Good morning and welcome to the MSA Safety, Inc. Fourth Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Elyse Lorenzato, Director, Investor Relations, MSA Safety, Inc. Please go ahead.

Thank you, Andrew. Good morning, everyone and welcome to MSA's fourth quarter earnings conference call for 2019. With me here today are Nish Vartanian, President and CEO; and Ken Krause, Senior Vice President, CFO and Treasurer. Before we begin, I'd like to remind everyone that the matters discussed on this call, excluding historical information, are 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 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 in our Form 10-K filings with the SEC. MSA undertakes no duty to publicly update any forward-looking statements made on this call except as required by law. We've included certain non-GAAP financial measures as part of our discussion this morning, and the non-GAAP reconciliations as well as our Q4 earnings press release are available on our Investor Relations website at investors.msasafety.com. With that, I will turn the call over to our President and CEO, Nish Vartanian.

Thanks, Elyse, and welcome everyone. For all of us at MSA, 2019 marked another year of strong financial performance, driven largely by our ability to consistently bring game changing innovations to market that help protect the lives of workers throughout the world. Financial highlights for the year include revenue growth of 5%; earnings grew about two times the pace of revenue, and we had very healthy levels of cash flow, all in-line with our expectations that we discussed at our Investor Day event in New York City back in November and on our past earnings calls. I want to thank and recognize the entire MSA team for their engagement and dedication to our mission of protecting people's lives. As I've said many times before, our mission is the foundation of our success. It's what drives our associates' passion to develop the most advanced safety technology for our customers, which in turn enables higher levels of both safety and productivity. This morning, I'll highlight a couple of those unique solutions as well as our progress on another key initiative with which we're making progress. But first, I'd like to provide a quick overview of our fourth quarter revenue performance, which is a clear indicator that our product solutions are driving MSA's business forward. We realized revenue growth of 5% in constant currency, despite a very difficult comparison from a year ago, particularly in our International segment. While the environment remain choppy in certain short cycle industrial products, the momentum that we gained from new products and gas detection and fall protection certainly helped offset that choppiness. Not only was invoicing strong, the order pace was healthy, as we had a book-to-bill ratio of greater than 100% in the quarter. We invested heavily in R&D in the quarter as we move closer…

Thanks, Nish, and good morning everyone. Before I discuss the quarter in more detail, I'd like to start with a few highlights of our full-year performance. We finished the year well with revenue growth of 5% on a constant currency basis for both the quarter and the full-year. We had a strong finish in orders as well with a quarterly book-to-bill in excess of 1 time. It is great to see this sustained mid-single-digit growth in our business and we're entering 2020 with a very healthy backlog. We remain favorable in the cost equation and executed a number of restructuring programs that drove incremental operating margins north of 35% for the year. As a result, full-year margins increased 60 basis points from 2018 which includes about 40 basis points of dilution from our acquisition of Sierra Monitor. Our strong free cash flow results in Q4 and for the full-year reflect our ongoing focus on improving working capital. We continue to execute around the balanced capital allocation strategy in 2019. We deployed $33 million for the Sierra acquisition and funded $64 million of dividends to shareholders, representing an 11% increase from a year-ago. Now I'd like to walk you through our fourth quarter results. Quarterly revenue increased 5% in constant currency. We had a 1% foreign currency headwind on revenue. Fixed gas and flame detection or FGFD was a leading driver of growth as we continue to see great momentum with our 5000 series gas monitors across both our reporting segments. Our new V series family of fall protection products continue to drive growth in the Americas, and was a major contributor to our sales vitality metric in 2019. Looking at our SCBA business after a softer third quarter driven by product approval and funding delays in the U.S., which impacted…

Thanks, Ken. I'm pleased with MSA's performance in 2019 and the progress against our long-term goals. For 2020, we continue to plan for mid-single-digit revenue growth based on our current backlog and order pace. And we're confident in our market positions. There remains a great deal of macro uncertainty. So we're approaching 2020 and particularly the second half with caution. We've been active in identifying a number of initiatives that we can implement if the business were to slow in the second half of the year. However, we remain focused on enhancing our market leadership positions through disruptive technology and customer-driven innovation and executing ongoing productivity programs to maintain a strong incremental margin profile. Thank you for your attention this morning. And at this time, Ken and I would be glad to take any questions you may have. Please remember that MSA does not give guidance. Having said that, we will now open up the call for your questions.

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Stanley Elliot of Stifel. Please go ahead.

Hi, good morning, everybody. Thank you for taking my question.

Good morning, Stanley.

Nish, kind of starting off, I mean you mentioned the mid-single-digit growth and then you also mentioned caution in the back half. I mean is that implying that there's a difference in terms of the cadence of how the year should progress? I know you don't want to give guidance, but since you brought that up, I thought I would just ask for clarification?

Right. We expect by year-end mid-single-digits, Stanley. We just don't know how the year will play out. There's obviously some disruption here in the first quarter with China, and then you have the Election at the back half, back-end of the year and maybe some tightness in spending. But we think as we see things today with the backlog we have in the pipeline of business that by year-end just like this past year, we could see mid-single-digit growth and continue to leverage that.

Perfect. And then you talked a little bit about the R&D expenses. Can you give us a little more color kind of where the allocation was, why the need for the acceleration, and what sort of level of spending should we think about in 2020?

You know, Stanley, we've always talked about excuse me between 4% and 4.5% on R&D spend. And we're up the upper end of that for the fourth quarter and as these programs and the products come to market, you may see an uptick in spend on a quarter-to-quarter basis and periodically, you might even see us dip below 4%. So it's just a matter of where we are and the development of a product and as we get closer to the launch of a product. So fourth quarter was fairly heavy, heavy. But we expect to be somewhere in that 4% to 4.5% range in 2020.

And then lastly, can you guys talk about the M&A environment? I noticed the transaction costs continue to move up, kind of higher? What are some of the characteristics I guess you are looking forward in an asset? And then maybe talk a little bit about the leverage capacity or potential deal size out there that you're exploring?

Well, I'll answer initially and then flip it over to Ken for some more color. But Stanley as we talked about in the past, we're very active when it comes to looking at some inorganic opportunities. Our balance sheet allows for some nice opportunity there. We've had a lot of success with acquisitions in the past. We'll continue to stay very disciplined with our approach to acquisitions to ensure that we continue to add assets that that support and enhance our position in the marketplace around our mission and what we do. So we continue to look at our markets that we serve those core product lines, possible extensions to that core product line. And we've been very active, to be quite honest, the results that we've seen to-date really don't equate to the effort that we've put in, there's been a lot of effort around looking at acquisitions and exploration and the valuations are fairly high. And as you know from our past activity, we're pretty darn disciplined to make sure that we can make acquisitions that are a good fit for the organization from a cultural standpoint, from a product standpoint, or within the markets we serve and provide a good return for our shareholders. So we're going to continue to be disciplined in that manner as we go forward and continue to look for those opportunities. With that, I’ll turn it over to Ken if you want to add some color.

Yes, the only thing I would add there, Nish, is that we do certainly have opportunities on our balance sheet to continue to be active on the M&A front. I've talked consistently about the expectation that we would be very willing to lever up the two-and-a-half times in this current environment for a deal. That would, that would strategically make sense for us. We're very much mindful of where we are in this cycle and also very mindful of continuing and committed to continuing to maintain an investment grade balance sheet. And so that's certainly top of mind with us. But with that said, we have a strong track record of bringing on past M&A that has made a lot of sense. It's been strategic and has added value to the portfolio and we intend to continue to follow that course as we move forward.

The next question comes from Richard Eastman of Robert W. Baird. Please go ahead.

I'll start with a simple one for Ken. Could you talk in the adjusted Op margin number? Could you just repeat, I believe that includes the LIFO charge and also could you just give us a sense of what the Sierra Monitor OpEx was in the quarter?

Yes, that's a good question, Rick. And so when we look at the margin performance in the quarter, it was around 17.3% on an adjusted basis. We had about 40 basis points of dilution associated with Sierra Monitors in that margin profile. The LIFO impact was around 50 basis points. And then R&D of course, was about 80. So if you add those three things, or if you consider those in the analysis, the margin was around 19% on a more consistently reported basis.

Okay. And then as we move forward, Ken, just to continue that thought, again the business seems to be structured and kind of pushing towards this kind of consistent 30%, 35% incremental. And should we assume on an adjusted Op profit basis, that maybe we could target 50 to 75 basis points of improvement for 2020?

Rick that's a -- when we look at the overall profitability profile, you're correct in expecting and continuing to expect incrementals of 30% to 40%. I'll let you go through and model what that might mean on an operating margin basis. But with mid-single-digit growth and with 30% to 40% incrementals, we should expect to see improved operating margins for 2020.

Yes, and again, I just -- I threw the adjusted in there, because it's a little easier to work with, but there's no reason to assume that any of the operating expense metrics fall out a line to deliver that type of incremental.

No, we are still very much structured to provide 30% to 40% incrementals. In fact, in the quarter, when we look at the operating income that we generated and you consider the fact that we had $2 million of LIFO and you had $3 million of R&D higher. If you add those or consider those in the analysis your margin -- your incremental margin was around 35%. So we very much are and what's good to see in the business is the International margins coming on with 14-plus-percent operating margins on 1% growth. It's hard for me to find a time and go back in time to find a point where we had that type of profitability performance. And that's really being driven by all the work we're seeing on the cost structure side, the productivity side that positions us well to continue to improve our business and bring on higher levels of profitability.

And I think I actually personally probably owe you, your due on International? I asked the question when we were going the other direction. So I need to acknowledge the fact that you guys are doing a great job. And Bob is certainly doing a great job. Just one more question, if I might, Nish, when you look at 2020 and we're carrying forward this kind of mid-single-digit growth rates. If I if I look up and down the product categories from your perspective, to the short turns businesses stay challenged here. Is that maybe where there's more risk than in some of the other businesses where you have a new product driver or you have some backlog? I mean, how should we think of the product lines, do you enter the year thinking each will -- each has kind of inform of target to grow mid-single-digits by product line?

That's a fair assessment, Rick. As you look at the short-term or short cycle products especially heavily focused around industrial being the hard hats, right? The hard hats stick out to you, I'm sure. And so that's been very choppy for us. And we don't have any indications that that is going to turn around in 2020. So we expect head protection, industrial head protection to continue to be somewhat choppy as we go into the year, we're excited about the new H1 helmet that has a nice sell point on it but the volume on that's not going to be tremendous. Overall, the market for that is not a huge market. But some of that will offset a bit of it. And but we do see some choppiness around industrial head protection and the adoption of the ALTAIR 360 or the A360 that will be a little slower ramp-up a lot like the 5000 series gas detector. So we'll probably see some significant numbers on that around in 2022, 2020 I mean 2021, 2020 will be a ramp-up year for that product. So I think that that's a fair assessment. In the oil and gas markets, the backlog for FGFE remains really strong. The backlog for breathing apparatus is good coming into the year. So some of those other products, we're in pretty good shape with.

Does the traction around the M1 again give you comfort with a mid-single-digit for SCBA for the year?

It really does, we don't have the large order that we had in 2018 offset. We had that very large order in 2018. And that's out of the system. So we're going against some normal comparables year-over-year and we're getting some nice traction and good feedback on a product and evaluation. So that that certainly will give us some help going forward.

I'm sorry; I promised just two more questions. One on Sierra Monitor, what kind of revenue did it contribute for the quarter?

Yes, the number on that that was about 1% revenue growth in the quarter, Rick is what we saw in that business.

Okay. And then last, I know the disaster in Australia with the wildfires, did that influence the business? I'm thinking more negatively than nothing. There's no positives that come out of that, but where there any pluses and minuses to your top-line from Australia, which is always historically been a decent market for you?

No, there wasn't at all, Rick, it really didn't impact our business at all.

The next question comes from Edward Marshall of Sidoti & Company. Please go ahead.

Hey, guys, good morning. So Nish, you talked about, I think when we were at the Investor Day, we talked about higher spend of R&D. I know you're well within your target of 4% to 4.5%. I'm curious as we kind of look forward; do you think you'll continue as the sophistication of the products that you're targeting the new rollouts? Do you think this will stay at kind of the higher end of the range for a while? Or do you think that'll normalize back down to the mid or low end of the range for R&D?

I think it'll normalize back down a bit to the normal level. I really don't see us in 2020 going much over 4.2%. But it could, I mean there could be some opportunities and we could accelerate some projects if we see some opportunity to bring some things to market sooner or some new opportunities. But I really don't see us getting too far outside that range that you've seen in the past.

And I guess if you just not, if you just look at the average of this past two quarters, it's kind of at that 4.2% range anyway. Was there less spend maybe in 3Q more in 4Q, is it just kind of more timing than maybe anything?

Yes, it's all a matter of timing on where we are in a project and some different aspects of it.

Got it, got it. When I look at book-to-bill, which has consistently been pretty good. I'm wondering if there's anything it was pretty even across the board or was there some chunkiness maybe in certain business lines for instance SCBA because this is a pretty decent backlog number, given the service, I understand the events, but the outlook I think overall has been a little bit more cautious or uncertain around certain periods in 2020 than normal. So I just want to try to get an understanding as to what maybe you're seeing maybe from the short cycle versus long cycle businesses, and how that might be reflected in the book-to-bill?

Sure. So the backlog is really built around, I think you mentioned the breathing apparatus we talked about earlier, on self-contained breathing apparatus because we're coming into 2020 with a nice sized backlog for both the Americas and International predominantly in the Americas. And then fixed gas and flame detection, fixed gas and flame detection we saw a nice build of business going into the fourth quarter and that business continues to be nice and strong. The 5000 Series gas monitor really is -- really gaining great traction in the marketplace. And we believe we're taking some share there and they're still really good spend on these major projects that we're seeing both in the U.S. and some pipeline activity in refineries and then also internationally, so there's some nice opportunity there. The backlog picked up a bit within Globe. So the Globe product line had some nice backlog built up, we had some nice strength in business in the fourth quarter and we had a bit of a supplier issue in the fourth quarter that slowed things down and then also things compounded a bit and that we gave the employees there the week of Christmas off, which was something different this year. So we had a -- we've got a real nice backlog in our Globe business coming into 2020. But the other businesses, that most of it’s fairly short-term and the backlogs are normal.

Got it, got it. And then if you look at the International margin, I'm trying to get a sense as to how much we've always seen kind of a pickup in the fourth quarter, it's been excessively larger this year. I'm curious, there's a couple of initiatives that you've been working on in particularly the emerging markets versus developed nations growth. And then obviously, channel optimization. I'm curious if there's been any inroads in those particular businesses that might have helped or is this purely operational and structural operational changes you've already implemented and rolled through? Or is it something seasonal that happens in the fourth quarter?

Yes. It's more of the operational changes and improvements that we've made in the business that you're starting to see go-forward and we have more of those coming in 2020. We've -- as we talked about, we believe over a five-year period; we talked about a 500 basis point improvement. And it's a grind, we just keep have to grind through as we restructure, we focus on our channels of distribution and focus on some improvement in our pricing. And then obviously, some of the restructuring and how we go-to-market in our back office operations. And Bob and his team continue to do a really nice job of that. And you're starting to see some of those savings come through in the fourth quarter and certainly have some more on a go-forward basis. So we're really pleased with where we are on our program there.

Great. It's good to see, good job on that business line. It's long overdue, I guess. Thanks guys. I appreciate your comments.

Thank you.

[Operator Instructions]. The next question comes from Larry De Maria of William Blair. Please go ahead.

Hi, good morning, everybody. First, a clarification. Obviously, you talked a little bit about the possibilities of the second half slowdown, you mentioned the Election, et cetera. Are you seeing anything more similar than questions from your customers, project pipeline, et cetera that would back up your kind of clinical caution, which may be prudent but just anything tangible out there that would suggest a slowdown and as you mentioned, the mid-single-digit growth by year-end. The implication that it could be flattish overall by year-end and that would bring the entire year down to mid-single-digit growth. Is that how we're thinking about it?

Well, first of all, Larry on the first part of your question, we're not getting any indication from our customers, or even our pipeline. When we look at our pipeline of business, through our sales organization and a lot of data points, we're not getting any real strong or clear indication that there will definitely be a slowdown in the back half or even a fourth quarter. But that being said, there's an awful lot of talk and you hear a lot of people in the business community talk about the uncertainty going into the Election and possibly tightening down on budgets and pulling back on some spend. And so if there is some pull back on spend for a short period of time in the fourth quarter or in the second half of the year due to the Election, that'll certainly impact our business in certain segments. I don't think it'll impact things such as breathing apparatus. I fully expect the fire service grants to flow as they normally would and we'll see in a normal flow of fire service business flow. But you might see some project business slowdown or some people stop or tap on the brakes a bit on some projects they're releasing towards the back half of the year and that's why we have some caution. And that's where that comes from. So we're just preparing ourselves for that. We do expect -- China side, we do expect our business through the first half of the year to follow its normal pattern. It's just that that back half of the year, we're just a little cautious about as we go into 2020.

Okay, fair enough. Secondly obviously you mentioned LUNAR, you talked about LUNAR for a while now getting closer to the launch. There are lot of questions about how you think about the actual market opportunity looking at a few years, just a $0.5 billion market from zero today or how do you think about this looking out maybe three years, five years?

Right. So, it's a nice opportunity for us, we still haven't settled on pricing for the device, it's not a $500 unit; it's not a $5,000 unit. So the pricing will be somewhere in that in between there. The market opportunity, it could be significant -- it could be as significant as the thermal imaging camera market where you could have several of these devices on fire trucks. And so we've sized the market and looked at it, but we just really don't want to stay to number until we get more comfortable with the adoption. And as we get into more of this in 2020 and 2021, but it could be a fairly significant market for us, you look at the thermal imaging camera market that grew to be a significant market and this could follow that, so to speak and display some of those devices.

Well how -- nobody signs a thermal imaging market then?

The thermal imaging market for MSA was in that $25 million range at the peak time for us.

Okay. And then you mentioned China as far as I listened to it, I jumped on late, but what's the impact that you’re expecting because obviously China is best source of growth recently, how do you kind of quantify China this year?

As we talked about China -- China is about represents about 5% of our business. And we expect to see some disruptions here in the first quarter and hopefully that'll be about it, we're ramping-up production as we speak but there has been some disruption obviously in our production here in the first quarter. And hopefully that short lived and we'll be able to offset that as we go through the year. I fully expect that once we get this situation behind us, I would expect the government to turn-off spending and try to stimulate the economy. So that could help the back half of the year overall for our business because we've had some nice growth in the past in China. So we don't look at China as being negative this year. It could be fairly positive in the back half of the year, if things continue to improve and the government turns up the heat on spending. So there could be some opportunity there as you go-forward.

This concludes our question-and-answer session. I would like to turn the conference back over to Elyse Lorenzato for any closing remarks.

Thank you. On behalf of our entire team here, we want to thank you again for joining us this morning. If you missed a portion of the conference call an audio replay and transcript will be available on our Investor Relations website for the next 90 days. We look forward to talking with you again soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.