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MSA Safety Incorporated (MSA) Q4 2022 Earnings Call Transcript

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MSA Safety Incorporated (NYSE:MSA) Q4 2022 Earnings Conference Call February 16, 2023 10:00 AM ET

Company Participants

Chris Hepler - Executive Director, Corporate Development & Investor Relations

Nish Vartanian - Chairman, President & Chief Executive Officer

Lee McChesney - Senior Vice President & Chief Financial Officer

Conference Call Participants

Stanley Elliott - Stifel

Rob Mason - Baird

Larry De Maria - William Blair

Operator

Good day, and invited to nan MSA Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will beryllium successful a listen-only mode. [Operator Instructions] After today's presentation, location will beryllium opportunity to inquire questions. [Operator Instructions] Please note, this arena is being recorded.

I would now for illustration to move nan convention complete to Chris Hepler. Please spell ahead.

Chris Hepler

Thank you. Good morning, and invited to MSA Safety Fourth Quarter and Full Year 2022 Earnings Conference Call. This is Chris Hepler, Executive Director of Corporate Development and Investor Relations. With maine coming are Nish Vartanian, Chairman President and CEO; Lee McChesney, Senior Vice President and CFO; and Steve Blanco, Segment President for Americas.

Before we begin, I'd for illustration to punctual everyone that nan matters discussed during this telephone whitethorn see forward-looking statements wrong nan meaning of nan Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not constricted to, each projections and anticipated levels of early performance. Forward-looking statements impact a number of risks, uncertainties and different factors that whitethorn origin our existent results to disagree materially from those discussed today. These risks, uncertainties and different factors are elaborate successful our SEC filings. MSA Safety undertakes nary work to publically update immoderate forward-looking statements made connected this call, isolated from arsenic required by law.

We person included definite non-GAAP financial measures arsenic portion of our chat this morning. The non-GAAP reconciliations are disposable successful nan appendix of today's presentation. The position and property merchandise are disposable connected our Investor Relations website astatine investors.msasafety.com.

Moving connected to today's agenda. First Nish will talk nan cardinal highlights of nan 4th and afloat year. He will past move nan telephone complete to Lee to talk our financial capacity and outlook. Nish will past reason pinch closing remarks. Following our prepared remarks, we will unfastened nan telephone for questions.

With that, I'll move nan telephone complete to Nish.

Nish Vartanian

Thanks, Chris, and bully morning, everyone, and acknowledgment for joining america today. I'll commencement connected descent 4. MSA delivered different beardown twelvemonth pinch exceptional results successful nan 4th quarter. This was made imaginable by our team's unwavering committedness to our mission. Our purpose-driven civilization and dedication to protecting nan world's workers is astatine nan halfway of everything we do, and sets nan instauration for our beardown performance.

I want to convey each of our associates for their focused execution and difficult activity to get MSA's starring information technologies and solutions successful nan hands of our customers astir nan world. And acknowledgment besides to our shareholders and different stakeholders for helping america build MSA into a world information leader that is making a affirmative effect connected nan wellness and information of workers and our communities astir nan world.

Moving to descent 5. Our squad delivered outstanding results for nan 4th and afloat year, including grounds income and robust separator description done beardown operational execution. Incremental operating separator was connected nan precocious broadside of our target for nan year, and we generated beardown rate flow. Even pinch ongoing proviso concatenation challenges and ostentation headwinds, we achieved broad-based maturation crossed our platforms of firefighter safety, state detection, and business individual protective equipment.

This maturation was enabled by our laser attraction connected driving improved throughput and executing our strategical plan. We proceed to beforehand our strategy by processing and launching innovative information solutions for illustration nan ALTAIR io 4 state detector, pinch afloat unreality connectivity seamless integration into MSA's grid software, and our proprietary XCell Sensors. And nan latest derivation of our V-Gard Hard Hat nan C1 pinch its patent-pending thermal obstruction to thief trim worker power stress, which has go a awesome attraction for workplace safety.

Notably, MSA's V-Gard marque Hard Hat has precocious celebrated its 60th day and nan V-Gard pinch its iconic creation has garnered beardown commercialized occurrence astir nan world and crossed galore industries. These types of caller technologies and connected solutions reside customers' unmet needs and alteration them to amended worker safety, heighten productivity and simplify compliance. And these innovative and differentiated solutions person besides helped america fortify marketplace stock crossed our portfolio successful 2022.

As nan information company, our committedness to corporate, societal work originates pinch our mission, which has been unwavering since our founding successful 1914 and is nan ground for our cardinal CSR pillars, our products, our group and our planet. And we are focused connected advancing our programs crossed each of these pillars to make MSA fresh for nan future.

Our continuous advancement astir biology sustainability, talent development, diverseness and inclusion and merchandise stewardship has been recognized some locally and nationally. MSA is proud to person been named 1 of America's Most Responsible Companies by Newsweek for nan 2nd consecutive year.

I judge that our advancements successful this area person differentiated MSA arsenic an employer of prime erstwhile it comes to our existing associates and prospective talent and a preferred supplier erstwhile it comes to our customers.

Before I move nan telephone complete to Lee, I besides want to admit an important squad accomplishment from 2022. I'm proud to stock that our 5000 associates operated 12 consecutive months without a mislaid clip injury. At MSA, we're surviving our ngo of protecting workers' wellness and starring by example.

MSA is good positioned from our starring merchandise platforms, diversification crossed extremity markets and geographies to our talented associates crossed nan globe. I'm proud of nan advancement we've made and excited for nan prospects ahead.

With that I'll walk nan telephone connected to Lee to talk our financial results and 2023 outlook.

Lee McChesney

Thanks, Nish and bully morning, everyone. Let's get started connected Slide 6 pinch nan quarterly highlights. Our MSA squad had a beardown decorativeness to nan twelvemonth pinch double-digit integrated income maturation crossed firefighter safety, state discovery and business PPE. Sales were a quarterly grounds of $443 million. We executed sequential measurement maturation which is accordant pinch seasonal trends successful our business.

Orders remained patient again this quarter. Design reengineering we performed passim 2022 and mean improvements successful nan proviso concatenation enabled america to trim backlog sequentially. However, proviso chains are still constrained and unpredictable and we expect that to proceed into 2023.

We entered 2023 pinch an elevated backlog of astir 25% from a twelvemonth ago. In January, orders again paced up of past twelvemonth and backlog has besides accrued slightly. This is accordant pinch trends successful anterior years. Gross separator successful nan 4th was 44.5%, up 110 ground points year-over-year from beardown measurement leverage, favorable operation and affirmative price/cost dynamics. We are encouraged pinch nan advancement we are starting to spot successful our gross separator complaint and will stay focused connected making further advancement successful 2023, contempt a challenging environment.

Fourth 4th adjusted operating separator was 21.6%, up 210 ground points from past year. Incremental operating separator was 48% successful nan 4th arsenic we benefited from pricing and beardown operating leverage from nan higher volume. Adjusted nett income was $71 million, which resulted successful diluted EPS of $1.80, up 8% complete past year. This twelvemonth we had a normalized taxation complaint and somewhat higher liking disbursal successful nan quarter.

Now I'd for illustration to return a infinitesimal to reappraisal our conception performance. In our Americas conception we had robust results pinch 14% maturation successful nan 4th driven by spot successful North America and Latin America. Americas saw double-digit maturation successful our firefighter safety, portable state discovery and business caput protection. Adjusted operating separator successful nan 4th was 28.6%, up 470 ground points year-over-year arsenic a consequence of coagulated commercialized execution, measurement leverage and costs management.

And successful our International segment, we made advancement contempt immoderate very challenging headwinds and delivered a resilient 7% changeless rate maturation successful nan quarter. From a location perspective, we saw double-digit maturation successful nan APAC region, offset by a mid-single-digit maturation successful EMEA. Currency headwinds of 9%, mostly related to nan euro and British pounds, resulted successful a reported 2% income decline.

Adjusted operating separator was 17% successful nan quarter, down 290 ground points year-over-year but up 900 ground points from nan 3rd quarter. Price/cost was unfavorable owed to rate headwinds connected cross-border transactions and nan conversion of longer dated backlog peculiarly successful state detection.

Now moving connected to descent 7. For nan afloat twelvemonth 2022, broad-based request drove grounds income of $1.5 billion, up 9% versus past twelvemonth and up a beardown 12% connected a changeless rate basis. Price realization represented astir two-thirds of nan maturation pinch measurement being astir one-third arsenic well.

For nan afloat year, gross separator was 44.1%. Volume leverage and value actions offset important ostentation headwinds and yielded 20 ground points of improvement. For nan year, adjusted operating separator was 19%, up 180 ground points from past year. Incremental operating separator was 39% for nan twelvemonth towards nan precocious extremity of our target range. Adjusted nett income was $223 million, which resulted successful diluted EPS of $5.65, up 21% complete past year.

Now turning to descent 8. We precocious announced an important transaction that strengthens our institution for nan future. On January 5th, we completed nan waste of a subsidiary holding bequest liabilities. This transaction materially reduces consequence successful our business, simplifies our equilibrium expanse and enhances rate travel predictability.

In backing nan transaction, MSA contributed $341 cardinal astatine closing, which included $315 cardinal successful incremental borrowings. We are committed to deleveraging quickly and we expect utilizing excess rate travel successful 2023 to repay borrowings. As nan closing occurred successful early January, this transaction will beryllium reflected successful our first 4th 2023 financial results.

Now turning to rate travel and leverage connected descent 9. Quarterly free rate travel was $40 cardinal aliases 77% of nett income. For nan year, free rate travel was $115 cardinal aliases 64% of income, down 26% versus past year. Cash travel was impacted by purposeful investments we made successful definite inventory to meet request and to amended customer transportation times amid nan proviso challenges passim nan year.

In nan quarter, we invested $14 cardinal successful CapEx, paid $18 cardinal of dividends to our shareholders and repaid $40 cardinal of debt. Cash astatine year-end was $163 cardinal and we person nary important near-term indebtedness maturities. In 2022, arsenic portion of our committedness to return worth to nan shareholders, we returned much than $100 cardinal done dividends and stock buybacks.

Full twelvemonth adjusted EBITDA accrued 18% to $337 million. Our nett leverage ratio astatine year-end was 1.2 adjusted EBITDA, compared to 1.6 successful nan anterior year. On a pro forma basis, adjusting for nan bequest liability and further borrowings, nett leverage was 2.2. We expect returning to our humanities leverage ratio wrong 12 to 18 months.

Now, let's move to 2023 outlook connected descent 10. We participate 2023 pinch beardown momentum and reasons to beryllium cautiously optimistic astir nan year. Our starring information technologies and solutions balanced crossed firefighter safety, state discovery and business PPE are sold astir nan world successful a wide scope of markets. These charismatic and diversified markets stay healthy. We spot increasing request globally for differentiated information products that not only protect workers, but make them much productive.

Demand trends successful our business stay patient and we entered nan twelvemonth pinch elevated backlog. That said, we're cognizant of nan challenges successful nan macroeconomic and geopolitical situation and that is resulting successful little visibility arsenic we look to nan backmost half of nan year. We do expect below-the-line headwinds to EPS from higher liking disbursal related to nan higher rates for our existing indebtedness and nan incremental borrowings related to nan divestiture, arsenic good arsenic little noncash pension income.

We expect pension and different nonoperating income to beryllium betwixt $13 cardinal and $15 cardinal for nan year. MSA's business is diversified crossed products and geographies and clip tested crossed economical cycles. While 2023 will surely person its ain challenges, we are assured successful our team's expertise to execute and thrust different twelvemonth of income maturation successful nan mid-single-digit scope and further amended our operating margin.

With that, I'll walk nan telephone backmost to Nish for his closing remarks.

Nish Vartanian

Thanks, Lee. Moving connected to descent 11. In closing, I'm incredibly proud of our accomplishments successful 2022. Despite nan galore challenges of nan past year, our squad executed good and continued to make advancement against our strategical priorities. We participate 2023 from a position of spot and we expect to build connected our momentum. Our balanced and diversified portfolio of innovative information technologies has ne'er been stronger and much applicable to our customers. We person exceptional talent passim nan company, pinch a heavy passion for our ngo and proven capacity of executing crossed economical cycles. I'm assured successful our expertise to proceed to present semipermanent worth creation to our shareholders.

With that, I'll move nan telephone backmost complete to nan usability for Q&A.

Question-and-Answer Session

Operator

Thank you. We will now statesman nan question-and-answer Session. [Operator Instructions] And nan first mobility is from Stanley Elliott from Stifel. Please spell ahead.

Stanley Elliott

Good greeting everyone. Thank you for nan mobility and congratulations connected nan beardown decorativeness to nan year.

Nish Vartanian

Thank you, Stanley.

Stanley Elliott

Could you each talk a small spot much astir nan spot successful nan Americas margins? Quite good, really this full 2nd half of nan twelvemonth contempt what's happening connected nan proviso chain. I'm judge pricing is helping a bit. But could you springiness america a consciousness of nan sustainability and benignant of really we should deliberation astir nan separator cadence really into 2023, particularly fixed benignant of immoderate of nan first half disablement versus immoderate of nan 2nd half uncertainties that you're talking about?

Nish Vartanian

Sure. And Lee, why don't you return that one?

Lee McChesney

All right, Stanley, bully greeting to you. So, really admit nan questions bully to telephone out. So, I deliberation it speaks to immoderate really bully momentum from nan team. You've seen passim nan year, immoderate bully progression connected some gross separator and pinch SG&A leverage. So I think, you've seen that travel together successful nan 2nd half. Certainly, nan – you get bully measurement leverage. We've sewage immoderate bully productivity, and past surely value and costs are now successful amended alignment.

So arsenic we look towards adjacent year, I mean, I deliberation surely for nan first half of nan year, you person to beryllium positive. That move could continue. So we're beautiful assured successful wherever those levels at. You do person to set for nan seasonality. Obviously, you've sewage immoderate different quarterly sizes. But you're going to see, I deliberation immoderate bully progression year-over-year, akin to what you've seen successful nan backmost half of 2022 here.

Stanley Elliott

Great. And you mentioned nan backlog strength. Have you each seen immoderate customers either municipal aliases otherwise, canceling aliases pushing retired immoderate orders astatine this point? I'm assuming not, but would emotion to get a small colour connected that if we could?

Nish Vartanian

Stanley, no, we really haven't seen immoderate cancellations. It's – a batch of our business is civilization order. It's inspected successful by nan customer and we really haven't seen immoderate cancellation of orders, owed to our inability to displacement nan backlog. We astir apt mislaid immoderate business nan upfront, particularly successful nan area of autumn protection, wherever we've had opportunities pinch immoderate orders, and we've struggled pinch nan proviso concatenation and astir apt mislaid immoderate business. But that type business ne'er really sewage connected our books. Our backlog is really helping from nan standpoint of being capable to present and customers waiting connected that.

Stanley Elliott

And past lastly for me, you guys person talked astir immoderate larger imaginable orders connected nan occurrence services side. Is location immoderate update you tin stock pinch america connected that? And possibly what benignant of timing should investors deliberation astir if you were to extremity up winning immoderate of those contracts?

Nish Vartanian

Yeah, nan pipeline is really healthy. When you deliberation astir nan occurrence work nan municipal budgets and authorities budgets are really strong. We've sewage nan AFG backing coming successful again this year. So, there's a number of orders successful nan pipeline, immoderate reasonably ample business. And that's conscionable a matter of moving done nan municipalities, and getting their approvals, and pacing from that standpoint. But we're optimistic astir nan occurrence work business. We're competing good successful nan marketplace, pinch our products proceed to heighten those products and optimistic astir that business sloppy arsenic to what nan system does successful 2023. That business, arsenic you cognize is somewhat insulated from an economical recession that whitethorn hap successful nan backmost half of nan twelvemonth that, represents astir 40% of our business. So we're optimistic astir nan occurrence work present successful 2023.

Stanley Elliott

Great, guys. That's it for me. Thanks truthful overmuch and champion of luck.

Nish Vartanian

Thank you, Stanley.

Operator

And nan adjacent mobility is from Rob Mason from Baird. Please spell ahead.

Rob Mason

Yes. Good morning, all. I had a mobility astir – location was a commentary astir your 2023 outlook, but besides I deliberation successful nan property merchandise conscionable aiming for mid-single-digit maturation for nan year. If that proved to beryllium nan lawsuit mid-single digit, really would that break down betwixt contributions from value versus volume? And americium I correct successful reasoning that FX is possibly neutral to moreover somewhat affirmative for nan twelvemonth astatine this point?

Nish Vartanian

It's a bully question. We – arsenic we laid retired our script readying for 2023. We went done a number of different scenarios connected request value and there's moreover immoderate backlog there. So we went done various scenarios. And nan pricing, we're going to get immoderate price, which is nan overhang we'll person from our 4th fourth 2022 value increase. So arsenic we spell done nan first 9 months of 2023, we'll get immoderate value there.

And then, we're looking astatine immoderate request portion measurement increasing. We do deliberation successful immoderate of those halfway markets that we person nan occurrence work business, lipid and state business, we'll astir apt spot low-single-digit maturation successful those areas and past nan value connected apical of that gets america to that mid-single-digit level. So that's really we travel to that scenario.

And we've worked done a number of different scenarios, based connected a imaginable economical slowdown successful nan backmost half of nan year. There's nan anticipation of possibly obtaining immoderate further value successful 2023. But we're still moving done those scenarios and we'll spot really nan twelvemonth plays out.

And past obviously, backlog plays into each of this, and having an opportunity to perchance trim backlog arsenic proviso chains amended for us. So there's a batch of variables that could play retired present successful 2023 but we support coming backmost to, sloppy of nan script we spell done that we person a precocious grade of assurance successful that mid-single-digit maturation rate.

Rob Mason

Nish, really -- spell ahead.

Lee McChesney

Just going to adhd your FX mobility was, hey, you person -- I deliberation it's a beautiful bully view. It will beryllium a spot of a headwind successful nan first half of nan twelvemonth and past beryllium a affirmative successful nan backmost half. It will beryllium a flimsy antagonistic based connected nan existent FX, Rob, correct now.

Rob Mason

For nan year, okay. Nish aliases Lee, conscionable really are you -- you speak to orders. Just possibly dissect betwixt your longer rhythm and shorter cycle, longer rhythm occurrence work whitethorn beryllium group speech because it's -- connected its ain dynamic. But fixed state and occurrence detection, I deliberation are being longer rhythm much perchance immoderate project-based, and past shorter rhythm obviously, business PPE. But tin you speak to nan 2 dynamics going connected there?

Nish Vartanian

Right. So, connected nan short-cycle products, that business is really strong. The 4th fourth we had earthy seasonality of that being a small little than 3rd quarter, which is very earthy for america to see, but it was still beardown erstwhile we see nan bid gait crossed those short-cycle products.

Quarter-to-date here, successful nan first quarter, from a booking standpoint, caller orders, that business remains really good. Surprisingly good. To beryllium rather honest, a small amended than we anticipated coming into nan quarter. And nan outlook for that business remains coagulated based connected immoderate of nan markets. Obviously, we're watching immoderate of nan markets successful those areas, nan utilities business, nan non-residential building and that full different pastry of different business manufacturing. We're watching those intimately and arsenic we tin and that business remains good.

On nan longer-cycle products being fixed state and occurrence detection, there's bully request there. The lipid value being $75 and supra and that's nan outlook for nan future. And that's patient for us. That's patient for america from nan standpoint of employment wrong nan lipid and state industry, number one.

And past number 2 for projects. There will beryllium immoderate projects and backing of projects and nan fixed state and occurrence discovery plays into that piece. And nan beauty location is if there's immoderate benignant of recession successful nan backmost half of nan twelvemonth aliases a slowdown successful business that fixed state and occurrence discovery business is different stabilizer for our business. We often talk astir our diversified portfolio and having resiliency and durability done different economical cycles. That's really we spot immoderate of that playing out. So we're reasonably optimistic astir our business arsenic we get into 2023 here.

Rob Mason

Good, good. Maybe conscionable 1 past housekeeping question, Lee. You mentioned pension income would beryllium little year-over-year astatine that level. Was it $22 million, $23 cardinal successful this past year, roughly? Is that nan level of diminution we're talking about?

Lee McChesney

It's going to beryllium – year-over-year it's going to beryllium astir a $6 cardinal aliases $7 cardinal difference. I tin person Chris travel up nan nonstop exemplary quality but that's nan headwind going into america for 2023.

Rob Mason

Okay, very good. Thank you.

Nish Vartanian

Thank you, Rob.

Operator

[Operator Instructions] The adjacent mobility is from Larry De Maria pinch William Blair. Please spell ahead.

Larry De Maria

Hey, thanks. Good morning, everybody. Maybe I missed this but tin you conscionable springiness possibly a small spot much colour connected orders book-to-bill lead times? And benignant of curious, if we're starting to spot nan bid book benignant of normalize arsenic proviso chains get amended aliases is this still good into nan 2nd half? Any colour location first off, please?

Nish Vartanian

So Larry, nan bid gait has been good. We're really pleased pinch nan bid pace. The bid gait that we saw passim nan year, we saw a bully beardown bid pace. For nan twelvemonth nan book-to-bill was 106%, truthful obviously, we had bully spot successful orders. Supply concatenation created a spot of a headwind for us. And rather frankly proviso concatenation continues to beryllium an issue. It has improved and we – nan measurement we would specify it champion is we were to complete a merchandise we mightiness person been waiting for 8 aliases 9 different components to decorativeness immoderate product.

Today, we're waiting for a mates of components. And truthful that has improved but we're still not cleanable and still moving done immoderate of that. So nan request for merchandise remains beardown present successful nan first 4th and we're optimistic astir nan business surely done nan first half of nan year. And nan backmost half we deliberation that we person immoderate resiliency successful our portfolio that will withstand an economical slowdown and that's wherever evidently nan backlog could thief us. If things slow down successful nan backmost half of nan year, we surely person that backlog arsenic a cushion going passim nan year.

Larry De Maria

Okay. Thanks, Nish. And past wrong a mid single-digit maturation outlook for 2023, but you've mentioned a mates of times evidently immoderate interest connected nan 2nd half macro, but evidently besides immoderate resiliency there. How do we deliberation astir first half aliases 2nd half and use that to nan mid single-digit growth? Should we person adjacent to possibly double-digit maturation successful nan first half and flatter maturation successful nan 2nd half and spot what happens, aliases really are we benignant of breaking that down first half 2nd half?

Nish Vartanian

So I'll fto Lee return that for us.

Lee McChesney

All right. So Larry, it's a bully question. Certainly, we person much visibility to nan first half than we do nan 2nd half. So I'd guideline you to -- we're astir apt going to beryllium successful nan much affirmative broadside of that mid single-digit successful nan first half of nan year. And then, if you conscionable return nan mathematics pinch nan little outlook visibility for nan 2nd half, it could beryllium lower. But to Nish's points earlier, we're going to person to spot really that plays out. There is an constituent of value that's retired there, but there's besides an constituent of volume. So based connected nan mid single-digit guide, again, I'd guideline a small spot higher successful nan first half than nan 2nd half. And we'll conscionable person to spot really nan first half plays retired here, but we're optimistic.

Larry De Maria

Yeah. That's adjacent capable and that's precisely what I was wondering. Thank you for that. The 2nd portion of nan mobility and nan past 1 would beryllium astir incremental margins successful 2023. Are we successful nan 30% to 40% normal scope aliases are location immoderate weird things successful there?

Nish Vartanian

No, I deliberation that 30% to 40% which is what we've committed to, we still spot that opportunity successful 2023. Certainly, we've covered beneath OM you've sewage immoderate of those impermanent headwinds operation for illustration nan liking and worldly for illustration that. But nary we -- arsenic you saw really beardown incrementals and a batch of those dynamics whether it's nan price/cost dynamic, whether it's this operation we person into North America I mean these are each affirmative things that should proceed surely successful nan first half of 2023 arsenic well.

Larry De Maria

Okay. Thank you and bully luck everybody.

Nish Vartanian

Thank you.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would for illustration to move nan convention backmost complete to Chris Hepler for immoderate closing remarks.

Chris Hepler

Thank you. If you missed nan information of today's call, an audio replay will beryllium made disposable later coming connected our Investor Relations website and will beryllium disposable for nan adjacent 90 days. We admit you joining america this greeting and we look guardant to speaking pinch you again soon. Thanks.

Operator

The convention has now concluded. Thank you for attending today's presentation. You whitethorn now disconnect.

Editor: Naga



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