Yahoo Finance MSA Safety Incorporated (NYSE:MSA) Q1 2024 Earnings Call Transcript
MSA Safety Incorporated (NYSE:MSA) Q1 2024 Earnings Call Transcript April 30, 2024
MSA Safety Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the MSA Safety First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Hepler. Please go ahead.
Chris Hepler: Thank you. Good morning, and welcome to MSA's First Quarter 2024 Earnings Conference Call. This is Chris Hepler, Executive Director of Corporate Development. I'm joined by Nish Vartanian, Chairman and CEO; Steve Blanco, President and COO; Lee McChesney, Senior Vice President and CFO; and Stephanie Sciullo, President of our Americas segment. Larry De Maria, who we recently announced as Executive Director of Investor Relations, is also with us this morning. During today's call, we will discuss MSA's first quarter financial results and provide an update on our full year 2024 outlook. On Slide 2, 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 detailed in our SEC filings. MSA Safety undertakes no duty to publicly update any forward-looking statements made on this call, except as required by law. Turning to Slide 3. 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. The presentation and press release are available on our Investor Relations website at investors.msasafety.com.
I'd now like to turn the call over to Nish Vartanian. Nish?
Nish Vartanian: Thanks, Chris, and good morning, everyone. As you're aware, on February 22, we announced a CEO succession plan. On May 10, I'll be turning over the CEO role to my colleague, Steve Blanco. I'm thrilled the Board has selected Steve to the role following a rigorous multiyear succession planning process. Many of you know Steve already, but those of you who don't, Steve is an outstanding leader with deep expertise in MSA's business and our industry. He's passionate about MSA's mission and values, and he puts the customer at the center of everything we do. Steve and I have worked closely together since he joined the company in 2012. He's been an invaluable partner over this time. And together, we have significantly improved the performance of MSA.
As we enter the 110th year of our great company, MSA has never been in a better position. With this foundation of strength and resilience, I have the utmost confidence in Steve's ability to lead MSA and continue the momentum we've achieved together to drive value for all stakeholders in the years ahead. With that, let me turn it over to Steve to take you through the quarter. Steve?
Steve Blanco : Thank you, Nish, and good morning, everyone. First, I want to thank Nish and our Board of Directors for their trust and confidence in me to lead MSA Safety and our more than 5,000 associates around the world. The work done over the past several years executing our strategy has helped transform MSA into a higher growth, higher margin and more efficient company. As Nish said, our company has never been stronger or positioned better for the future. As we move forward, we will continue to leverage our scale, brand and customer-centric innovation to drive profitable growth. Our leadership team and I are devoted to serving our customers in support of our singular mission of safety. On behalf of my fellow MSA associates, I want to thank Nish for his significant contributions, leadership, and dedicated years of service.
He's always demonstrated a passion for our mission, our associates, and our customers. Nish has been instrumental in transforming MSA into the company it is today. I'm energized to build on this momentum as we enter the next phase of profitable growth, and I look forward to sharing more details with you at our upcoming Investor Day on May 22. As you'll see on Slide 4, MSA is a purpose-driven growth company with a unique mission, that men and women may work in safety and that they, their families and their communities may live in health throughout the world. This mission has remained the same throughout MSA's 110-year history. As the safety company, we are committed to advancing our mission and helping our customers address their safety needs.
Safety continues to be an attractive market with long-term growth tailwinds. Our customers around the world remain focused on enhancing their safety programs, and we strive to be their partner of choice. Innovation and customer centricity are at the heart of everything we do. We have a proven process that brings to life unique solutions that help solve our customers' toughest safety challenges. As a result, we have established strong positions around the world in firefighter safety, detection, and industrial PPE products and solutions. We will continue to deliver market-leading innovation complemented by inorganic growth, as you've seen in the past from us, to help us better serve our customers. And our team will leverage the MSA business system to continually drive enhanced performance in all we do.
Now let's look at our Q1 performance on Slide 5. We're off to a solid start this year, sustaining the positive momentum from our record 2023. The team executed well and delivered sales growth of 4% and earnings growth of 18%. Backlog in the quarter continues to be slightly elevated, specifically in detection and industrial PPE due to certain supply chain challenges. The operating environment remains dynamic, and the team did a good job of navigating these challenges to continue delivering solutions to our customers. Moving on to our product categories. Sales in firefighter safety were strong, up double digits in the quarter. We saw strength across our head-to-toe firefighter solutions and delivered on the remaining SCBA units for the initial Air Force order we received last year.
The fire service market continues to be resilient and the environment for funding around the world is healthy. We recently attended the Fire Department International Conference in Indianapolis, and it was a pleasure to engage with our customers, channel partners, and our MSA fire service team. We just launched an exciting new product, the Cairns 1836 Fire Helmet, which incorporates customer feedback regarding comfort, weight, ergonomics, and cleanability. It was great to see the enthusiastic response to this helmet as well as our broad range of firefighter products and solutions. Our sales in detection and industrial PPE were down mid-single digits in the quarter. Although order activity was healthy, our conversion was slow due to supply chain issues, which were more pronounced in our shorter-cycle products, including portable gas detection and fall protection.
We finished the quarter with higher backlog in both detection and industrial PPE. While the supply chain continues to be volatile, we're working closely with our suppliers and remain confident in our path forward. We continue to build out our detection portfolio with innovative new products. In fixed gas and flame detection, we recently launched the FL5000, which has the latest advanced infrared sensors and leverages computer learnings to enhance performance and responsiveness. This is an exciting addition to our flame detection lineup. In portable gas detection, we continue to see accelerating momentum with our io 4 ALTAIR gas detector, which is now available in over 60 countries. As I wrap up, I want to highlight the resiliency of our business, which continues to benefit from the broad diversity of our products, geographies and markets.
With attractive industry fundamentals, our proven innovation process and leading positions in our markets, I'm excited by our future. I believe we have the best team in the industry. And with our mindset around continuous improvement and our commitment to MBS, we are well positioned to create value over the long term for our stakeholders. Before wrapping up, I want to thank all of our MSA associates who work diligently every single day to deliver on our mission and serve our customers. With that, I'll now turn the call over to Lee to review our first quarter results and outlook. Lee?
Lee McChesney: Thank you, Steve, and good morning, everyone. We appreciate you joining the call today. I will now review our performance in the first quarter and provide an update on our full year outlook. Let's get started on Slide 6 with quarterly results. Sales were $413 million, an increase of 4% over the prior year with balanced contributions from volume and price. Currency translation added 1 point to overall growth. Across our product categories, firefighter safety was a strong contributor to growth, up double digits and was partially offset by declines in detection and industrial PPE. And from a regional perspective, sales in our more developed markets, including North America and EMEA saw solid year-over-year growth, while sales in Latin America and APAC were softer, resulting from a contract renewal timing with a customer in Latin America and a slower recovery in China.
Orders were healthy in the quarter. Our order pace accelerated each month in the first quarter, and so far in April, orders are up high single digits over the prior year. And our commercial pipeline is encouraging across our product categories and the majority of our regions. In the quarter, our book-to-bill was 1x. Backlog grew sequentially, specifically in detection and industrial PPE categories due to supply chain issues. We expect backlog to normalize by the end of the year. Now moving on to margins. Our margin performance continues to be very robust, and our team's commitment to MBS is clear from our results. Gross profit margin in the quarter was 47.3%, up 180 basis points over the prior year. Operating margin on a GAAP basis was 19.4% in the quarter.
Adjusted operating margin was 21.3%, up 190 basis points over the prior year, and incremental operating margin was 71%. Margin expansion was largely driven by volume leverage, productivity, and price/cost management. GAAP net income was $58 million or $1.47 per diluted share. On an adjusted basis, diluted earnings per share were $1.61, up 18% over the prior year. The increase is primarily due to higher operating profit and lower nonoperating expenses. Now moving on to our segment performance. In our Americas segment, sales increased 5% year-over-year with double-digit growth in firefighter safety, partially offset by declines in detection and industrial PPE. Adjusted operating margin was 29.2%, up 360 basis points compared to the prior year period.
Margin expansion was largely driven by volume leverage, productivity and pricing. In our International segment, growth was flat year-over-year. Our EMEA region delivered mid-single-digit growth, which was offset by declines in our APAC region, where we continue to see slower market conditions in China. Currency translation was a 1% benefit in the quarter. Adjusted operating margin was 11.5%, a decline of 190 basis points year-over-year. And margin was impacted by unfavorable geographic mix and inflationary pressures. Now turning to Slide 7. Free cash flow in the quarter was $40 million, representing a conversion rate of 62% of adjusted earnings. Free cash flow conversion was impacted by normal working capital seasonality and tax and compensation payments.
Our robust financial position and strong free cash flow generation provides us optionality to reinvest in our business and enhance our portfolio going forward while continuing to return excess capital to our shareholders. We invested $11 million in CapEx, including investments in our Morocco and Mexico facilities to improve efficiencies. We also repaid $5 million of debt and returned [$18 million] in dividends to shareholders. Net debt at the end of the quarter was $448 million and cash was $148 million. Our net leverage ratio at quarter end was 1x. Adjusted EBITDA for the trailing 12 months ended March 31 was $461 million or 25.6% of net sales. Now I'd like to move on to our full year outlook on Slide 8. While we're off to a solid start in 2024, we continue to take a very balanced approach as we look to the remainder of the year.
The resilient and improving order trends throughout the quarter and a strong commercial pipeline support our full year outlook. We continue to carry some excess backlog and expect normalization will now occur by the end of the year. Broad diversification across products, geographic regions, end markets, along with the attractive underlying market trends in the safety industry gives us confidence in executing on our growth commitment this year. Tempering our view is the challenging operating environment in certain regions and industrial end markets. As I look forward to full year 2024, we reiterate our sales outlook of mid-single-digit growth, which compounds on top of the 17% growth we delivered in 2023. We remain well positioned and are steadfastly focused on delivering our financial commitments and creating sustainable value for our shareholders.
On that note, we are energized to host our Investor Day in New York via webcast on May 22, where we will provide an in-depth review of our business, strategy and financial objectives. As I wrap up today, my final prepared remarks are for Nish. Congratulations to you as you conclude your management career at MSA. You've made a tremendous impact on our company, customers, and associates. Thank you. I appreciate your guidance, support and partnership over the past 2 years. I wish you all the best in your retirement and look forward to our ongoing partnership with you serving on our Board of Directors. I will now turn the call back to Nish for his concluding remarks.
Nish Vartanian: Thank you, Lee. Let's advance to Slide 9. After 39 years at MSA and 6 years in the CEO role, my retirement comes after a very detailed succession planning process with our Board. MSA continues to demonstrate excellent performance and has a strong foundation in place with our talent, innovation, and scale to continue advancing our mission and delivering strong results. I look forward to still being part of the MSA team as I continue to serve as a member of the company's Board of Directors. I'm tremendously thankful for the support of our associates, our Board, and the investment community during my tenure as CEO. It has been an absolute privilege leading MSA, serving our customers and developing MSA's next generation of leaders.
I'm incredibly proud of our progress on accelerating innovation, growth and margin performance. This has resulted in significant value creation for our stakeholders, and today, MSA is a high-performing, purpose-driven growth company. I had the pleasure of working alongside Steve and his leadership team, and I'm confident in their ability to continue the strong momentum that we've achieved together. I know MSA will be in excellent hands with Steve at the helm. And with that, I'll now turn the call back to the operator for questions.
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