MSA Safety Incorporated (MSA) Earnings Call Transcript & Summary

Well, good morning, everyone, and welcome to Baird's audio webcast of MSA Safety Incorporated's group call as a Baird-hosted NDR. So welcome, and thanks for joining us. I'm Rick Eastman, Managing Director and Senior Analyst here. I head up the advanced industrial equipment team here at Baird, and MSA is part of our cherished coverage. So I'd like to introduce our speaker. We're very fortunate to have Ken Krause, Senior Vice President, Chief Financial Officer of MSA; and also Elyse Lorenzato, Director of Investor Relations. We'll have, maybe the layout for the call, Ken will start with some overview commentary on MSA, and then you are more than welcome to send in questions. There is an online chat platform, or just by e-mailing me at [email protected]. So please throw some questions out. I will have to relay them to management, but we will certainly work them into the presentation. Also, from a disclosure standpoint, from a research standpoint, analyst standpoint and Baird's standpoint, please refer to the event confirmation e-mail or published research or Baird's website for important disclosures regarding MSA and the discussion today. So with that, I think what I will do is turn over to Ken, Ken Krause, again, CFO of MSA Safety. Ken will give us some opening remarks. And then I will -- Ken, when you're done, if you want to hand it back to me, I have some questions to start us with. And then please send your questions in to [email protected]. With that, Ken?

Well, thank you, Rick. I appreciate that. And before I begin, I would just ask Elyse Lorenzato to -- that many of you know and have worked with, to just run us through our safe harbor disclosures. So Elyse?

Thanks, Ken. This is Elyse Lorenzato. And before we get started with the discussion, I just want to remind everyone that our conversation may include forward-looking statements this morning, and those statements involve risks, uncertainties and other factors that could cause our actual results to differ materially from those that we discuss. And so, as always, we'd encourage you to take a look at our SEC filings and our risk factors within those filings for further information. Ken?

Well, thank you, Elyse. Given the current environment, I thought I'd kick it off, kick off the call with a few comments about MSA's near-term priorities and how we're managing through the pandemic. As we navigate this challenging environment, I want to start off by expressing my deep appreciation to all the associates at MSA. We couldn't be prouder of the reaction by our people and their dedication to our mission. They are working with speed and agility to ensure business continuity through the crisis and continue our work as an essential business, and they're providing the highest levels of support for our customers, many of whom are on the front lines of the COVID-19 outbreak. Our top priority is and will continue to keep -- be keeping our associates safe and healthy, and we've taken a lot of steps to do just that. The next area we're focused on is ramping up our respirator manufacturing capacity to meet the urgent needs of our customers. We're in the process of procuring equipment that can effectively operate at the high levels of demand. This ramp-up process takes time, and we expected that, and we discussed that with our investors and investment community back in April when we announced our first quarter results. From a financial perspective, we worked early on in this crisis to identify cost levers that we can pull in a downturn environment. We had indicated in April that we expected a weaker Q2 compared to Q1 on the revenue side. That expectation continues to hold. We continue in May and into June to see weakness in certain short-cycle products, and saw delays in fire service orders due to social distancing and not being in front of customers during May, but also some longer-term upside potential from potential government stimulus and stockpiling activity. Regardless, we are well-positioned from a cost and liquidity standpoint to manage through this crisis and emerge as a stronger organization. The environment is challenging right now, but we're hopeful that we will be on a short-term trend. Work sites are opening back up, and our sales team is getting back out on the road. The long-term thesis and the trajectory of MSA is still very much intact. The portfolio is diversified. The secular trend of safety is now more prominent than ever. Our strong brands and technologies support pricing even in a tough environment. Our incremental margins are strong, and we continue to take costs out of this business. We're also continuing to invest in a very exciting new product development pipeline. So with that in mind, I'll turn it back to Rick to take us through some Q&A. Rick?

Very good. All right. Well, thank you. And again, send any questions you have to [email protected], and I'll work them into the conversation. So Ken, I thought I would just, maybe from a fireside chat perspective, just kind of start around revenue. And you addressed this a bit here, kind of near-term trends. And my thought is coming out of the first quarter, there was this expectation, and I think you had mentioned that earlier, that maybe the second quarter would see the brunt of the facilities closures and inability of sales to move around and get in front of customers. I think Nish, CEO, Nish, kind of referenced maybe 2015 and '16, kind of peak declines were in the mid-teens. This was around oil and gas. But is there -- can you just add a little bit of color around the sequential first to second quarter revenue decline? And is it kind of a double-digit revenue decline given some of the challenges of just getting in front of customers? And early June, any inflection in that process?

That's a great question. Thanks, Rick, for that question. And when we look at our business, I think Nish and I had talked about the business on the Q1 earnings call, and we had talked about similarities between now and our industrial recession of 2014 and '15. And we certainly have seen those. We have seen it actually a bit more prominent, as you would expect. We had talked about effectively the economy being put into a coma during the month of April and -- March and April, and unemployment ramping so significantly. And that's exactly what we saw. We saw some downturns in our business across employment-related sectors, fully in line with the pandemic that we were responding to. So it was a bit greater than what we saw in the industrial recession, but I think we all fully expected that. A couple of reasons to be optimistic, however, are that, first, when we look at China and we look at the Chinese response and what we have seen in our Chinese business, we started to see -- we saw a nice bounce back in that business, and more of a V-shape oriented recovery in China. And it was good to see. We saw a bottoming of that in February and into early March, and we have seen nice rebounds as we went into the second quarter in that area. So a reason to be optimistic. But it was certainly a challenging month. When we think about April or into May and the order activity, it was certainly challenging. We've seen a bit of a green shoot and a reason to be optimistic to start June with a bit of a moderation in the slowdown versus what we saw in May. And we think as work sites come back online in the summer here and as markets start to recover and employment trends start to reverse, we would be hopeful to see some improvements in those underlying employment-related product areas. With that said, we're very much being proactive. We're pulling short-term levers, cost levers in our business. We're being proactive around travel, around hiring, around a number of discretionary areas. And we intend to continue to be proactive. We're also looking at our restructuring pipeline, and we are accelerating areas that we can accelerate and bring up the speed a little bit more quickly and deploy those dollars to get the returns in a more accelerated fashion. So we're doing just that. And especially in our International segment of our business, Bob Leenen and the team are doing a tremendous job at deploying restructuring dollars and seeing some nice returns in those areas.

Got it. Got it. Okay. And just to stick on revenue kind of drivers here or revenue status, maybe. But one of the positives that we did see in terms of your product lines that have kind of emerged mid-March is just around air-purifying respirators. And you've made some -- made a decision to invest in that capacity. Maybe walk us through when did that business pick up, was it mid-March? Was it earlier than that? And then also kind of speak to what exactly are we doing on the capacity side? Are we doubling capacity there and maybe the timing of which that would come online?

Yes. That business has traditionally been classified as what we call non-core. But that business has always been a very profitable business for us. It's a very healthy business. But up until now, the growth dynamics just haven't warranted it being classified as a core business. But as we got into March and we started to assess that business, we started to see a nice uptick in demand in that business associated with the pandemic. As we had talked about in April, we saw about $8 million to $10 million of incremental sales come through in that business. And some of the short -- some of those business -- some of that increase in business in March was just fulfilled from existing inventory that we had. But as we looked at that, we saw continued demand coming in the door in April. We decided to bring forth and accelerate some of the investments in that business, investments that we had looked at making down the road. And so those investments are not only helping expand capacity and help us meet the demands that we've seen in that business, but they're also helping us improve the productivity of that business. And so we expect to see some nice improvements in productivity. I think what you're seeing in MSA and seeing us do as part of this pandemic and the recession that we're navigating through is to take advantage of our financial strength and wherewithal to invest in our organic business and some of the areas where we see the greatest demand, while pulling back in other areas. And so this area of APR is just that area. As I had indicated, we saw the demand come through in March, continue to stay at healthy levels in April up into our earnings call and has continued to show nice growth into May. So we're optimistic that as we get into the second half, we're going to be able to pull down some of the backlog that we built in that business in the first half here as we ramp the manufacturing and meet the customers' demand.

So to say it's basically, it's newer equipment, better productivity, but there's not a 2x addition of capacity.

Yes. At this point, we haven't provided texture around how much capacity exactly that we'll bring online. But I'll say it's a substantial amount of capacity, and it would be -- it would allow us to meet some of the demand that we're currently seeing and the trends of demand that we would hopefully expect to see in the coming quarters. The other side of this is just staffing as well, is ramping up the staffing side of this as well. It takes people to meet some of the demand as well. So you've got a combination of equipment, as well as staffing that comes into play here.

Okay. Okay. Very good. And then I want to just, as we're speaking to the revenue line here, just -- can you just remind us maybe of the exposure at MSA to the oil and gas industry? How much of that might be upstream versus downstream? And just kind of speak to where we are with the price of oil. And if we stay under $40, is $40 a trigger point to this industry? Or just throw some color around the oil and gas exposure here.

Sure. When we look at the business, we're very diversified across upstream and downstream. And that was enabled through that acquisition coming out of the Great Recession of General Monitors. And so we made that investment and gave us a nice exposure into the upstream market. So today, it's pretty evenly split between upstream and downstream. And what's interesting to see is when you look at that business, the business on the upstream side, especially, has a nice recurring revenue stream. That fixed gas and flame detection business has a really nice recurring revenue stream that helps cushion that business. In fact, in 2015, '16, '17, when oil was going from north of $100 a barrel down to around $40 a barrel, we were able to hold in there. Although we saw quarterly declines from time to time in the fixed gas and flame detection, which were more prominent, from a full year perspective, we were able to hold the line there and see a relatively flat environment emerge. And so roughly, like I say, roughly over approximately 1/3 of our business is in oil, and about 1/3 of that business is in the fixed gas, flame detection space, 1/3 to half. And then the other half is in more employment-related products. In that area, the employment-related products, not surprisingly, is where you're seeing the most significant pullback, with people not going to work and the high unemployment that we're seeing in the economy, you're seeing that have an impact on those shorter-cycle businesses.

Great. Okay. Okay. And then around coming out of the first quarter, I know there's a lot of reference, you actually had a good fixed gas and flame quarter in the first, but there's backlog to be built there or there was backlog build there. How do you feel about the risk around any pushouts there? Or is there any visibility on back half of the year for that backlog?

There's always a risk around pushouts, cancellations. But generally, we have not seen anything of consequence, nothing material. And we don't normally see much in that way of cancellations in the fixed gas space. This business -- the fixed gas product that we sell is oftentimes one of the last things that go into the platform. And so we generally don't see a lot of cancellations on that business. And to-date, we're not seeing that. I think last week, Nish had spoke about that. We have not seen any significant or material cancellations or pushouts. And so it should provide that, the respirator business and the ramp-up there, and then some of the recent improvements we're seeing also in some of the ballistic helmet business, especially over in Europe, should give us a bit of a tailwind for the second half of the year and provide some support on the revenue line.

Okay. And just as you mentioned it there, so you are seeing some life and some backlog on the ballistic helmet side in Europe?

Yes. We've seen some order activity there, Rick, lately over in Europe. I wouldn't say it's overly material, but it's one of those areas that's contributing to some backlog in our business.

At least prop up the other part of the non-core revenue?

Right. Right, and that's...

Is that the best way to look at it?

Yes. And when you look at the last couple of years, I think we started to lap that this year with the ballistic helmets. We started to lap some of the stronger orders. So it's good to see some of those orders come back online here this year and hopefully provide support in the coming quarters.

Got you. Okay. And then let me just, bigger picture here around revenue. You've spoken for years around a mid-single-digit type sales goal for MSA. I think the market seems to be kind of plus low to plus mid-single kind of range for sophisticated safety equipment, that category. But maybe talk about the role of pricing [ versus ] and share gains in your mid-single digit. Are both assumed? And then maybe just talk about pricing, both domestically and internationally.

Yes. When we look at the growth dynamics in the business and the formula, pricing is obviously very important. We have talked a lot about pricing over the last couple of years, the fact that we do not go to market based upon price. But we go to market based upon the value that our products bring the customer. And so that has contributed nicely to the margin improvement and the growth that we've seen. And we have started to really launch more aggressive programs associated with how do we price our products in the international markets. We've done a great job in the U.S. and we've had a great position that we've enjoyed for a number of years here in the U.S. But we have also, in line with launching some of the restructuring programs in International, we've also turned the attention to what pricing can bring to the equation. And so it becomes even more important to us as we think about the future and the opportunity to continue to close the gap on the overall margin profile between the U.S. and International segment.

And where do we stand internationally in terms of institutionalizing or putting some structure around pricing gains, internationally and Europe?

Yes. I would say that we've made progress, but we're very much in the early innings. I think a lot of our attention over the last couple of years, Rick, as you know from covering us for some time, is on the cost side. And we've done a nice job over the last year or 2 really improving that cost structure in International. Just looking at the numbers earlier today, in the first quarter, I think, of '17, we had a margin internationally of around 7%, and this year, we were north of 11%. So nice improvement over a relatively short period of time. But I'll tell you, most of that improvement is coming from some really challenging work on the cost side, taking costs out of the business, and we made great strides there. But recently, we've really pivoted and started to spend a lot more time on pricing and the value proposition associated with our products. I think our team in marketing is doing a tremendous job at really instituting a number of processes and procedures in the International segment. A lot of our experience from the Americas and the U.S. we are starting to take abroad. And our team is doing a nice job at putting those processes and procedures in place. And we had the benefit of, before we went into this travel freeze and unfortunate situation with the pandemic, we had the opportunity to travel around the world in January, spending a lot of time with our business leaders. And what we saw there was the focus on pricing; the focus on identifying the value in our new products and how to price those products effectively. And I fully expect as we start to execute in quarters to come, you'll start to see that pricing come through even more clearly on the International margins.

Okay. Okay. And then just back to the -- maybe the original question was kind of this mid-single-digit growth. And market tends to be low to mid. I mean if we get, just say, a blended point, 1 or 2 points of price, do you build share gain into that kind of mid-single-digit number? Because we've seen some fantastic share gain around SCBAs, maybe fall protection. But how do you guys internally think about share gain as a step-up to a mid-single-digit kind of targeted growth rate? Is it...

Yes. I mean, if you look at the overall algorithm for growth at MSA, if you're at a mid-single-digit growth dynamic, you're probably at a low-single-digit sort of market share or market growth, 1 point or 2 on pricing, and 1 point or 2 on market share. And you're exactly right. I mean you look at fall protection last year and the year prior to that and the growth rates there. You look at SCBA going back to 2015. You look at some of the X&S 5000 products that we're launching on the fixed gas and flame detection side. I mean it's truly exciting to see, to see that share gain. So share gain is certainly a part of the growth algorithm at MSA, and it's something that we, I think, have delivered on over the last number of years.

Got it. Yes, yes. And then maybe I want to just speak quickly to maybe the new product growth driver at MSA as well. I mean we've seen some real traction there. Again, I think it speaks mainly to your market share gains, and that's where it's been visible. But just maybe the first question around kind of new products would just be, is there a rule of thumb internally or just a structure around a minimum gross margin threshold for new products that we're investing in and bringing to market?

Gross margin is important at MSA, obviously, like it is to many. And when we look at the models, I wouldn't say that it's about -- that there's a target necessarily associated with gross margin expansion on the products. But what I can do, what I can say is that if you go -- it's interesting, when you go back, we had a slide in our Investor Day deck back in November, that showed a number of new products that we launched. And what you'll see generally is that when we launch a new product, we're able to improve the overall margin. Because what we're able to do is to provide our customers with a cost of ownership advantage on many of our new products. And so we're able to translate that into higher margins at MSA. We've seen that across the spectrum. I wouldn't say, however, that when we launch, we intend to have higher margins on day 1. And the SCBA is a great example of that. When we look at the G1 SCBA, when we launched that, it was actually dilutive to the overall margins. But the R&D team and the engineering team has an incredible focus on value engineering. And so what we do is we will launch a product, and then we'll go back into that product, and we'll take a closer look at that product and ask ourselves, "Are the customers willing to pay for this innovation? Does this innovation provide our customers with a feature that's valuable to them?" And if we say no, we answer, we go through our voice of customer efforts, and we go through our assessment of that, and our answer is no, then we'll reengineer that product and take that out. And in doing that, oftentimes, we will improve the overall margin profile. We did it with the G1 SCBA, when we took those -- that product from being dilutive to being nicely accretive to the overall portfolio at MSA. So if it's not accretive at launch, we certainly go back and take a closer look at the product to -- in an attempt to make it accretive to the overall profile.

Got you. Okay. Okay. And then just staying on this theme of new products. One of the overriding themes around new product introductions here over the last maybe 18 months has been this connectivity, improving the connectivity offering. In fact, I think even to the extent that you made some inorganic -- you made an inorganic investment in Sierra Monitor. But kind of pull this connectivity theme together here around the ALTAIR product, the LUNAR product. And just -- that seems to be an industry trend here around connecting the instruments. So maybe you could just kind of speak to that and where MSA is in pursuing its overall connectivity strategy.

Yes. We see connectivity as a really important part of the strategy going forward. We started a number of years ago with a focus on connectivity, and we've continued to gain momentum in that area. You had mentioned Sierra Monitors. We have also invested in an organization called safety io. It's about connectivity around the gas detection product lines. We've also made significant investments in fire service with the Connected Firefighter and the LUNAR product that we're looking to launch later this year. And so we've continued to build this area of our business because we see this as an opportunity and a growth driver for years to come. We see an opportunity to continue to invest in this business, a business that we feel will offer a nice recurring revenue stream, but also a capital-light business model. And those are the kind of business models that we really like at MSA and in an area that we feel like will help us fulfill our mission with our customers as well and help them go to work in a more safer environment, a more connected environment, an environment that we feel is an area that we can certainly make an impact on.

Is it -- when think about this connectivity theme and strategy, I'm kind of sensing it's less of a hardware issue and perhaps more of a software issue, in terms of having a dashboard, having the connectivity and the processing power. And maybe just kind of -- is that spot on? And maybe where are we in this kind of the software side of enhancing our connectivity offering here?

Yes, that is. It's a very accurate assessment of that. When we look at MSA, it's interesting, and I think there were some statistics we provided, again, back at our Investor Day. But our move to this is being enabled with our move into software engineering. I mean we have deployed significant resources into software engineering, bringing in a number of new software engineers, making significant investments and shifting, quite frankly, shifting the overall mix of engineering talent at MSA. We still obviously invest in a significant amount of mechanical engineering talent, but we've also really stepped up the efforts on the software side and partnering with leading universities across the country to bring in the best and the brightest. And it's been an area of investment for us and is an important part of how we get to this connected strategy. Safety io, as I mentioned earlier, we've invested in a site in Berlin, Germany, where we have a headquarters for this business. And we've continued to partner with universities there to bring in new talent to really ramp up our efforts on the software side. And we expect to continue to do that as we move forward.

Okay. All right. And to that extent, Sierra Monitor, did everything go on schedule there in terms of the integration? And is that -- did we get the benefit and the return there early on that we were anticipating?

Glad you asked that. We had actually looked at that not too long ago, and we look at that every month. Every acquisition we make, we really have a laser focus on the returns. And just looking at that recently, I couldn't be more prouder of the efforts that the team has executed on and the results that they've been able to achieve in a relatively short time period. That business, when we bought that business back in May of last year, we saw an opportunity. And the reason we saw the opportunity is it was a business that we felt like if we were able to deploy some investment, we could help it reach its full potential. And I think we're doing just that. When we bought that business, it was a low single-digit sort of margin business. And in a relatively short period of time, we have improved margins up to high teens, low 20 range. And so our team and our integration leader over there, Gustavo Lopez, is doing a really nice job at bringing in that team and integrating that team into the fold at MSA and helping it reach its full potential and tapping into new markets, really, with the cross-sell opportunity between the 2 organizations. So it's not only about taking cost out and improving the efficiency, but it's also opening up that product to new markets, markets where MSA are already strong in. So we're seeing nice results there, and it's good to see.

And is that -- is some of that integration, their connected integration technology, has some of that been brought into, and is it into MSA? Does it show up in any of the gas products? Or -- I'm just curious -- or is that mostly third-party sales at this point?

It's mostly in third-party sales at this point. But there is some efforts around how do we bring that technology into the fold at MSA, to an extent. And so we're actively looking at that, evaluating that and how we can integrate that into our existing portfolio.

Okay. Okay. And then just along the same lines on the connected side, LUNAR comes, I think LUNAR, for the fire service, will be available this summer. We've kind of spoken to that. Will that product go direct? Or will it go through the channel? And then importantly, is there a AFG amount that's been identified for a product like LUNAR for reimbursement?

At this point, there isn't. So on the AFG side, there isn't. We're looking at leveraging our existing channels to sell that product. And I know our channels are pretty excited about that product. Not only our channels, but our customers. We have been very active up until, unfortunately, March and April. But we were very active at getting in front of customers, demoing that and working with partners and our customers around that. And I know that not only our channel is excited, but our customers are very excited about the opportunity to bring this exciting technology into their departments, helping continue to advance the mission of safety and make -- provide firefighters with an even more safer environment to go to work in. And so a lot of excitement up and down the channel there and up and down the business with respect to the LUNAR technology. And we're excited about launching that later this year.

Okay. Very good. And to stick on fire service for a minute. We've seen some incremental funding with the CARES Act, with the Heroes Act, at least proposed. Have we seen any of the funding, in particular, around the CARES Act, has any of the funding started to flow? Or are these funds that perhaps boost expenditures in the '21 time frame?

So on the CARES Act, that funding is flowing, as you put it. That funding is coming in. And that funding is primarily to provide support for COVID relief efforts in the first responder community. Where we're seeing some opportunity and some improvement there is on the adapters for G1s, the respirator adapters for G1s. We're seeing that come through. But that's certainly coming through currently. And you speak about the Heroes Act. That's not been passed yet. But we're optimistic that, that will pass and provide our customers with even more resources to continue to acquire resources that they -- and supplies that they need to do their jobs in a safer environment and safer manner. So we're excited to hopefully see that come to fruition. But the CARES Act is in the marketplace, we're seeing the funds flow and we're hopeful that we'll continue to see more support for our first responders going forward.

Got it. Okay. And then just last on the fire service. Maybe some -- an update, Ken, around maybe order flow around the M1. That product was introduced in December, I think, of '18, the idea being it would be more feature price competitive internationally. And I'm -- just maybe give us some thoughts around what the uptake has been there. Has it generated some share gain outside of the U.S. in the SCBA category?

Yes, it has. We said when we launched it, it wasn't necessarily the G1, but obviously, it's an exciting product that meets the needs of the first responder and the fire service community internationally. But in terms of the size of the opportunity, we didn't see it necessarily as the same size as the G1. But we are seeing great wins. We're seeing good opportunity. We're seeing good uptake. Wins in Hamburg, Madrid, Taiwan cities and more. And so we think that fire service is going to continue to be a very important market for us in years to come. And we see great opportunities in not only the continued replacement cycle around the G1, the LUNAR technology, but also here in the M1 internationally, we're seeing good wins, good excitement, good interest and we think that will be a driver of growth in years to come.

Okay. And then I just want to maybe turn to margins here a little bit. We've talked -- you've mentioned MSA kind of targets this 30% to 40% incremental margin and has done a great job delivering here on with sales growth. And you've expressed confidence that a decremental margin could be less, so I'll throw out 20%. But just maybe speak to us a little bit around that confidence and maybe where those offsets come in on the SG&A side or COGS side, to manage the decremental margin here that we might see in the next, I don't know, quarter or 2.

Yes. Yes. So when you look at decrementals, our incrementals, obviously, have been very strong for the last several years. But I think if you go back to 2015 when we were in the industrial recession, we really started to take some considerable costs out of the business and improve margins. We would hope that if we do continue in this recession and further slowdown, that we would continue to take cost out of this business and improve the decrementals down into that 20% to 25% range, if not better. Currently, our focus has been short-term levers. It's been travel, it's been hiring freezes, it's been discretionary costs, looking at payroll and things like that a little bit closer. But they've been very much short term in focus, with a combination of trying to accelerate some of the things that we had already been actioning in our International segment. As we get into the second half, we're continuing to look at more aggressive restructuring, more areas that we can action, just like we actioned 3 or 4 years ago during the industrial recession, when we went forth and took out upwards of $30 million of cost. Not to say that we're looking at taking $30 million out of cost again, but we're looking at execution. We're looking at executing restructuring programs that will allow us to continue to invest in this business and invest in organic areas, but also inorganic areas. I think we've enjoyed the benefit of a very strong financial profile, and we are actively investing in organic investments like the APR build-out, center of excellence build-out here in Cranberry and restructuring activities that I spoke about. So we'll continue to look at this. We'll continue to be very responsible and very proactive. But also, at the same time, being mindful. Our talent is one of our biggest core competencies. Our talent is one of our biggest assets. When we look at the talent that we have at MSA, the talent is one of the biggest reasons why we've been so successful. And we want to be mindful of how important it is to retain that talent through this business cycle and not lose key resources and key folks and key people. So we're continuing to look at that and balance that short term versus long term and invest in restructuring activities that will continue to bring value to our shareholders.

And if our recovery growth rate lags or slows, I mean maybe you guys lag a little bit, maybe it's oil and gas that keeps some pressure on and just some of the short-cycle businesses, but to the extent that we're looking at '21, are there some structural cost opportunities, if you will, that could allow you to, again, deliver this 30% to 40% at a growth rate, but maybe a depressed growth rate? I mean so in other words, when we get on -- when we lap the temporary stuff, because people have to get paid next year irrespective of the growth, but are there some levers to pull there that even on a slower than some people might expect recovery, that we would have that opportunity?

Yes. It's interesting. That's exactly what we're looking at right now. We're looking at a number of things that we can structurally improve our business. And so that's a focus for us as we get through June and into the second half, and we'll continue to share our progress in that area with our investors as we get ready for the second and third quarter investor calls later this year. But it certainly is a focus for us. We see opportunity. We continue to see opportunity across the business. We've oftentimes talked about sourcing. We've oftentimes talked about manufacturing, supply chain. We've talked about shared service models, a number of things that we continue to invest in. And those are the things that will allow us the opportunity to offset these short-term measures when they do come back in the business, because we know they will come back, and -- but also position us for a longer-term much improved business.

Okay. And then just my last question here maybe around margins. Obviously, International, about 1,000 basis points or 10 points below the kind of operating margin we see in North America. And we've spoken to this in the past, where maybe Europe, Bob has just done an amazing job there relative to the sales environment. But is the rest of International, the non-European piece, are operating margins there still in the, call it, mid-teens?

Yes. The margins outside of Europe are very healthy. We've talked about that a few times. And our business in Asia, our business in the Middle East, our business in a number of our international regions are very healthy, positioned extremely well. Europe has been and continues to be the focus. And Bob, as you had indicated, Bob is doing a really nice job at execution and executing in that area to take cost out and to narrow the margin profile, the difference between the margins in the U.S., the rest of the business in Europe. So very active. Looking at -- continuing to look at footprint actions, structural changes, indirect sourcing and as I mentioned earlier, pricing. And so very active in that area.

Got you. Okay. Okay. And then the International business outside of Europe, I mean we kind of think of International as being 35%, and then Europe as maybe 20%. But there's like 15% of the business that would be non-Europe international. And is there a strategy for revenue growth in that piece of the business? I mean it just strikes me that there's not necessarily revenue scale there. Is there anything to be done there, or is -- we'll fix Europe first?

No, no. There's no -- not at all. When we look at our strategy, there's 3 broad focus areas of the strategy. And 1 area is leveraging our Americas and leveraging what we have already in the Americas. The second area is value creation in our European segment. And the last -- not the last, but the third area would be how do we invest disproportionately in emerging markets. And the other areas of that segment are our emerging markets. When you look at China and what we've done in China, we've had considerable success there. When you look at the Middle East, another area of success for us in the International segment. China has been enabled through fire service. We've enjoyed a nice position in fire service, and we've continued to be very successful in the fire service segment. And when we look at the Middle East, we've continued to see nice improvement in the oil and gas area. It's interesting, when we look and we compare and contrast oil and gas and we look at the global energy market, you have to compare and contrast the difference between Middle East energy and U.S. energy. And there is certainly a distinct difference between the two. And we saw that difference back in 2015, when the oil and the energy sector was contracting so greatly in the U.S., we were seeing good growth the Middle East. And in fact, through the first quarter, we had a tremendous result here coming out of our Middle East business in the energy sector and we continue to invest in that area.

Okay. Okay. Very good. And then just 2 things that came on, 2 questions that came in over online. And I'm just going to read this here: Is it reasonable to assume pricing gains near term in the employment-exposed business are under volume pressure, particularly International? That's one.

Yes. Pricing has been an area that we've enjoyed the benefit of through the Great Recession of 2008, 2009 and the 2015 industrial recession. So even despite having a challenging macro environment, we have been able to pass along pricing on our products where we've been able to do that, and we intend to continue to do that. There's a value in our products, and it's important for us to price that value.

Got you. And then this is, I guess, somewhat related, but: Is there any risk in the channel, AR risk in the channel relative to current business conditions? I guess that's the best way to phrase it.

Yes. One of the first areas of focus for us as an organization when we started down this path in March was focused on our credit policies, and our overall receivable profile -- profile of receivables, and so we embarked upon that very early on. And I'll tell you, we have not seen any major issues with respect to that. We've been able to partner with our customers on a global scale to ensure that we didn't have any undue credit losses. And so we've been very, very successful in that area, and we continue to keep a very close eye on that area of our financial statements.

Okay. Very good. All right. So we've pretty much run up against our time limit here. So again, thanks to everybody on the line for joining us for this MSA presentation. Again, if you need any research materials or a model, call me or e-mail me, Rick Eastman at Baird. And again, if you need any MSA presentation materials, I'm sure Elyse would be there to help you as well. So with that, thank you again for joining us, and we'll end the call now. Thank you.

Thank you.