority of our co bid response plan. So we are watching this area very closely.

We plan to maintain hiring and discretionary cost controls through the second quarter as we manage through this uncertainty.

There are a number of other short term cost reduction measures that we currently have prepared and on or on the shelf, we can and will pull those levers as needed based on the order book, which we monitor daily.

From a longer term perspective, we plan to continue to execute our roadmap of European cost reductions that we laid out at Investor Day. We also continue to evaluate programs to improve our global footprint and optimize our business structure.

Strong product margins and cost control drove an 80 basis point improvement in adjusted operating margin from a year ago with improvements across both the international and America segments also our most recent acquisition Sierra monitor, which we acquired in the second quarter of 2019 has become accretive to the MSR consolidated.

Any margins in less than a year. In addition to the inventory step up rolling off after Q4, we've been able to drive efficiencies throughout that business.

Our adjusted effective tax rate was 25% in the quarter, which increased about 100 basis points from a year ago as we had higher losses in jurisdictions, where we cannot take tax benefits.

Adjusted earnings were $1.18 per share or 4% higher than a year ago. We indicated on the February call that we expected an 8 million dollar full year headwind in 2020 from noncash pension expense that had a four cents impact on adjusted earnings in the quarter as expected similar to many companies.

We added discrete cost associated with the virus back to adjusted operating margin and adjusted earnings metrics.

As niche had mentioned made in managing our liquidity position is a key focus area for our team in response to the economic downturn.

Our balance sheet is strong and positions us well moving forward to level set on our position at the end of March we have cash and the balance sheet of $123 million. Our current debt balances $372 million are less than one times on a net debt basis versus the covenant of 3.5 times.

Our next principal payment on our senior notes is $20 million in the fourth quarter of this year, which is not overly material to our cash flow.

We have ample capacity on our credit facilities and shelf facility agreements as well at the ended the quarter, we have more than two turns of EBITDA available on our covenants, which provides plenty of flexibility.

To manage cash flow, we have already begun applying best practices to drive improvements in receivables and payables working capital ended the quarter at 26.1% of sales relatively consistent with a year ago.

The increase from year end is primarily related to the timing of receivables as we had our strongest invoicing month of the quarter in March combined with an increase in inventory, which was partially offset by improvements in a.

We have not noted any material credit issues to date and we have a team that is closely monitoring this area.

The balance sheet is very strong and our capital allocation priorities remain very much intact. We remain focused on investing in our business and funding our dividend, while maintaining an investment grade balance sheet.

This had mentioned the investments we plan to make for the respirator manufacturing ramp up and we plan to continue funding R&D in line with previous expectations in 2020.

We are positioned well to manage the challenges, we all are facing and to pursue growth opportunities when appropriate.

The wrap up let me step back and summarize the operating environment as it stands today, our factories are open and our supply chains are moving we do continue to work through logistics semmaterials challenges, but we have not seen any major disruptions today.

Our diversified portfolio positions us better than most in this environment just looking at our April orders, we have seen significant declines in short cycle industrial and energy related products. However that is being more than offset by higher demand for firefighters safety products and respirators. So in total after.

Strong March April orders are up more than 10% versus a year ago as we see this shift in product mix play out.

While this can change quickly and it will take some time in investment to ramp up our respirator capacity and get that backlog out the door in coming quarters. Our business is very much holding up in April.

The defensive nature of the portfolio that we've we've built is providing great support the finished the first quarter and to start the second.

While the business continues to hold up well through April there is a great deal of uncertainty in many moving pieces.

Among them are the conditions in the energy market the timing of when construction products may resume when the broader economy might open up and how the demand patterns evolve for respirators and the back half of the year like many others. Our line of sight for the full year is just not clear.

This makes it very difficult to provide expectations for the full year growth rate. What we do know however at this point is we've had a great growth in the first quarter, which was heavily influenced by healthy orders and strong invoicing in March for orders were strong in total for April notably in our respirator and fire service lines, where we are building backlog.

This is helping to offset weakness in hard hat fall protection in portable gas areas that often book and ship very quickly.

Backlog levels are healthy and should provide support in coming months in quarters. When you think about the composition of backlog in how the impacts the near term. It's important to note. It will most likely take us into the third quarter before we were able to see backlog moderate and fire service and respirators for respirators in particular, we expect to make progress on that front.

As we ramp up our manufacturing capacity in the coming months.

We've modeled a number of scenarios internally for 2020, and we have a playbook ready for a range of potential outcomes. We have a number of initiatives that we are executing can launch to improve productivity and reduce our cost structure. While there is a great deal of uncertainty in the global economy, We had strong start to the year was 7% revenue.

Growth and 37% incremental operating margins our business leaders are executing our growth and productivity plans across both of our operating segments and we're seeing very strong results. Looking ahead. We have a response plan in place the manage our cost structure and liquidity position through the economic downturn as always we are committed.

That being proactive operators through this crisis and controlling the controllable, we're well positioned with a flexible cost structure and strong balance sheet to manage through and maintain our solid fundamentals over the long term with that I'll turn the call back over to niche for some concluding commentary Nash thanks, Ken the strong.

Revenue growth and incremental margin profile in the first quarter provide a solid foundation to start the year. Our portfolio is diversified we're well positioned from a cost structure and balance sheet perspective. The managed through these times, we'll continue to focus on protecting the health and safety of our workforce, enabling business continuity in our plants and throughout our supply chain.

Thanks, and ramping up our manufacturing of our existing respiratory portfolio to do our part in supplying much needed pp.

Over our long history MSC has faced many periods of turmoil and economic challenge, but we've always emerge a stronger organization and I'm confident that we're going to do that again.

At this time, Ken and I will 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 answer session.

To ask a question you May Press Star then one on your Touchtone phone.

We're using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then to.

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

Our first question comes from Stanley Elliott with Stifel. Please go ahead.

Hey, good morning, everybody nice to hear your voices. Thank you for taking the question.

Can you Stanley.

Hey.

Question for you guys could you will.

You kind of talking about.

Well, let me switch gears. So so are the municipal customers have you heard anything concerns around funding.

That level as it relates to the fire service piece, given kind of what you've seen with sales tax receipts in the you mentioned good visibility to third quarter and then also kind of as a corollary is there anything within the cares activity could either but you will help that segment of the market or benefit MSA as a whole.

Sure, Yes family, there's actually Invacares Act.

There is 100 million dollar addition to the assistance to firefighter grants and Thats for coated related products and we're well positioned for that.

To to pick up some business with a PR adapters for RG G. One face piece and seven face pieces also as a as an a PR adapter. So we're well positioned for that and some other opportunities with within the fire service. So there is that $100 million that was added.

We havent seen any pull back at all from the fire service as mentioned in our bookings for fire service was was quite strong in the month of April we picked up some real nice business.