MSA Safety Incorporated (MSA) Q4 2011 Earnings Report, Transcript and Summary

Welcome to the MSA fourth quarter earnings conference call. My name is Christine and I will be your operator for today’s conference. [Operator Instructions] Please note today’s conference is being recorded. I will now turn the call over to Mark Deasy.

Good morning, everybody. Welcome to our fourth quarter and yearend earnings conference call for 2011. As Christine said, I'm Mark Deasy, Director of Corporate Communications. And joining me this morning are Bill Lambert, President and Chief Executive Officer, Dennis Zeitler, our Senior Vice President and Chief Financial Officer, Joe Bigler, President of MSA North America. And with us for the first time on these calls are 2 presidents of MSA International, Ron Herring and Kerry Bove. Ron is responsible for our business in Europe, Northern Africa, Russia and Middle East and India, while Kerry oversees our business in Asia, Australia, Sub-Saharan Africa and Latin America. This call is originating from the MSA Corporate Center here in Cranberry Township, Pennsylvania. Our fourth quarter press release was issued this morning at 8:30 A.M., and we hope everybody has had an opportunity to review it. The release is posted on the homepage of MSA's newly redesigned website which by the way has a new address, and that address is www.msasafety.com. This morning Bill will provide his commentary on the quarter and yearend results and then Dennis will review our financials in more detail. After Dennis's comments, we will open up the call for your questions. Before we begin, I want to remind everybody that the matters discussed on this call, with the exception of historical information, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements, including, without limitation, all projections and anticipated levels of future performance involve risks, uncertainties and other factors that may cause our actual results to differ materially from those discussed here. These risks, uncertainties and other factors are detailed from time to time in our filings with the SEC, including our most recent Form 10-Q which was filed on October 27, 2011. You are strongly urged to review all such filings for a more detailed discussion of these risks and uncertainties. Our SEC filings can be easily obtained at no charge at www.sec.gov, our own website and a number of other commercial sites. That concludes our forward-looking statements. So at this point, I'll turn the call over to Bill Lambert for his comments. Bill?

Thank you, Mark, and good morning everyone. Let me begin by saying thank you for joining us today on this conference call and for your continued interest in MSA. I apologize for my voice. I have a cold and I seem to be losing my voice a bit, but I feel fine, so that’s the good news. Presumably all of you have seen our fourth quarter earnings release and have our financial figures with all comparisons corresponding to the equivalent period in 2010. To begin, I want to say at the outset that we're pleased to report today's quarterly results, which demonstrate another quarter of solid performance by the MSA team. The team remains committed to executing our corporate strategy, and the financial results reflect our ongoing efforts to: one, grow MSA's core business in both developed and emerging markets throughout the world; two, focus on developing innovative new products that help keep our customers safe in the workplace; and three, optimizing our global manufacturing operations and our business efficiency under initiatives like Project Magellan. While our quarterly results reflect continued demand for MSA products around the globe, we are keeping a watchful eye on the ongoing economic uncertainty with a particular focus on Europe and what impact the deteriorating economy in that region might have on the markets that we serve. As you saw in our press release, our consolidated sales in the quarter were $304 million, increasing $19 million or 7% compared to the same period a year ago. Our comparative earnings per share were $0.46 per share versus $0.33 per share for the same period in 2010, an increase of 39% on the 7% sales increase. When analyzing our EPS, I think it's worthwhile to note that during the quarter we recognized pre-tax non-operating restructuring charges of $2.4 million primarily related to our ongoing efforts to shrink our cost structure in Europe. These restructuring charges equated to roughly $0.05 per basic share after-tax. But also, our reported EPS included pre-tax non-operating foreign currency losses of $1.5 million or roughly $0.03 per basic share, after-tax. So excluding these charges, our earnings per share was $0.54 per basic share in the fourth quarter versus, as I indicated, $0.39 per basic share last year. The increase in sales volume across many of our product lines combined with our continuing efforts to improve margins and our success in emerging markets continued to positively impact our results during the quarter. A record fourth quarter and annual revenues for 2011 were driven by the focus our team is placing on driving demand for our core product lines, which includes fixed gas and flame detection systems, industrial head protection products, supplied-air respirators, portable gas detection instruments and fall protection products. For the first 4 of these product lines, our efforts resulted in fourth quarter sales growth of 13% for fixed gas and flame detection, 18% for industrial head protection, 14% for supplied-air respirators and 10% for portable instruments. While these products continued to show solid growth in core industrial markets throughout the world, seasonal slowing in construction markets negatively impacted sales of fall protection products. For the quarter, fall protection product sales increased 4% around the world. Driving demand for core product groups is a very critical element of our long-term corporate strategy, and we remain focused on executing this initiative in both developed and the emerging markets throughout the world. Another critical element of our strategy that contributed to our solid quarter was the continued progress we're making in managing manufacturing costs and improving gross profits as part of our operational excellence initiative under Project Magellan and our efforts to improve our integrated supply chain processes globally. We remain focused on this initiative and efforts in this area helped to contribute to the 200 basis point improvement in gross profit margins we saw during the quarter. As always, Dennis will provide more detail about this progress in his comments. Throughout 2011, we remained committed to developing innovative new products that enhance the MSA brand and advance the level of worker safety in the industries that we serve. For the year, our research and development expense was $39 million, up from $33 million in 2010. Almost 50% of the increase in R&D spending is associated with the addition of General Monitors. Looking at the quarter, we invested $10 million in R&D compared to $9 million in the same period a year ago. I continue to be pleased with the results coming out of our global product leadership team and those that result from the investments we're making in R&D. During the year, we successfully launched several new and exciting products that helped to drive our record revenue results for 2011. But certainly a highlight of these efforts was our new Altair 5X portable gas detector. The Altair 5X is an updated version of our very successful Altair 5 portable gas detector, but it takes advantage of our internally developed XCell gas sensor line. This new line of sensors provides unmatched performance and an industry-leading lowest total cost of ownership. The investments we are making in the portable gas detection product line are really paying off. We continue to grow portable gas detection revenues as we convert significant customers from the competition. For the year, we achieved revenue growth of 14% and achieved a 300 basis point improvement in margins across this core product group of portable gas detection instruments. Also introduced in 2011 was MSA's new twin-leg self-retracting lanyard for personal fall protection and our new V-Gard hardhat accessory line. What is especially encouraging is that both of these products were developed under a joint development effort between our newest R&D design center in Suzhou, China, and our product development teams here in the U.S. I was especially pleased to see that for the full year, fall protection sales increased 19% and they showed a 400 basis point improvement in gross margins. During the fourth quarter, we launched the PrimaX IR infrared fixed gas detection system used to detect combustible gases. This product offers the widest operating temperature range in the industry and is very well suited for the oil and gas market in regions where temperature variances can be extreme like in Russia or in the Middle East and in China. We also introduced the Gassonic Observer H fixed gas detector, and as part of our ongoing cross-branding efforts with General Monitors, the MSA UltraSonic EX-5. More and more global customers are recognizing the need to safeguard personnel, their capital equipment and the environment by utilizing General Monitors' industry-leading ultrasonic gas leak detection technology. While the Observer has applications across many industrial markets, its technology has seen the greatest application in oil and gas markets. The key features of this technology are the speed of sound response time, wide area of coverage, integrated digital communication protocols using a HART and Modbus, event logging and the highest levels of safety integrity for our customers. This product was launched with global approvals to support our strategic objective to penetrate the oil and gas market around the world. Overall, I think it's exciting to see the results of our global product leadership team as we continue to innovate and bring new products to customers in our key target markets around the world. Now, I'd like to turn your attention to the results in each of our geographic segments, and I'll start with North America. While sales grew 4% over the same quarter a year ago in the North American core industrial market, it is encouraging to see the strong growth in multiple core MSA product lines. More specifically, sales of head, eye and face protection products increased 19%, while portable gas detection product sales increased 8% in North America. While sales showed solid growth in these core product groups, profitability in North America also improved with margins increasing almost 600 basis points for these same product groups, due to the combined effects of strategic pricing on new innovations that we introduced and lower costs from operations. In the North American military market, we saw a $9 million increase in shipments of advanced combat helmets during the quarter. As we've indicated in previous call with you, we are nearing the completion of this most recent contract with the U.S. Army and we'll see continuing quarterly decreases in ballistic helmet shipments throughout the balance of 2012 as we finish this contract. Although municipalities continue to deal with funding cuts, cuts that continue to produce headwinds to our business in the fire service segment, we recognized a modest increase in sales of $2 million in the fourth quarter for the North American fire service segment. This increase came about as we converted several major municipal fire departments throughout United States and in Canada from competitive SCBA to MSA's FireHawk SCBA. Looking at Europe, ongoing economic uncertainty and austerity measures continue to provide headwinds to our market segments there, especially in our government-related business. As we have noted in the past investor calls, our business in Europe has historically been heavily dependent on military, first responder and government-related fire service funding. While business and economic conditions are very challenging across Europe, we remain committed to executing our strategic initiatives aimed at targeting new channels of industrial distribution and lowering our overall cost structure there. Improving performance in Europe continues to be a long-term improvement initiative of management with a forecasted flat to flow single-digit GDP growth rate for most of Western and Central Europe in 2012, a key focus of ours continues to be lowering our overall cost of doing business in Europe. But our performance from MSA Europe does have elements of a growth story in it that I think are worth noting. Sales across Eastern Europe, Russia and the Middle East and India were up 18% or $8 million for the year. This growth exceeds the GDP growth rates for the regions and demonstrates our growing presence and share gains in these markets. The strength in these markets is primarily attributable to infrastructure projects as well as strong oil, gas and petrochemical market segments. I'm pleased to report solid results in the international segment, which includes the geographies of Asia, Sub-Saharan Africa, Australia and Latin America. Our focus on emerging markets and the efforts we're putting forth in this segment are very much reflected in the positive results we've reported. Growing our business in international emerging markets, as I noted earlier, is another key element of our corporate strategy. Broadly across international segment, our fourth quarter industrial sales were up 10% when compared to fourth quarter of a year ago with real growth being 15% when we exclude the effects of weakened foreign currencies. We continue to grow our business in areas like Latin America where local currency revenues increased a very healthy 26% during the quarter. Full year sales in Latin America were up 28%, while sales across Asia were up 25%. It's clear from this performance that our team remains highly committed to advancing our strategy, and the results in our core industrial markets within the emerging international regions are gaining traction and are certainly encouraging for us to see and report. During 2012, we plan to continue to make investments in China, Southeast Asia and Latin America as we advance MSA’s strong market positions in these critical geographies. I mentioned earlier the great success we are seeing in the marketplace with the Altair 5X portable gas detector, but clearly another highlight for us throughout all of 2011 was our success in fixed gas and flame detection by integrating General Monitors, which we acquired in October 2010. Over the past year and through the addition of General Monitors, our fixed gas and flame detection business has been an important contributor to MSA's overall strengthening performance and we continue to see solid results in this area of our business as we enter 2012. Combined MSA and General Monitors sales of fixed gas and flame detection products during the fourth quarter were strong, reaching $56 million with a 14% increase compared to the same period over a year ago. It's exciting to see the success of the efforts we made this on this front during 2011. Our team remains highly engaged and the investments we are making in R&D and in launching new cross-branded products are helping us create the world's leading line of fixed-gas and flame detection instruments. The revenue in earnings growth, we have reported over the past several quarters, demonstrate how our global team is effectively executing our corporate strategy here at MSA in light of the generally modest and slow economic recovery, we saw during the past year. While we continue to closely monitor uncertain economic conditions, especially in Europe, I assure you that we remain focused on our long term strategy in those areas of our business that will help us to accelerate growth, increase our market share and ensure the company's long term success. I'm delighted that we're seeing a modest strengthening in U.S. industrial market conditions and continued strength in the emerging markets around the world. But we expect uncertain economic conditions to remain in much of Central and Western Europe for most of 2012 and we remain diligent in our efforts to find opportunities for growth, where they exist while lowering our overall cost of doing business in Europe. Overall, I remain cautiously optimistic and believe our business and position in the market has continuing opportunities to strengthen. I feel that our strategy is appropriate, and provides us with sustainable competitive advantage, helping us to achieve record sales and profitability in 2012. For the future, I look forward to providing you with additional progress updates on the strategic multi-year initiatives I noted at the beginning of my remarks. Now I would like to turn the conference call over to Dennis Zeitler, our CFO who will provide you with more insight into our financial results. Dennis?

Thank you, Bill. Good morning. I would like to give you some further insights into our fourth quarter performance and comment on the balance sheet and cash flow statements. Additional information will be available next week when we file our Form 10-K with the Securities and Exchange Commission. As Bill mentioned, sales in the fourth quarter of 2011 were $304 million, an increase of 7% over the fourth quarter of 2010 and our highest quarterly sales ever. Compared to last year, international sales were up 10%, North America up 9% and Europe down 2%. By markets the story is also good with the fire service up 6%, military up 23% and core industrial business which is 2/3 of our business up 5% over last year. And local currency terms, our core industrial sales were up 7% driven by a 15% increase in our international segment. Our North American segment sales in the fourth quarter were up 9% compared to 2010, comprised of a 6% increase in the fire service, a 57% increase in military and a 4% increase in core industrial sales. We shipped over $15 million of ACH helmets in the fourth quarter and that contract will begin winding down in the first quarter of this year. In our core industrial business, head protection was up 19%, portable gas detection up 8% and fixed gas and flame detection was up 21% with a strong contribution from General Monitors. Our sales of gas masks, air-purifying respirators and ballistic body armor decreased this quarter in North America compared to 2010, with a lot of this decrease being Paraclete Body Armor sales, a business we sold in October. Our international segment sales were up 10% this quarter in U.S. dollars but were up 14% in local currency terms. Fire service was up 12%, military was down 6% on a very small base and core industrial sales which are 82% of our international sales were up 10% in dollars or up 15% in local currencies. We had solid growth in each of our major international geographies with excellent results from Latin America and South East Asia. In Europe, our reported sales were down 2% with the weak euro contributing 1% of that decrease. Without the negative currency impact, our European fire service sales increased 4%, military was down 18% and core industrial sales were flat compared to 2010. The economic uncertainty in Europe has certainly impacted our business there in recent quarters. The other view of our sales performance as to separate the 2 portions our business that historically have been the most volatile, the U.S. fire service and the U.S. military, from everything else. Our U.S. fire service sales of $34 million was an increase of 5% and our U.S. military sales of $20 million, was an increase of 57%. Then, when we look at all of our other globally diversified sales, which comprise 82% of our total sales this quarter, these sales were up 6% in local currencies or 4% in U.S. dollars. Our gross profit for this quarter was 39.5%, up 200 basis points from 37.5% last year. Our global efforts to reduce manufacturing cost, the increased production volume at our factories and more effective pricing all contributed to this gross profit improvement. It is our expectation that we will continue to improve our gross profit margin performance in 2012 by higher volumes, cost discipline, product mix and value based pricing. Selling and administrative cost in the fourth quarter were are unchanged when compared to last year and down slightly compared to the third quarter of 2011. We will continue to control and to reduce the numerous aspects of administrative cost. The $2.4 million of restructuring expense in this quarter was driven by staff reductions in Western Europe as we made a number of moves to reduce personnel expense in light of that challenging economy. Our investment in new product development this quarter was $10 million, an increase of 9%. We continued to investment in exciting new product that will be coming to market in 2012 such as more of our V-Gard brand at Hard Hat accessories. More of our best-in-class XCell Sensors and cross-branded MSA and General Monitors fixed gas and flame detection products. The result in operating income excluding those restructuring charges and currency expenses is $32 million, an increase of 43% over the fourth quarter of 2010. That is just under 11% of sales in the fourth quarter and an average of 11% for the full year that is 300 basis points higher than the full year of 2010, and our plan for 2012 is for our operating income as a percent of sales to exceed 12%. Our consolidated tax rate this quarter was 32%, slightly lower than in previous quarters. However, it is significantly higher than last year because last year we accounted for a full year of the R&D tax credit in the fourth quarter. The bottom line is net income of $70 million or $0.46 per basic share compared to $0.33 last year. However, on a pro forma basis, excluding restructuring in currency expense, our net income would be $20 million which is $0.54 per share. As for the cash flow statement, we had a very good year and we plan to carry our successes into 2012. Our cash position has not changed significantly over the year and stands at $60 million composed entirely of cash outside the United States. Our total debt at the end of 2011 was $342 million, down $35 million during the year. It is our plan over the next several years to significantly reduce this outstanding debt. Other sales for full year of 2011 were up $200 million. Our working capital at year end only increased $3 million. Our net spend for capital equipment purposes during 2011 was only $12 million due to some significant asset dispositions and we paid $38 million in dividends. In summary, our net cash flow for the year was $74 million, which was 106% of our net income. Those were my comments. At this point, Bill, Joe Bigler, Ron Herring, Kerry Bove and I will be more than glad to answer whatever questions you may have. Please remember that MSA did not give what is referred to as guidance and that precludes most discussion related to our expectations for future sales and earnings but having said that, we will now open the call to your questions.

[Operator Instructions] Our first question comes from Edward Marshall from Sidoti & Company.

My first line of question is on the gross margin and I guess we could drop that down to operating income as well. How much more at this base do you think you can squeeze out? I know you have the cost cuts going on Europe and of course the acquisition of General Monitors and you mentioned scale and pricing as well. But you mentioned that 12% or exceeding 12% on the operating line next year. So I'm assuming that starts from a gross margin, how do we think about this?

We don't break it down between gross margin and other cost of sales and operating expenses, but it's all the way through that P&L and as we've talked about in the past. There is certainly some opportunities for lower cost and higher gross margins but we have some significant opportunities in other cost of sales. We had some significant variations in factories in 2011 that we do not anticipate in 2012. And we also have several initiatives for reduced admin expenses in 2012. So going from 11% in 2011 to 12% next year, it's all the way down through that P&L.

Do you know what the -- can you quantify the cost take outs that you're going to see in '12 that weren't there in '11 from either administration or just infrastructure taken out or facility?

In total or specific items?

In total would be fine -- or if you have specific item.

We had $5 million worth of professional fees in 2011 that we do not anticipate repeating in 2012, that's an admin expense. We had $6 million worth of variations and scrap, making ACH helmets this year. We're not going to have that much in 2012. So there’s some major items up and down that P&L, 0.25% here, 0.50% there.

I saw that you're -- switching gears a little bit, I saw you at nicely profitable in Europe and I know you're doing lot of work there. What inning are we in, as far as the reductions that you're seeing in Europe? I'm assuming that's where the restructuring charges continue to show up on the P&L. Where are we with that process? I know it's a lengthy process as well.

Right. Ed, this is Bill. We did incur more restructuring charges, I think $2.4 million in the fourth quarter of last year. Most of that if not, just about all of that was related to Europe and ongoing efforts to lower that cost. We'll continue to see a little bit of that. If things deteriorate further in Europe, we’ll likely seeing more of that. But as we look at Europe and where we went through the efforts that we have over the last 2 years there, we think for at and appropriate size for the organization. We're getting… [Audio Gap] appropriate size for the organization. It is a bit of A Tale of Two Cities; you have Western and Central Europe which have a lot of headwinds right now. You have Eastern Europe and into Russia that is growing quite dramatically and where we think we're gaining some significant share over there. So it's a matter of redistributing, if you will, certain resources where you have gotten them planted in Central and Western Europe but we need more resources, pushing our product and entering markets in Eastern Europe and into Russia. What inning are we in for the overall transformation of Europe? Well, I'm very pleased to see that for the full year, we showed profitability in Europe, about $7.3 million and versus the loss reported last year. But we still have innings to go, that's for sure. I would say we’re probably, and I looked at Dennis also and also to Ron Herring here, since Ron is leading most of this effort. I would say we're probably in the fifth inning. I think there is ways to go. But we’ve definitely, I think, turned a corner in profitability. I do feel much more confident about that. I'm really pleased as I indicated in my comments to see the level of growth that we saw out of Eastern Europe and into Russia. And I'm enthused by some of the things that I continue to hear in that area. But I'm also concerned about the ongoing uncertainty in Euro-based countries and what affect that might have.

And if I could I think you mentioned one of the weaknesses in your industrial business was on your fall protection line. And I'm curious, I think there was a rather large acquisition in the year, might have been in the middle of the fourth quarter, of a fall equipment line. Are you seeing any pressure, maybe from consolidation in that market or from the acquisition that occurred, the market share losses or anything else that you can comment on?

No, actually the market share that's captured by the International Safety Equipment Association and gets published regularly shows that we are gaining market share. I reported that we had a 4% sales growth in the fourth quarter in fall protection. And I'm not too concerned about that 4% sales growth because it's a seasonal decline in fall protection for the year. MSA’s fall protection sales were up 19%. So we continue to grow our business in fall protection. We're doing a lot of good things in that regard. And I see continuing opportunities for growth. Maybe not as much here in the North American market or the U.S. market but certainly outside of North America, we see tremendous opportunity for continued growth. The acquisition of Capital Safety by KKR that was announced in the fourth quarter unclosed. I don't think that that' an indicator that there is a continued consolidation in that particularly area. When we look at the total breadth of the number of competitors in fall protection around the world, I don't that one major acquisition is an indicator that there is major consolidation going on.

That just went from one private equity to another in essence.

And then finally, the orders through 1Q so far, or at least business at 1Q. Has there been any pick up in any specific area or anything that's different than what you saw transferring through the fourth quarter?

I think that, and I'll try to walk a fine line here because we don't give guidance but I think as I indicated in my comments, near the end of my comments, I am pleased to see what's feels like a continuing strengthening in U.S. economy. The North American economy, the order of book looks pretty healthy and I'm pleased to see what's happening there. And also outside of North America, I think the emerging markets continue to be unaffected for the most part by the European crisis. And so that's good news. So our Asian business and Latin American business continues to be strong. Central and Western Europe is really the issue here and that's where you've got a lot of trepidation, not just -- primarily by our customers and in many cases those governments over there that are funding the fire service markets and militaries in Central and Western Europe. So that affects our business over there. That's the area that gives us the greatest concern right now.

Our next question comes from Walter Liptak from Barrington Research.

I wanted to ask you about, you provided us with that operating margin target for 2012 which is nice, but I wondered what level of revenue you need to get, if your revenue is flat in 2012, can you get there or do you need some revenue growth?

You are not forecasting flat growth, spot sales are you Walt?

No, I'm just trying to getting an idea what you are forecasting for revenue in that 12% number?

I think Bill might tell you. He is forecasting record sales and record earnings for 2012 as far as an increase.

For Europe, can you talk about just the trend during the quarter especially Central Europe, October, November, December, what you're seeing?

I think we mentioned somewhere in our conference calls comments, either Dennis or me that in the fourth quarter sales for Europe were down 2%. 1% of that down was due to the change in the euro. So it was down slightly in the quarter. We're not seeing a complete pull back of sorts over there. We're just seeing a lot of indecision, quite honestly. So our sales were down about 1% in Europe in the fourth quarter. I think it's accurate to characterize our business over there as just a very low growth, flat-to-low growth expectation with the possibility of downside risk, should things begin to fall apart.

I wonder if you could tell you us, you broke out Western Europe versus I guess, Eastern Europe, Russia. What percentage of sales is Eastern Europe, Russia, net of out of the whole comment [ph] in which is -- will be your Europe sales?

Certainly under 10%. Does that sound about right?

For the year, our sales in that area were a total of $50 million. What we call our Middle Eurasia zone or MEZ is Russia, India and the Middle-East. We had a total of $50 million worth of sales.

So it's a good sized business but at 10% if the quarter of Europe is down, it's going to be a headwind that's what causes you concerned, is that right?

Right.

The probability in Europe looks good despite the tougher revenue environment. Can you maintain this level of profitability or improve it in 2012 even if revenue is flat to down?

We expect to be able to improve it.

And I was wondering about military sales, what was the full year revenue number?

Globally?

Yes.

Full year military number was $95 million. Does that sound about right?

Yes, that sounds exactly right, Bill. $95 million.

And you mentioned the end of the helmet contract, what do you expect in for 2012? How much is rolling off?

I can give you a global forecast. I can tell you that in the U.S. we shipped $38 million worth of ballistic helmets in 2011. And we'll probably ship less than $10 million in 2012. And of course we also will not have Paraclete at all. We shipped about $11 million worth of Paraclete product in 2011. That will be 0. So you put that 2 together we're down about $40 million in U.S. military sales.

The next question comes from Holden Lewis from BB&T.

I had questions about that the comment about revenue being up versus down, I guess when you put all of the pieces together, military -- U.S. military, you probably give up, as you said, $40 million. U.S. fire safety, maybe you can sort of enlighten us as to expectations there but it seems that you've got some good orders there. But that momentum is still difficult until you get to the new products in 2013. So maybe that is down after a good year. Forex is going to work against you, I mean, there are some pretty big pieces that work against revenue being up next year. So I guess, I’m just trying to get to the, how confident are you, given those pieces and what you expect there, if that revenue will be up and where is that going to come from? Europe, obviously being challenging.

Well, my confidence is based on where we stand today in February. And how we ended last year and how we started this year. And the strength that I commented on with regard to the North American market and the emerging markets of the world and in Asia, in Latin America and in the Middle Eurasia zone. That's where the growth is coming from. The industrial market is where the growth is coming from. Oil and gas in particular, is a very strong segment for us. We'll be leveraging the strength that we saw last year in our fixed gas and flame detection business as well as portable instruments business. The U.S. fire service market is not as robust as it was a few years ago, but it's by no means unhealthy. And we continue to fight it out and I think we reported a 2% growth in our fire service sales in the fourth quarter of last year. And even in North America for the full year, we showed a 4% growth in fire service sales. So it's difficult in the North American fire service market, no question, but there is opportunity for low single-digit growth and that's where we're fighting it out. If we can keep Europe at flat to low single-digit growth and make the other improvements operational that we're looking for there, we think we can see -- I can put the rationale together that shows record sales, record profits for 2012. And that's what we're expecting to hit this year.

Can you give some insight as to what contribution you'll get from new products? I don't recall exactly what products got introduced when, during 2011. Does that look like it’s kind of -- 2012 will be a bigger year for new products? What does that tell you about the margins? Just some update on new introductions and how we're proceeding with that.

Yes Holden, we do have a pipeline of new products. We have been focused on product leadership and new product development efforts. Over the last 10 years, we've really been focused in this area. We have a new pipeline of products we'll be introducing this year, but as has been our practice in the past, we don't give that specific guidance on what impact from those products would we expect to see this year. So I'm going to avoid going down that path of trying to give you some sort of expectation of those new products and their impact to our top line growth.

The new products that you've introduced, we know that a few of them had substantially higher margins that you have done strategic pricing in. Does all of that seem to be continuing the play out as you issue all of these new products that the margins are substantially higher than the maybe the incorporate or the products that proceeded it?

Yes, that has been our intent. That's been a part of our corporate strategy here over the last few years. We've talked about it at investor calls and investor meetings, and it continues to be a part of our strategy. So the gross profit margin of improvements that you see are coming from things like higher volumes and a smaller footprint operationally, from a cost discipline that Dennis mentioned before from the product mix, and from value-based pricing on some of these innovative new products that we're introducing to the market. So that's where we can break that apart and look at that closely inside the company and we can see that we're getting a nice impact, nice effect from these new products that we're bringing to market.

And then I guess the last way to ask, maybe a similar question, given the numbers you’ve given before. I think last year new products as a percentage of sales finished up –correct me if this is wrong, but I thought it was like 23%. What does that percent look like in 2011 and I guess, would you expect the percentage to increase in '12?

We don't get that calculation ‘til end of the first quarter. And I don't have a forecast for this year.

What do you expect for -- do you expect the 23% is higher or sort of same rate?

Probably about the same is a good guess, because anything that's been out more than 2 years, we have to drop off. And I couldn't tell you, Holden, off the top of my head what's going to get dropped out of that list as opposed to what gets added to that list. There’s kind of arithmetic to that.

Okay. But you expect in '11 maybe new product percentages is probably about the same in 2012? Do you think the percentage goes up or are we dropping and adding it at sort of the same rate, because your goal is obviously to get back into this 30% or 40% range, right?

That's exactly right, Holden. I would expect us to see some incremental improvement in 2012, a percent or 2, or probably still below our 30% target. That 30% to 40% is a target range that we had set for ourselves that we had actually achieved for a number of years prior to the economic crisis and recession in 2009 and '10. But I would expect we would see some incremental improvement in 2012, and I would imagine that last year's was probably in that 23%, 24% range just as it was for 2010.

The next question comes from Richard Eastman from Robert W. Baird.

Bill or Dennis, could you just double-back to the gross margin for a minute in the quarter? I would have thought given the commentary on the sales mix in the quarter, SCBA sales, some of the higher gas detection equipment sales, that the gross margin would have been even a point better than it actually was at 39.5%? And I probably would make the same comment when I look at the number sequentially and I look at the better volume growth that you have from Q3 into Q4. Why did that gross margin not come in more like 40.5%? Was there any one-time hits there?

Well, there are 2 things I can think of and I bet Joe and Ron might think of some other ones. But one is the fact that we sold $11 million more ACH this quarter, and that's sort of very low margin. And some of the SCBA sales were very large competitive bids, lower than our typical SCBA gross margin. Joe, do you have any other thoughts on that?

Those were the 2 key drivers.

Dennis, I think you mentioned in you commentary that there was about, did you say $6 million of scrap on the ACH program? Is that ECH program or ACH program?

ACH. The existing helmet that we're shipping on, when it goes right down, we made no money selling ACH helmets last year.

That $6 million wasn't in the fourth quarter, was it?

Not all of it, no.

What do you expect for restructuring expense in '12, just $4 million, $5 million, 0?

0.

So when you talk to your operating profit EBIT target of exceeding 12%, that's essentially a GAAP EBIT margin?

Yes, I think we can hold to that as long as we don't have any significant change in the economy in Europe.

Does that also carry over to the gross profit margin? In other words, are you going to see a full point of improvement at the gross margin? Does it fall through there?

Yes, most of it will, yes.

Maybe one last question on the military side. We talked about Paraclete being $11 million and we have the helmet drop-off. Given what's left in the business, is there any prospects for growth there? I guess it's mostly SCBA and some gas mask business. Is it best just to look at $11 million as military sales and lock it by the difference between Paraclete and the ACH business? Is there anything – prospects there?

I think that your assessment for the North American segment is right. It is about SCBA, supporting the SCBA sales that we have there to that market and there are some smaller product lines that will also support military. But it won’t be, we don’t think, we’re not, say, based on how the government has delayed and extended deadlines for the next ACH contract, we don't expect any impact this year from helmets and we would expect that we would finish off our current contract each quarter, which showed declining sales most likely until we finish that contract off. But then outside of North America, we are a large provider of gas masks to the militaries outside of North America -- riot control gear to certain militaries or paramilitary forces around the world. It is also an important segment to us. So that outside of North America, Rick, I think when you look at it, we don't see quite the same downward impact that we feel in North America.

So we might actually see some growth offset. And do I remember -- non-U.S. military sales, are they about half the business or will be? They probably will be the next year.

They will be more than half next year, but they were just a little bit less than half this year.

Is there, I know I’m putting you on the spot here on the call. Is there a point here where we just phase down the military business and just absorb it into industrial sales? I mean, if you didn't make any money on the ACH business, why pursue anything more there?

Those are very good questions, Rick. And rather than be put on the spot here, I can only tell you that we have some, what we think are some very good capabilities on the military side and in helmet production, in particular. We had some hurdles to clear last year and some difficulties that hurt us, as Dennis gave detail to. And as we look to the future, we need to decide whether or not that's an area that really does have future growth for us or really doesn't. And that's a decision that I think is best made here, and then we'll make the announcements publicly whenever that is made.

The good news, Rick, is that this is a record year sales with nothing significant coming from the U.S. military. It is unusual. Historically, when we have record sales and record earnings, it was usually impacted by significant U.S. military sale. We've had military sales as high as 22%, 23% of our business. And we are looking at 2012 being a record sales and record earnings with very little U.S. military business.

I think it's all fair. I just look at it a little more from the capital allocation and the investments that you made. Again, there is an alternative for that capital, the industrial or fire service market that actually has a better return.

Your next question comes from Brian Rafn from Morgan Dempsey.

Talk a little bit about, and I think the SCBA, the air tanks, you are coming up I think on new standards for fire & rescue in points. When does that start rolling out? How long is that? When do you start to seeing some material sales?

I would think that we would -- that standard becomes effective late this year. I look to Joe Bigler. Is it December of this year?

Yes, really it'll have an effect on the market in 2013. You won't see any effect of the new standard here in 2012. In 2013 and beyond, it should be a key catalyst to the fire service market in North America.

Joe, how do you see that rolling out? Is that more of a metropolitan Class A, Class 1 urban fire department? Is more volunteer? Do smoke jumpers and fire rescue, airborne -- how do those sales start in 2013?

Well, I think from a North American perspective, it will be pretty much across the board, particularly starting with the metropolitan departments. When the new standard is issued, it really has some wide broad application. So that's going to be one catalyst, the new standard. The second big catalyst is a lot of those air cylinders are approaching their 15-year life and some of the breathing apparatuses is obviously from September '11 as approaching 10-year life, which is basically the useful life of an SCBA. So whether it's a volunteer department or a metropolitan department, this new standard combined with the length of service, these units have been in service, is going to provide a fairly robust market. We believe that will start in 2013 and run for several years in North America.

When you guys look at your fire service equipment, you look at fire helmets and self-contained breathing apparatuses, gas detectors, do you guys ever package on a turnkey basis or bundled products in a package or are they all sold separately through different lines?

They're generally package. We don't do any of the bulk packaging or bundling packaging. Our distributors, our distribution network certainly does that quite effectively, where it's necessary for a major department or whatever, but we don't do that. The products are sold individually.

What are you guys seeing relative to raw materials, any commodity inflation, metals and plastic resins and that type of things as you see it for your products?

I think that what we are starting to see is increasing pressure on some of those commodities, plastics, resins in particular associated with the price of oil and in increase of oil. On the metal side, though I'm not aware of us, and I look to geographic presidents, on the metal side I'm not aware of any particular strains that we're feeling in that regard. Are you aware, Dennis?

No. I think metals are fine but you're right on the resins and plastics.

In resins, would you say mid-single digits, low-single digits, double-digits? What are you seeing, kind of price inflation?

Those vary all over the world, there’s big variations in that so I couldn't really give you a global number.

If you look at what you guys are running capacity utilization, the number of ships you're running maybe overtime. North America, Europe, Asia or maybe fire versus military versus industrial, how do you see labor utilization here in 2012?

I think here in the U.S. our factory utilization is probably in the 80% range, so we've got some amount of upside there. In Europe it's much lower than that. We've got probably plenty of room to add there. I look at Ron. Outside of that, Kerry, in your factories, Latin America and Asia. But China and Brazil are running in the 80% range. But Australia, South Africa are not. So we've got room there.

And then if you guys look at, you talked about ramping up, getting back to your historic norms on new product launches, but would you say there is a change in early adopters receptivity of customers for new products or is there a more of a malaise or is that customers are very sensitive to the latest and greatest gadget?

I think we're seeing an increase in sensitivity to the latest and greatest and that's why we're seeing some of the kinds of successes that we are with innovations that we're introducing. So I would not characterize it as malaise at all. I would be quite opposite and say that we're seeing broader acceptance of the innovations that we're bringing to the marketplace.

You talked about sales revenue growth. As you look at 2012, is the growth in top line primarily a function of unit volumes delivery or you mentioned you're getting a little pricing inflation. What's kind of the mix between pricing inflation and unit volume?

I'd say that there is a piece of it that is pricing related, strategy pricing related. I would say that the bigger piece grows volume and getting more products into the markets. And as I said we saw those strong 20% plus growth rates in the emerging market areas. That's primarily being driven by increased volume.

I have just got one final. You guys have been kind of mum [ph] on the ballistic combat helmet. As you see U.S. forces, Marine, Army, ground units being rotated back to the U.S. out of Iraq, historically DoD has abandoned equipment. They have left equipment. Equipment has been stressed. Do you see any positives in the next generation helmet from the fact of just replacement? Obviously it's certainly been somewhat the way but if the stuff is stressed and old and left for Iraqi forces obviously I it has to be replaced at some point.

I think so. I think you're right in general. I think that the enhanced combat helmet, the ECH which is not yet in production. And which has struggled by one of the competitive producers of that helmet. That has a price point which is so much higher than where the advanced combat helmet is. I think that would provide some significant headwinds for the Army and the Marines to broadly adopt that helmet as their choice of the next generation helmet. I've got to believe the finances of doing that are going to provide a lot of headwind to that. We’re probably looking at -- whatever replacement rate you're looking at or the military might be looking at, the technology is probably going to be based much more on today's existing advance combat helmet than some next generation thermoplastic helmet.

And then is there any residual, just on the ACH helmet, for, you mentioned red riot control, I would think like S.W.A.T. or police as a buffer for military or is the military is so, so large that the police is negligible.

Well, on a global basis police is not negligible, paramilitary is not negligible for us. But we have a broad range of products in the product line, everything from the TC 2000 which is similar to the advanced combat helmet that the military uses, not exactly the same but quite similar, to a line of riot control helmets and gear that are produced in our French factory. So we have got the product lines, for those areas. So I wouldn’t call it negligible but I'd call it's still smaller part of our business.

The next question comes from Jack Ryan [ph] from Dougherty & Company.

Most things have been asked and answered, but I was wondering on the General Monitors side, when that was acquired with very high gross margin profile. With the integration, anything you taken away from what they did in the manufacturing side or pricing side, that you are able to implement going forward with the combined entity?

In 2011, I don't know, there is nothing that we took away or consolidated from our operations perspective. There were opportunities to reduce lower cost. And in our supply chain activities to improve some of those margins in our healthcare cost and that sort of things from employee programs that we had. I would characterize those as much smaller and it was never about generating value and cost, it was all about growth. And seeing how we bringing these teams together on a global basis and we introduce cross-branded products with new technologies and that's where we've seen the growth and the improvements.

What you're looking for, Jack is how did the rest of MSA benefit – how does the rest of MSA benefit from what we might have learned, of how General Monitors does business? I think we are just very proud and very happy that we managed that General Monitors stayed as profitable and as successful as it was after we bought them. I think the integration opportunities are down the road as far as our fixed gas. We now call it fixed gas and flame detection. We don't call it General Monitors versus our MSA permanent instrument business. We are merging the 2 businesses. And that's where the real opportunities will be when we run all of our permanent gas detection business as one.

Your final question today comes from Edward Marshall from Sidoti & Company.

Just a quick follow-up. You touched on the SCBA and the potentially pent up demand in the replacement cycle there. I'm going to give you a chance and, Bill, I don't want to wear your voice out, but I'm wondering if given you a chance to brag a little bit, have you tested the market share? I'm assuming you're showing equipment in trade shows, what's the acceptance and then of course what's the competitor, I know you put a lot of R&D efforts in into this, and if you could just talk about that?

I think on the SCBA front, again, the International Safety Equipment Association tracks breathing apparatus sales from I think all of the competitors who produce SCBA. And so we're able to see what the total market is doing. And we obviously know what we are doing. And we've seen some nice gains in market share over the last couple of years and certainly last couple of quarters in SCBA. I'm pleased with the way even our existing products and some of the improvements we have made to it has gained market share. We have talked in the past about introducing new products to that market, anticipating the new standard in late 2012 and what impact that will have on the marketplace in 2013 and 2014. We're still on that track to introduce those new products. The acceptance has been very favorable in the alpha testing and some of the voice of the customer work that we have been doing to this point in time. But we've still got some improvements to make, some tweaks to make. And I think that once we introduce that product, that's when you'll see me jumping up and down and crowing about it. But right now, we're sticking to knitting and making the improvements to that product, anticipating what the needs of the customers are and serving those fire service markets on a global basis with the product portfolio that we currently have and the improvements we've made and introduced over the last 2 years.

That was the last question for today. Please go ahead with any final remarks.

We want to thank everybody again for joining us today. I want to remind everybody if you missed a portion of this morning's conference, an audio replay will be available on the MSA website for the next 30 days. And once again, we have a new website. And to give you that address, it is www.msasafety.com. On behalf of Bill, Dennis, Joe, Ron and Kerry, we look forward to talking with you again and hope everybody has a great day. Thanks again.

Thank you for participating in the MSA's fourth quarter earnings conference call. This concludes the conference for today. You may all disconnect at this time.