Q4 2022 MSA Safety Inc Earnings Call
Good day and welcome to the N S. A fourth quarter and full year 2022 earnings conference call.
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I would now like to turn the conference over to Chris Hetzler. Please go ahead. Thank you good morning, and welcome to the MSA safety fourth quarter and full year 2022 earnings Conference call. This is Chris Heckler Executive director of corporate development and Investor Relations with me today are Nish Vartanian chairman.
President and CEO Lima, Chesney, Senior Vice President and CFO and Steve Blanco segment, President for Americas before we begin I'd like to remind everyone that 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 detail.
And our SEC filings MSA safety 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.
The non-GAAP reconciliations are available in the appendix of today's presentation.
Presentation and press release are available on our Investor Relations website at investors thought MSA safety Dotcom move.
Moving on to today's agenda first Mitch will discuss the key highlights of the quarter and full year. He will then turn the call over to Lee to discuss our financial performance and outlook.
Well, then conclude with closing remarks, 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 and thanks for joining us today.
I'll start on slide four Msas delivered another strong year with exceptional results in the fourth quarter. This was made possible by our team's unwavering commitment to our mission.
Our purpose driven culture and dedication to protecting the world's workers is that the core of everything we do and sets the foundation for our strong performance.
I want to thank all of our associates for their focused execution and hard work to get Msa's, leading safety technologies and solutions in the hands of our customers around the world.
And thanks also to our shareholders and other stakeholders for helping us build MSA and with global safety leader that is making a positive impact on the health and safety of workers and our communities around the world.
Moving to slide five our team delivered outstanding results for the quarter and full year, including record sales and robust margin expansion through strong operational execution incremental operating margin was on the high side of our target for the year and we generated strong cash flow.
Even with the ongoing supply chain challenges and inflation headwinds, we achieved broad based growth across our platforms, a firefighter safety gas detection and industrial personal protective equipment.
This growth was enabled by our laser focus on driving improved throughput and executing our strategic plan.
We continue to advance our strategy by developing and launching innovative safety solutions like the Altair I O forecasts detector with full cloud connectivity seamless integration into Msas grid software and our proprietary XL sensors.
And the latest derivation of our V Gard hard hat the C. One with its patent pending thermal barrier to help reduce worker heat stress, which has become a major focus for workplace safety.
Notably MSA V. Gard brand hard hats has recently celebrated its 60 <unk> anniversary.
The V Gard with its iconic design has garnered strong commercial success around the world and across many industries. These.
These types of new technologies, and connected solutions address customers' unmet needs and enable them to improve worker safety enhance productivity and simplify compliance and these innovated and differentiated solutions have also helped us strengthen market share across our portfolio in 2022.
As these safety company, our commitment to corporate social responsibility begins with our mission, which has been unwavering since our founding in 19 forties and is the basis for our key CSR pillars, our products our people and our planet.
And we are focused on advancing our programs across each of these pillars to make MSA fit for the future.
Our continuous progress around environmental sustainability talent development diversity, and inclusion and product stewardship has been recognized both locally and nationally.
Santa Fe is proud to have been named one of America's most responsible companies by Newsweek for the second consecutive year.
I believe that our advancements in this area have differentiated MSA as an employer of choice when it comes to our existing associates and prospective talent.
And a preferred supplier when it comes to our customers.
Before I turn the call over to Lee I also want to recognize and important team accomplishment from 2022 I'm proud to share that our 5000 associates operated 12 consecutive months without a lost time injury.
The MSA, we're living our mission of protecting workers health and leading by example.
MSA is well positioned from our leading product platforms diversification across end markets and geographies to our talented associates across the globe.
I'm proud of the progress we've made and excited for the prospects of pet.
With that I'll pass the call on to Lee to discuss our financial results and 2023 outlook.
Thanks, Nish and good morning, everyone, let's get started on slide six with the quarterly highlights.
Our MSA team had a strong finish to the year with double digit organic sales growth across firefighter safety gas detection and industrial P. P C.
Sales were acquired the record of $443 million, we executed a sequential volume growth, which is consistent with seasonal trends in our business.
Orders remained healthy again this quarter design reengineering, we performed throughout 2022 and moderate improvements in the supply chain enabled us to reduce backlog sequentially. However.
However, supply change, you're still constrained and unpredictable and we expect that to continue into 2023.
We entered 2023 with an elevated backlog.
Proximately, 25% from a year ago in January orders again paced ahead of last year and backlog has also increased slightly this is consistent with trends in prior years.
Gross margin in the quarter was 44, 5% up 110 basis points year over year from strong volume leverage favorable mix and positive price cost dynamics. We are encouraged with the progress we are starting to see in our gross margin rate and remain focused on making further progress in 2023, despite a challenging environment.
Fourth quarter adjusted operating margin was 21, 6% up 210 basis points from last year, Inc.
Incremental operating margin was 48% in the quarter as we benefited from pricing and strong operating leverage from the higher volume.
Adjusted net income was 71 million, which resulted in diluted EPS of $1 80.
8% over last year.
This year, we had a normalized tax rate and slightly higher interest expense in the quarter.
Now I'd like to take a moment to review our segment performance in our Americas segment, we had robust results with 14% growth in the quarter driven by strength in North America, and Latin America Americas saw double digit growth in our firefighter safety portable gas detection and industrial head protection and.
Adjusted operating margin the quarter was 28, 6% up 470 basis points year over year as a result of solid commercial execution volume leverage and cost management.
And in our International segment, we made progress despite some very challenging headwinds and deliver a resilient, 7% constant currency growth in the quarter.
From a regional perspective, we saw double digit growth in the APAC region offset by a mid single digit growth in EMEA.
Currency headwinds of 9% largely related to the euro and British pound resulted in a reported 2% sales decline.
Adjusted operating margin was 17% in the quarter down 290 basis points year over year, but up 900 basis points from the third quarter price cost was unfavorable due to currency headwinds on cross border transactions and the conversion of a longer dated backlog, particularly in gas detection.
Now moving on to slide seven for the full year 2020 to broad based demand drove record sales of 1.5 billion up 9% versus last year and up a strong 12% on a constant currency basis.
Price realization, representing about two thirds of the growth with volume being about a third as well.
For the full year gross margin was 44, 1% volume leverage and price actions offset significant inflation headwinds and yield 20 basis points of improvement.
For the year adjusted operating margin was 19% up 180 basis points from last year, Inc.
Incremental operating margin was 39% for the year towards the high end of our target range.
Adjusted net income was $223 million, which resulted in diluted EPS of $5 65 up 21% over last year.
Now turning to slide eight we recently announced an important transaction that strengthens our company for the future on January 5th we completed the sale of a subsidiary holding legacy liabilities.
This transaction materially reduces risk in our business simplifies our balance sheet and enhances cash flow predictability.
In funding the transaction MSA contributed 341 million at closing, which included $315 million in incremental borrowings.
We are committed to deleveraging quickly and we anticipate utilizing excess cash flow in 2023 to repay borrowings.
As the closing occurred in early January this transaction will be reflected in our first quarter 2023 financial results.
Now turning to cash flow and leverage on slide nine quarterly.
Quarterly free cash flow was $40 million or 77% of net income for the year free cash flow was $115 million or 64% of net income down 26% versus last year.
Cash flow was impacted by purposeful investments, we made in certain inventory to meet demand and to improve customer delivery times amid the supply challenges throughout the year.
In the quarter, we invested $14 million in Capex paid $18 million of dividends to our shareholders and repaid $40 million of debt.
Cash at year end was $163 million and we have no significant near term debt maturities.
In 2022 as part of our commitment to return value to the shareholders, we returned more than $100 million through dividends and share buybacks.
Full year, adjusted EBITDA increased 18% to $337 million, our net leverage ratio at year end was one point to adjusted EBITDA compared to one six in the prior year.
On a pro forma basis adjusting for the legacy liability and additional borrowings net leverage was 2.2, we anticipate returning to our historical leverage ratio within 12 to 18 months.
Now, let's move to 2023 outlook on slide 10.
We entered 2023 with strong momentum and reasons to be cautiously optimistic about the year, our leading safety technologies and solutions balanced across firefighter safety gas detection and industrial P. P are sold around the world in a broad range of markets. These are attractive and diversified in March.
<unk> remain healthy we see growing demand globally for differentiated safety products that not only protect workers, but make them more productive.
Demand trends in our business remain healthy and we ended the year with elevated backlog.
That said, we are cognizant of the challenges in the macroeconomic and geopolitical environment and that is resulting in less visibility as we look to the back half of the year. We do expect below the line headwinds to EPS from higher interest expense related to the higher rates for our existing debt.
And then incremental borrowings related to the divestiture as well as lower noncash pension income, we expect pension and other nonoperating income to be between $13 million and $50 million for the year.
Msa's business is diversified across products and geographies and time tested across economic cycles, while 2023 will surely have its own challenges, we're confident in our team's ability to execute and drive another year of sales growth in the mid single digit range and further improve our offer.
Pretty margin.
With that I'll pass the call back to niche for his closing remarks.
Thanks, Lee moving on to slide 11 in closing I'm incredibly proud of our accomplishments in 2022.
Spike the many challenges over the past year, our team executed well and continued to make progress against our strategic priorities we.
We entered 2023 from a position of strength and we expect to build on our momentum.
Our balanced and diversified portfolio of innovative safety technologies has never been stronger and more relevant to our customers. We have exceptional talent throughout the company with a deep passion for our mission and proven capability of executing across economic cycles I'm confident in our ability to continue to deliver long term value.
Creation to our shareholders with that I'll turn the call back over to the operator for Q&A.
Yeah.
Thank you we will now begin the question and answer session.
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To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
And the first question is from Stanley Elliott from Stifel. Please go ahead.
Hey, good morning, everyone. Thank you for the question and congratulations on the strong finish to the year. Thank.
Thank you Stanley.
Could you talk a little bit more about the strength in the Americas margins quite good really the whole second half of the year. Despite what's happening on the supply chain I'm sure pricing is helping a bit but could you give us a sense of the sustainability and kind of how we should think about the margin cadence really in to 'twenty three are especially given.
Kind of some of the first half visibility versus some of the second half uncertainties that you're talking about.
Sure Lee why don't you take that one.
Alright, good morning, too so I'm.
Really appreciate the questions a good call out so hey, I think it speaks to some really good momentum from the team you you've seen throughout the year. Some nice progression on both gross margin and with with SG&A leverage. So I think you've seen that come together in the second half certainly the you got a nice volume leverage we've got some good.
Activity and then certainly price and costs are now in better alignment. So as you look towards next year I mean, I think certainly for the first half of the year you have to be a positive <unk>.
Dynamic of continue.
So we're pretty confident in where those levels that you you do have to adjust for the seasonality I'm. Just you know obviously, you've got some different quarterly sizes, but youre going to see I think some nice progression year over year on a similar to what you've seen in the back half of 'twenty two here.
Great and you mentioned that the backlog strength.
Have you all seen any customers either municipal or otherwise.
Canceling or pushing out any orders at this point I'm, assuming not but would love to get a little color on that okay.
Hey, Stanley No, we really haven't seen any cancellations. That's a you know a lot of our businesses is custom order is expected by the customer and we really haven't seen any cancellation of order due to our inability to ship the backlog.
Probably lost some business.
Up front, especially in the area of fall protection.
We've had opportunities with some orders and we struggled with the supply chain and probably lost some business, but that or that type of business never really got on our books are our backlogs really helped us from the standpoint of.
Being able to deliver and customers waiting on it.
And then lastly for me you guys had talked about some larger potential orders on.
The fire services side.
Is there any update you could share with us on that and.
Maybe what sort of timing should investors think about it if you were to end up winning some of those contracts.
Yes, there you know the pipeline is really healthy you know when you think about the fire service and the municipal budgets and state to state budgets are really strong and we've got the AFG funding coming again this year.
So there's a number of orders in the pipeline some some fairly large business and now that's just a matter of working through the municipalities getting their approvals I think from that standpoint, but no. We're we're optimistic about the fire service business, we're competing well in the marketplace.
Products continue to enhance those products and optimistic about that business, regardless as to what the economy does in 2023 that business as you know is somewhat insulated from.
And economic recession that may occur in the back half of the year and that represents about 40% of our business. So we're optimistic about the fire service ear in 'twenty three.
Great guys. That's it for me thanks, so much.
Exciting you Stanley.
And the next question is from Rob Mason from Baird. Please go ahead.
Oh, yes, good morning, all I had.
Question around you know there was a commentary.
Around your 2023 outlook, but also I think in the press release, just aiming for mid single digit growth for the year. If you know if that proved to be the case mid single digit how would that break down between contributions from price versus volume and am I correct in thinking of FX.
Maybe neutral to even slightly positive for the year at this point.
No. That's a good question, we you know as we laid out our scenario planning for 2023, when we went through a number of different scenarios.
And price.
You know and there's even some backlog there. So so we went through various.
Scenarios and and you know the pricing, we're going to get some price which.
Which is the overhang will have from our fourth.
<unk> fourth quarter 2022 price increase so as we go through the first nine months of 'twenty three we'll we'll get some price there and then we're looking at some some demand unit volume increasing we we do think in some of those core markets that we have fire service business.
Oil and gas business, you know, we'll probably see low single digit growth in those areas and then the price on top of that gets to us gets us to that mid single digit level.
So that's how we come to that scenario and we've worked through a number of different scenarios are based on a possible economic slowdown in the back half of the year, there's a possibility of maybe obtaining some additional price in 'twenty three.
But we're still working through those scenarios and we'll see how the year plays out and then obviously backlog plays into all of this and having an opportunity to possibly reduce backlog a supply change.
Of course, so theres a lot of variables that.
That could play out here in 'twenty, three but we keep coming back to regardless of the scenario. We go through that we have a high degree of confidence in that mid single digit growth rate.
Yeah go ahead Susan.
You can add your FX question was hey, you have a pretty good view it will be a bit of a headwind in the first half of the year and then be positive in the back half it'll be a slight negative based on the current FX broad right now.
For the year Okay.
<unk>.
Nish or just how are you.
You speak to orders.
You know me.
Maybe dissect between your longer cycle and shorter cycle longer cycle, you know fire service, maybe set aside because it's on a on its own dynamic but you.
Fixed gas and flame detection, I think of being longer cycle more potentially some project based and.
And then shorter cycle, obviously industrial PPE, but.
You speak the two dynamics going on there.
So I'm not on the short cycle products that business is really strong you know the fourth quarter, we had to had natural season.
Seasonality of that being a little lower in the third quarter, which was which is very natural for us to see but it was still strong but when we consider the order pace across those short cycle products.
Quarter to date here in the first quarter from from a bookings standpoint, new orders that business remains really good surprisingly good could be quite honest, a little better than we anticipated coming into the quarter and the outlook for that business remains solid based on some of the markets you know obviously we're watching.
Some of the markets and in those areas. The utilities business that you did nonresidential construction and that whole other pie of other industrial manufacturer and we're watching those closely.
As we can in that business remains good on the longer cycle products being fixed gas and flame detection. There's good demand. There you know oil the oil price being $75 and above and that's the outlook for the future that is healthy for us that is healthy for us from the standpoint of employment with.
Within the oil and gas industry number one and then number two for projects you know there'll be some projects and funding of projects and the fixed gas and flame detection plays into that piece and the beauty. There is yes. There is some sort of recession in the back half of the year, a slowdown in business that fixed gas and flame detection business is another stabilizer for our business you know, we often talk about our diversity.
<unk> portfolio, and having resiliency and durability through different economic cycles.
That's how we see some of that playing out so.
You know where were.
Fairly optimistic about our businesses as we get into 'twenty three year.
Good good maybe just one last housekeeping.
Question Lee you mentioned pension income would be lower.
Year over year at that level was at.
$20 million to $23 million.
And this past year.
Roughly is that the level of.
Climb we're talking about.
Oh, it's going to be you know year over year I was gonna be about a six or $7 million difference.
I can have Chris Schott with exact model difference, but.
That's the headwind going into us for 'twenty three.
Okay very good alright, thank you.
Thank you Rob.
And once again, if you have a question. Please press Star then one.
The next question is from Larry de Maria with William Blair. Please go ahead.
Hey, Thanks, good morning.
Maybe I missed this but can you just give maybe a little bit more color on orders booked to bill lead times and kind of curious if we're starting to see the order book shorted normalize as supply chains get better or is it still you know well into the second half so any color there first off please.
So where are you now that the the order pace has been good we're really pleased with the order pace on the order pace that we saw you know throughout the year. We saw a good strong order pace for the year the book to Bill was 106%.
So we're obviously we had good strength in orders supply chain, you know created a bit of a headwind for us in Europe .
Frankly supply chain continues to be an issue.
It has improved and we.
The way we would define at best is.
You know we were to complete a product we might've been waiting for eight or nine different components to finish on product today or waiting for a couple of components and so that that has improved but we're you know we're still not perfect and we're still working through some of that so the demand for product remains strong here in the first quarter and.
We're optimistic about the business certainly through the first half of the year and you know the back half we think that we have some resiliency in our portfolio that will withstand an economic slowdown and that's where obviously the backlog could help us if things slow down in the back half of the year, we certainly have that back that backlog as our Cushing going.
Going throughout the year.
Okay. Thanks, and then.
Mid single digit growth outlook for 'twenty, three but you've mentioned a couple of times obviously some.
Some concern on the second half macro, but obviously also some resiliency there.
How do we think about first half for second half and apply that to the mid single digit growth should we have.
Now a closer maybe a double digit growth in the first half and flatter broke the second half and see what happens there.
How are we kind of breaking that down first half second half so I'll, let Lee take that force.
Alright, So hey, Larry So it's a good question.
Certainly we have.
More visibility to the first half than we do to the second half. So I'd guide you to you, we're probably going to be in the more positive side of that mid single digit in the first half of the year and then you know.
If you just take the math you know with the worst outlook visibility for the second half it could be lower but two initiatives points earlier.
I have to see how that plays out you know there is an element of price that's out there, but there's also the element of volume. So you based on the mid single digit guide again, I guide a little higher in the first half in the second half and we'll just have to see how the first half plays out here.
Yeah.
Domestic.
Yeah, that's fair enough and that's exactly what I was what I was wondering if thank you for that the second part of the question and the last one would be around incremental margins in 'twenty three.
The reason the 30% to 40% normal range or are there some weird things in there.
I think that 30% to 40%, which is what we've committed to we still see that opportunity in 'twenty. Three certainly you know we've covered below O M. You got some of those temporary headwinds it makes what could be interesting stuff like that but no. We are you know as you saw really strong incrementals.
And a lot of those dynamics, whether it's you know the price cost dynamic whether it's you know.
This mix, we have into North America. I mean, these are all positive things that should continue certainly in the first half of 'twenty three as well.
Okay. Thank you and good luck everybody.
Thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Chris have work for any closing remarks.
Thank you if you Miss the portion of today's call an audio replay will be made available later today on our Investor Relations website and will be available for the next 90 days. We appreciate you joining us this morning, and we look forward to speaking with you again soon thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Okay.
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