Q3 2022 MSA Safety Inc Earnings Call
Good day and welcome to the MSA third quarter 2022 earnings Conference call all participants will be in a listen only mode.
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After todays presentation, there will be an opportunity to ask question to ask a question you May Press Star then one. Please note. This event is being recorded I would now like to turn the conference over to Chris that Blair Executive director of corporate development and Investor Relations. Please go ahead Sir.
Thank you.
Good morning, and welcome to the MSA third quarter 2022 conference call.
This is Chris Heckler executive director of corporate development, and Investor Relations I'm here with Nish, Vartanian, Chairman, President and CEO Lee much Esne senior Vice President and CFO and John Buck Chief Accounting Officer 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.
We have included certain non-GAAP financial measures as part of our discussion this morning, and the non-GAAP reconciliations as well as our third quarter press release are available on our Investor Relations website at investors thought MSA safety Dot com.
Moving on to today's agenda first initial will discuss key highlights of the quarter. We will then provide a few remarks on our results before turning the call to John to discuss the details of the quarter. Finally, Mitch will provide closing comments following our prepared remarks, we will open the call for questions with that I'll turn the call over to nish.
Thanks, Chris and good morning, everyone I'll start my comments by thanking the MSA team for delivering excellent results in the third quarter.
At MSA. It all starts with safety I'm pleased to report we're closing in on our 12 consecutive months of not having a lost time incident.
While we've enjoyed a very strong safety record over time this is truly exceptional performance.
Shifting gears and looking more closely at the quarter, we saw strong financial performance with organic double digit year over year growth in both orders and sales healthy incremental margins drove adjusted operating margin of 19, 7% and another step towards our aspirational goal of above 20%.
Order activity continued at a robust pace.
And our backlog remains at historically high levels up more than $150 million year over year.
The pace of orders increased each month during the quarter and order activity remains healthy in October .
<unk> has been broad based across products and markets book to Bill remained above one for the quarter we.
We saw slight easing in the supply chain during the quarter that combined with various engineering and supply chain initiatives. We've implemented throughout the year has resulted in improved deliveries and lead times for our customers. It's great to see that progress and we're happy to get product into the hands of our customers inflationary pressures continue.
To be present across our business in response, we continue to be proactive on the pricing front to keep pace with rising costs.
Our balance sheet remains strong and we continue investing in our business.
As I mentioned last quarter.
We continue to add inventory in key areas to mitigate supply chain risks as we work to improve delivery times for our customers. I'm also pleased that we continue to see customers recognize our market, leading innovation and differentiated products. Even in this challenging environment, we continue to be rewarded with a strong order pace.
And solid margins as a credit to the value, we deliver with our safety technologies and solutions.
Lastly, before we start the review of our quarterly financial highlights I want to take a moment to welcome Lima Chesney Tour team lead joined NSA last week, as our senior Vice President and Chief Financial Officer, I'm delighted to have Lee on board to help drive continued growth and leadership in our industry with that I'll now turn the call.
Over to Lee Lee.
Nish. Thank you and good morning, everyone. Let me start by saying that I'm really excited to join the MSA team a company with such a great mission passion and purpose.
The history of MSA speaks for itself and I'm delighted to work with niche and the management team on the growth opportunities that lie ahead that ultimately will drive sustained long term value for our stakeholders.
Look forward to getting to know many of you on the call over the coming weeks and months.
Now, let's jump into the key highlights of the third quarter.
Overall, our team executed a very strong quarter and a dynamic environment.
Incoming orders were up a robust 20% year over year with sales of $382 million up 12% organically on a reported basis and up 16% on a constant currency basis versus last year.
This was the second consecutive quarter of double digit constant currency growth.
And that growth in the quarter was balanced across price realization and unit volume.
Importantly profitability was also healthy in the quarter and we saw year over year improvement in gross and operating margins. Adjusted operating margin was 19, 7% up 370 basis points over the prior year East.
These growth and margin executions combined to fuel adjusted earnings per share of $1 45 up 45% over last year's third quarter.
With that overview I will now turn the call over to John So he can provide you with more insight into these results, but before doing that I do want to thank and recognize John and the entire finance team at MSA for their leadership. During this period of transition really well done with that I will turn the call over to John for his commentary.
Thank you Lee.
On today's call I'll provide a recap of our third quarter financial performance and review key balance sheet and cash flow metrics.
Before getting into the results I want to note that on July 1st we reached the one year anniversary date of the acquisition.
So the data discussed on the call today and in our filings this quarter.
Comparison basis, unless otherwise noted.
As we mentioned third quarter sales were up 16% on a constant currency basis.
Foreign currency translation was a 4% headwind in the corner and most pronounced in our international segment, resulting primarily from euro and British pound exposure.
Strong growth in orders and ongoing supply chain challenges resulted in a book to Bill approximately one one times and record backlog at the end of the quarter.
While we saw some improvements in the supply chain during the quarter, we do not expect a normalized supply chain at least until well into 2023.
Now turning to profitability our <unk>.
Gross profit margin was 44, 4% of sales in the quarter, an increase of 50 basis points over the prior year.
Pricing initiatives implemented throughout the year, Joe healthy improvement in underlying product margins and this was offset by indirect charges related to inventory and warranty.
We continue to be active on the pricing front to keep pace with rising costs in our business a price increase recently went into effect in October for both segments.
SG&A expenses were 21, 7% of sales in the quarter compared with 25, 7% in the prior year.
We had approximately $2 million of favorable nonrecurring adjustments in the quarter.
In addition, the prior year amount included transaction expenses related to the Bacharach acquisition.
Reported operating margin was 16, 8% in the quarter compared to nine 5% of sales in the prior year.
On an adjusted basis operating margin was 19, 7% compared to 16% in the prior year.
We levered well on a sales increase with incremental margin of 50% in the quarter.
On a year to date basis incremental margin was 36% in line with our targeted range of 30% to 40%.
With that I'll now provide a closer look at the financial performance of our segments.
Our Americas segment sales were up a strong 21% year over year and adjusted operating margin improved 640 basis points to 27, 2% the higher sales volume positive price realization and disciplined cost management drove the margin improvement.
In our international segment reported sales declined 5% year over year, and adjusted operating margin contracted by 350 basis points to 8%.
Currency translation was an 11% headwind on the sales during the quarter.
<unk> were impacted by lower sales volume.
Ex headwinds on cross border purchases and less favorable product mix due to supply chain constraints on gas detection products.
Book to Bill was elevated and more than one two times and backlog increased in the quarter.
GAAP net income was $45 million or $1 14 per diluted share compared to GAAP net income of $21 million or <unk> 54 per diluted share in the prior year.
On an adjusted basis, adding back restructuring product liability and similar items net income was $57 million or $1 45 per diluted share compared to $39 million or $1 per diluted share in the prior year.
Now turning to cash flow and the balance sheet.
Quarterly free cash flow was $55 million up 55% compared to a year ago.
Year to date free cash flow for the first nine months was $75 million.
As we discussed last quarter, we've been carrying an elevated level of inventory throughout the year in response to strong demand high backlog levels and input shortages.
We expect to realize improvements in working capital in the fourth quarter.
Quarterly Capex was 9 million, we paid $18 million of dividends to shareholders and deployed 2 million to repurchase shares in the quarter year.
Year to date, we have returned more than $80 million to shareholders through dividends and share repurchases.
Our balance sheet remains strong at the end of the quarter, we had cash of $160 million and net debt was $445 million or one four times adjusted EBITDA for the trailing 12 months.
With that I'll turn the call back over to Nash for closing remarks.
Thank you John and closing I would like to provide some thoughts on our near term outlook. We entered our fourth quarter with good momentum as I noted earlier order pace remains healthy and our backlog continues to trend at record levels.
This gives us good line of sight over the next 90 days and into next year.
Despite foreign currency headwinds and an uneven supply chain, we expect our fourth quarter sales to be ahead of last year's record quarter.
I'm very optimistic about msas position in the market the diversified products and broad range of end markets, we serve position us well against the backdrop of an uncertain global economy. The resiliency in our business is strong with leading positions in the fire service market and our longer cycle fixed gas and flame detection business.
Current demand is robust.
We're closely watching for any signs of softening given the weakening macroeconomic outlook.
As always the MSA team remains focused on managing the controllable and delivering value for our stakeholders.
Confidence in our ability to meet any challenges that may lie ahead.
That concludes our formal remarks, so at this time I'll turn the call over to our operator, so we can begin our Q&A session.
Thank you and we will now begin the question and answer session.
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Your question. Please press Star then two.
And our first question today will come from Stanley Elliott with Stifel. Please go ahead.
Hey, good morning, everyone. Congratulations on the results and Lee welcome to the call.
Thanks, Good morning.
You know the commentary you had about the kind of strong double digit orders a lot of momentum in the business and the outlook is there any more that you could share kind of what youre seeing right now kind of what what's giving this level of confidence despite some of the macro.
Indicators being a little more mixed.
Sure Stanley.
Looking at the business, it's strong across all segments of our business and surprisingly strong quite frankly, when it comes to those industrial construction products the <unk>.
<unk> business has been good the and as you saw as evidenced in the hard hat revenue that we reported as we look out into the future for the business, we have confidence for the fourth quarter due to the backlog. We have we're seeing some improvement in the supply chain, it's not perfect. There's still touch and go in certain areas. As you saw the portable gas detection business was.
Down slightly on a global basis, and that's really a matter of components. We feel we're in a better position for that in the fourth quarter. So we should catch up there and being pretty good shape, but we just don't know what other what other supply chain issues might pop up as we work our way through the quarter, but as far as the business is concerned the backlog is very strong.
We're certainly looking at 'twenty, three and doing some planning and when we look at our markets. The fire service market. We have a high degree of confidence that that is going to be confident.
Positive force through 2023, the backlog is solid the pipeline for new business is good we're competing well in the marketplace. When you consider fixed gas and flame detection. This is really a late cycle product we have a nice backlog for that business. The outlook is good for 2023.
For fixed gas and flame, particularly here in North America, and the Middle East.
I think with oil and gas.
We will see a significant drop in spending as we look forward into 'twenty three that business should be relatively good.
As demand for oil continues to be strong in the middle East the Americas in other parts of the world will need to react to that so I think that will have.
Some good business in that area and the utilities business continues to be fine. It's a commercial construction will continue to watch our that's where we could possibly see a slowdown in some business and so we're watching that closely and hopefully maybe we'll see some federal infrastructure spend come through to help us.
The outlook for the business is good we think we've built a good resilient portfolio and when you look at those factors in our markets and we also have the backstop of of an outsized backlog. The backlog is at a record level and if we do have a slowdown obviously that backlog helps us with getting product into the market.
And plus we're getting pricing as John mentioned, we had a price increase around the world October one so we'll see nine months of price benefit.
In 2023, so we should get some help there.
But we just don't know where things are going to go into back half of the year. So so we're watching things very closely done a nice job of managing our SG&A and making sure we get that aligned so we feel pretty optimistic about the outlook. Despite some of the concerns on the macroeconomic side, we'll watch our head count closely we're going to hire engineer.
Years, we're going to hire in production.
But we're going to certainly watch our head count and other parts of the business and go slow until we get a better feel for where we are and hopefully as we get into 'twenty three we'll be there and I expect margins to continue to improve.
We had some nice margin performance here in the third quarter pulled our number up for the year hopefully we will see the same in the fourth quarter and we'll continue on that path of margin improvement as we get into 2023.
Great that's great color.
Volumes in North America, and some of the core products, you mentioned supply chain feels like it's improving modestly.
Is that the result of the work that you all have done to find additional sources. You are you still using kind of the vendor buys third party as much.
And when we think about kind of 23% to some of those broker buys actually wind down just because of the improvements you guys have made internally.
Exactly so the team has done an exceptional job internally our engineering team did an exceptional job in and qualifying additional electronic components for our products and.
You know now that they've got that complete in the approvals in a relatively short period of time, just a great job by them now we have options, we have options of suppliers to us to help us with the supply chain piece.
Number one number two we're being told that that supply chain for electronic components should get much better in the back half of 'twenty three.
So certainly I would expect to see some of those broker buys drop off maybe we will see a few in the first half of the year, but certainly would expect those to drop off in the back half and then the beauty is is we'll have more optionality with regard to electronic components and hopefully do a nice job on driving down our costs on some of those components as supply chains get back.
So so.
Combination of things that we've done that we think puts us in a good position going forward.
And on the European or the international business.
Could you help us with what's what Youre seeing maybe out of Europe versus maybe out of China.
6% organic growth is pretty good I think some of what's getting masked by by what's happened there is on the FX side, but.
Any sort of commentary there would be helpful too.
Actually right Stanley. So so we had positive growth.
For our international segment they had.
Yeah.
Take FX headwind I think of about 11%.
So that created some challenges for them.
The demand for product continues to be very strong in Asia. We saw some some good business from an incoming standpoint in Asia.
And the middle East.
You know what you saw with the business was a matter of timing the fire service market, that's timing of orders that will ship.
As we go forward and then I mentioned the gas detection piece.
<unk> gas and flame detection was could be better for four.
<unk> segment because of the backlog we have so we should be able to get volume their out the door in the fourth quarter and into next year and also portable instrumentation. The team's done a really nice job you know when we look across the Americas and international the team's done a nice job from an SG&A standpoint, and really managing our expenses, we think we're positioned really well with international.
As those volumes come back.
We have our cost structure in place and Bob's doing some things on pricing. So I think you'll start to see us get back to those normal levels of margins that we expect as we get into 2023.
Perfect guys. Thanks, so much for the color and best of luck.
You bet. Thank you Stanley.
And our next question will come from Rob Mason with Baird. Please go ahead.
Yes, good morning, everyone and I'll extend my welcome to lead as well.
Thanks for all the color around the.
The demand strength that Youre seeing I was curious in the quarter did this shipments on a couple of the large CBA win that we talked about last quarter did that get underway.
In the quarter.
Yeah, we did we in fact, we shipped the La County, I think is what you're referring to so we shipped that la La County that was completed in the third quarter.
The fact of the matter is had we ship that order or not we would have seen the results. We had in the third quarter for self contained breathing apparatus.
Going into the fourth quarter with a very large backlog of business for self contained breathing apparatus I will certainly carry us into 'twenty three it's been so strong so.
Whether we ship that La County.
Would've shipped other orders so but that order did in fact go out in the third and actually I think it went in the month of September Steve is that correct correct. Yeah. Okay. Yeah, Okay. Okay fine.
And then just noting that you took additional price.
I guess in October can you just update us where we sit.
On your current kind of price cost ratio, you've been able to walk the gross margin higher.
Sequentially as we've gone through the year, so obviously youre catching up but I'm just curious where you currently sit whether we're at parity or.
Just where are you currently reside there.
When we look at the quarter, we think we're a parity we think when you look at the growth of the business. We probably saw two thirds of that from price and a third on volume.
So you look at about 8% on price and we think that that from an inflation standpoint, that's what we've seen in our product costs. So we think we've done a pretty good job in and walking that.
Staying staying at par.
With with the inflation that we're seeing in the marketplace. So the October increase that we had we think that that'll continue to position us well as we go forward and we are evaluating 23, you know as we get into 'twenty, three and we look at inflation and watch our costs closely we're pretty confident that if there is some adjustment in our expenses.
We'll certainly make the adjustments in pricing as we go forward. So we're evaluating that as we go.
I'll go into the 23 year and we're pretty confident that we will we'll be able to execute just as we have had this year.
Hum.
And just at the operating margin line to go back to the geographic.
Segments.
I think there was I mentioned that there was a couple of million dollars of one time.
Maybe a onetime benefit in the cost did that show up in Americas.
International.
Incrementals or Decrementals. However, you want to look at it depending on the geography.
We're both.
More extreme and I'm, just trying to reconcile that right. So.
So on the SG&A piece that was predominantly in the Americas. So they did have the benefit of that.
And John was there anything else was that correct probably charges for the acquisition, yes. So in the prior year, we had a couple of million dollars of Bacharach transaction costs.
All I'll say that that currency also had about a 3% impact on SG&A in the quarter.
Okay.
The perhaps the currency challenges at the EBIT line.
In international are those just yet.
Should we expect that those continue.
To work their way through.
I thought you made mentioned that maybe you are trying to address that but I'm just trying to think about as we look forward here in the very near term.
Yeah I'll leave it there.
Yeah. Let me go ahead and to your point you know Europe went through a.
Pretty extreme quarter for I think for all companies. So is finished just talked about we've done a lot of really good things on on price.
You know a nice macro statements certain parts of the world, where theres been more FX pressure that will be areas, we focus on.
Going forward here as well, but yeah, I think certainly the FX stays at levels that you have those pressures, but we have actions universe, we're still going to do more as I just said in the in the pricing space.
And we're certainly focused on getting as much efficiency out of SG&A as well and then we'll continue to drive productivity. So.
It goes back to earlier comment over I'd say the next six months I think youre going to get the margins back into more expected levels and it will make progress in the fourth quarter, but it will take a bit of time here just given the extreme pressures have come into the European market.
Understood understood.
Back in the queue nice nice work on the quarter. Thank you Rob Thank you.
Yeah.
And once again, if you would like to ask a question. Please press Star then one.
Yes.
And this will conclude our question and answer session I would like to turn the conference back over to Chris for any closing remark.
Thanks, and thank you for joining us. This morning, if you Miss the portion of the conference call an audio replay and transcript will be available on our Investor Relations website for the next 90 days, we look forward to speaking with you again soon.
Thanks again.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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