MSA Safety rporated(MSA) - 2020 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a revenue decline of 10%, with local currency revenues down 8% due to weakness in the industrial portfolio, partially offset by strong shipments of SCBA into fire service and growth in respiratory revenues [31][32] - Adjusted operating margin improved by 30 basis points to 18.7%, with year-to-date adjusted operating margin also at 18.7%, up 50 basis points despite headwinds [42][43] - Free cash flow conversion was strong at over 150% of net income, with a total of $63 million generated in the first half [44][45] Business Line Data and Key Metrics Changes - The industrial PPE segment, particularly fall protection, head protection, and portable gas detection, faced a 25% decline due to work site shutdowns [12] - The SCBA business in the fire service market saw a 3% revenue increase, driven by momentum in China and Europe, as well as solid execution in the U.S. [13] - Air-purifying respirators (APRs) accounted for 10% of Q2 sales, increasing over 60% year-over-year, contributing $23 million in incremental revenue year-to-date [15][16] Market Data and Key Metrics Changes - The company experienced a 9% revenue increase in China, with incoming orders up 16%, indicating a strong recovery in that market [33][120] - Europe reported a 7% decline in revenue, while the Middle East and Africa experienced low single-digit declines [84][85] - The backlog remained healthy, consistent with the end of the first quarter, providing support for the second half [32][120] Company Strategy and Development Direction - The company is focused on providing a safe work environment for employees while advancing its mission and investing in growth opportunities [9][10] - Strategic pricing, cost controls, and restructuring programs have driven operating leverage despite revenue declines [11][28] - The company is positioned to pursue M&A opportunities as business conditions improve, with a strong balance sheet supporting these initiatives [30][135] Management's Comments on Operating Environment and Future Outlook - The near-term outlook remains unclear, heavily influenced by the timing and shape of economic recovery, virus resurgence, and funding conditions [24][25] - Management expressed confidence in the diversified portfolio and strong balance sheet, which position the company well for challenges ahead [26][49] - The company remains committed to productivity improvements and long-term margin expansion projects [49][130] Other Important Information - The company incurred approximately $3 million in higher costs related to the pandemic, impacting gross profit margins [34] - SG&A expenses decreased by 18% on a reported basis, reflecting the benefits of restructuring programs [36] - The company plans to maintain discretionary cost controls through the third quarter to navigate uncertainty [38] Q&A Session Summary Question: How did business cadence trend through the quarter? - Management noted strong order pace in April, a weak May, and an encouraging June as the economy began to reopen, but early July showed some softening [55][60] Question: What is the status of distributor inventory levels? - Management indicated that much of the product is made to order, but distributors cut inventory levels in May, with some recovery in June [61][62] Question: How much of the International segment's improvement is due to cost savings versus restructuring? - Management highlighted that improvements in the International segment are largely due to restructuring initiatives and pricing strategies [65][70] Question: What caused the decline in the portable gas business? - The decline was attributed to direct market conditions, with budget cuts and project delays impacting sales [76][77] Question: How did Europe perform compared to the rest of the world? - The Asia business, particularly China, performed well, while Europe saw a 7% decline, reflecting the impact of COVID-19 [81][84] Question: What is the outlook for revenue growth in the third quarter? - Management expressed uncertainty about revenue growth due to the unpredictable nature of COVID-19 and its impact on business operations [90][130] Question: What is the status of the M&A pipeline? - The company continues to engage in discussions with potential acquisition targets, but integration challenges due to travel restrictions remain a concern [93][135] Question: Were temporary furloughs a factor in margin performance? - Management confirmed that there were no temporary furloughs, and cost savings were primarily from reduced travel and lower variable compensation [122][123]