Q4 2021 MSA Safety Inc Earnings Call
Good day and welcome to the MSA fourth quarter 2021 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your.
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Please note. This event is being recorded I would now.
Like to turn the conference over to Chris Hepler. Please go ahead.
Thank you Jason Good morning, and welcome to Msa's fourth quarter and full year 2021 earnings Conference call. This is Chris Epler Executive director of corporate development and Investor Relations I'm here with Nish, Vartanian, Chairman, President and CEO , Ken Krause, Senior Vice President CFO and Treasurer, Steve Black.
Co President of Americas, and Bob Lean and President of International before we begin I'd like to remind everyone that the matters discussed during this call may include 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 a number of risks uncertainties and other factors that may cause our actual results to differ materially from those discussed today.
These risks uncertainties and other factors are detailed in our SEC filings MSA undertakes no duty to publicly update any forward looking statements made on this call except as required by law.
We have included certain non-GAAP financial measures as part of our discussion this morning, and the non-GAAP reconciliations as well as well as our 2021 fourth quarter and full year press release are available on our Investor Relations website at investors thought MSA safety Dot com.
Moving to today's agenda initial will discuss key highlights of the fourth quarter and full year.
And then turn the call over to Ken to discuss our financial performance and this will conclude with closing remarks.
And then we will open up the call to questions with that I'll turn the call over to Nish.
Thanks, Chris and good morning, everyone.
Today's call I'll start with an overview of the fourth quarter and also talk about the trends we're seeing in the market.
Kevin will then provide a more detailed financial review after that both Steve Blanco President of the Americas, and Bob <unk> President of International will join Us for our Q&A session and it's nice to have Bob back in the U S for a couple of weeks.
We delivered a very strong fourth quarter, despite ongoing supply chain constraints, a challenging backdrop of rising inflation and evolving impact of COVID-19.
I'm very pleased with our team's disciplined execution and navigating these headwinds in the fourth quarter. We achieved all time records across many of our key financial metrics.
Quarter over quarterly revenue of $410 million was a record up 6% from a year ago, driven by acquisitions and strong growth in industrial personal protective equipment.
And we achieved a record 19, 5% adjusted operating margin in the quarter up 150 basis points over the prior year.
This is evidence of the progress, we're making toward our aspirational goal of 20% plus operating margins.
Demand for our life protecting products and technologies remains strong and our backlog continues to trend at record levels. As a result of a solid order pace and supply chain challenges.
Backlog ended the year up more than $70 million from a year ago impacting GAAP numbers in the quarter was MSA llc's noncash charge, which Ken will discuss in more detail.
As we continue to manage through the ongoing impacts of the pandemic I want to again recognize and thank our entire global workforce for their tremendous commitment to delivering safety solutions to our customers around the world at MSA, Our greatest asset is our people.
Their commitment and dedication to the MSA mission were evident.
And our strong year end performance.
I also want to recognize the significant progress, we're making on margins in international.
In the fourth quarter adjusted operating margin was very strong at 19, 9% to provide context on our progress with international back in 2017, we set a goal to improve our operating margin performance.
Since then we've transformed the business to be more efficient agile and customer focused our international team has done an excellent job of managing costs driving productivity improvements and focusing sales efforts on the geographies and markets, where we can deliver the greatest level of value.
That has resulted in nearly 400 basis points of margin expansion over the past four years, but theyre not done our international team continues to execute programs to drive further growth and profitability as we bring leading solutions to our customers' greatest challenges.
Shifting focus now to our full year, our total revenue for 2021 increased 4% to $1 4 billion.
Core product revenue was up 2% on an organic constant currency basis, and the acquisitions of back rack and Bristol uniforms added 5% growth.
This was offset by lower sales of respiratory products.
Which term to return to normalized pre pandemic levels, our adjusted operating margin for the year was 17, 2%.
I noted on our third quarter call that our order book was strengthening and that continues to be the case as we closed out the year and throughout January .
As we saw in the first three quarters of the year, our incoming orders exceeded revenue again in the fourth quarter <unk>.
Incoming orders were up mid single digits, when compared against both 2020 and pre pandemic 2019 levels we.
We saw solid demand across our portfolio with the largest drivers were industrial personal protective equipment.
Fixed gas and flame detection and turnout gear.
Supply chain disruptions and labor constraints did impact our ability to ship some product in the quarter.
As we look forward in 2022, we expect challenges related to supply chain inflation and COVID-19 to continue specifically.
Specifically related to the supply chain the availability of electronic components is worsening.
Which could impact our ability to deliver certain products in the near term.
Yet even with these challenges I'm enthusiastic that our company is well positioned to navigate through this environment and continue creating value long term and here's why.
First the.
The exciting work our team is doing on product on the product development front and the new technologies, we're bringing to the safety market second our relentless focus on continuous improvement as evidenced by what we were able to accomplish in the quarter, including the very meaningful improvements in international segments profitability.
And third.
Our team's unwavering commitment to the MSA mission of protecting lives.
We've all been tested throughout this pandemic, but the resilience of our team.
And their overall respect for the health and well being of each other and understanding that what we do everyday does make an impact in people's lives are important qualities of the MSA culture and all played a part in our success in 2021.
Before I turn the call over to Ken I want to mention one other achievement in the fourth quarter that made us made us, particularly proud for.
For the first time MSA was named one of America's most responsible companies 2022 by Newsweek.
The Newsweek list highlights organization spanning 14 industries that strive to be excellent corporate citizens.
They were selected from a list of candidates.
The top 2000 public companies headquartered in the United States based on revenue.
As a company that's focused exclusively on helping to protect workers corporate responsibility has been at the heart of the MSA mission since our founding in 19 2014.
We're dedicated to the mission of protecting lives around the world and are also proud of our progress in the area of talent development diversity and inclusion environmental sustainability governance and risk.
We work to evolve and improve these programs each year to build greater resiliency and adaptability into our overall business model. So again, gaining this kind of recognition was a proud moment for all of our associates and I hope for our shareholders as well.
With that I'll now turn the call over to Ken to take you through our quarterly financial results Ken.
Thanks, Nish and good morning, everyone I'll start the discussion with financial highlight centered around growth profitability and our balance sheet before providing more detail on the fourth quarter.
We had a strong finish the acquisitions, we made earlier this year combined with strength in industrial PPE, notably head protection portable gas detection and fall protection drove revenues to a quarterly record while orders were strong in fixed gas and flame detection CBA in turnout gear supply chain.
And labor constraints had an impact on deliveries and drove our quarterly book to bill ratio above one times and backlog to record levels.
It was good to see the strong finish in margins. Despite the ongoing inflationary and supply chain challenges. We continued to see a very healthy level of gross margins a strong improvement in adjusted operating margin and a return to over 40% incremental margins. This performance speaks to our ability to realize.
Price improvement combined with our ongoing focus on improving productivity.
And we took the opportunity to continue to invest in the business to drive long term profitable growth and enhance our market positions throughout 2021.
We invested over $400 million for the year in strategic acquisitions technology partnerships and capital expenditures and returned nearly $70 million to shareholders through dividends our balance sheet remains strong with net leverage of one six times at year end, we are positioned well.
Well to maintain our balanced approach to capital allocation.
Before reviewing the details of the quarter I want to summarize the noncash charge our subsidiary MSA LLC took related to cumulative trauma product liability claims in the quarter consistent with prior years and the fourth quarter. We conducted the annual review process to determine MSA llc's cumulative.
Trauma product liability claims reserve based on that review MSA Llc's product liability reserve increased by $182 million, which reflects the estimated liability through 2074 net of insurance recoveries. The pretax charge was $160 million. It is important to note that.
Noncash charges related to products sold many years ago and are no longer offered for sale at the same time MSA LLC continues to defend and resolve the claims that are currently pending.
Now, let's take a closer look at the financial results in the quarter I'll start with a focus on revenue we achieved record quarterly revenue of $410 million, an increase of 6% over the prior year acquisition related revenues and strong growth in industrial PPE were weighed down by lower sales of pandemic related respiratory.
<unk> products, while at CBA, and <unk> were down organically in the quarter healthy orders and ongoing supply chain challenges drove backlog up in these areas from.
From a geographic perspective revenue in our Americas segment was up 4% overall and down 2% on an organic constant currency basis, driven by lower sales of non core products core product revenue was up 2% on an organic constant currency basis.
Our international segment revenue was up 9% overall and down 1% on an organic constant currency basis.
The healthy demand trends, we saw in the quarter continued throughout the fourth quarter.
Our continued throughout the first quarter.
Order activity was strong finishing ahead of the pre pandemic levels of 2019 and has remained healthy to start 2022.
We finished the quarter with a book to Bill well above one times, our teams executed well in light of the challenging environment, but we continue to face shortages in electronic components impacting our ability to ship certain products and the challenges are intensifying to start the year.
From what we're seeing in the market, we expect supply chain challenges to persist well into this year and don't expect meaningful improvement in the first half of 2022.
Turning to profitability and earnings gross profit totaled $178 million or.
Or 43, 4% of sales in the quarter compared to $162 million or <unk> 41, 8% on sales in the prior year.
Gross profit margin was negatively impacted by 70 basis points for purchase price amortization related to the <unk> and Bristow acquisitions. We made in 2021. Excluding this gross profit margin was a healthy 44, 1% in the quarter.
230 basis points compared to a year ago. It is important to note that the change to FIFO did not have an impact on the margin comparison as all periods have been restated we implemented several price increases in 2021 to offset inflation, we had a price increase take effect in our America segment during the.
Quarter, and one went into effect on January one.
In our international segment, while we continue to see inflation at varying levels and region in the regions. We operate we are taking the necessary pricing actions and remain focused on taking additional actions to mitigate the impact of inflation on our margins.
SG&A expense in the quarter was $87 million or 21, 1% of revenue up $10 million from the prior year. This was driven primarily by $7 million of increased costs from acquired companies $3 million in variable compensation and $3 million in discretionary costs, which were offset by about two.
In cost savings I'm pleased to see the second half SG&A expense come in lower than the 23, 5% we guided to in September .
We continue to invest in restructuring programs to enhance operational productivity and margin performance across our business and ultimately drive improved incremental margin leverage which we saw come through this quarter. Our quarterly adjusted operating margin was 19, 5% an increase of 150 basis points from a year ago. We.
Saw healthy incremental margins in quarter over in the quarter of over 40%.
Looking at our segment performance Americas adjusted operating margin was 23, 9% up 200 basis points year over year, while internationals adjusted operating margin was very strong at 19, 9% up 230 basis points year over year, when I think back to the commitments, we made at Investor day in late <unk>.
2019 related to international the team has delivered on the profitability expansion goals with a focus on pricing productivity improvements and complexity reduction I'm also pleased to see that gross margin was up year over year in both of our reporting segments on.
On a GAAP basis, we reported a loss of $1 57 per diluted share compared to earnings of 38 per diluted share in the prior year on an adjusted basis, adding back product liability expense restructuring and similar items in both periods earnings per share was $1 67, a 26%.
Kris over the prior year higher operating income, resulting from the higher revenues price realization productivity improvements and to a lesser degree a lower tax rate contributed to the increase again I want to reiterate that the change in accounting methods from LIFO to FIFO did not have an impact on the change in earnings.
Between periods.
Turning to cash flow and the balance sheet quarterly cash flow, excluding product liability was $63 million, we continue to execute on our balanced capital allocation strategy in the quarter, we invested $13 million in capex paid $17 million of dividends to shareholders and repaid $16 million.
In debt at the end of the year, we had cash of $141 million and net debt of $457 million or one six times adjusted last 12 months EBITDA.
Our strong balance sheet and cash flow provides ample capacity to invest in organic and inorganic growth opportunities.
Also in the fourth quarter as I've discussed previously we discontinued the use of the LIFO accounting method, we believe that the FIFO method of accounting for inventories preferable because it conforms our entire inventory to a single accounting method and improves comparability against our peers our financials.
For all of the periods presented in yesterday's press release and in our Form 10-K that soon will be published have been adjusted to reflect this accounting change looking back over time, our LIFO had an unfavorable impact to margins in 2020, or 40 basis points and was a headwind of EPS to EPS by about <unk>.
10 set.
If we would have continued to report on that basis for year end 2021. It would have had an impact of about 50 basis points for the year on margins and had been a headwind to EPS by 15 cents of <unk>.
Which <unk> would have been in the fourth quarter.
Overall, the business is performing well demand is robust and there are signs of end market improvements across the globe, we have and continue to make organic investments and evaluate other areas of growth I've spent considerable time with customers recently and the feedback has been very positive around our products and solutions.
Our market positions are healthy our relationships with customers and channel partners are strong and we remain very committed and are focused on making investments to drive sustainable long term value creation for our shareholders. We do expect supply chain and inflation headwinds to continue into 2022.
Especially in electronic components, and this could impact our ability to deliver products, notably in fixed gas and flame detection in the near term as we said before supply chain is our biggest variable with that the team is executing very well with our suppliers to ensure material availability and our folks.
On pricing has never been greater I am proud of the work our team is doing and thank them for their unwavering commitment to our mission and our customers with that I'll turn the call back over to Nish for closing remarks nish.
Ken <unk>.
While supply chain disruptions and inflation continue to be present ongoing challenges I'm very pleased with how our teams work with speed and agility to ensure we're delivering products to our customers in meeting their needs.
While maintaining discipline around pricing to ensure we're offsetting rising costs.
I'm also pleased with the progress, we're making with last year's two acquisitions and the introduction of key new products and technologies.
Despite the challenges we face.
We are positioned well for what I believe will be a successful 2022 demand.
Demand is robust for our products and solutions as we continue to build strength in the MSA brand around the world our balance sheet is healthy and we will continue looking to look to strengthen our market positions through both both organic and inorganic investment.
Thank you for your interest in our company you participate in your participation. This morning at this time, we'll be glad to take any questions. You may have please remember that MSA 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.
Ask a question you May press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Stanley Elliott from Stifel. Please go ahead.
Hey, good morning, everybody. Thank you all for taking the question.
Hey, good morning, I'll talk about you talked about the pricing piece within kind of the portfolio and orders up I think it was like mid single digit ish, how much pricing tailwind should we expect kind of within the 'twenty two period.
All else being equal.
So I'll open up and then Ken will give a little more color.
Stanley We we did have a price increase in the fourth quarter.
In Latin America, and in Northern and North America. So so we did implement one.
I think it was.
October and November .
In each of those segments.
So obviously, we will get some benefit from that in 2022, we had a mid year price increase in North America in July timeframe. So, we'll see a little increase from that for the first half of the year.
And then in international we had a price increase in January net effect of that and Kevin you might want to give a little more color to that yes. The its interesting we did have exceptional job at continuing to price the value of our products Stanley throughout the year and we remain committed.
Just take it back to a higher level. When we think about outlook can we think about growth rates in the business.
In 2022.
The order pace that we spoke about previously provides us a sense of confidence in our ability to continue to grow our business when.
When we think about growth rates of mid single digit organically and then the.
Additional acquisition related revenues of another 3% to 4%, we think that a high single digit sort of growth rate for the year is probably not out of the question now hedge that a bit when I think about the supply chain, it's going to certainly be a tough start to the year. When we think about the first half of 2022.
We are dealing with unprecedented challenges with respect to electronic components and other supply chain material material availability. So so.
So we continue to navigate that we continue to navigate it well, but we feel like we are positioned to continue to grow this business into 2022.
Seasonally the second half is always a little bit stronger.
Could you help us how this is going to deviate from from normal just kind of given the supply chain issues, you're thinking about in the first half of the year and everything within that.
Sure Stanley So it really depends upon what we can get out the door in the first half and the pace of business throughout the year. So.
As you know the market.
As tight for electronic components, and it's not improving so we're taking some action self-help what we're doing is really two key actions. There. We've created a microprocessor task force and we're looking to find and secure compatible microprocessors for all critical components in platforms that are on allocation.
And that will open up the market for us a bit in the second half right. So we'll get approval on some alternative products that we can bring in and implement with our products. So there'll be some nice opportunity as we go forward with those self help actions.
Traditionally we have a strong second half and that's really driven largely by those assistance to firefighter grants in Es and the CBA business of fire service business in general in the back half of the year and then of course, there are some large orders that go out for fixed gas and flame detection that traditionally hit in the fourth quarter, we anticipate that happening and then we're trying to position.
Or if there is any miss in the first half of the year, we can make that up in the second half. So at this point, we just don't know what that impact will be.
As the supply chain is just it's just not very stable.
And then last for me in terms of like the key cumulative trauma loss piece.
My memory was the deeper pre 1986 products.
We're seeing like in.
Acceleration it seems like in claims both last year and this year.
Kind of help us with the confidence around kind of taken the reserves out to 74.
What sort of.
Is there any risk to that just how youre thinking about kind of where you are from a coverage standpoint because I.
I would've thought it would've been covered by now.
Stanley just a point of clarification, so we stopped selling those products.
In the late 19 nineties.
So no longer sold those products that was not in the ADC. We sold those I believe from the sixties through the nineties somewhere in that timeframe.
Ken you might yes sure commented it definitely is a volatile area for MSA LLC Stanley. It's an area that we just can't know for certain where claims filings are going to go in the future. The spike occurred after the the onset the spike you referred to occurred after the onset of the pandemic and it continued into 2000.
One.
The pandemic may have affected claiming rates. It may have not have but theres really no sure way of telling.
What I can say is the increase in MSA Llc's Reserve is really result of the increased level of new claims that were filed throughout 2021.
For background just for background <unk> reserve was increased in the second and third quarters to account for an uptick in the number of new claims filed in those quarters and during this annual comprehensive review at year end the claims filing activity for the full year was taken into account.
It was it was really incorporate into the models that are used to estimate the number of future claims projected to be filed over several decades into the future and as you well point out the reserve is through 2074 at.
At this point.
Perfect guys. Thanks, so much and best of luck.
Thank you Stanley.
Our next question comes from Rob Mason from Baird. Please go ahead.
Yes, good morning, guys.
You've kind of touched on it I think but again, maybe going to just trying.
Trying to put your seasonality into context with both your backlog as well as supply chain constraints I mean should we.
When you say things have gotten worse.
In the first quarter. It also looks like again based on maybe where we were thinking the fourth quarter would come in that you outperformed.
<unk>.
In the fourth in the fourth quarter and so should we be may be basing our.
I guess, what I'm asking is what's the right baseline to.
To work from off the fourth quarter, where we thought we would be or where are we.
Kind of ended up at $4 10 in revenue.
So I'll kick that off and Ken will add some color to it.
So think about our business traditionally first quarter is traditionally our weakest quarter. When it comes from a revenue standpoint, and that really stems Rob from from those those fast turn products in the fast turn products really havent been affected tremendously.
By the supply chain issues right, so youre thinking hard hats.
Ball protection, and even portable gas detection portable gas detection, we did a nice job of maintaining delivery and I think that looks pretty good for the first quarter, we should be in pretty good shape with that.
Where we are having some difficulties as with fixed gas and flame detection self contained breathing apparatus and really turn out gear as it has been more.
A labor issue with one of our plants.
Getting employees, there and then some contact tracing with Covid and some challenges we had there in the fourth quarter, which will hopefully go away.
So you'll probably see that normal pattern of a lower first quarter.
Occur because of those fast turn products and then as we can get the fixed gas and flame detection products in a CBA out in larger quantities, we expect that we'll start to catch up throughout the year on our turnout gear.
It should improve.
Yeah, just a finer point on that Rob.
It's been really good to see the business do so well to start the year from an orders perspective, if you remember last year. It was a tough first quarter for us and certainly with the tough year over year comparison, as we were comparing to pre pandemic levels, but as we start this year, we're seeing solid order growth of <unk>.
10, plus percent, we feel like we should be able to to show some growth.
Potentially high single digit growth here in the first quarter. The one thing that I just want to point out and continue to point out is the fact that we're all dealing with supply chain challenges that are there.
Are changing on a daily basis, and so if we continue to see what we what we have right now and we continue to see the performance coming through a high single digit sort of growth rate in the first quarter is probably not out of the question, but again, it's just so many there's so many uncertainties we're dealing with.
I see I see just on those.
Short term industrial products, you talked about any sense that.
Your channel distribution channel is now comfortable stock.
Stocking those are we able to do that.
It feels stocking orders.
So when you think about portable gas detection portable gas detection is really a made to order product. There's a lot of different configuration. So those those are that's not a stocking item well.
Well over half our hardhats have logos and again, that's traditionally not a stocking item. So those again are made to order type products and so we do get some stocking in fall protection and some some stocking in obviously the non logo it hard hats, but thats not a significant part of the business the inventory levels have been pretty consistent.
We typically do get distributors loading up a bit here in March and April on hard hats, because of the turnaround season.
So so so we don't see a lot of that so we don't expect a lot of change in the channels. There hasnt been any so called panic buying so to speak where people are worried about inventory that might have been an issue last year.
We ran into shortages of polyethylene.
But that's really not the case today.
Just last question Mitch.
I know that you are constrained on the fixed gas and flame.
So.
Backlog is higher but where do you think that.
The business is in terms of just the overall demand level.
Recovering for that product line. That's a really good question, we saw the traditional recovery in our business. If you go back and you look at the in the revenue for our hard hats.
You saw that turnaround right. That's the business that picks up first when employees get back to work.
They typically get a hard hat safety glasses, earplugs et cetera, and we saw that business come back as we normally do in a recovery and then right behind that is the portable gas detection and fall protection, we saw that natural progression of business and we and now we're seeing fixed gas and flame detection demand for products for fixed gas and flame has been really.
Strong it's rebounded quite nicely.
Is that on a broad basis, not just here in the U S. But on a global basis, we're starting to see demand pick up.
And those end user customers with oil prices.
Got back over $90 a barrel the capex budgets are pretty good and we expect the spending to kick in as we normally do so the outlook for that should be pretty good through 'twenty, two and hopefully into 'twenty three.
Very good thank you.
Thank you thanks, Rob.
Again, if you have a question. Please press Star then one.
There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Kris <unk> for any closing remarks. Thanks.
Thanks, Jason and thank you all for joining US. This morning, if you missed a portion of today's conference call an audio replay and transcript will be available on our Investor Relations website for the next 90 days.
Look forward to speaking with you again soon thank you.
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Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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