MSA Safety Incorporated (NYSE:MSA) Q4 2023 Earnings Call Transcript
MSA Safety Incorporated (NYSE:MSA) Q4 2023 Earnings Call Transcript February 15, 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 Fourth Quarter and Full Year 2023 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 Safety fourth quarter and full year 2023 earnings conference call. This is Chris Hepler, Executive Director of Corporate Development and Investor Relations. With me today are Nish Vartanian, Chairman and CEO; Steve Blanco, President and COO; and Lee McChesney, Senior Vice President and CFO. Before we begin, I would 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. 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. Moving on to today's agenda. First, Nish and Steve will discuss key highlights of the fourth quarter and full year 2023. Lee will then review our financial performance and outlook. To conclude, Nish will provide closing comments, at which time we will open up the call for your questions.
With that, I'll turn the call over to Nish.
Nish Vartanian: Thanks, Chris. Good morning, everyone, and thank you for your interest in the work we do. I'll start on Slide 4. Our team delivered excellent results in the fourth quarter, with strong growth and operational performance, wrapping up an outstanding 2023 for MSA. Our results are a testament to our passion for our mission and dedication to addressing our customers' toughest safety challenges. Despite the lingering pandemic effects on global supply chains, rising interest rates and dynamic macroeconomic conditions, our team outperformed throughout the year. I'm very proud of our execution and achievements in 2023, and we're carrying that momentum into 2024. Moving on to Slide 5. MSA sole purpose and mission over its 110-year history has been to protect workers' lives and critical infrastructure and high-hazard environments.
And our customers recognize that we at MSA know what's at stake when they put their lives on the line each and every day. This provides us with a unique bond with our customers and being alongside them on the safety journey allows us to be a true partner in the development of products and solutions like few other companies. Across our many leading firefighter safety, detection and industrial PPE technologies, we protect more than 40 million workers around the world. We do not take this responsibility lightly. It drives our passion for continuous innovation. Now on Slide 6. Over the past several years, we've been diligently working to build MSA into a higher growth, more profitable company with greater resiliency and durability. With customer centricity at its core, our strategy has focused on accelerating our innovation engine, enhancing our go-to-market strategies and customer-facing activities and increasing productivity and driving efficiency.
To complement our organic efforts, we've effectively deployed capital across several acquisitions to better serve our customers, expand and diversify our end markets and win in regions where we've been underpenetrated. Our deliberate actions resulted in a high-performing, more agile company with an even greater ability to drive stakeholder value over the long term. Slide 7 summarizes the financial impact of these actions. We have executed on our financial commitments to deliver solid mid-single-digit growth and 490 basis points of margin expansion while compounding earnings at an attractive rate. We've also added to our high-performance talent while continuing to reinforce our culture, putting us in a tremendous position to build on this performance.
I'm incredibly proud of our team's accomplishments, which have MSA well-positioned as we move forward. With that, I'll now turn the call over to Steve, who will take you through the key highlights from the quarter and year.
Steve Blanco: Thanks, Nish, and good morning. I'm on Slide 8. I'm pleased with our performance in the fourth quarter and the year. The team delivered on our growth margin and cash commitments through effective collaboration and excellent execution. Our continuous improvement efforts and MSA Business System, or MBS, initiatives continue to take hold across our global footprint, and we are seeing results. Our team continues to develop and introduce innovative safety solutions, secure new business opportunities and operate with greater efficiency and purpose. We exist to serve our customers and help them solve their safety and compliance challenges. That puts innovation front and center in everything we do. As part of our differentiated development program, we work closely with our customers to deeply understand their processes, pain points and desired outcomes.
We're committed to utilizing the latest technologies, cloud connectivity and AI to develop and deliver products and solutions that delight our customers and have a material impact on efficiency, transparency and effectiveness of safety programs around the world. With the recent supply chain constraints, our team has done a nice job of being agile and pivoting between product redesign and new product development. Driven by engagement and flexibility, we've been able to work through the supply chain challenges to meet both existing customer demand and deliver on our NPD commitments, introducing several exciting new products like the Sentry io controller and M8 SCBA and achieving 37% product vitality for the year. On the commercial side, we had solid execution across the portfolio and several exciting wins.
In firefighter safety, we announced significant contract wins, such as Los Angeles City Fire Department, Pittsburgh Bureau of Fire, the U.S. Air Force and several U.K. fire authorities, including West Midlands Fire and Rescue Authority. We had healthy growth in our firefighter protective apparel and helmets business as well. We also made solid progress in our detection business. We landed new business across our fixed detection products, including Bacharach's multiyear win with the U.S. Navy. We also expanded into new geographies with our recently introduced Altair io 4 portable gas detector. Additionally, we continue to see strong interest in our solutions in the energy markets, including LNG and hydrogen applications. Within industrial PPE, our team drove double-digit growth for the year.
Our differentiated fall protection solutions like the V-SHOCK series continue to garner strong customer interest and gain share, and we secured attractive wins in our head protection business. In support of our growth, we drove process improvements supported by our business system to enhance fill rates and get product in the hands of our customers. We also continued our multiyear journey to optimize our global footprint and most recently opened a new modernized manufacturing facility in Morocco to support future growth in our international business. We're seeing results of the deliberate actions to enhance efficiency and productivity across our global operations. Moving to Slide 9. We had a strong finish to the year, demonstrating our ability to execute in dynamic market conditions.
The combination of strong execution, our highly differentiated portfolio and resilient demand resulted in double-digit sales growth, strong margin improvement and robust cash flow. Demand for our firefighter safety, detection and industrial PPE solutions remained healthy throughout the year, and we were better able to serve our demand as supply chains began to normalize. We continue to operate in a market with secular growth tailwinds, and our unique portfolio positions us to capitalize on these trends. Our enhanced focus on margins and cash conversion provides us with ample resources to invest in attractive growth opportunities and drive sustainable profitable growth. Leveraging our core values, the MSA team continues to raise the bar on performance, with strong commercial execution, product innovation and operational performance, all while deepening our talent bench.
We have a clear trajectory for future growth and margin enhancement, and we will build on our already strong foundation. Before concluding, I want to thank our more than 5,000 associates around the world for their steadfast commitment to advance our mission and drive improvement across our company. I'll now turn the call over to Lee to review our financial results and outlook.
Lee McChesney: Thank you, Steve, and good morning, everyone. We appreciate you joining the call today. I will now review our differentiated performance in the fourth quarter and full year 2023 and provide color on our 2024 outlook. Let's get started on Slide 10 with the quarterly financial highlights. Sales are $495 million, an increase of 12% over the prior year with positive contributions across our product categories and regions. We had a healthy balance of volume and pricing in the quarter and currency translation added 2 points to the overall growth. Orders also remained solid in the fourth quarter, up mid-single digits, and we are seeing similar trends so far in 2024. Market conditions are generally healthy, and our new business pipeline is very active.
Consistent with the normal patterns we see in our business in the fourth quarter, our book-to-bill was below 1x, and we continue to reduce our backlog closer to normal levels. Backlog reduction was largely in our firefighter safety business and, to a lesser degree, in detection. As supply chains began to improve, our team through the implementation of the lean principles of MBS recognized an opportunity to improve our processes and increase customer fulfillment while converting past due backlog and sustainably reducing inventories. As a result, we are seeing meaningful benefits including improved on-time and in-full fill rates, reduced inventory levels and higher cash conversion. Now moving on to margins. Gross profit in the fourth quarter was 48.1%, up 360 basis points over the prior year.
Operating margin on a GAAP basis was 20.6% in the quarter. Adjusted operating margin was 23.3%, up 170 basis points over the prior year and incremental operating margin in the quarter was 37%, at the higher end of our target range. Margin increases were largely due to volume leverage, price cost benefits, improved productivity and innovation. Our laser focus on driving sustainable margin improvements across all elements of the P&L continue to yield results. GAAP net income in the quarter totaled $76 million or $1.93 per diluted share. On an adjusted basis, diluted earnings per share were $2.06, up 14% over the prior year. The increase was largely due to higher operating profit, which was partially offset by the higher interest expense and a higher adjusted tax rate in the quarter.
Now I'd like to review our segment performance. In our Americas segment, sales increased 15% year-over-year with growth across the product portfolio, including double-digit growth in firefighter safety and detection. Currency translation was also a 1% benefit in the quarter. Adjusted operating margin was 29.8%, up 120 basis points year-over-year. Margin expansion was largely driven by volume leverage, price realization and productivity. We also had solid results in our International segment, where growth was up 6% year-over-year and was well balanced across product categories and regions. Currency translation was a 3% benefit in the quarter. Adjusted operating margin of 18.2% improved by 120 basis points year-over-year, driven by volume leverage, price cost management and a favorable mix.
Now moving on to Slide 11, where I'll review our full year results. Broad-based demand drove total net sales of $1.8 billion, up 17% versus last year. We saw double-digit growth in both segments with healthy contributions from price and volume across our product categories. For the year, adjusted operating margin was 22.2%, up 320 basis points from last year. Incremental operating margin was 41%. Adjusted diluted earnings per share were $7.03, up 24% over the prior year. Overall, MSA's performance was very strong, and we continue to identify opportunities to drive further improvement in the years ahead. Now turning to Slide 12. Free cash flow in the quarter was $147 million, representing a conversion rate of 180%. Free cash flow growth benefited from higher earnings and solid execution with working capital, which was reduced by 760 basis points from the prior year.
We invested $12 million in CapEx, repaid $145 million in debt and returned $18 million in dividends to shareholders. For the full year, adjusting for the divestiture we completed in January, free cash flow was $397 million compared to $115 million in the prior year. We significantly strengthened our financial position in 2023. At the start of the year, in conjunction with the divestiture of our legacy liability subsidiary, we communicated our intention to prioritize debt reduction in the subsequent 12 to 18 months. Through strong teamwork and collaboration across the company and the use of our MBS principles, we exceeded our commitment finishing the year at 1.0 net leverage. We repaid $289 million of debt since the divestiture as a result of robust cash generation, profitable growth and disciplined investment strategies.
Net debt at the end of the year was $455 million and cash was $146 million. Adjusted EBITDA for the full year was $449 million or 25.1% of net sales. Our overall financial strength enables us to continue investing in the business to drive long-term profitable growth and return excess capital to our shareholders. Now I'd like to move to our 2024 outlook on Slide 13. We've taken a balanced approach in our outlook based on the positive sector dynamics in our industry that underpin demand, the essential nature of our differentiated products and solutions and the stability and diversity of our portfolio and end markets. However, the operating environment continues to be dynamic, with an increasingly uncertain macroeconomic and geopolitical climate.
With this backdrop, we remain responsibly optimistic in our outlook, which balances the opportunities and risks we see ahead of us. We expect to generate mid-single-digit sales growth in 2024, with incremental margin and cash flow conversion aligned with our long-term targets of 30% to 40% incrementals and near 100% free cash flow conversion. We expect to have greater visibility in the first half of the year, and we will continue to be agile in the event the operating environment differs meaningfully from our expectations. For modeling purposes, I will provide our view on the below-the-line drivers that impact earnings. We expect our tax rate to be between 24.5% and 25.5% in 2024. Based on current rates, interest expense is expected to be approximately $40 million.
Finally, pension and other non-operating income will be similar to 2023 levels. As I now look forward, I'd also like to share my warm congratulations and gratitude to our global team for their solid execution in 2023 and on achieving excellent performance across sales, profitability and cash flow. We are well-positioned entering 2024 and are firmly focused on delivering on our financial commitments, in creating sustainable value for our shareholders. I now turn the call back over to Nish for closing remarks.
Nish Vartanian: Thanks, Lee. I'm on Slide 14. Our team delivered a strong quarter to close out an outstanding year in 2023. We continued our purposeful investment across all aspects of our business while also delivering on our growth, margin and cash flow commitments. These actions and the divestiture we made last January further improved our strong financial position, and have provided for greater capital deployment optionality. We have a team of high-performing associates around the world who are driven by our mission. Their commitment to continuous improvement enables MSA to better serve our customers and advance our mission. I'm confident our focus and determination will help drive long-term value creation for our shareholders and continue to make MSA safety the preferred choice for our customers around the world.
One last thing before I wrap up, I'm now on Slide 15. We'll be hosting an Investor Day in New York and via webcast on May 22, where we'll provide a detailed review of our business strategy and financial goals. I'm excited about this event, and I look forward to seeing many of you in New York. With that, I'll turn the call back to the operator for a Q&A.
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