Q2 2020 MSA Safety Inc Earnings Call
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Thanks drew good morning, everyone and welcome to I must say second quarter earnings Conference call for 2020, joining me on the call today, our niche Vartanian, Chairman President and CEO and can cause senior Vice President CFO and Treasurer and I will note that we are always <unk>. This morning, joining the call from our respective home.
Because we don't anticipate any technical issues. So please bear with us if any should happen.
Before we begin I'd like to remind everyone that matters discussed on this call. Excluding historical information all forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
One 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 both discussed here. These risks uncertainties and other factors are detailed in our filings with the FCC, including in our most recent form Ken.
Okay filed in February of this year.
Anything 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 a part of our discussion this morning, and the applicable non-GAAP reconciliations as well as our Q2 press release are available on our Investor Relations website at Investor stop and let's say safety dotcom.
And now I will turn the call a virtual chairman president and CEO Michel to Union.
But at least and good morning, everyone. This morning, I'll provide an overview of the various demand trends, we're seeing across our portfolio and how we're executing in this environment.
Then I'll hand, it over to Canfor financial review and we'll start to Q when a session.
Well the cold with Nike pandemic continues to impact our families are communities are workplaces and our economy. The team at MSC continues to execute very well.
Despite the many challenges we've all faced in the first half of 2020, our associates dedication Tim essays mission.
Shifting lives as well as our high performance culture was clearly evident in our quarterly financial results.
Well, we remain focused on providing our employees with a safe working environment, while advancing our mission and providing our customers with products and services, they need each and everyday investing in growth opportunities and driving improvements in productivity.
We had a number of accomplishments in the quarter, despite having a challenging macroeconomic environment, we reported a strong quarterly adjusted operating margin of 18.7%.
I'd be pleased with that result in any quarter, but I thought it was particularly noteworthy here because we achieved that performance despite an 8% decline in revenue.
The operating leverage was driven by strong results in strategic pricing discretionary cost controls reductions to very variable compensation.
Returns from our international segment restructuring programs that Weve action over the past 12 to 18 months.
We did a great job of controlling the controllables.
And our results reflect the diversification of the resiliency of the MSC business model.
As expected.
And as we had indicated on a number of webcast in June the industrial P.P.E. area of our business, notably fall protection head protection and portable gas detection is where we saw the greatest challenges in the quarter.
These product to protect the individual worker. So there are largely tied to employment levels in the energy construction utilities and general industrial market.
These areas were collectively down 25% as Worksite shutdown and the economy came to a screeching halt.
In the fire service market Rsvb, a business was a source of growth.
Revenue was up 3% on momentum in China in Europe, and solid execution in the U.S. as we work through several strategic orders.
Our order pace was strong this third quarter, but we did see some delays beginning in may as a valuation and decision processes were pushed back due to social this the distancing measures.
Nonetheless, our pipeline is as strong as it's ever been both in the U.S. with GE, one and internationally with the M. A C D.
As always with the fire service the outlook for the second half will be somewhat dictated by the timing of AFG funding in the third quarter.
Our nation's first responders has been instrumental on the front lines of the Cobot 19 pandemic for this reason, it's encouraging to see recent government stimulus packages such as the care Zack provide firefighter funding at the federal level.
As fire departments resumed their revaluation and decision making processes, we expect they will secure the funds required to purchase mission critical equipment.
Continuing through the portfolio our air Purifying Respirator line was clearly the standout in the quarter. These products reflect 10% of Q2 sales and increased more than 60% from a year ago year to date air purifying respirators rape yards as we often refer to them.
Have provided $23 million of incremental revenue for MSC.
While the surge order pace that we saw on the outside of the pandemic moderated through the quarter. We continue to post double digit order growth through June.
We discussed that working down the backlog in this area would take time and that continues to be a case.
Our a PR backlog remained elevated.
And we expect to make further progress in reducing lead times in the second half.
Well the increase in a pure demand as primary primarily from existing customers a markets. There are a few new growth opportunities we continue to target.
First we made inroads with several health care systems by providing Elastomeric respirators for use in hospital settings.
There was an interesting article in the New York Times published in May.
On the many benefits of reusable, Alaska mirror respirators, and healthcare as a complement to end 95 masks.
As you may have seen on our web site MSC has invested in a number of marketing initiatives and campaigns to educate potential customers on the advantages of reusable respirators for emergency preparedness applications.
And because we manufacture respiratory protection in the United States, Germany and Brazil.
We are able to localize manufacturing for each of those markets.
The Capex investments, we're making and our Hbr manufacturing operations will prepare us to respond well to future demand and our payback period on those investments remains very attractive based on our results to date and existing backlog.
Most importantly, we're proud to fulfill our mission of protecting lives in health at a time when the world needs at most.
Another area, where we're seeing attractive returns on strategic programs in the international segment of our business as many of you know we've been heavily focused on improving commercial excellence and executing cost.
Reduction roadmap, mostly in our European region, it's encouraging to see international margin expansion of 240 basis points year to date.
We have discussed the focus on pricing as part of our international margin improvement plans at our 2019 Investor day.
We are indeed, seeing improved price realization across international and SGN, a is declining at a much faster pace than revenue as a result of previous restructuring programs.
Bob Lean and the entire international team have done a great job executing.
And we see continued opportunity ahead.
And we'll give you more insight into the additional restructuring investments, we're making to drive further improvements on our cost structure.
Well Im assays long current growth algorithm remains intact, the near term outlook is more unclear.
Much depends on the timing and shape of an economic recovery beyond that a number of other factors could impact how the second half of the year unfolds. These factors include the extent of a virus resurgence in the us and other parts of the world conditions in the energy market and employment levels and construction and manufacturing.
The timing and extensive AFG funding as well as the passage of additional government stimulus programs and how the demand patterns evolve for our respiratory protection business as we continue to target new opportunities.
What we do though is that MSC has a diversified portfolio and a very strong balance sheet that position us well for these challenges.
We're also accelerating certain strategic programs to drive further productivity improvements across our business.
With that I'll now turn the call over to Ken to take you through our financial results Ken.
Thanks niche and good morning, everyone before I begin the piano review I want to step back and provide a few performance highlights.
The team executed well in a difficult environment on the revenue decline of 8%, we drove 30 basis points of adjusted operating margin expansion.
Returns from international segment pricing improvements and restructuring programs global discretionary cost controls and reductions the variable compensation collectively drove strong leverage despite the later sales volume.
Year to date adjusted operating income is relatively flat on a 3% revenue decline.
Great to see both our short term and long term cost structure actions, helping to mitigate the impact of challenging business conditions across our end markets.
We've maintained our balanced approach to capital allocation through this pandemic and our quarterly cash flow conversion of more than 150% highlights our proactive efforts to manage working capital. We continued to invest heavily in our business announced an increase to our dividend in may and are maintaining an investment grade balance sheet.
Our strong financial position is allowing us to invest in a number of organic initiatives that positions us well for the long term as we navigate the challenging business environment. We are positioned very well to go on the offensive in terms of M&A as business conditions and visibility improve.
Now I'd like to walk you through our second quarter results as reported revenue was down 10%, while local currency revenues declined 8% on weakness across our industrial portfolio.
Partially offset by strong shipments of FCB, a into fire service and growth in respiratory revenues, the 2% foreign currency headwind on revenue was related to a weaker Brazilian real and euro versus the same quarter a year ago.
Well it is hard to predict the shape of the economic recovery and the rebound in shorter cycle areas. Our overall backlog remains healthy and should provide support in the second half backlog is relatively consistent from the ended the first quarter just as we had expected.
While there is uncertainty, especially here in the United States and in Latin America, what I can tell you is that our China based business has been a bright spot for us in the second quarter.
We started to see a rebound back in the latter part of March revenues were up 9% in the quarter and incoming orders were up 16% what is especially encouraging is the growth was broad based across most of the portfolio, including fire service and ESG CST.
Gross profit declined 110 basis points from a year ago, as we incurred about $3 million of higher costs related to the pandemic, coupled with the less favorable product mix.
These additional costs were related to lower throughput in our factories higher freight costs and implementing measures associated with who've been safety protocols across our work sites. These items had a significant impact on our Americas segment margin.
Price realization remains very healthy across the business on pricing remains a major focus for our organization. The focus is evidenced by the improvements in margins in the international segment in the quarter International segment gross margins have improved nearly 200 basis points for the quarter and year to date periods.
SGN expense of $69 million was down 18% on a reported basis were 14% in constant currency organic terms.
We continue to realize the expected returns from previously executed restructuring programs, particularly in international were quarterly operating margin is up 310 basis points for this segment constant currency SGN eight was down 11% on the revenue decline of 4%.
And we continue to see solid leverage in the Americas segment SGN as well.
We delivered $6 million the savings from previously executed restructuring programs and discretionary salt cost savings in the quarter, which includes reduced travel controlled hiring reduced advertising and trade show expense professional services and other and other costs as well.
We plan to maintain discretionary cost controls through the third quarter as we manage through the uncertainty.
We also reduced our variable compensation accruals by $5 million in the quarter with the most significant impact in the Americans and corporate segments of our business.
From a longer term perspective, we continue to invest in programs to streamline our cost structure and optimize our footprint, we incurred just under $9 million of restructuring expense in the second quarter related to two areas. The first is the continuation of the European cost reduction activities, we accrued for steps that we plan to take later this.
Here that will drive savings for 2021.
These programs are part of the European cost reduction roadmap that we laid out at Investor Day last fall and we've accelerated the timeline based on total bid demand challenges as I'd indicated earlier, we've seen tremendous returns and leverage from the European restructuring initiatives that we've executed over the past several years.
The other program relates to global manufacturing footprint optimization, if you recall, we discuss the opportunity to streamline manufacturing operations at our Investor Day last November and in June we announced plans to expand our Cranberry Township gas detection center of excellence through the construction of a new facility as part of the.
Program, we recently announced to our workforce that we plan to close our Lake Forest, California manufacturing operations in the third quarter of 2021.
Steps, we're taking to advance our global gas detection Global center of excellence are expected to provide $3 million to $4 million of cost savings in 2021 and will enable further actions and savings in 2023.
We continue to evaluate additional programs, we can implement and drive further savings in 2021 and beyond.
We've often talked about a portfolio of margin expansion opportunities and it's encouraging to see the wheels moving on these important long term projects.
Quarterly adjusted operating margin improved 30 basis points to 18.7% of sales year to date adjusted operating margin is running at 18.7% up 50 basis points. Despite a number of headwinds that are impeding revenue growth this year.
Adjusted earnings were $1.11 per share or 9% lower 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 that pension expense that had three cents a three cents per share impact when adjusted earnings in the quarter as we had expected.
Free cash flow conversion was strong in the quarter at more than 150% of net income we continue to apply best practices to drive improvements in receivables and payables. These efforts fully offset the investments we are making in inventory as we ramp up our respiratory manufacturing operation.
Our second quarter results include $5 million of Capex investments associated with respiratory or the respirator ramp up projects in Jacksonville.
Our balance sheet is very strong and our capital allocation priorities remain balanced in the first half we generated free cash flow of $63 million pay down debt by $9 million funded $33 million in dividend and deployed $28 million for share repurchases to offset dilution.
Leverage was 1.2 times on a gross basis at the end of the quarter or less than one tons on a net debt basis.
We remain well positioned to continue to focus on advancing organic opportunities. During this downturn that will drive long term growth and profitability improvement.
We also continue to be very active with acquisition pipeline development are staying close to attractive targets. When the time is right. We will be well prepared to go on the offensive invest and invest in organic growth.
Doing a quick look back on the Sierra monitor acquisition, which we lapped here during the second quarter I'm very pleased to note that this business has reported more than 20% EBIT margins in the second quarter. If you recall in 2018 before the acquisition Sears business had a 60% gross margin, but just barely broke even on.
EBIT line.
To wrap up it was good to see the strong level of profitability in the quarter from a demand perspective, the environment remains very challenging and order trends have been choppy for much of the second quarter and into the third.
There are shoots of hope in different areas of the business, but with the virus resurgence and related economic challenges, it's difficult to put a finer point on the outlook for the second half.
Our backlog continues to be healthy as we entered the second half, but we we remain vigilant and managing our cost structure and executing on long term margin improvement projects.
We have been very proactive through this crisis and we're committed to continuing that approach, we are well positioned to manage through and emerge from this downturn as a stronger organization.
With that I'll turn the call back over to niche for some additional commentary niche.
Thanks, Ken and wrap up our formal comments I'm pleased with our team's strong execution in the second quarter, and we remain very well positioned to manage through this challenging environment.
Our mission has never been more important and we remain committed to investing in our business and executing productivity on productivity initiatives to drive continuous improvement.
At this time cannot I'll be glad to take any questions. You may have please remember that MSC does not give guidance, having said that I'll now open up the call for your questions.
We will now begin the question answer session to ask the question unique Cross Star then one on your Touchtone phone, if you're usually speakerphone. Please pick up your handset before crossing the t's.
Thrall. Your question. Please press Star then soon.
At this time, we will pause momentarily to assemble a roster.
The first question comes from Stanley Elegance of Stifel. Please go ahead.
Hey, good morning, everyone nice to hear your voice and congratulations on the nice quarter.
Thank you stand with good to hear family.
You'd want to get in too much in the specifics and you mentioned kind of a choppy order environment is there way to talk about how maybe business cadence trended through the quarter I'm kind of given all the moving parts and then and then you mentioned some green shoots into it to July but would be curious to kind of get a flavor for what you're seeing.
Particularly as it relates to economy.
Economies reopening and such.
Well I'll answer first and kind of if you want to add some after I answer feel free to up but let's Stanley. You know we saw we had a strong we had strong order pace in April as we've talked about communicated.
May was very weak for us and then we saw some real encouragement in June as as the economy started to open up a bit and you saw workers come back.
We saw business pick up and.
Quite frankly, the early part of July started to soften up a bit. So it's if the business has just been really choppy and and we are encouraged by some of what we saw with.
Head protection, which which obviously is directly related to workers coming back to work, but but that that has been just really choppy for us. So so we have a real lack of.
Site to what's going to happen here through the second half there just a lot of variables, obviously tied to cobot.
Parts of the business have been stable and fairly strong and we would fixed gas and flame detection, we pretty much results were what we expected.
Turnout gear wall, while the numbers look a little soft.
Thats a matter of output in our plant some supply chain issues with getting material and us getting product through the plant, but that business is really stable in in really good shape and breathing apparatus is pretty much where we expected to be where we had a strong second quarter and.
It just becomes a matter of timing with the AFG funds as is always the case.
So you know, it's really a matter of the economy opening backup and those workers getting back to work and and having those PV products I'll kick back in force.
Ken if you want to add anything for the case I missed something yeah, no. The only thing that I would add is that as we had talked in our public webcast June may was a really tough month.
Do started a little bit slow, but we had a really good finished the June June was June was a solid month for us before the virus resurgence here again in July here in the Gulf Coast and some of those states, where we are are considerably stronger than others, and so but but generally we feel like we're well positioned here as we entered the second half the back.
Globe is very healthy and our pipeline of restructuring activities are certainly moving forward.
And you know in terms of what's happening at distribution.
I think that they have kind of taken down their inventory as well be curious kind of get your view on on what level of of inventory do you think they're carrying just because my guess is they're trying to be conservative and how they're approaching things as well given the lack of visibility.
That's a real good reach Stanley, but keep in mind, there's an awful lot of our product that's made to order so whether its logo it hard hats or breathing apparatus gas detection those are assembled to order and a lot of cases.
The one areas fall protection fall protection is an area, where we're distributors will.
Built inventory and cut inventory back in.
No that's exactly what we saw in the month of May we saw.
Distributors cut their inventory levels pretty heavily and obviously the the pipeline was pretty weak and then that came back a bit in and in June July has been spotty. There are some that feel that there's going to be a possible resurgence in the fall of construction jobs. If they can keep lit uncoated. So some maybe thinking that they need to build tremendous.
Tory so it's really spotty, it's a it's a difficult environment and and I'm sure distributors are going to wash their inventories very closely for cash flow purposes and.
So, but we don't think de stocking was up was a major factor and our business.
Through the quarter.
And lastly from me very nice work on international year to date.
Can you help parse out kind of.
How much of the improvement that we've seen it has been more discretionary cost saves versus restructuring versus the pricing improvement that you're seeing in the channel just try to get a flavor for what sort of cadence were on on a improvement trajectory here. So all I'll answer the first thing Ken maybe you can give a little more color on that but you know the teams done a fantastic job we've talked.
We've talked about this for a couple of years, we showed some improvement we're a little frustrated with the time, it's taken to get to where we are today up but clearly the team has done a great job. We talked about this at the 2019 investors day, and and Bob and his entire team have really built a culture of looking at their costs there cost.
Picture on a monthly basis, and looking for opportunities to restructure and drive productivity improvements as an organization.
So we've done some nice work in those restructuring that the for the cost to come through it takes a little bit of time in Europe, and up and we're starting to see that and as we talk about with our pricing strategy, we are able to execute real well in the Americas going back to 2018, and 19 and that took a little more time.
To put the processes in place and get disappoint in place around pricing. So we've seen some real strong results around that and then we have a new operations director for international Who's just on a fantastic job from an operational standpoint in driving some improvements and thats been another leg of improvement as an organization and then of course, we have.
Have a number of restructuring initiatives going into the future. So so we're optimistic about the path. We're on for international the teams done a nice job.
We certainly feel we'll meet some of those internal goals, we set for ourselves and I think we stated 500 basis points of improvement over a five year period, we're well on track for that so so we're really pleased with with what we're doing there Ken I don't know if you can parse that out a bit more for Stanley. If if if I would first one thing I would purchase the SGN a side of the business.
When we look at SGN aid, notably.
In the quarter, we've talked about a reduction to compensation accruals of about $5 million. The majority of that reduction is actually in the Americas in corporate segment and so so what you're seeing come out of that international segment.
As a couple of 100 basis points of improvement.
Associated with SGN, a in a couple of hundred basis points of improvement in the in the gross profit line and so which is really for the most part all coming from our restructuring activities. I mean, we're just seeing some really good returns.
Associated with the dollars you're spending on the restructuring line.
Perfect. Thank you very much the time appreciate it.
Thank you Stanley.
Your next question comes from Richard Eastman.
Sir Please go ahead.
Yes. Thank you.
Yeah.
Couple of things on the on the product line.
On the product lines, the portable gas business fell maybe more than anticipated and again is that is that a function of you serve kind of a two to recent function. There as well is part of the distribution or is that all too is that more of a direct drop off and we could just through a little.
A bit of color on the portable gas business.
No that Rick Thats really and good morning, that's that's really a.
Direct business, that's that's a it's a direct relation to what's happening in the marketplace. If you don't see a lot of portable gas detection in the pipeline. Yeah. Those are assembled to order for customers are they might buy two gas three gas different variations in the product.
So so that's.
Thats budget cuts that that will we that's what we saw there with employment cuts.
Projects were pushed out so on a portable side it was probably down a bit more than we anticipated, but not unusual from what we saw from initial downturns and 15 16 2008 nine.
So what we expect that to moderate a bit you know what's really interesting is it's still a very small part of our business, but our safety Io, where we have our subscription service for portable gas detection, we had our best quarter ever we actually met our internal plan in the second quarter for the number of contracts. We signed we won some significant order.
Is there that pulled through some gas detection business. So we're encouraged by that that.
That.
Monitoring workers and the path, we're taking with with safety Io, we feel we're on a good track there. So we're positioned well, but that's that's typically what we see and then and then as as things bounce back a bit and work picks up we'll start to see that business pick up again.
Okay. Okay, and then just push I wanted to just dig into international little bit further.
Could you, maybe clarify and speak a little bit too how Europe did not I'm kind of looking at this.
7% decline, that's why I guess, a reported decline in revenue for all of international.
I guess about three point, so that was currency, but [noise], but let me just ask you you know how did Europe performed versus rest of world I would think the rest of world Peace, maybe just kind of do without a little bit.
Curious how sales were kind of rest of world versus a euro.
Sure and I'll open it up and then Ken will provide some more detail.
At a high level Rick.
Our Asia business was actually very good China is ahead of last year, China business bounced back very nicely in the second quarter.
The business the order pace has been real strong in China were up in China year to date, and we were up in the second quarter.
So the outlook is really good in China. When we were kind of hoping that we would see a similar recovery for Europe and the Americas that we saw in China due to their quick recovery from cobot.
But that hasn't materialized. Yet then we started to see some good recovery in Europe and.
Now that's petering out a bit I think a couple of countries are tightening back up again.
But but we.
We are seeing growth in our Chinese market and Ken maybe have some more detail for among.
The other pieces.
Yeah. The only thing I would add is that it's interesting our business reflects kind of how cobot spread around the world. Unfortunately, you see it second quarter good growth coming out of China Asia I think it was I talked about in my prepared comments, 9% growth.
So the middle Eastern Africa, not doing quite as bad as May be Europe, Europe was off something like 7% in the quarter.
The Middle East and Africa was was off a low single digit. So so you kind of you kind of saw our business respond. The same way that you saw the code that virus outbreak kind of kind of occur throughout the world throughout the second quarter, but like I said, we're pretty happy to see that Chinese business bounced back so quickly.
Okay understood and just to just maybe a quick question around.
When you when you put the pieces together.
And we track into the third quarter, but typically the third quarter for you guys.
You know has some seasonality to it particularly in Europe.
But we had this you know very weak may and I'm curious how do you feel sequentially about revenue into the third quarter relative to the second I mean.
Oh puts and takes kind of considered here.
Should you know do you feel comfortable that at least we should see sequentially some revenue growth across the businesses and across the geography is relative to the second.
You know Rick the clarity on it it's really tough a lot an awful lot of arpus from a large percentage of our business comes and goes out the door in a two week peer period sure. So the line of sight to August and September. It's just really tough today, you know, it's really hard to get your arms around.
No the where we're headed with Covidien, the recovery and what what looms out there, but you're right in that you know the third quarter is typically a bit soft because of Europe and they typically go on holiday, which we're seeing that and then there is a bit of a low with a with the breathing apparatus and timing with a AFG funds as.
We are waiting to see what happens with their funding and.
And they do some quick evaluations and make their purchases and that typically helps late third quarter and in the fourth quarter. Obviously, so we look for that pattern to continue we hope obviously that that the low point is the second quarter, but it's just really hard to tip.
The predict that and be from with that with the choppiness of the business and watching the economy opening close and people pull back, particularly in some of those strong markets that we serve the in the south when you get into the Gulf Coast in Texas, Louisiana.
Alabama those are all good markets for us and and they seem to be tightening up a bit. So it's it's okay. At this point.
I've got you, okay, Okay, and if it can just sneak one more in.
In the M&A pipeline what are the opportunity set look like this I mean.
Maybe maybe handicap.
The the potential for for a bolt on acquisition to drop in by yearend.
You know we continue to to.
Don't have good conversations with a number of targets and opportunities one of the difficulties today with the lack of travel would be integration and that's that's one area that concerns us as you go down the path and you look at acquisition opportunities.
How do you get the integration work done with the with the lack of travel and cobot. So so that plays into it the international opportunities would be even more difficult, but we continue to cultivate that that pipeline. We have a number of active situation forward to have a good discussions with some targets.
And and that remains open we're well positioned as you know two to two active.
We've had a lot of success with acquisition. So that's a key part of our asset allocation and and our strategy as we go forward. So we'll be very active theirs as things open up Rick.
Okay, Alright, very good thank you.
Thank you Rick.
Your next question comes from Dan Moore of CJS Securities. Please go ahead.
Good morning, as this is Brendan on for Dan just wanted to ask about.
Fire safety, you talked about just difficulty getting Frank customers right now its social doesn't saying I was curious if now I understand there's some seasonality that more of the back half of the year, but is there kind of backlog building there just with the.
Lack of ability to to see it worked on or or is it or is that one's kind of waiting for the funding.
Well the backlog is really in the our opportunity pipeline when we look at our we match our opportunity pipeline of business for both GE want an M SCB a.
On an annual basis month to month basis, and the pipeline is fantastic right now we're in or if we're in a strong position with opportunities.
So that's what's building there are a number of departments, who would be doing evaluations today live evaluations with product they've they've pushed those off a bit.
So we look for that to continue I would imagine once they get their funding, they're going to push hard to get those Don.
And and and so the activity will begin once again, but the the encouraging part is that.
The pipelines really strong for both G. One of them one and it's just a matter of timing of the FG grants and getting some of those evaluations done where people are looking at competitive conversions. So so thats. The that's that's what we're seeing today, we don't see funding as as a big issue breathing apparatus is that critical must have type item.
For fire departments.
So so that's a that's a must have product and critical nature, where firefighters use those an atmosphere is that are immediately dangerous to life and health.
So from a funding standpoint, we're we're really not getting any indications for foot from fire departments that that they will be holding off on purchases when they need to replaced or breathing apparatus. So that's so far have been pretty encouraging for us. It's just a matter of timing at this point.
Okay, Great and then with the cares and here as acts or have you seen any benefit or impact from that yeah. There is or is that.
Still still too early to tell.
So we have others theres been through the cares Act there was approximately $100 million for fire departments for co bid related products, and so where we fit in that category as we have an air purifying respirator adapter that that plugs into the M. seven in Q1 face piece any am one face piece for that matter.
And that converts that face piece into an air purifying respirator, you could put a high efficiency or a and 95 type filter on near for Covance and so a number of departments, who hadnt purchase that in the past I've got some funding and made those purchases. So we did see some of that business come through.
I believe last I looked about 40 million of the $100 million has been allocated to fire departments. So theres still a little bit of money left in that pipeline.
There is money in the Heros act up quite a bit of funding for fire departments.
Going forward and you know I would imagine that theres going to be some level of funding for those firefighters.
That will come in to next round of funding however that looks so so we're keeping a close eye on that and.
And certainly that would be helpful.
Okay, and then a changing gears to international segment near the impressive margin performance is this.
Does this level of kind of.
How we should think of looking forward, obviously not exactly.
Obviously fluctuate but is this kind of level that you think international can do for now on pending.
And extreme drop in sales or something of that nature. Sure. You know, we've we've talked about where I think we have 15% op margin and the area and so we've talked about that being the target out long term. So I think you know second quarter was was on the high side, we probably we got some wind to our back on some of the SGN a and some Ben.
To fit there.
But the encourage real real encouraging part is as the cost takeout that we've really focused on a lot of those are permanent and.
The pricing that we're realizing in the marketplace the team's doing a much better job and have much better discipline around getting price in the marketplace and we're starting to see some benefit to it'll take some time from an operational standpoint, and some of the the adjustments were making so.
We're on a good track certainly I don't expect.
This this level through the balance of the year, but we're on a good track here to meet the goals, we set for ourselves and hopefully exceed them.
And I don't if you want to area. Thank you.
No I think you hit all the whole the key points mesh think right.
Thanks, guys.
Thank you Brian.
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.
Hi.
Good morning, everybody.
First the.
Clarification.
I believe he said I wanted to clarify orders were up 16% year over year and that can do that is what's the book to bill at the end of the quarter.
Yeah.
Yes, the 16% increases in China.
The Chinese order pace. So we saw good good order flow there and as we had said.
On the call layer in the prepared comments.
The backlog remains relatively steady with the end of the first quarter, So orders and and book to Bill has hanging in there pretty at a pretty healthy level.
Okay. Thank you.
Affrication and secondly.
Obviously, the nice margin performance, especially international.
Temporary furloughs big factor.
The company's and it all workers back now in other words that big.
Tailwind.
It becomes a headwind it just more in line with what it should be curious at the temporary furloughs and level of employment look into the second half.
Yeah, Larry you know, we haven't had temporary furloughs for our workforce. We we held off on that quite frankly, we took a hard look at.
You know pay cuts for for management and furloughs for some management and other key people and we got a fantastic workforce with a great culture, and we have done a nice job from from a profitability standpoint, and been able to manage through this thing without cutting for a one k. contributions or pulling to lever on any.
We are those so.
We haven't done that and really what you saw was that the cost savings from TNT and lack of travel that we've had and then obviously you know the bonus and somebody incentive plans those are not going to pay out at 100% because revenues down and so we unwound some of that there would there were some.
In that area, but we have not done any furloughs of our of our management team and workforce or any of the pay cuts at this point.
Okay. Thanks. It is it's good to hear.
So I guess sort of run going with this is.
Realize obviously, we know there's lot of uncertainty in the second half side, you guys seem fairly optimistic obvious if yard.
Cetera.
And to Q, obviously, most likely the most affected by the macro shutdowns et cetera.
Typically if you ask about first half, 45% second half Frac, 55%. Historically is there anything that would suggest that there would be in big discrepancy would that into the second half, obviously caveat being covered could accelerate over the summer shutdown again, but absent something material like that is that a regular seasonal.
Anywhere the second half pre lease the same as the first half is there it would you push back on that at all.
You know Larry it's just really hard to to get line of sight and to give any outlook with not you know with Covance and then also the AFG funding and the timing of the funding.
Hopefully there's not a hurricane.
Hey that FEMA controls meetings with the AFG funding and if there's a hurricane typically puts things on hold where they get distracted and and and.
And that slows the pace down of AMG funds that are released there's just so many variables as we go in as we're in the second half of the year here.
It's just really hard to to to give a statement like that.
Okay, I'm, just looking historically and I think one from the last five years. It was flat first half in second half every other year seasonally second half a stronger AFG flows.
Maybe hurricane could push into next year, but that's obviously would be fairly unprecedent, I think and be more like well from threeq to Fourq you.
Okay and.
The only thing I would add to that Larry is I mean, we're very balanced I mean, when we think about where our businesses for the remainder of the year. We've got a very healthy backlog were as you know, we're ramping up our respiratory manufacturing capabilities.
But we also are dealing with the virus resurgence and the potential for further issues as you had pointed out and so so that's I think part of the reason I think why your niche in the hesitancy in niche and when you win when you asked that question.
Just feel like where balance we just feel like we have a balanced view and we're taking.
We're trying to focus on the Controllables you know in controlling what we can control execute the restructuring programs that we can to continue to improve the efficiency of our business.
But there's just so many unknowns on the horizon that it's hard for us to commit to what we might do in the second half.
Okay. Thank you.
And as it relates to M&A. Obviously, you guys are somewhat eager to get back out there I guess you can talk about bid ask spreads are they getting closer in line and.
I know one of the hold ups for most companies being able to forecast EBITDA for potential acquisition I don't that's getting any easier or not so let's talk about the ability to do deals based on bid ask spreads and forecasts and kind of been happening obviously need to do it again deals done.
Well, that's one of the challenges right is what is the EBITDA of a company you're looking at today, where some of them are seeing in some cases, we've got companies that have had 30 and 40% dropping their top line.
And so getting an understanding as to what the EBITDA would be for a company who is in that position and how quick their business may snap back that becomes an unknown and a time from a timing standpoint, so so thats become one of the challenges and hopefully by year end, we'll we'll see some clarity and be able to get a better understanding and.
Pull that lever on something no Ken if you want to add something to that.
Yes, just from a bid ask spread bid ask spread perspective, Larry I think there certainly coming back into a more normal.
Our excess occasion level from where they were may be latter part of last year, but with that said you hear the has within key that we have around the visibility into visibility we have in our own business and it makes it very difficult for us to go out and try to establish what an EBITDA stream might look like for for somebody else's business at this point.
So with that said we were looking for good brands were looking for good businesses and we think we have a really nice pipeline of healthy relationships that hopefully, we'll be able to action in the coming quarters in years, just as we have you know with Latchways as we as we rebounded from the industrial recession of 2015.
General monitors when we were rebounding from the great recession. So so we feel like we're positioned well to do that and hopefully we'll get an opportunity here in the in the future to do that.
Okay, Yeah, 'cause that's supposed to understand I know you guys want to be sort of counter cyclical and buy things when they're rolling it out of favor.
It seems like it's not imminent I guess and then last question price in order to positive in Europe with positive in North America, and Europe, and just give some color on magnitude of positive price <unk>. It was positive you had we had positive pricing, we measure our pricing and price increase.
And track those metrics on a monthly basis.
So both the Americas and international did did quite well in that area. We were really encourage and we talked about the fact that Europe is really kicked in Europe in the middle East those are two areas that have just taking a lot of work.
The build disciplined and they're starting to come through nicely on the pricing.
The only thing I would add is the if you look at gross profit Larry we had talked about in the prepared comments being done 110 basis points and we identified $3 million of costs that we incurred in the quarter. If you exclude those costs you can see that we actually had some nice some improvement in.
In the gross profit line, which was reflective of the pricing initiatives administered indicated because we certainly weren't getting it from mix with portable gas than some of those products that are our most profitable products coming down so greatly.
We weren't we did not have a favorable net but we did see some some pricing improvements.
Very good okay. Thanks, and good luck guys.
Thank you Larry.
The next question comes from Garo Norian Palisade capital management. Please go ahead.
Hey, guys.
On the a PR capacity expansion you guys have any more certainty regarding costs and timing of when you'll get to where you want to be and can you share that.
Sure. We all the costs are pretty much in line with what we anticipated we were for probably on the upper ended at $10 million to $13 million range.
So thats coming together nicely. We're we're we're pacing well there were doing a nice job in.
Execution of the program, it's not as fast as we would like it to be will probably be completed October timeframe is now what we're projecting.
To to have completion would like to have seen it.
In the third quarter and earlier in the third quarter, but with posted that's slowed us down a bit and has a pace wise were up a little bit behind where we expected to be but no. That's understandable dealing with some of the.
Issues, we don't control.
So we're pacing well there and we're really encouraged with the where we'll be from a productivity standpoint.
In Jacksonville really happy with how we've ramped up there. Obviously this is a very difficult environment to add a lot of employees and new employees.
And build the safety precautions in that we have to make sure. We're protecting those employees. So the teams done a really nice job in Jacksonville and in fact, we've had a number of.
Industrial engineers and other key individuals from Pittsburgh, who volunteered to go down there and help with that so so thats coming together nicely and we're we're encouraged about where we are in and completing that come October.
Good to hear and just can you help me understand why is that business.
Not as.
Significant internationally it seems like it's very north Americas focused business.
Yeah, you know, we upped the volume of that business has always been much larger for MSC you know as we've talked about the majority of that business has come from existing customers existing customers who've really amped up their their air purifying respiratory protection programs.
And in the existing customer base throughout international is not as large and strong as we have here in the Americas, but we do do business, that's fairly significant and in Europe, we manufacture in Berlin, and then also in Brazil, where we've expanded production in that area. So.
That business, there's some opportunity there for some good growth.
As we go forward there'll be some good opportunities for us.
Great. Thanks.
You bet. Thank you.
And really follow from Richard Eastman of Baird. Please go ahead.
Thank you thanks for the follow up here.
Just on that same on the same LPR business initial maybe could you just kind of speak to us a little bit I'm trying to kind of parse through your comments in the in the press release and clearly we have a backlog there.
Products were scaling up the capacity to to fulfill the backlog.
But how do you how do you feel about the longer term growth in a PR.
Does that become.
Structurally a growth business for you or we basically you know kind of taken advantage of the backlog here and fulfilling that.
So how do you look at the growth there.
Post backlog flush if you will.
Yeah really it Rick were really putting some marketing effort into that so we see it as a possible growth opportunity for us and we're investing in and some marketing activity to to try to position Elastomeric respirators.
As an alternative or supplemental option for.
The the medical community along within 95 respirators and it just.
Just depends on our success in that area and so that remains to be seen there are some in the in the medical industry, who have documented that was.
That article I mentioned and into New York Times, and there have been some other publications that have talked about the you know the opportunity to use elastomeric respirators.
As a backup wendy's.
Major Pandemics hip.
And that's not at this point widely accepted so it just becomes a matter of how widely that becomes excepted here in the U.S. and other parts of the world and you know could provide a nice opportunity for us going forward. So we continue to stay after that and so remains to be seen but you know as as we mentioned the investor.
Cements, we're making in were really confident on the payback due to the level of business. We're seeing today the backlog that we have we've done a nice job in supporting the customers. Those long term customers that we've had so we think we're pretty well positioned for that business as we go forward.
Okay got you and then just secondly, pretend it's just a question around Opex.
Kind of moving forward you made the comment that the opex stays tightly manage through Q3, but it's a little bit maybe a little difficult to sift style.
There is lower traveling here's some things around you know access and and but how does how does the opex you know kind of flex here as we move forward. So should we should we expect Q3's opex to be flattish sequentially is that the degree of management, you're putting into that and then.
And we'll see some you know inflation around Q4 or.
<unk> Yeah. That's a good question when we look at SGN <unk>, let me try to help you out there a bit and so we have about $69 million NSG in a in the quarter. There was a 5 million dollar adjustment to our compensation accruals in the quarter. So most likely that.
Wont occur again in the in the third quarter, you'll certainly have some true ups as you go for probably not to that same magnitude. So that's probably needs to be considered and then out of the the additional six or so million dollars of additional savings that we have in the in the line roughly half of that is.
His savings associated with restructuring activities that we've executed on and so so you could see 5 million as the compensation accruals in the 3 million.
Is roughly related to the true no travel and things like that that we're doing because of the pandemic and so that might give you a better senses to how how the breakout of SGN a is.
This concludes our question and answer session I would like to turn the conference back over to this 14 for any closing remarks.
Thank you.
I believe at the end of the day. It comes down to this we have a mission at a passion for protecting lives of people who work in dangerous environments and that mission has never been more important than it is today.
Built on our mission, we had a strong corporate culture and very healthy balance sheet that puts us on from ground to ride through this challenging macro economic environment.
Around the world the MSC brand is known for durability and reliability.
We excel at delivering sophisticated safety solutions, our customers rely on to work in the most challenging work environments known to man.
As you've heard today, despite the difficult macro challenges, we face with the diversification of our products and markets. Good investment inorganic growth opportunities disciplined cost control for today and an eye for future.
Solid cash flow.
Our strong balance sheet and the support of a good backlog of orders were well positioned to continue to fulfill our mission.
And continue to create shareholder value.
Thank you for taking your time and your interest today and I must say I appreciate that.
Have a good day.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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