MSA Safety Incorporated (MSA) Earnings Call Transcript & Summary

Good morning, and welcome to day 2 of Baird's 50th Annual Industrial Conference. Much appreciate your attendance this morning. In this session, we're going to highlight MSA Safety. Very excited to have them joining us here again at our industrial conference. So I'm Rick Eastman, Managing Director and Senior Equity Analyst here at Baird, covering the advanced industrial equipment sector or leading that coverage. So let me introduce MSA. They are a leading provider and pure-play of sophisticated safety equipment products globally. The company targets high-end personal protection applications in 6 core product areas in which it has market-leading shares in markets where it has earned tremendous brand loyalty from its customers. Increasingly vigilant safety regulations in developed countries provide steady demand, continued industrialization and increased enforcement of safety standards in developing regions, such as China, South America, Eastern Europe offer MSA significant international growth runway. Diligent efforts to realign operations and improve efficiency, offers continued earnings leverage over the next few years. So with us today is Nish Vartanian, Chairman, President and CEO; also Ken Krause, Senior VP, CFO and Treasurer; and Elyse Lorenzato, Director of IR. So I'm going to hand the presentation off to Nish. Nish is going to provide us with an overview and -- of MSA. And then hand it back to me for some fireside chat questions. If you do have anybody on the line has a question, any client, please e-mail me at reastman@rwbaird.com, and I'll certainly get the question into the back end of the fireside chat. So with that, Nish, I'll hand it over.

Thanks, Rick. And thanks for that nice introduction, and thank you, everybody, for joining us here today with MSA. So on the first slide, Elyse, if you could transition that. We do want to touch base on the safe harbor. I know when you can't sleep at night, this is something you want to read to put you to sleep. But just a quick reminder. And also a reminder that we do not provide forward-looking statements on profitability or earnings per share. So with that, we'll go into the presentation. If you don't know the MSA story and just a quick overview, we're traded on the New York Stock Exchange. Our sole focus and the mission of this organization for the past 105-plus years is that men and women may work in safety and that their families and communities live in health throughout the world. It's -- our focus is purely around protecting workers in high-risk environments, as Rick touched on. So our products are diversified from a product standpoint, markets that we serve, and also, we have good diversity in our geographies. So we have 2 business segments, the International and Americas. And as you can see, about 2/3 of our business is in that Americas segment. About 1/3 in the International segment. And if you were to break that down further, about 55% of our business is in the U.S. market. That chart on the bottom left is really reflective of a company that listens to its customers to develop products that solve the most challenging products that those problems, that those customers have in protecting their people and their assets. And that coupled with our internal execution to drive efficiencies by leveraging our systems and processes. And we've been rewarded for that, as you can see on the chart on the bottom left. And we think we've got some real runway ahead of us. Next slide, Elyse. So as Rick mentioned, we have leadership positions across our core product areas, either 1, 2 or 3 position on a global basis across our products and in those markets that we serve. Those leadership positions are -- with those products, those products are highly engineered, they're protected with patents and trademarks. They're highly engineered. And all of those products are really mission-critical in protecting people around the world in some of the most dangerous environments. And as we mentioned, we're diversified by product, by market and geography. Next slide, Elyse. Now as you can see, we talked about the success of the organization over the past. We've had significant margin improvement really by focusing on that core product portfolio where we can continue to engineer products by solving the problems of our customers to bring those solutions to market. And then driving the efficiency and productivity of the organization. And when you look at the margin profile and the margin improvement and the accretive margins that we have going forward. We think that there's real opportunity as we go forward with this business. Year-to-date, we're running our op margin in the down market at about 18% margins. Real strong margin improvement in our International segment, where we're delivering on what we anticipated happening as we announced at the New York Stock Exchange during our Investor Day. Some real strong performance in the International segment. And really, when you look at that improvement we've had year-to-date on the International segment, we think that there's plenty of runway ahead of us. We have talked originally about taking our margins from that 11% range, up above 15%, and we think there's plenty of runway ahead on that. And when you look at the incremental margins of this business, as we see the volumes begin to come back into the business, there's no reason why we don't have runway to get our margins where you're going to see a 2 handle on it at some point in the future. We continue to drive efficiencies in the organization. And we're going to continue to expand the margins. And when those volumes come back, I think we'll have some real success there. And part of the success and the story is, and on the next slide, Elyse, is really the way -- next slide, Elyse, is really the way we leverage our balance sheet. Our balance sheet is really well positioned. We have debt at 0.7 or 1.2. And then we have used that balance sheet with inorganic growth with some key acquisitions over the last 10 years, starting with General Monitors, which was our largest, Latchways, Globe and Sierra Monitor was the most recent and all of those acquisitions have somehow strengthened our position within those core product areas or core markets or expanded us into some adjacent market segments like we did with Globe. Globe was a highly successful acquisition that we made that brought turnout gear to MSA that we could sell into and through our channels of distribution and the fire service. And so we've had a lot of success with that. So the pipeline is quite full for us. When we look at acquisition opportunities, as you can see in the past with General Monitors, where we will lever up to 3x EBITDA. And so we've got a lot of capacity as we go forward to invest this business, both from an organic standpoint, from an R&D standpoint, where we spend about 4% of our revenue on new product development. Product vitality runs around 35% and then inorganic opportunity to expand and strengthen our product lines. But you'll see us be very disciplined around that acquisition area to make sure that we stay focused on our mission of protecting workers and really focus solely on safety equipment. Next slide, Elyse. So despite the near-term uncertainty, the long-term growth algorithms intact for this organization, we had a really strong first quarter, pre-COVID and that's kind of the performance we expect of this organization. So as we come out of COVID, because of the secular trend of safety, with ESG efforts, safety and protecting workers has never been more front and center and important to companies as it is today. We continue to invest in that new product development. The pipeline is full of innovative safety solutions for the organization to continue to strengthen our market leading positions, and we've got a strong track record of completing strategic acquisitions and leveraging that balance sheet to improve our business and our market position. We continue to execute on our productivity gains to really leverage our systems and processes, so we can drive that internal efficiency as an organization to improve the profitability. And we continue to be a differentiator and really attracting and retaining the brightest talent that we can find for this market and for our business. In fact, I don't know if you recently saw Pittsburgh Post-Gazette recognized MSA as one of the top workplaces. And we won that award 7 times as one of the top workplaces. This past year, we were recognized as the top workplace for large company category in Western Pennsylvania. And we're quite proud of that to be recognized, and that's recognized by votes of our employees, which is really reflective of an organization that's really focused on our mission and driving improvement in the organization. From a diversity standpoint, we've done a really nice job, and I think that this has helped us tremendously from our talent pool is about 35% of the executives at MSA are female or diverse individuals. And our Board of Directors of the 9 Board members, 3 are women and 1 woman of color. So we really focus around diversity, and we think that, that strengthened the talent within MSA. So with that, Rick, we'll flip it back over to you for question-and-answer session.

Yes, very good. Okay. As mentioned earlier, if you do have a question, just please e-mail me at reastman@rwbaird.com, and I'll work that question in. So much appreciate that. Nish, maybe just to start off, companies are really delicate about this, I totally get it and understand. But if we just look at the recent change in administration, and let's assume Biden will take office. But just -- does MSA lean into this new administration or lean away from it. And I'm thinking maybe if -- is there any tariff implications you guys haven't spoken to that, but I mean to the extent that maybe some tariffs are eased, would that be a plus or minus? And then also just any sense that you guys have, and I know you track this closely just around first responder funding under a different administration. Maybe just some thoughts there without putting you under spot.

Yes. No, it's great. So from a tariff standpoint, as you recall, when the tariffs were originally rolled out, we saw tariffs, it really didn't impact our margin streams. We saw no significant shift, but we do manufacture our products locally for the markets. For instance, most of the products we sell here in the U.S., nearly all are manufactured in North America and predominantly here in the U.S. So the tariff issue didn't have a negative impact on us and nor do we see it having a positive impact if things change in the future. So I think our margin profile will continue to be really healthy as we go forward. As far as the democratic administration, quite frankly, we would lean into that. Standards and regulations drive this business. And so we did pretty well under the Trump administration, Republican administration, I think by evidence of our chart, we have margin improvement. Our market share has never been higher than it is today. So we did quite well with the past administration. But the fact of the matter is, is with the Democratic administration, we'll probably see more standards and regulations. You'll see more money for the fire service. I've been with the congressional dinner, firefighters, congressional dinner in many years. I can tell you, Joe Biden is passionate about firefighters. In fact, he's so passionate, I don't know if you recall, he kicked off his campaign here in Pittsburgh with local union #1 in the background and from local union #1. So I think it's pretty safe to say, he will have some funding for the fire service, which obviously presents some opportunity for us. And you'll probably see some more standards and regulations that help drive our business, whether it's around confined spaces or fall protector. Fall protection is an area where clearly, we have not -- as a country here, specifically in the U.S. and in many parts of the world, improved from protecting workers from falls. Falls are the #1 killer of construction workers. And we think that we can make some significant improvement there with some new products that we're bringing to market to really help that situation as we go forward.

Understood. Okay. So I'll put you in that -- it's a rather empty category of CEOs that like new regulations. So that's kind of a small group of you guys. But no, excellent points, though, excellent points. Just -- I just want to talk a little bit around one of the things that's been so impressive about MSA over the years is just that you guys are just consistent singles and doubles hitters, meaning you focus on organic growth and you touched on this a little bit earlier, but I wanted to kind of speak to the growth algorithm in North America and then is there a difference in North America versus international? Maybe we can just cover those in 2 blocks. So what provides you the consistency in the North American market price and share gain? And maybe we could just speak to that for a few minutes.

Sure. So we've worked on it very hard. And singles and doubles is a really good way to the price. We worked really hard within our markets to improve our pricing. We have, over the last couple of years, done a nice job of that. We have a lot of confidence around how we can price our products more effectively in the marketplace to continue to drive good margins. When we bring new products to market, we spend a lot of time around price and price position in the market to continue to try to improve our margins with every new product that we bring to market. So it is about pricing. It's about trying to eke out some market share gain. We've got really strong market share here in the Americas market. And so we can pick up 1%, 2% or 3% market share gain each and every year around fall protection and hard hats. These markets don't change radically because safety is really built around brand and confidence in that brand. Safety manager is not going to ship product based on a couple of senses saving some money, a couple of cents here or there and ship a product quickly or on a number of occasions, they're slow to change. And so we look at that gradual improvement in our market share, gradual improvement in our pricing as we go forward. And so there's a combination of bringing new products to market and starting to win that business over. One of our most successful areas has been in the fire service market with the G1 SCBA. Some feel, we had market share around 25% when we launched that product. And here, 6 years later, we're probably in the mid-40s from a market share standpoint on that product. As we mentioned, one out of every 2 departments we bring on board are competitive conversions, and we continue to do a nice job there. We have a lot of room to run with fall protection. Fall protection is the area where we have the weakest market share on a global basis. And there's some nice opportunity there, as you saw with the growth over the last couple of years in fall protection before COVID. So that's really the story here in the Americas. On a global basis, you do have some different dynamics, where you have faster-growing economies such as China, you have -- where you have new standards being put in place, such as Latin America. And then the Middle East, which just happens to be a really big market, which is a nice opportunity for us to continue to grow. Europe is akin to the U.S. and that you're not going to get tremendous growth, but that's an area where you just have to continue to battle it out to improve your affiliates and effectiveness as an organization. And then as the economy comes back, we're really excited about what we're going to be able to do with that international and European market specifically as we go forward.

Rick, one thing I just -- yes, I just want to add something there. Two points that really -- when you think about the portfolio at MSA, it's the diversification, right? And so when you think about fire service, industrial PPE and fixed gas, very rarely, do you see all of those markets working at the same time, but very rarely do you see them all not working at the same time either. So you've got a nice kind of mix of business that comes together. And then also the niche aspect of our business. There's a lot of people that have looked at fire service over the years and kind of put their nose up because it's just hard -- sometimes hard to scale in that business. But we've found a way to make it work. When it comes to China, when it comes to the U.S., when it comes across to some of our markets across Europe, that fire service market has been a real winner for us. And so I think that's the -- those are the 2 things that really come together and set ourselves apart from many of our competitors.

Yes. Yes. And Nish, you had mentioned this earlier, but when you think about your ability to take share and again, we work really hard in this industry to take a point or 2 or 3 of share a year. But does that pivot around new products? Again, it's -- you can take share through distribution. But again, you're not really in high-growth markets, you're in consistent growth markets. But does your share gains, do they tend to pivot around your spend on innovation?

They really [indiscernible]. When you consider and you look at it, customers are constantly looking for how can they better protect their workers and find effective ways to protect their workers. And the G1 was really a classic example of how we brought new solutions to the market and fit form and comfort for the firefighter, rechargeable battery pack, which was something that was critical, so they didn't have to have batteries throughout the unit that they were replacing on a regular basis, which added to their cost and waste on disposal. Two, the SNS 5000 transit -- the SNS 5000 transmitter is really an incredible product. And there's patents in -- around those products and the sensors where they respond quicker to gases and hazards. They are calibrated on fewer cycles, so that saves money and operating cost. And then the sensors will last quite longer than what's available on the market today. So it's finding those solutions for our customers really helps us to gain some market share.

Yes. Yes. And then maybe just -- before I leave that topic, I mean, could you just speak to maybe what that new product pipeline looks like today? I mean the products in this industry because of brand and specs and the things we talked about, there's not like rapid adoption of a new product, right? But maybe you could kind of speak to over the next maybe 12 to 24 months what's kind of impactful in there, either by product category or maybe product in particular?

Yes. So we're putting a lot of effort and emphasis on fall protection. We've had some real nice success around fall protection. And as I mentioned, that's an area where there's just really an unacceptable level of death that continues from falls or injuries from falls in the construction industry and other markets. Europe is really much more advanced than the U.S. from a standard and regulation standpoint than the U.S. is. And then when you get into some other international markets, there's some real opportunities there. So as you saw with our growth in fall protection, the market starts for some new solutions in that product category area. And we're making a lot of investment there. So one product that we've recently launched is a V-TEC Hook io. So it's -- electronically, you can see if a worker is actually connected to an acreage point. One of the problems, and a lot of construction workers will fall to their death, wearing fall protection equipment, but they are not tied off to an acreage point. They disconnect maybe to move around or to do some different things for a short period of time, and they think that they'll be safe and they slip, and unfortunately, they go down. So this snap hook is electronically designed so you can monitor and make sure your workers are connected at all times. In fact, we designed this product jointly with a key customer who's probably going to order a significant number of these as we go forward. So those are opportunities for us as we go forward with fall protection. We continue to have some nice opportunity around gas detection. And so nice investment there around our safety io initiative in the MSA grid. So there's some nice opportunity in those 2 categories. And of course, the LUNAR product that we're launching for the fire service is an entirely new tool for the fire service that will help protect firefighters.

Yes. And all the products you just mentioned. So this V-TEC Hook io, gas detection safety io and then LUNAR, they all have this common theme of connectivity. So you basically can have somebody else monitoring the safety dynamics, not just the worker who's kind of distracted? Is that the idea?