Mine Safety Appliances' CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: MSA Safety (MSA)

Call ST: 10:00

Call ET: 10:47

Mine Safety Appliances Company (NYSE:MSA)

Q1 2013 Earnings Conference Call

April 24, 2013 10:00 a.m. ET

Executives

Mark Deasy – Corporate Communications Director

Bill Lambert – President & CEO

Dennis Zeitler – SVP & CFO

Joe Bigler – President of MSA North America

Rob Cañizares – President of MSA International

Kerry Bove – President of MSA International

Analysts

Edward Marshall -- Sidoti & Company

Richard Eastman - Robert W. Baird

Dick Ryan – Dougherty & Company

Operator

Welcome to the MSA first quarter earnings conference call. My name is Christine and I will be your operator for today’s call. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Mark Deasy, you may begin.

Mark Deasy

Thank you Christine and good morning everybody and I too would like to welcome you to our first quarter earnings conference call for 2013. As Christine said I am Corporate Communications Director and with me this morning are Bill Lambert, President and Chief Executive Officer; Dennis Zeitler, Senior Vice President and Chief Financial Officer; Joe Bigler, President of MSA North America; and Rob Cañizares, President of MSA International, who is responsible for business in Europe, Russia and Middle-East, India and North Africa and lastly Kerry Bove, President of MSA International responsible for Latin America, Asia, Australia, and also here in Africa.

Our first quarter press release was issued this morning at 8:30 and we hope everyone has had an opportunity to review it. The release is available on the home page of our web site at www.msasafety.com. This morning Bill Lambert will provide us commentary on our quarter. Dennis will review our financials and then Bill will conclude with formal remarks with the few closing comments. After that we will open up the call for your questions.

Before we begin, I want to remind everybody 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, 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-K, which was filed on February 20 of this year.

We strongly urge you to review all such filings for a more detailed discussion of such risks. Our SEC filings can be easily obtained at no charge at www.sec.gov, our own website and many other commercial sites. That concludes our forward-looking statements. At this point, I will turn the call over to Bill Lambert for his comments. Bill?

Bill Lambert

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. Presumably, all of you have seen our first quarter press release and have our financial figures with all comparisons corresponding to the equivalent period in 2012. As we discussed in our last call in February, I told you we were seeing uneven economic and business conditions in the early weeks of 2013. Older activity was choppy in January and to some extent in the February. This was due to seasonal slowdowns associated with the Chinese New year, holidays and vacations in the Southern Hemisphere and the uncertainties surrounding the sequestration issue in the US. I was pleased to see how older place show an improving trend during the second half of the first quarter and that has remained so into the first few weeks of the second quarter.

Well this does give us a little encouragement as we get into the second quarter. Uncertainty in the global economy seems ever present. Therefore, we remained diligent on managing and controlling operating costs to assure improved performance going forward. Additionally, our management team remains committed to executing our corporate strategy for the strong focus on one, growing MSA’s core business in both developed and emerging growth markets around the world, two, developing innovative new products that help keep our customer safe in the work place and three, diligent management of manufacturing and operating costs by executing efficiency initiatives like Europe 2.0 which as I have described before is the next step we’ve taken in our European transformation. This initiative is focused on the integration and alignment of our SAP IT systems throughout Europe. It is focused on transitioning Europe from a sub optimized affiliate based organization to one that is Pan European working under common process season data enabled by a common IT platform.

Our goal is to improve our customer service while decreasing the complexity and costs of our business in generating more robust financial performance out of MSA Europe. Of particular note, I am pleased with the progress we are making on the previously mentioned Europe 2.0 program. With the Easter weekend, we had our first go live event with the new system in Germany, our largest and most complex organization in Europe, with no disruptions in our business. In fact, we already beginning to see the operational business process improvement efficiencies that we had expected. Leading longer term to reduced costs and improved customer service. It is important to know that we have close to 70% of our Western European revenues under the Europe 2.0 system by the beginning of 2014. As you saw in our press release our consolidated sales for the quarter were $283 million. On an as reported basis sales were down $10 million from the year ago. However, the first quarter of 2012 included $5 million of ballistic helmet sales in our North American segment. This non-core business was divested in the second quarter of 2012.

Additionally, weakening foreign currencies decreased as reported first quarter 2013 sales by $5 million. Therefore, excluding the currency effect and the divested business impacts our sales were relatively flat when compared to the first quarter of 2012. Dennis will provide more of the financial performance details and a break-up by region and by market in his comments.

In my comments, I want to discuss and provide context to you regarding our strategy to grow this business and to expand our operating margins. Driving demand for core MSA product lines remains a key element of our long-term strategy. As you probably recall these lines include fixed gas and flame detection instrument systems, portable gas detection instruments, industrial health protection products, supplied air respirators, and fall protection products. Sales from these five core product lines comprised almost 70% of our total first quarter sales and showed local currency revenue growth of 3% when compared to the first quarter of 2012. When analyzing year over year core product sales growth I think it’s important to consider the significant amount of large orders we delivered in the first quarter of last year which is a tough comparison it’s a record first quarter for MSA.

Looking back at the first quarter of 2012 we delivered $5 million of non-recurring large fixed gas and flame detection instrument orders associated with large projects in the Middle East and in the Gulf of Mexico. As you might remember Q1 of 2012 was a record quarter for the general monitors. Excluding those a non repeating large FGFD project related orders from the year over year comparison. MSA core product sales growth was 6% in the quarter led by growth of 14% in breathing apparatus and 9% in portable gas detection products. In spite of the ongoing spending restrictions that we see in the fire service market, the results we are achieving in increasing breathing apparatus shipments are very encouraging. The fire service remains the key market segment for MSA.

I have talked in the past about how we are positioning ourselves with new products for what we anticipate would be strong years, late in 2013 and in the 2014 and in 2015 within the fire service. In these years, life cycle issues associated with older SCBA purchase 10 plus years ago with assistance to fire fighters grant money we believe will be evaluated for replacement. In just a few days one of MSAs largest fire service shows the fire department instructors’ conference or FDIC. We will get underway in Indianapolis. We will be displaying two new products at this show. A new SCBA called the MSA M7XT air mask and a new thermal imaging camera called the MSA evolution 6000. While we are currently in the final stages of obtaining the required niosh and NFPA approvals for these products, these new products provide you with the solid sense of optimism. We have until August to continue to sell our current version SCBA after that all SCBA sales would be of the new M7XT version which will meet the latest NFPA performance standards. We are focused on executing key initiatives and programs throughout the fire service. The construction, oil and gas, mining and other key industrial markets that drive profitable growth of core products and improved levels of customer satisfaction and loyalty. We continue to see strong results from these efforts throughout developed and emerging markets like Mexico where during Q1 our key distributor named MSA Mexico their supplier of the year. As we have noted in the past we remained committed to developing innovative new core products that enhance MSA brand and advance level of worker safety in industries we serve.

During the quarter, we showed solid progress in this area introducing innovative new products like the mining version of our very successful all care 4x portable gas detection product platform. This new version is specifically approved for the mining markets in North and South America. The incredible ruggedness to ability and low cost of ownership advantages that the all care 4x processes resonates with mining market customers in both developed and the emerging markets.

During the quarter our team also developed and introduced combination carbon monoxide H2S sensor which is the first combination sensor of its type in the world that is resistant to hydrogen. Carbon monoxide sensors that have been available to date are often cross sensitive to hydrogen which can limit their application in steel mills and another application.

The new combination design addresses that problem and brings all other performance benefits that customers have come to expect from MSA innovative line of XL sensors. Staying in the portable instrument category we launched major enhancements to the capability of our industry leading MSA GX2 instrument calibration and data management systems. These enhancements including new software named MSA linked pro allows you just the manage vast amounts of data from their fleet of portable instruments onsite and with often need expense of third party subscription service.

Our voice of the customer market research chapters indicate customers wanted this and we have developed and launched the right data management package at an attractive price point that many customers in market place are embracing as they look to lower their total cost of ownership.

The results that we see from our R&D team continue to be encouraging and reinforce my belief that innovation and the continuous flow of new product introductions are critical to success in the advance to safety markets that we serve. The progress we are making in managing manufacturing cost and improving gross profits as part of our operational excellent initiatives is also encouraging.

Our efforts to optimize our manufacturing footprint and improve our supply chain processes globally continue to yield solid results. Overall, these and other initiatives continue to favorably impact gross profit margin in the quarter which increased 80 basis points of Q1 a year ago. In light of the ongoing economic uncertainty we continue to implement and monitor contingency plans that require close management of operating costs. These contingencies plans have us focused on controlling costs without sacrificing ongoing development of talent or the required investments in new products and new technologies. Now I would like to turn the call over to our CFO Dennis Zeitler who will provide greater insight into our first quarter financial performance.

I’ll back after the CFOs report to provide some closing comments. Dennis?

Dennis Zeitler

Thank you Bill, good morning. So let me give you my insight in the first quarter performance and also comment on the balance sheet and cash flow statements. Additional information will be available later today when we will file our form 10-Q with the Securities and Exchange Commission. As Bill mentioned, sales in the first quarter of 2013 were $283 million down $10 million from the first quarter of last year. However the first quarter of last year had $5 million of US ballistic helmet sales and the strength of the US dollar compared to last year further reduced our reported sales by another $5 million.

So, on a local currency basis and excluding divested businesses our sales this quarter were flat when compared to the record sales we had in the first quarter of last year. By markets, our global fire service sales were up 5%. Our military business was down 39% and represented just 3% of total sales. And our industrial business representing 70% of sales was down to 1% compared to last year. By product, our five core product consist nearly 70% of sales and were up 3%. SCBA sales were up 14%. Portable instruments were up 9%. And fire protection was up 3%. Head protection was down 2% and fix gaining and gas and flame detection which we abbreviate as FG&FD was down 6% compared to an exceptionally strong first quarter last year.

Remaining 30% of sales were down 6% with decreases in most product categories as we execute the first element of our corporate strategy to focus on our core most profitable and growing product line. In North America, sales in the first quarter were down 1% due to the divested ballistic helmet business, otherwise sales were up 3%. Our sales of fire service were 10% higher this quarter than last year. Well our sales of US military were down 74% and were less than $2 million. The remaining 71% of our North American sales was up to 1%. By product group, our five core product groups 80% of sales in North America and were up 6% in total. North SCBA sales were up 21%. Portable instruments were up 6% and fire protection was up 10%, however, head protection sales and FG&FD were each down 1%. As noted earlier, cease gas and plane detection was exceptionally strong in the first quarter of last year. All other non-core product groups were down at total of 8%.

Our international segment reported sales were down 9% however 6% of this decrease is due to currency devaluation especially the South African Rand and the Brazilian Real, fire service sales were down 1% on those sales of fire helmets and TIC cameras. Military business was only $1 million and the remaining 80% of our sales in the international segment were down 3%. This unusual decrease are international sales happened in the region of the world where mining is our largest market and the recent weakness in commodity prices impacted our sales. Those are NDN countries of South America, southern Africa and Australia with our sales in these regions decreasing 11% and the region where mining is not as significant for us such as China, South-East Asia and Brazil our sales were up 14%.

In our overall international segment sales of core products are up 1% for the quarter and represented 53% of total sales. SCBA sales are up 10% and portable instruments were up 7%. However head protection was down 2% and both FG&FD and fire protection were down 10%. All other product groups were down 7%. The second element of our corporate strategy is to grow our sales in the emerging markets and sometimes investors tend to think of our international segment sales as an odd with the emerging markets but our report in North American sales include the emerging market of Mexico and our European sales include the emerging markets in Eastern Europe and Russia. While our international sales include the developed economies of Australia and Japan, so our actual emerging market sales were 29% of our total sales in the first quarter and they increased by 2% over last year.

This is not the growth rate that we have historically enjoyed and we expect to report better numbers regarding this element of our corporate strategy in the future. In Europe, our reported sales were down 2% but down 1% in local currency terms. European fire service sales were flat. Military sales were down 5% and the industrial business representing 56% of total European sales was down 2%. Core product sales were flat this quarter and comprised 66% of the total sales. SCBA were up 8% and portable instruments were up 15%, however head protection was down 6%. FG and FD were down 15% and fire protection sales were not material.

All other product growths were down 4%. Again, this is an especially difficult comparison for our European sales, which were up 17% in the first quarter of last year. Our gross profit ratio this quarter was 44.1% and improvement of 80 basis points over the last year with gross profit dollars of just $2 million less than last year, even though sales are $10 million less. The third element of our corporate strategy is to reduce cost, our global efforts to reduce manufacturing cost, the increased percentage of our sales coming from the higher margin core products 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 by increasing volumes, cost discipline, product mix, and value based pricing. We are pleased to be reporting to our investors that these efforts continue to bear meaningful results. Administrative costs were up almost $5 million this quarter compared to last year. $2.3 million of this $5 million was due to changes in how we must account for executives stock based compensation. Of this $2.3 million, half is a one-time charge. The other half relates to the certain senior executives who are now eligible retired, although they are far too young to seriously consider that possibility. We did not increase stock based compensation, we only accelerated the recognition of the expense into the first half of this year versus the second half. Therefore, stock based compensation of the remaining three quarters of this year will be $2 million less than last year.

Another $1 million of the $5 million increase in administrative expense related to salary inflation around the world, $1 million is one time business development cost that we incurred and $1 million is the decrease in recorded pensioning compared to the last year. So, except from mere increases that were granted over the past year, there was no ongoing increase in actual administrative spending compared to the first quarter of the last year. Selling and marketing cost are up 4%, are little less than $2 million due to the both merit salary increases and headcount addition that are focused on the driving sales of our core products. Our investment in new product development this quarter was $10.6 million, up $1.4 million over the last year as we are investing in a significant pipeline of new products to be introduced over the next 24 months. I do not expect this expense to increase significantly as the year progresses. There was a $1 million foreign currency loss this quarter and there were no restructuring charges. The result in operating income excluding those foreign currency expenses was $31 million compared to $41 million last year as a percentage as below that is 11% this year versus 14% last year. About half of this $10 million decrease from last year is accounted for by the stock compensation accounting that I mentioned earlier, one time business development expenses and a decrease in pension income. Contrary to last year, the first quarter is typically our lowest quarter given the numerous nonrecurring expenses we saw this quarter and the recent improvement in our custom orders, we do remain confident that we can accomplish our operating margin goal for the full year

Our consolidated tax rate this quarter was 27%, down 300 basis points from last year due to our accounting this quarter for all of last year's research and development tax credit which were retroactively approved by Congress in early January and the pro-rata portion of that credit for this year. I would expect the tax rate to be close to the 30% for the remainder of 2013. The bottom-line first quarter net income of $19 million or 52 cents per basic share compared to 65 cents last year, adjusting only for the foreign currency loss, pro-forma EPS would be 54 cents.

Our cash position of $77 million is down 6 million in three months and is composed almost entirely of cash outside the United States. Our total debts at the end of the quarter were $286 million. As you know, it is our plan over the next several years to significantly reduce our outstanding debts. We did see a significant increase in accounts receivable at the end of the quarter as March was a strong invoicing month. We invested $7 million dollars in capitalized items and we paid over $10 in dividends. In summary, we are confident in our ability to grow sales and improve our financial performance. On a pro-forma basis, our sales for the first quarter were a record by slight margin and our operating earnings for the first quarter were second only to the unusually strong first quarter of the last year. I will now return the microphone to Bill.

Bill Lambert

Thank you, Dennis. As I look back at the quarter just finished, I see plenty of opportunity for encouragement and optimism as we saw successes on many fronts, however there were some disappointments and unfavorable surprises in non-operating costs that detracted from our overall performance. We must do better in these areas in coming quarters and we will. As we move forward in 2013, our plan is to continue to execute the same strategies that have transformed MSA into a company that has proven itself capable of delivering profitable growth throughout the economic cycle.

Our focus remains on driving demand of core products throughout our markets and geographies driving down manufacturing and operating cost, while investing in new and innovative core products. We believe our strategy positions us to create value and gain profitable growth even in uncertainty. Our market presence and product portfolio is stronger than ever but we are carefully monitoring economic condition and its impact on demand for our products and technologies. Attention to detail and agility in an uncertain environment will be key.

I assure you that we will remain focused on those areas of our business where we are seeing stability and we have good opportunity for growth. Agility will enable us to profitability grow, increase market share and ensure the company's long-term success. At this time, Joe Bigler, Kerry Bove, Ron Herring, Dennis Zeitler, Stacy McMahan, and I will be more than glad to take your questions. Please remember that MSA does not give what is referred to as guidance and that precludes most discussion related to our expectations for future sales and future earnings. Having said that, we will now open the call to your questions.

Question-and-Answer Session

Thank you. (Operator Instructions). First question is from Edward Marshall of Sidoti & Company, please go ahead.

Edward Marshall -- Sidoti & Company

Good morning guys.

Dennis

Good morning Ed.

Edward Marshall -- Sidoti & Company

So if I can understand appropriately, I guess the SG&A expense and the selling expense, I think Dennis you said $2.3 million in change in stock based compensation based on year over year comparison.

Dennis Zeitler

Correct.

Edward Marshall -- Sidoti & Company

And I think you said $1 million or so of that is nonrecurring. What you doing, are you accelerating the option expense there due to timing of retirement is out, what is going on.

Dennis Zeitler

While there are two things going on Ed. I will try to make it relatively clear. The nonrecurring things has to do with performance shares and how you got to account for in the way of performance shares that are based upon an internal matrix. You have to account for them on market based value so if they like it to the other. If you have a performance shares that are based on a market like a total share holder return, that gets accounted for at the time of issue the values of stock when they are issued and they are never change, it doesn’t go up, doesn’t go down.

When we issue our performance unit share that’s based on an internal matrix, we – if the share price goes up we have to account for the incremental costs, the incremental value of that or it goes down. We have to account for the increase in our stock price. That we changed it, so we no longer have performance share units based on the internal units they are all based on total share holder return. So this is the last year we’re going to have this catch up on the value of the stock.

Edward Marshall -- Sidoti & Company

Also change in the principal so that’s the --

Dennis Zeitler

Basically, over the tricky one we hadn’t got before that accountant thought that there are two different ways to account for something like that. The other half is simply based on our group of our executives getting close to age 55 and Bill’s what interesting Bill’s birth date is actually April 1st, he is current 55, so we have account for not only first quarter but we have to account for some of it in the second quarter and then Kerry and Ron are significant group that are 53 and 54 as I get closed to that age we have to accelerate their recognition.

As we did not increase with the total this year we will be no more than what last year and actually because of somebody’s ketchup’s in future years they expense will actually go down.

Edward Marshall -- Sidoti & Company

Yeah, right, that make sense, so I could ask you already 3.6 in Q1 I guess you saying about, is it a million dollar per se what the full balance that would be considered non-recurring?

Dennis Zeitler

One million is non-recurring.

Edward Marshall -- Sidoti & Company

One million?

Dennis Zeitler

But if you look at quarter over quarter you go to second quarter that compensation will still be about a million dollars over Q2 2013 over Q2 2012.

Edward Marshall - Sidoti & Company

So you -- I mean this fair vital number of 82.5 that’s it roughly where you run on a quarter basis for the years bounce on the run rate you said about it?

Bill Lambert

We will try it.

Edward Marshall - Sidoti & Company

I mean its second quarter and selling expense is kind of higher than normal and I am trying to kind go past together as to the expectations that we should be thinking about because you know my understanding was that they would bounce back under ADN in didn’t so try and understand why it didn’t and different mechanics and pieces moved in there. I understand this higher -- below the pension income as well some other changes including these SC&A expense now but just try and understand what would be recurring?

Bill Lambert

You look at sequential quarters, the first quarter had a total staff compensation of 5.2 million,

second quarter would probably be about 2.8.

Edward Marshall - Sidoti & Company

Okay, so that will be adjustment there, okay and then the 2.8 there is additional for the balance of the year that is getting better --

Bill Lambert

That continuous to go down

Edward Marshall - Sidoti & Company

Continuous to fall, okay

Bill Lambert

May be a billion dollar quarter after that

Edward Marshall - Sidoti & Company

So from the SC&A expense it will be a sliding down on to the ray as move to throughout the year.

Bill Lambert

That yourself correct.

Edward Marshall - Sidoti & Company

Right off course.

Bill Lambert

We had the additional business development expense again and rather would not -- we would not anticipate having in Q2.

Edward Marshall - Sidoti & Company

Was it a business development expense again?

Bill Lambert

That was an acquisition that we were looking out.

Edward Marshall - Sidoti & Company

What was the total thing?

Bill Lambert

$700 thousand.

Edward Marshall - Sidoti & Company

700 thousand, okay and then on to the R&D expense it ran 10.6 and you have lot of stuff in the pipeline is that about I mean – where we should be running in the last year so as we 10 million plus?

Bill Lambert

That’s what I am told that I will probably will not change much quarter to quarter rest of the year.

Edward Marshall - Sidoti & Company

Okay the key things of quarter that you’ve mentioned in the press release saying that March was stronger than the January and February we saw some weak, is there anything a particular I know u mentioned the core products there are anything in particular from the market prospective the market that which you served you saw strength may be that you hadn’t seen strength in before and weakness may be where you haven’t seen the weakness before i.e. I think there were on gas what like it was little bit softer in this particular quarter and with that pickup in March or that continued to stay soft?

Bill Lambert

I don’t think that I categorized zonal gas has been soft. It is not as strong this year as it was nearly part of this last year. I think we talked about that in our conference call back in February. We came out of the gates in early 2012 very -- very strong on the oil and gas side and that’s just not repeatable but there are lot of other of orders in the later part of 2011 and in to the early part of 2012and was just not non repeatable for 2013 but one area that we did also talk about in our last conference call where I think we are seeing some strengths, we mentioned both in my comments and Dennis’s comments is really the North American fire service market we are seeing fairly strong this is we said we thought we might what we are seeing fairly strong SCBA sales to the North American fire service market. Both fire service, meaningful fire departments as well as industrial accounts.

Edward Marshall - Sidoti & Company

Anything on the construction side notable to discuss?

Bill Lambert

I don’t think so, there is not much note worthy there, I think in Dennis’s comments provided some texture around industrial head protection sales being down may be a percentage point or so and we are just not seeing a whole lot going on in construction not yet any way.

Edward Marshall - Sidoti & Company

Okay, fair enough, Thanks guys.

Bill Lambert

You are welcome.

Operator

(Operator Instructions) and our next question is from Richard Eastman of Robert W. Baird please go ahead.

Richard Eastman – Robert W. Baird

Yeah just a follow up for a second Bill on your comments about the US fire service and may be again I just city over Bill or – Could you just talk may be for a minute or two about you know how you are seeing is the SCBA demand you know is that fire service is that up due to the pre-buy or is the market healthier for the product overall?

Bill Lambert

Yeah right, it is very difficult to separate those two areas to really have a good handle line how much of it is pre-buy and how much of it is the condition we’ve talked about in the past which is just essentially a life cycle issue on all the breathing apparatus that were brought 10 years ago or so under the AFG funds that were provided by the US Government. We’ve talked about in the past about positioning ourselves forward what we think is going to be a fairly strong uptake in demand as we approach the useful life of some of the SCBA that were purchased back in 2012 and 2013 and 2014. Those were extraordinarily strong years for SCBA purchased in the US fire service because they were few about blood money provided by the assistance to fire fighter grant program. Now this year, we also have the NFPA 1981 standard which becomes effective which is effective now and manufacturers need to sell only that type of approved product by August of this year. So some fire departments who are familiar with our current version SCBA are pre bind we do see a little bit of that happening but we also see that other fire departments are very interested in the new standard and very interested in the new product that will be introducing at the FDI sea shone Indianapolis. So you’ve got a combination of effects. I would not say that we are seeing an overall improvement in municipal fire department funding. We are not seeing any kind of great improvements on that front, and I’ll look to Joe Bigler if still he has any comments or would I like to add (inaudible).

Joe Bigler

No I think you pretty much categorized, I think the replacement SCBA market is growing the SCBA is getting all so I think the number of SCBA that will be replaced is somewhat on the rise. As Bill said the reducible parts of this market now funding isn’t getting any better but there are some municipalities with the funding they have do their they are shifting to SCBA to do the pre-buy because the new NFBA standard comes, and industrial side of SCBA was relatively strong as we take a look at some of the energy companies even some of the Federal Government Agency they with strong purchases by these industrial accounts and SCBA that helps SCBA sales goes into the fire brigades. So certainly an uptake in the number of SCBA it’s been replaced primarily because of the age of the SCBA out there.

Richard Eastman – Robert W. Baird

Is the municipal market place, fire service market in the US, is it your feeling Joe the markets kind of weaned off? You know this Federal AFG money and that you know what we are going replace is going to be key things this morning keeping with municipal budgets?

Joe Bigler

As you know the 2012 AFG funding, about 60% of that funding has been released. There is still some probably 35% to 40% of that funding is still has to be released and they are just starting to take requests for the 2013 AFG funding which were told that will be somewhere around 5% to 8% below the funding level of 2012. So AFG funding is still the factor but is becoming a less and less of the factor and it is really going to rely more and more on the municipal budgets.

Richard Eastman – Robert W. Baird

And just Bill, if we could just talk for a minute or two to Europe, you know Europe was off 1% kind of (inaudible) growth and can you may be just give us a flavor for Easter Europe did for Western Europe and I will jump the answer and just ask if the Eastern Europe growth is more distribution, expansion of distribution or there is actually you know end market demand in Eastern Europe.

Bill Lambert

Okay, let me try to break that down. We don’t provide that level of clarity in our public numbers but I just try to give you a bit of flavor in that regard. When we look at Western Europe for the first quarter versus last year sales were actually just about flat from where they were a year earler may be a point higher 0.5 % point higher. We actually see that in the other parts of Europe outside of Western Europe when we kind of group Eastern Europe, Russia, and former CIS countries and middle East countries together. Also we saw a little bit of slowdown compared to last year a quarter ago -- a year ago quarter because I talked about some of the Fixed gas and Flame detection, large orders are won in the middle East. I don’t see though this has a trend where we are actually seeing and feeling is good income in order growth coming out of those that those parts of the world of the Eastern European, Russia, Former CIS and we see a lot of opportunity in the middle East for a strong verbal. That does help Ric.

Richard Eastman – Robert W. Baird

Yeah, that’s good, and then from a gross margin perspective can you just add a little bit of color as to what the geographic mix did to you gross margin, I know this kind of tough answer again it just strikes me that some of your mining related and markets were weaker geographically and it strikes me that you know those are lower gross margin kind of geographies and is that can you look at your gross margin and say mix actually was favorable by geography, or is that too granular?

Bill Lambert

That is too granular for me and just can you prepare decorum. I am getting really stuff here. North America is definitely our most profitable business for its strong core product sales but I don’t see most of the improvement we saw in gross margin came in North America. I don’t see a significant improvement and the International segment I don’t see – there was some improvement let me get the right one here- there was some improvement in Europe in total, significant improvement in US and about flat in International.

Richard Eastman – Robert W. Baird

Okay, alright, lets I think more or less answered my question enough. Okay thank you.

Operator

Thank you. Our next question is from Dirk Ryan of Dougherty & Company please go ahead.

Dirk Ryan – Dougherty & Company

Thank you . We didn’t have any restructuring charges in Q1 and you anticipate such charges during the rest of 2013?

Bill Lambert

We do think but I don’t have a good idea what the number is, that will be a small number in our low single digit millions may as we go to Europe 2.0 but I really don’t have an estimated what quarter this is going to be.

Dirk Ryan – Dougherty & Company

Okay and what are your CAPEX expectation be for this year, totaling?

Bill Lambert

Yeah, in total it should be somewhere in the low 30s.

Dirk Ryan – Dougherty & Company

Okay, now when you look at Q2 are there any – was there any ballistic sales in the year ago quarter or any large orders that you are going to kind of look at again when you report this year and kind of say well it is not a proforma is there anything in there that was similar to Q1 a year ago.

Bill Lambert

I think we’ve done with the ballistic helmet sales comparisons just when we get into the second quarter.

Dirk Ryan – Dougherty & Company

Okay and then on the gas and taxing side where the deliveries a year ago similar to Q1.

Bill Lambert

Dirk I am going by memory here. I know that the first half of last year did have some extraordinarily large FGFD type orders. We talked about the $5 million difference in Q1. I don’t remember what it is for Q2 but it’s well I hesitate to say what would be this Q2 versus last year. But there were strong shipments in Q2 a year ago in fixed gas and flame detection. I just don’t remember just how big they were and how that will compare to this year. I cannot provide you that kind of color.

Dirk Ryan – Dougherty & Company

Okay, and Dennis you’ve mentioned you still (inaudible) operating goals for this year. So I am not going to ask what they are but can you give us some context of directional where that might go from last year?

Dennis Zeitler

We’ve thought probably about increasing operating margins of 100 basis points a year, up to 15% in 2015.

Dirk Ryan – Dougherty & Company

Okay, great, that’s it for me, thanks.

Dennis Zeitler

Thanks Dirk.

Operator

Thank you. We have no further questions. I will now turn the call back over to Mark Deasy.

Mark Deasy

Okay, thank you Christine and since we have no more questions and that will conclude today’s call. I want to thank everybody again for joining us. If you miss the portion of this morning’s conference an audio reply will be available on our website for the next 30 days as well the transcript of the call. So once again on behalf Bill, Dennis, Joe, Ron and Kerry, we look forward to talking with you again and hope everybody has a great day. Thank you. Good bye.

Operator

Thank you ladies and gentleman, this concludes today’s conference. Thank you for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Expand
Tagged: , Medical Appliances & Equipment,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.