MSA Safety Incorporated (MSA) Earnings Call Transcript & Summary

Good afternoon, and thanks for joining us. I'm Rob Mason, senior equity analyst at Baird that covers MSA Safety. Before I jump in, I am required to remind you to refer to the event confirmation e-mail as well as Baird's published research or website for important disclosures regarding the company's [indiscernible] we’ll discuss at this event. That said, I do want to introduce our MSA participant. We have Kim Krause, who is a Senior Vice President, CFO and Treasurer at MSA joining us. So good afternoon, Ken. I appreciate you offering us the opportunity to host the discussion. Ken, I did know...

Good to be here, Rob. Thanks for having me.

I know you wanted to run through maybe a couple of slides, offer a few remarks, and then we'll go to a discussion. So I'll pass it over to you to let you handle that.

Great. Well, thanks, Rob. I appreciate that. I think Chris is going to -- Chris Hepler is also with me. He will be -- he's in charge of Investor Relations. He'll walk through the safe harbor statement. And Chris?

Sure. Thanks, everyone. Just as a reminder, Ken may make forward-looking statements on today's call. There are risks, uncertainties that may make actual results differ from those discussed herein. These risks are outlined in our filings with the SEC, and we undertake no duty to publicly update the forward-looking statements except as required by law. And with that, I'll pass it to you, Ken.

Great. Thanks, Chris. And just starting here on the first slide. At MSA, our safety -- our mission remains unchanged. We've had the same mission since 1914, and we've been executing on that mission that men and women may work in safety and that they, their families and their communities may live in health throughout the world since our founding. But we certainly have evolved over the years. And today, our focus is really on advancing worker safety while delivering productivity solutions to our global customer base. Today, technology is so important to our customers, and we continue to make groundbreaking investments in technologies across the portfolio. As we look at the portfolio here on the next slide, we continue to have leading positions in many of our markets. And while we are organized geographically on the reporting segment, 3 major markets really are part of our growth story. First and foremost is firefighter safety. You very well probably know of our position with the G1 SCBA and the M1 SCBA internationally. Our investments in the Globe turnout gear business and Bristol with our -- which have created a really strong position with turnout gear. And then more recently, we've made significant investments in Fotokite, which is a tethered drone technology as well as LUNAR. Both of those technologies really help provide firefighters with better situational awareness. And we've learned over the years that with better situational awareness comes a more safer firefighter. And so it's an important part of our growth plan as we think about the growth going forward in firefighter safety. In the industrial PPE market, we continue to make significant investments in that market as well. You probably know us by the V-Gard hard hat, which is used throughout a number of end markets. We also have a really strong position in fall protection as well as portable gas detection. When we look at our portable gas detection, we're really excited about the products that we're bringing to market around the connected worker and notably, the ALTAIR io4. It's an interesting product that offers an opportunity to recalibrate those instruments remotely. It gives us an opportunity to automate safety compliance, again, helping provide better safety solutions in a more productive manner. And last and certainly not least, here is our Fixed Gas & Flame Detection. We've made significant investments in Fixed Gas & Flame Detection over the years, going back to general monitors and more recently, with Sierra monitors and then followed on with the Bacharach acquisition. We continue to make investments throughout that with the X&S 5000 series of products and the platform product that we launched a few short years ago. This area is probably the area where we're feeling more of the pain around supply chain and our delivery. We certainly have felt the impact of the chip shortage in the semiconductor industry. And as I talked about in February, we've continued to see challenges with the supply chain. But nonetheless, we continue to have market-leading safety solutions. We have a strong financial profile and a relentless focus on our mission of protecting workers around the world and throughout all of the geographies that we operate our business. When we look at the business update here, I want to touch upon a few key items. First and foremost, demand trends across our core products and across our geographies remained very strong throughout the quarter. In fact, organic growth of orders are double digit. We're seeing double-digit growth in our order pace throughout the quarter in the product portfolio. That healthy customer demand and the supply chain challenges that I spoke about previously, are driving backlog to record levels. We're now in a position where backlog is up over $50 million since year-end, and it's up over 60% versus the average of the last 3 years, March quarter. And so backlog is very strong. What I will say is we're not seeing cancellations. We're not seeing any evidence of double bookings. We're not seeing any material change or cancellations in our backlog, which provides us provides us a sense of confidence as we go forward. And we'll -- I'm sure as we talk through some of the Q&A, we'll talk about some of the things we're doing to manage through these challenges on the supply chain and focused on -- and our focus on improving throughput in our factories. As I talked about the electronic components, the other thing that we do struggle with at MSA in the quarter here and over the last couple of quarters, labor availability, most notably in our globe facility, our turnout gear business. We are certainly focused on that. We're seeing some improvements there, but we're not out of the woods just yet. We continue to keep inflation and pricing front and center. We are certainly seeing inflationary pressures in our business from materials to labor, but we have been really successful at passing along that inflation through higher prices. And we continue to maintain a focus on maintaining a positive price/cost equation. It may vary from quarter-to-quarter, but our focus is as we think about the full year to maintain a positive price/cost equation. Also touching upon the Ukraine situation, unfortunately, what's going on in Ukraine is very challenging. It's good to say we don't have a significant amount of business in that region of the world, in Russia or in Ukraine, but we are standing up just as we have in past situations to really try to help. We recently donated $0.5 million of fire service equipment to the Ukrainian fire service to help in their response to this unfortunate set of circumstances and situation. And so we continue to stand ready to help those firefighters and those on the frontline as they respond to these challenging times. As we think about our go-forward outlook, we continue to maintain our commitment to drive mid-single-digit organic growth through a combination of volume and pricing. As I talked earlier, we certainly have an opportunity to drive high single-digit growth this year and even maybe double-digit growth on the backs of the acquisition. We should see 2 to 3 points of acquisition growth this year. we should see 3% to 4% or points of growth associated with pricing, and then we should see 2 to 3 points of growth associated with unit volume growth. Now much of that is dependent upon our ability to navigate these supply chain challenges and see our way through that. And I could see some upside from there. But I also could see some downside from there as well, depending on our success with navigating these challenges. With that said, we remain committed to driving incremental margins of 30% to 40% and a cash flow conversion of 100% of net income. Overall, business trends are healthy. Supply chain constraints are and inflation are really driving the near-term pressures and a little bit of cautious optimism when we think about the outlook. So Rob, I'll turn it back over to you. We can walk through the questions and answer any questions that you might have.

Sure. And just as a reminder, if any of our listeners have questions, I think you have the ability to submit those. So please put those in, and we'll weave those into the conversation as well. Ken, we'll just start where you left off around the current conditions. I think it was pretty clear from your comments that demand trends have been holding up. And clearly, that's probably a little more visible in the order rate than it is the revenue just given the supply chain issues that we carried into the year. Given that MSA largely goes through an indirect channel, certainly in the Americas region, and you talked about comfort that there's not in the way of double ordering going on, but I'm just curious what your process is to filter through the orders, to gauge sell-through. And are you seeing channel partners try to get ahead of -- it's been a dynamic pricing environment as well. Our channel partners trying to get ahead, front-run some of the price increases and just your ability to process all that and come out with a comfort level on the demand side -- in demand side.

So yes, 2 or 3 things to comment upon there. First, from a price increase perspective, we are in the process of passing along an additional price increase here effective April 1. And so if you remember last year, we had 3 or so off-cycle price increases. We've commenced an effort again this year due to the pricing or the inflationary pressures that we're seeing in our product portfolio. And any time you do that, you normally do see some orders that are accelerated. But the backlog situation that I spoke about is really not just related to a short-term acceleration. It's related to a broad-based demand environment, which remains very strong through the course of the quarter coupled with the challenges we're seeing on notably the gas detection as well as the turnout area. When it comes to monitoring these double bookings and these potential for things of that nature, we have 2 things that we continue to do. We really stay close to our end users. So we have a really good relationship with end customers, and we understand the application that these products are going into. We also are maintaining a very close relationship with our channels and how important they are in our go-to-market strategy. So those relationships really give us insight into the use of these products and understanding where they're being used. In fact, there are certain portions of our products that are spec-ed in to existing contracts. And so the fact that they're spec-ed into certain areas helps alleviate the concern around double bookings. But nonetheless, when we look at the activity, we're just not seeing cancellations. We're just not seeing people move away and customers -- our value customers, move away from MSA once they place an order. They're willing to wait. They're willing to take the time to wait for our products to ship to them, and we're doing everything we can to accelerate that timing to really try to bring it forward as much as we can. We're doing a lot on the engineering. We're doing a lot in our talent management area as well. So -- and I'm sure we'll touch upon that.

Sure. Sure. And then just to clarify, you mentioned the backlog being up, I think, $50 million. You said that was from year-end. Do I hear that correctly?

That's right.

And I think you said previously about year-end backlog was up $70 million, I recall.

Yes.

Okay. So we are stacking some backlog there to work down at some point. And it sounded as well just regionally, again, some breadth of demand holding up there. If you had to characterize, I guess, in this situation, maybe good, better, best, how would you bucket the various regions that you're playing in?

The Americas is doing really well. The U.S., Latin America continues to be a strong performer. Our leadership team in Latin America is really knocking it out of the park. And kudos to that team for all they're doing to really drive the performance we're seeing there. So I would say that's on the verge of best. That market, both the U.S. as well as Latin America continues to perform. Hard hat shipments are incredibly strong. I just had a meeting last night with our sourcing team and talking about HDPE sourcing and high-density polyethylene. And they're doing an exceptional job at getting the sourcing and getting the supplies available where we can meet the growing demand. So orders are good, demand is great. We're doing everything we can to open up supply. And I would say the U.S. and Latin America is certainly doing a nice job on that front. I would say our international business is doing okay, but this -- it's a challenge. I think there is certainly a tremendous amount of risk in the business and in the macro environment. But when I look at inflation, I look at the war that's occurring in East Europe and Ukraine and Russia, I can't help but think about how close Germany is and Poland is to the front line. And so I can't imagine how unnerving it has to be to come to work each and every day and dealing with those situations. So we're keeping an eye on that, but that's definitely a challenge for us. We're making some progress. We're making some positive impact on our business, and it's super exciting to see the improvements that we're seeing in margin in that business. The growth is hard to come by. And then when I go to Asia, the team is doing a nice job. There's some challenges from time to time. I think we've all seen some quarantining measures that are going back into place in Asia. But the team is staying highly engaged and driving demand for our products. So generally, it's a fairly balanced environment across the business, but the one area that I do call out that's doing a pretty nice job in terms of the growth is the U.S. and Latin America.

Okay. And just on that international piece and it's specifically Europe, I guess, you speak to that in aggregate international. You frame up just the European portion of that, what it comprises just to level set.

European portion comprises of Western Europe, Eastern Europe and the Middle East. And so everything kind of in that segment of the world falls into the European operating segment. And then Asia Pacific is everything that you would think of in the Pacific Rim from China down through Japan, Thailand and Australia.

And that European piece is about 60% of international. Is that?

Yes, it's roughly -- I would say roughly 50% of international. And so you have the Middle East, which is a strong business for us, and we're seeing strong demand there. But yes, it's roughly 50% of that international segment and then you have Australia and Asia, which make up the remainder.

Okay. And just around the actual revenue, again, it sounded like the high single-digit framework that you had spoken to earlier in the year, is still the right framework to think about. It sounds like obviously, demand continues to support that, maybe more than support that with supply chain, the constraint. How would you rank supply chain's cooperation at this point relative to that framework?

It's difficult. Rob, it's very difficult. The supply chain challenges are certainly exhausting at times for the team. It's electronic components and using the broker market and then even attracting labor in certain areas like up in the Globe up in Pittsfield, New Hampshire. It's been a challenge for us, but we're making progress. And I still have -- I would say, our plan for the year of that high single digit is certainly still intact. But the further we get out, the more challenging it will be. I think as we think about Q1, something in the range of $320 million to $330 million of revenue is certainly not out of the question and still keeps us on track in terms of our internal plans as we think about the year to get to that high single-digit sort of growth rate but we need to monitor it. And it's good to see -- with that said, it's good to see all the effort we're doing on the engineering side to try to respond to these challenges. Our team of highly talented engineers is really focused on going back in and reengineering certain products to open up more supply to open up new sources of chips and new sources of supply that will allow us to deliver. Now that's going to take some time. Most likely, we'll see the benefits of that as we get into Q3. So it's going to take a little bit of time. But I think that bodes well. I think the efforts that they're doing and the energy they're expanding is certainly not only going to help us here in the current year but should help us as we move into '23 and beyond as we widen up that supply chain a little bit and bring more suppliers into the fold. I think that's certainly going to help us from a competitive advantage perspective.

So it sounds like perhaps at least around the component side, it's more about making your own look this year? Or do you see some signs that you could get a little bit better supplied as we get into that?

I think it gets back to really execution on our side, what can we do to avail ourselves to better opportunities. I don't think we're planning for any major improvements in supply chain on the macro level. But we do really -- we are really trying to execute on a number of initiatives that will help us better position us to deliver on our plan for the year. whether it be talent, whether we're doing a lot of things around labor and talent and recruiting and talent and recruiting fairs and things like that. We're really trying to step up the effort when it comes to recruiting. And then coupled with the engineering redesign work and also looking at our manufacturing footprint, how do we leverage the footprint more effectively? We've got multiple factories throughout the U.S. and throughout the world for that matter and trying to identify where we can best manufacture these products. And so we're doing things there on a number of our product lines to position us to deliver on our plan for the year. So we're not planning for any major improvements in the macro level. We're trying to execute as best as we can.

When you noted -- just on the labor front, you noted Globe. Perhaps that situation has stabilized, maybe a little bit better. Is it fair to say your labor constraint is mainly isolated to Globe? Or has that evolved as you've gone through the year as well?

Yes, I think it is. When you look at the labor constraint, Rob, it's been primarily in Globe, our inability to deliver out of Globe. And so we've got some elongated lead times there. But we're making progress. The team is doing a nice job. Our team leader in the Globe site is doing a nice job at helping manage his workforce and adjust appropriately. Across the portfolio, you have labor constraints in certain areas. But I think they're being masked a bit by the material availability that we're seeing in some of our plants. And so it's helping us actually run our plants more efficiently and more productive. As we get into the latter part of the year, that could provide a bit of a constraint if we see supply chains open up. But what the team is doing under Glennis Williams' leadership is really impressive in terms of all of the effort we're doing to bring on new folks and to really look at our labor head count and footprint. I think we're making some progress. And so I think that those risks aren't as pronounced as we -- as the risks are on the material availability side.

Okay. Understood. And just to circle back around price, one question there. You mentioned April increase going in. Is that a global increase? Or is that market specific?

Yes. It's primarily focused in on the Americas business right now, but we are evaluating other things we can do in other areas of the world. When we look at our market positions, our market positions are strongest here in the Americas. Our channels of distribution are strongest. Our product portfolio is the strongest. And so we feel very comfortable about that and about that price increase here in the Americas. But we also are mindful of the inflationary pressures internationally. And so we need to be able to respond and react to those inflationary pressures. It's an unfortunate situation that we have to raise prices, but the inflation that we're feeling in our product portfolio is requiring us to do just that.

Anything that you have done, I guess, over the last 6 to 12 months that's helping you realize that price increase any faster than historically would have been the case?

There's a bunch of -- a number of different tools that we've put in place. It's allowing us to get out to the customer, a lot of digital marketing investments that we've made under Dave McArthur's leadership over the last couple of years. And that has actually helped us tremendously through the pandemic and also during the -- with our price and management and approach to improving on our pricing. And so -- I mean there's a number of things we've done to really automate some of that work, and it's definitely helped us get that price out into the market more quickly.

Is repricing backlog something that you're -- I've seen some of your competitors do that. Is that something that...

It's not something that we are doing. We are really focused on pricing the products. We're not going back -- at this point at least, we're not going back and repricing backlog or adding surcharges associated with backlog or anything of that nature. It's really -- new product sales or product sales that are generated are priced at the new pricing -- in the new pricing structure.

Yes. I think that's perhaps a little more channel-friendly based on the feedback that I've heard, again, from one of your competitors, but it's contentious that way. Just as you think about, again, I guess, as we go down the P&L, obviously, you'll strive to be positive price cost. Just given the footprint comment that you made and reevaluation there, you do have some -- certainly in Germany, a larger footprint and maybe a bit in France as well. The question has come to us just as we've seen the dynamics play out here over the last month, certainly around what's happening to energy prices. Is that a needle mover for you, just thinking about the cost to operate there? Or is it more around just the overall material inflation that you're battling?

There's 2 things. There's -- overall material inflation that we're battling is certainly something that we keep an eye on in terms of making sure the price is appropriate. But also just labor inflation. Merit increase this year is double what it has been historically. So labor is important an important part of the equation, not as important as material, but it certainly is getting our notice. And then just generally overhead. And so we're looking at a number of different things across the spectrum, whether it be automation where we can and some high volume, low mix -- high-volume sort of products really taking a close look at automation in our factories. We're looking at our footprint. Our gas detection center of excellence that we invested in here in Cranberry is offering us opportunities as we make acquisitions to really rationalize excess footprint. And so that certainly is helping us improve margins and stay positive on the price cost equation as well. So there's a number of things we're doing to try to manage through this to stay in front of it. And in addition to investing in software, the team is really spent a lot of time putting some new software in place that helps us manage our order quantities and where we are from an inventory perspective, ensuring we don't have stock-outs. There's a challenge from time to time around stock-outs, but the teams did a nice job at really keeping things on the rails and moving forward.

Just so I'm clear, Ken, when you spoke about the merit increase being doubled, was that a cost of goods sold, manufacturing labor commentary? Was that broader MSA salary labor comment?

It's really a broad. When you look at our cost structure, you look at labor, it's competitive dynamic. And cost of just about everything is on the rise. And so merit increase across the back office as well as the production employees was all a bit higher than we normally would see it, but it certainly is justified based upon the inflationary cycle and requires us to continue to maintain that discipline on the pricing side and in terms of pricing our products. And the team is doing a nice job of doing that. It was good to see the finish last year staying positive in the Q4 period on price cost, and our focus is to do just that again here throughout '22.

Maybe just last point there. I've typically thought about your cost of goods sold mix being about 70% variable or raw material and the balance being kind of evenly split between labor and overhead. Is that still -- even with the inflation dynamics that have played out, is that still roughly the mix there?

Yes, that's right, Rob. That's roughly the mix in the cost of goods sold area. It's more heavily dependent upon material than it is labor or overhead.

Okay. Okay. And just around the margin effort here, a lot has been -- a lot of ground has been plowed around the international margins, but there's still opportunity there. Just maybe speak to where we are just in that effort, there was some additional savings look like we're hearing into this year, work you've done around your shared service center, being able to port more of that -- to leverage that facility in Poland, I believe that is. But just what's left to do there in terms of the agenda? And how does that play through on the P&L between gross margins and just the operating leverage in that business?

Sure. International has made great strides in terms of improving profitability, and it continues to make strides despite having a very slow growth environment. And if we could see some growth, it would be wonderful, and I imagine our margins would improve even more. But nonetheless, whether it be the focus on pricing, the education around the value proposition of our products, the manufacturing optimization efforts that we're doing or the back office, shared service efforts that we've implemented in that area, have all paid off. And I think we're certainly not at the beginning of the game here. We're not in the first or second inning, we're probably in the seventh or eighth inning. But nonetheless, we see even more opportunities to improve the margins across MSA. When we think about the margin profile at MSA, I think we finished last year in the mid-19% range of operating income for the fourth quarter, provides us a sense of optimism as we think about the future. The thing that I oftentimes will talk about are our incremental margins. Our incremental margins in Q4 of '21 versus Q4 of '19, so prior to the pandemic and then kind of coming out of the pandemic, were 43%. That provides me a sense of confidence in our ability to drive an even higher margin profile and to get our business to a 20-plus percent operating margin profile in the coming years. And that Q4 number gives us even more confidence in our ability to do it. And so we're focused on initiatives up and down the P&L, and all those initiatives should help us get to that 20% operating margin profile in coming years.

Sure. Maybe I'll pivot quickly just on the acquisition side that fits with the margin expansion story as well, Bacharach brought in some healthy margins to begin with. And I think the integration perhaps enhances that. You had talked about a couple of key factors on the integration around reducing complexity there in their business model. At the same time, you wanted to invest for growth. Can you just update us where we are on the integration of Bacharach and also maybe just on the demand side for them. That's an adjacency for you what it looks like at this point.

Yes. It was great to acquire Bacharach. It's a tremendous business with some really great people. And Aaron Tufts, is our integration leader over there. He reports to me on this integration, and he's doing a great job. We're realizing synergies throughout the cost structure. And we're seeing good growth come through from a number of different areas. Our book-to-bill was unfortunately well above 1 because, again, certain supply chain challenges we have, it's a gas detection business. It's very similar to our gas detection business in terms of the technology and the manufacturing. So not surprisingly, we're seeing some tight supply chain challenges in that area of the business. But nonetheless, margins are healthy. I think recently, the margins eclipsed 26% in that business. So it's a really healthy margin profile. Demand is strong, and we're taking costs out. We've begun an implementation effort of an SAP system in that acquisition and that should help us enable even more synergies as we go forward. So that business is very much on track. It's exciting to have into the fold. And when I look at the approach to M&A, it fits squarely in the middle of the fairway. It's a business that allowed us to expand our addressable market, but leverage technologies and manufacturing processes and back-office support functions that we're very familiar with. And so we're looking at continuing to execute on additional M&A, just like that as we go forward. With that said, we're really mindful of the environment that we're in and the recessionary pressures and such, but we continue to actively evaluate and screen additional opportunities for growth.

I want to pivot real quickly just to some end-market discussion. Again, it sounds like, broadly speaking, you're seeing good demand in all your key end markets. But obviously, commodity prices are up, that tends to bode well for demand factors in your exposed businesses. Energy is one of those. Clearly, obviously, people are attuned to that. How should we be thinking about that business because it does have some longer-cycle elements to it. Your fixed gas business is about 20% of your overall MSA sales. I'm not sure if we should be apportioning all of that fixed gas business to energy or if it serves some other in markets now with Bacharach in that bucket, it certainly does. But just help us a portion how to think about maybe the short cycle aspects of your energy exposure versus longer cycle. Does a pickup in commodity prices have a bigger impact for you perhaps in 2023 in that area of your business?

Yes. We believe it does. I mean if we go back and we model our business in past cycles when oil eclipsed the $100 a barrel, it certainly had a positive impact on our revenue performance. We are seeing hard hat sales at very strong levels. we're seeing portable gas demand at very strong levels. And now with our recently announced new products in both of those areas. We've got a new cooling hard hat, which essentially reduces the workers' temperature by upwards of 20 degrees Fahrenheit called the C1. A lot of interest in the Gulf Coast, a lot of interest in Florida and in those markets. And then in the io4, which is the portable gas detection with connectivity that's built in, a lot of really good interest, really good demand and business is flowing pretty nicely in those short-cycle products. The longer cycle, a lot of demand there as well. And that's -- you look at the fixed gas space, even though we have diversified some of that business with the Bacharach acquisition, we still are very heavily dependent upon energy. Over -- about approximately 25% to 30% of our portfolio is in the energy sector of which 2/3 of that is short cycle and 1/3 would be more of a longer cycle sort of product. But good demand, really good demand in that area. And it's exciting to see some of the new technologies we're bringing to bear. They not only service that market but service all of our markets.

And fair to say your energy demand at this point, not a lot of variation by region that you would call out? Is it fairly evenly distributed?

Yes. It very much is. And I've spent time in the quarter with customers in Houston. I've been in Houston a couple of times, spending times with our fixed gas reps as well as some of our channel partners and demand is robust. I hear the same thing in the Middle East and other parts of the world as well as well and down into Latin America with Mexico and in Brazil. So the demand is robust across spectrum, but it was good to see the interaction, have the interaction with some of our customers in the Gulf Coast, where they're excited to get back to business and to see the robust level of business activity and conditions we're experiencing.

Ken, 1 thing that's come up is there's a different methane regulatory framework out. Is that on the periphery for MSA's fixed gas business? Or is that potentially more material? Just how do you play in that?

Yes, it definitely is. It's something that's got our attention. Our new product development efforts are underway. We're spending a lot of time there. And so it's definitely an area of opportunity for MSA, Rob. I don't know that we have -- it's not significant right now, but it certainly is something that we're trying to respond and react to.

Okay. Another interesting question that gets presented, it doesn't appear like this is necessarily manifesting in your business, but just around industrial PPE, in this notion of being near full employment as well. So the question becomes what could be the runway there in a tighter employment situation? My response has been -- that's, I think, in part, that's where innovation comes into play in a bigger way for MSA. Just any thoughts around that? Or you just talked about a new head protect or hard hat that's coming out. Same thing on the portable gas side. But anything we should be watching that's coming our way or anything in the very recent rearview mirror that could be a bigger contributor?

It's a fair question. And when I look at some of the products, I talked about the C1, but spending time more on the io4 and safety solutions are really important for us. What that product has the opportunity to do is to track lone workers. And lone workers, they might be by themselves on a pipeline in the middle of Wyoming. And so it allows us to track them, provide situational awareness about their condition. And so safety solutions and the investments we're making around that sort of situation in connectivity, subscription-based revenues will certainly help us manage through that potential for decline as we go forward. So we have a number of things we're doing. The Connected Worker platform is really exciting for us as we think about the future.

Okay. I've had a couple of questions come in. I want to make sure we get to those before we run out of time. One is just around your cash flow target that you -- that was on the slide as well, 100% conversion that you target. It's certainly tougher in this environment, trying to manage working capital when you are supply constrained as you are. How to think about that perhaps this year just with the dynamics around working capital, understanding that the target is unchanged, but?

Yes, the target is very much unchanged, but you're spot on in that there is a -- it's a challenging environment. We're trying to build some inventory to deliver our backlog. And so you might see -- Q1, Q2, you might see a little bit of build in backlog -- our build in working capital, certainly -- you've certainly seen the build in backlog but you'll continue to see probably some build in working capital, which might eat into the cash flow slightly. But as we get into the second half, I would expect that to turn just like it has over the course of the last couple of years to deliver on the business in Q3 and then into Q4. And so that's overall the plan. We probably will see working capital run in the 27% to 28% range this year. It might be higher than that in the first half, but we would probably see it abate and improve as we go into the second half. I think longer term, that working capital number should get back to the 23% to 24% range. That's where it's been historically. And as we emerge from this supply chain challenge that we're dealing with, that's where I would expect it to return to. And so stay tuned on that, but that's generally how we think about working capital and expectations for that as we think about '22 and beyond.

A somewhat related question. And again, this is more around the product liability side. There was the noncash charge that you took in the fourth quarter. And really, the question was around your confidence whether those product liability charges are behind you.

Yes. It's always hard to call. It's always hard to say whether or not MSA LLC will continue to take product liability charges. When we look at the Q4 charge, it was really related to an uptick in claims, experience that we saw primarily in respiratory protection products that we hadn't sold for years that protected underground miners. And so we continue to monitor it. We continue to analyze it. Stay tuned. We'll obviously discuss it and report on it as part of our 10-Q here later in April when we filed the 10-Q with the SEC for the first quarter. But it's really hard to call whether or not that will abate going into the future. We feel like the reserve we have at year-end is as accurate and is complete as can be. But we continue to monitor it as we go from quarter-to-quarter and year-to-year.

The third question that came in was a similar area, but somewhat touches on the liability risk, but there is some, I guess, a peripheral exposure around PFAS. But the question was around the industry and that relates to some turnout gear material that's supplied into the marketplace. But the question was around NFPA standards, possibly changing to incorporate material that excludes that element, PFAS free turnout gear. Is the industry headed in that direction?

There's a lot of energy and a lot of effort towards moving towards PFAS-free doc or material. MSA does not manufacture PFAS, does not manufacture the material. We are a recipient of the material that's generated by our suppliers. And I know the supplier base is really actively evaluating and moving towards PFAS-free articles. Stay tuned on the regulatory front. It's hard to say which direction that they will take on that. But by all accounts, we stand ready to deliver the safest products for firefighters that will protect them. And we're hopeful to see changes on that front from our suppliers and our material suppliers in that area of our business.

When there's been in the past -- I'm not sure if there's a situation that mirrors this. But if there's new regulations that were promulgated, does that inspire a replacement cycle along those product categories?

Yes, it certainly could, Rob. And the thing that it could do is something that you've heard -- or we've heard discussions around is the requirement to have multiple suits. So one firefighter may be required to have 2 suits so that there's always one that's clean because we know it's a really toxic environment that they work in each and every day in fighting fires. And so cleaning the garment is really important to remove carcinogens from the fabric and such. And so there may be a move towards multiple garments, and that could certainly spur increased demand for our products. And so a number of things that are out there on this front, and we certainly stand ready to help and move towards the safest product possible for firefighters.

Maybe as we start to conclude, just I did want to get a question in, Ken, just to get your thoughts around capital allocation currently. I'm not thinking that the strategy, the priorities has necessarily changed, but you did complete larger -- your largest acquisition, I guess, last year. Just what the pipeline looks like on M&A and thoughts around how you allocate capital here in the, I guess, the near term.

Certainly. So Chris Hepler who's with me is in charge of M&A, and he could add some color here as well. But he's done a great job at building a pipeline, staying active and really evaluating additional targets as they come to fruition or come to market. And so we remain very focused on going after procuring additional growth opportunities through acquisition. You're right. We spent upwards of $400 million last year for acquisitions. We've also invested in Fotokite, which is a technology -- a tethered drone technology for firefighters, providing better situational awareness for firefighters. And so we continue to actively evaluate targets across the spectrum. Our balance sheet is positioned extremely well. I think we're currently at 1.6x net debt to EBITDA. So we have capacity to do additional deals and grow. With that said, we're also mindful of recessionary risk that loom and where we are in the cycle. And so we're taking a very balanced approach. We feel like our acquisition last year for Bacharach was at the perfect time. We were able to go after and buy a business that's really attractive and deploy capital while terming out a 15-year term note with 2.65-or-so percent fixed rate of interest. So today, that 10-year is roughly 2.5%. So we feel like we were able to put the balance sheet to work at a really good time. With that said, I don't think we're done. I think we continue to want to look at additional deals, but we're also very aware of where we might be in the cycle. So Chris, I don't know if you want to add any color to...

The only thing I would say is the importance of growth, and it is a priority for us to continue to grow the business, and acquisitions will play into that growth just as NPD will. From a pipeline perspective, Rob, yes, the market continues to be pretty robust. There's plenty of activity. And we continue to be focused on the names that are most strategic for MSA.

Makes sense. Makes sense. Ken, I'll slip one last quick one in on you that came in. The estimated '22 -- 2022 benefit from the accounting switch from LIFO to FIFO.

Yes. So what we've done with the accounting is we restated all comparative periods. And so when we look at the LIFO accounting, the impact, I believe, that we talked about last year was roughly 30 to 40 basis points of margin. And so that would be -- that was what we saw in terms of it -- terms of the headwind on margins. It actually improved margins slightly, roughly 30 to 40 basis points by moving away from LIFO. But we didn't move away from LIFO to improve margins. We moved away from LIFO because our business was not being managed under a LIFO basis. As we made additional acquisitions, we had to bring those into the fold, and we just decided we're not looking at the business under a LIFO method. It didn't make sense to continue. And the benefit was not -- and the impact was not all that material at 30 to 40 basis points. So we moved away from the accounting method of LIFO. And so that's generally the update on the change in LIFO -- from LIFO to FIFO.

Perfect. Perfect. Well, it's a great update. Ken and Chris, again, appreciate your time. Thanks, everybody, for joining us. We'll leave it there.

Well, thank you so much. Thanks for your continued interest in MSA. And thanks for having us today, Rob. I appreciate Baird's support.

Absolutely. Thanks, Ken.