Q1 2023 MSA Safety Inc Earnings Call

Speaker 1: The SP.

Speaker 2: Good day and welcome to the MSA first quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Speaker 2: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touchtone phone. To withdraw your question, please press star then 2.

Speaker 2: Please note, this event is being recorded.

Speaker 3: I would now like to turn the conference over to Chris Hepler. Please go ahead. Thank you. Good morning and welcome to MSA Safety's first quarter 2023 earnings conference call. This is Chris Hepler, Executive Director of Corporate Development and Investor Relations.

Speaker 3: With me today are Nish Vartanian, Chairman, President, and CEO , Lee Mochesny, Senior Vice President and CFO , and Steve Blanco, Segment President for the Americas.

Speaker 3: 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.

Speaker 3: 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 Safety undertakes no duty to publicly update

Speaker 3: 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.

Speaker 3: The presentation and press release are available on our investor relations website at investors.msasafety.com. Moving on to today's agenda. First, Nish will discuss key highlights of the quarter. He will then turn the call over to Lee to discuss our financial performance and outlook.

Speaker 3: NISH will 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.

Speaker 3: Thanks, Chris. Good morning, everyone. We appreciate you joining us today. I'm on slide four. I want to start with a brief story that has a very important reminder. NSA's purpose runs deep in our company, and our employees are very often involved in community work that ties closely to our mission.

Speaker 3: One of our associates locally here in Pittsburgh, who also serves as a volunteer firefighter, responded to a house fire recently.

Speaker 3: where tragically two children were killed by the smoke and flames.

Speaker 3: The investigation identified that there were no smoke detectors in the home, which could have helped save the lives of these children. As a result, he's become passionate about smoke detectors and launched a community event on smoke detector awareness.

Speaker 3: To amplify this important message, I want to remind everyone on this call to check your smoke and carbon monoxide detectors regularly, change the batteries, and ensure they're installed throughout your home. It can help save you or your loved one's life.

Speaker 3: Now moving on to slide 5, MSA had an outstanding start to the year with strong revenue, earnings, and cash flow growth. We're very encouraged as this marks the third straight quarter of double-digit revenue growth and healthy incremental margins in cash flow. Our profitable growth was a result of broad-based demand for the last three decades.

Speaker 3: we saw balanced growth across our key product categories and regions.

Speaker 3: Growth in our shorter cycle products like portable gas detection, head protection, and ball protection was strong in the quarter.

Speaker 3: Our fixed gas detection business also saw solid growth and orders.

Speaker 3: And in firefighter safety, we saw healthy growth in breathing apparatus and protective apparel specifically in our globe business.

Speaker 3: So to all of our MSA associates around the globe, thank you for delivering another great quarter. Results like these are driven by your unwavering dedication to our mission of safety.

Speaker 3: We also take great pride in our ability to design innovative solutions that address our customers' toughest safety challenges and improve their productivity.

Speaker 3: By putting the customer at the center of everything we do, our teams are able to design better solutions that address these challenges.

Speaker 3: This has helped us introduce better solutions to the safety industry and has resulted in leading product vitality, which was 37% for 2022. This demonstrates a strong product market fit for our solutions, and we're competing well in our markets.

Speaker 3: A great example of this is the continued expansion of our fall protection portfolio, an effort that was started pre-pandemic. We recently launched the V-Shock series of self-retracting lanyards to complement our V-Tech lineup. The V-Shock product line is designed for durability, ease of use, and improves our competitive position.

Speaker 3: in the growing fall protection sector, while extending our addressable market.

Speaker 3: And on the commercial side, we continue to see momentum in the fire services market with recent wins with Los Angeles City for the G-1 breathing apparatus and Bedfordshire United Kingdom for the M-1. These contracts build on our wins that we had last year with Los Angeles County and London Fire Brigade.

Speaker 3: And we've also had recent notable wins in Chile, China, and in France. Moving on to slide six, as the safety company, our commitment to sustainability begins with our mission.

Speaker 3: and is the basis for our key sustainability pillars, our products, our people, and our planet.

Speaker 3: In our recently published annual report, we announced a 1.5 degree Celsius carbon reduction target, reducing our scope 1 and 2 emissions by 42% by 2030.

Speaker 3: To achieve this target, we're incorporating sustainability principles into our daily operations across the globe.

Speaker 3: Our associates are inspired by our ambition and we have numerous initiatives in process to help us reach our target. Not only is sustainability incorporated in how we operate, it's also incorporated into the products we develop.

Speaker 3: As an example, we recently launched the Baccarek MGS-401 entrance monitor that provides improved safety to monitored areas, such as mechanical rooms and walk-in freezers, by providing accurate gas concentrations, and audible and visual alarms when gas levels are too high.

Speaker 3: Importantly, the monitor also helps customers more easily comply with refrigeration safety standards.

Speaker 3: It's another way our team is bringing innovative solutions to solve our customers evolving safety and sustainability challenges.

Speaker 3: With that, I'll pass the call to Leigh to discuss our first quarter financial results and outlook. Leigh? Thank you Bronx create agreement on values in the E influence, in the market and also the financial

Speaker 3: Thanks Nish and good morning everyone. Before getting into the numbers, I want to remind you that the accounting related to the Legacy Liability Divesture we completed in January is in this quarter's GAAP results.

Speaker 3: In our adjusted numbers, we have removed the impact of the transaction.

Speaker 3: Now, let's get started on slide 7 with the quarterly financial highlights.

Speaker 3: We're off to a strong start for the year with solid results across our product categories and regions.

Speaker 3: Sales were $398 million, an increase of 20% compared to the prior year.

Speaker 3: Currency translation had a 2% unfavorable impact on sales. Growth was well balanced between volume and price, with each contributing about half.

Speaker 3: We saw improved sales and gas detection and fall protection.

Speaker 3: as a result of strong demand and better supply chain conditions.

Speaker 3: As Nish mentioned, border growth was healthy in the quarter, up double digits compared to the prior year. Book to bill was more than 1.1 times and back law grew mid-teen sequentially and is up 20% from last year.

Speaker 3: Gross margin in the quarter was 45.5%, up 230 basis points year over year from sound price cost management, volume leverage and productivity.

Speaker 3: We are encouraged with the sustained progress we are seeing in gross margin. With supply chain moderation in certain product lines, and the application of our business systems or operations, we're seeing better throughput in our facilities, and that's showing in the results.

Speaker 3: In the first quarter, adjusted operating margin was 19.4%, up 310 basis points compared to last year. basketball margin was 35%.

Speaker 3: adjusted an income of $53.7 million, which resulted in diluted earnings per share of $1.36, an increase of 24% over last year.

Speaker 3: Now I'd like to review our segment performance.

Speaker 3: In our America segment, we had strong results with sales of $280 million, an increase of 24% over the prior year.

Speaker 3: America saw double-digit growth across all key categories, including firefighter safety, gas detection, and industrial PPE. And the growth was balanced across both North America and Latin America.

Speaker 3: Adjusted operating margin in the quarter was 25.6%, up 240 basis points year over year as a result of volume leverage and disciplined cost management.

Speaker 3: In our international segment, we also had strong results. Sales were $118 million, an increase of 12% on a reported basis, and 18% on a constant currency basis.

Speaker 3: currency translation was a 6% headwind in the quarter. From a product perspective, both gas detection and industrial PPE saw double-digit growth, which was partially offset by slower growth in firefighter safety gear.

Speaker 3: We performed well in both EMEA and APAC. Our adjusted operating margin was 13.4% in the quarter, expanding 480 basis points over the prior year, driven by volume leverage and disciplined cost management.

Speaker 3: Now, moving to cash flow and leverage on slide 8. Free cash flow when adjusted for the divestiture was $52 million, or 97% of adjusted income. Cash flow improves in the quarter from higher earnings and improved working capital and demonstrates our proven ability to deliver robust cash generation.

Speaker 3: Our financial position is strong. In the quarter we invested $8 million in capex and returned $18 million in dividends to our shareholders.

Speaker 3: We were paid $18 million of debt after adjusting for the divestiture, and net debt on March 31 was $731 million. For the trailing 12 months ended March 31, 2023, adjusted EBITDA was $361 million.

Speaker 3: Net leverage at quarter-end was 2.0 compared to 2.2 times pro forma at year-end 2022 when adjusted for the divestiture.

Speaker 3: When we announced the divestiture in January , we said we would focus on reducing leverage and we're making measurable progress.

Speaker 4: Now let's turn to our updated outlook on slide 9.

Speaker 4: We have several reasons to be responsibly optimistic entering the second quarter. Demand has been resilient and our markets continue to be well funded. Short cycle product demand has been strong this year and we continue to carry an elevated backlog across the business.

Speaker 4: The recent moderation in supply chain constraints and approved factory throughput give us confidence that the worst of our supply chain challenges are behind us.

Speaker 4: We will continue to balance these positives with macro uncertainty in the back half of the year. The economy continues to be very dynamic and there's growing recession concerns across most of our key regions.

Speaker 4: Our teams are focused on those variables that are in our control and executing our strategy to deliver profitable growth and strong cash flow like we've done for the past several quarters.

Speaker 4: Considering these dynamics and the strong start to our year, we now accept growth for the full year in the high single-digit to low double-digit range, with incremental margins in our target range of 30-40% and free cash flow conversion of approximately 100%.

Speaker 4: Before closing, I want to take a moment to thank our associates around the world for bringing our vision to life each and every day, and for their strong execution this quarter. At MSA, I have now seen over and over our team's commitment to our mission of worker safety, and that approach is fueling our resilient results.

Speaker 4: With that, I'll pass the call back to Nish for his closing remarks.

Speaker 3: Thanks, Lee. I'm on slide 10.

Speaker 3: In closing, I'm encouraged by the strong starts of the year. Our unparalleled portfolio of innovative safety solutions continues to gain momentum in the market.

Speaker 3: We're strategically investing in our business to accelerate key initiatives to deliver sustainable, profitable growth. And our teams are energized by our progress and driven by our mission of safety.

Speaker 3: As we look forward, MSA's diversification across products, geographies, and end-markets has made our business more resilient. And our expectation is that the successful execution of our strategy will continue to drive long-term value creation.

Speaker 3: With that, I'll turn the call back over to the operator for the Q&A.

Speaker 2: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys.

Speaker 2: To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

Speaker 2: And the first question will be from Stanley Elliott from Steve. Please go ahead....

Speaker 5: Hey, good morning everyone. Congratulations on the strong start to the year. Thanks Stanley. A question for you guys around the fire department. I mean, going to FDIC last week, there's considerable momentum that you're seeing there. You mentioned all the conversions. How do you all think about that business from a physical capacity standpoint?

Speaker 3: predominantly in the fourth quarter. So we have plenty of capacity. We can run that line at very high rates and handle increased capacity or increased demand with ease. You know, I don't lose sleep over our capacity constraints. I lose sleep over the supply chains. You know, that's really the gating issue when it comes to getting breathing apparatus out the door. But as far as our capacity is concerned, we're in really good shape. And you're looking at kind of how the core products performed in the quarter. I mean gas detection up 47% or so. How much of that is how you've kind of thought about going to market differently with kind of longer term revenue contracts.

Speaker 3: successful. On the IO4 and the connected worker, you know that that pipeline continues to ramp up, the business ramps up in a very favorable manner, but really what you saw in the quarter was was more about demand in the quarter and also supply chains getting better. And then last for me, you mentioned strength and a lot of your short cycle.

Speaker 5: We've heard about infrastructure spending, mega projects, reshoring, things along those lines, different capex cycles maybe potentially, but the results that you're putting up seem to really kind of counter your concerns over what one might think about from a recessionary standpoint. Why don't I take that first, Stanley, and then pass it on to Lee for some more color.

Speaker 4: you know, we continue to monitor pace of business closely and as you know, we don't have tremendous line of sight in that business as you get into the second half of the year. But you know for now that business looks looks pretty good and Lee if you want to add some more color to that. Yeah, so I think Stanley what I would say there is if you go back to February when we gave an outlook, we said we're going to be cautious on that view and if it turned out to be positive it would be an opportunity. That's certainly what played out in the first quarter. To Nish's point, you know, we can we can only see so forward there. You know, that's what the business we carry the smallest backlog in because we turn it quickly. We're expecting some of that to continue in the second quarter. That's part of the update.

Speaker 2: from Baird. Please go ahead.

Speaker 3: Yes, good morning and good work on the quarter as well. Your outlook that you did raise to be high single digit to low double digit sales for the year, how does price factor into that growth for the full year to the extent that you know it was roughly I guess about 11 points in the first quarter.

Speaker 3: How does price trend through the year?

Speaker 4: Thanks Rob, and good morning. Lee, why don't you take that? Yeah, sure. So, I think the price impact will be at its most in the first quarter, Rob. And as we go through the year, that will become a smaller part of the consideration, and frankly that's part of the math and the outlook as well.

Speaker 4: We're watching the commodity space closely, just like we're watching the pricing environment as well. And our goal is to keep those in balance. So far we've done a good job with that. So again, it's one of those things where we're not going to assume perfection.

Speaker 4: We'll see how that plays out. It's played out well so far, and I think I'm happy with where we are from a tools and insight perspective, and we'll manage accordingly.

Speaker 3: Would you assume for the full year a similar, call it 50-50, weighting between price volume as you had in the first quarter?

Speaker 4: Yeah, I think that's the right balance, and I think when you think about the back half, Rob, you know, there could be some opportunities on both sides just depending how it plays out, but we're just, again, we're going to just continue to be cautious on that back half of the macro factors.

Sure, sure. And then just I'm curious around the book to bill that was 1.1 or so, what were the bigger drivers of that, you know, being well above or solidly above one in the quarter?

from a product standpoint. Well, I'll tell you, it's interesting. I'll let Steve or Nish add in here as well. When you think about the growth we had in the first quarter and then you think about the book to bill being positive, that just frankly speaks to a very broad demand environment. You know, it's funny, if you look at the...

the insights on growth and then you look at the order number, they're very consistent in terms of being all double digits across the categories in very similar numbers. The only difference is a little bit in the industrial PP&E space, but that's just partly because the business turns quickly.

And where we saw, Rob, some real good strength was in the breathing apparatus segment protective apparel. Those were a couple of the real strong ones and fire helmets were also good.

And where we saw, Rob, some real good strength was in the breathing apparatus segment, protective apparel. Those were a couple of the real strong ones, and fire helmets were also good.

Nish, I think there was a mention maybe the fire service was a little bit softer overseas, but you also called out some wins there. Is that just a timing difference in the quarter? Or how does that shape up for the year, I guess? That's correct. That's correct. Just seasonality and timing on a quarterly basis.

You know, we have some nice orders in the pipeline from an international standpoint. We're really optimistic about that business. We had a nice win, another nice win in the UK. There are a few more in the pipeline. So we're optimistic about that business. That should be solid throughout the year. Very good. I'll get back in the queue. Thanks.

Thank you. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Chris Hepler for any closing remarks. Thank you, Chad. And thank you all for joining. If you missed 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. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.