MSA Safety Incorporated (MSA) Earnings Call Transcript & Summary

Good afternoon. Thanks for joining us here at the MSA Safety presentation. I'm Larry de Maria. I'm the analyst here at William Blair that follows MSA Safety. I'm required to inform you that for a full list of research disclosures and potential conflicts of interest, you can visit our website at www.williamblair.com. Today from MSA, we have Nishan Vartanian, Chairman, President and Chief Executive Officer; and Ken Krause, Chief Financial Officer. As many of you know, MSA Safety is a global manufacturer of sophisticated safety products to help protect workers and facility infrastructure. Core products include breathing apparatus, firefighters' helmets, protection apparel, fixed gas and flame detection, portable gas, industrial head protection and fall protection. The company has been around since 1914 and has a long history of success and dividend and a successful story and a very well-run company. So with that, I'm happy to turn it over to Nish, who's going to have some comments, and then we'll have some Q&A. So if anybody would like to drop a question into the chat, I will definitely keep an eye out for it and drop it in as soon as you want. So thanks for joining us, everybody. And Nish, to you.

Super, Larry. Thanks so much for the introduction. And just a little background on myself, for those of you who are not familiar with MSA or me personally. So I started with MSA about 36 years ago as a sales intern and have had a nice ride up to, as Larry mentioned, President, Chairman and CEO of MSA Safety. So I just want to thank everybody for your interest in MSA. You have all heard a lot of these presentations, and we'll hear a lot more here over the following days, and I'm sure these presentations blend together for you. So I'm going to cut to the chase on the front end of the presentation on a couple of key things for you. So ESG. if ESG matters to you, there are 3 things about MSA I really want you to know. So pick up your pencils. Number one, our mission of protecting workers and infrastructure is the foundation of everything we do at MSA. It's what we think about when our feet hit the ground in the morning, it's how we recruit our top talent, engage and motivate our diversified workforce, that diversified workforce is both young and experienced in men and women from various backgrounds and they're all attractive to the mission we have. From the time Thomas Edison invented our first product to today, we strive to leverage the latest technology to create great products that solve our customers' greatest challenges. And we take great pride in being recognized as a top workplace in Western Pennsylvania. In fact, we were voted the #1 workplace in Western PA for large companies in 2020 by the Pittsburgh Post-Gazette by our employees, which is a nice complement for us. Number two, while we have a singular focus of safety, our business is very diversified. It's diversified by market, by geography, by products. And some of those products are short-cycle products, which provide us some leading indicators and other of those products are lagging indicators for us because they're really CapEx aligned, and we'll talk a little bit more about that. So you only have to look as far back as 2015, the industrial recession to see how our fixed gas and flame detection products and our fire service-related products insulated us from significant declines in revenues with our topline as far as our top line is concerned because our top line remained flat through that industrial recession in 2015 and '16. And then recently here in 2020 during the pandemic, we had about a 3% decline in business, while other industrials saw an 8% and 10% decline. And what really helped us through that recent decline was our APR products, of course, and the fire service business remained very stable. So our agreement to purchase Bacharach, which we'll talk a bit more, will bring some further diversification into MSA's top line and our profitability. And then number three, we play to win. And winning for us is defined as mid-single-digit growth and pulling that growth down to the bottom line with leverage. What that means for us as a company is we can invest more in our mission of protecting the lives of workers, provide a reasonable rate of return for our shareholder base, which includes, in part, a dividend that's increased for over 50 years and help our communities, either through employee volunteer work or some financial support. So for me, it's really humbling to have had the opportunity to lead a company that's had only 9 CEOs, 6 chairmans over 107 years. And there are 2 recent events that are great complements to what we do. I recently had a CEO of a larger company come visit us and just sharing some thoughts and ideas about return to work in some other areas. And I had to take a break from our meeting for about 45 minutes, and I had our Vice President of R&D take the individual up to our research lab and show him some products that we're working on and what we were doing from an R&D standpoint. And when he returned, his comment to me was, what you have here at MSA is every CEO's dream. So I met an incredible number of bright and motivated people who love the work that they do, and they know the importance of the work and how it's tied to the mission of your company. You guys have just done a fantastic job. And I thought that, that was the ultimate compliment you can get from one of my peers of a bigger company. And then a second comment I recently heard from an investor, one of your peers, they said, if an investor has any focus on ESG, it's borderline negligence to not have some level of investment in MSA. And I think that's a real complement that comes from your community, so to speak. So really proud of what we've done here at MSA. I'll take you through a short slide presentation, and then Ken and I will take some comments that you might have. So Elyse, next slide. And I'll be able to fly through this based on some of the comments. So safe harbor, you guys are all familiar with this, just a reminder on the safe harbor comments. Next slide. Talk about the overview of MSA. The revenue of approximately $1.4 billion, 5,000 employees globally, a couple of areas I didn't touch on, market cap exceeding $6 billion and the diversity in MSA from a product standpoint and obviously a geographical standpoint that I talked about, you can see here on this chart. Next slide. So we're exposed to a number of key global trends that you see in the marketplace. Obviously, from an ESG standpoint, there's a lot of focus around safety. There's a lot of focus around connected devices and connected workers and an area that we're working on with some nice success, and we expect that to grow significantly and we continue to have some good trends from a performance standpoint at MSA. So from an economic cycle standpoint, we're well positioned as we move forward. Next slide, please. So as we talked about with our attractive markets and our leading positions, Larry mentioned a bit about the fire service market in our leading position. So we have a leading position with our self-contained breathing apparatus, firefighting helmets and protective apparel. We've recently launched our fire grid through LUNAR, which is a new device for firefighters to help with firefighter location and also ties in thermal-imaging cameras, which we're pretty excited about, about that product we're bringing to market. In the gas detection space, we have fixed gas and flame detection and portable gas detection. We're doing a nice job on Safety io, when we're talking about connected workers and being able to help customers with managing their fleet of products. The Bacharach, the agreement that we have for acquisition with Bacharach, that fits into our fixed gas and flame detection area of products. It also touches on a bit of portable gas detection. So that's right in the sweet spot of what we do. And then, of course, the protective or PPE equipment, industrial head protection and fall protection. We're a distant #3 in the fall protection space. We continue to see that area as a nice growth opportunity for MSA. It's the fastest-growing segment that we play in, and it's the area where we have the least market share. Pre-pandemic, we had 3 consecutive years of double-digit growth in that area. And we think as things return to normal, we have some nice opportunity in that space as we go forward. Next slide, please, Elyse. so we've had disciplined execution around what we do as an organization. We've invested from an R&D standpoint to drive our organic growth and then used our balance sheet, of course, to spend from an inorganic standpoint to drive that mid-single-digit growth for the organization over the past 5 years. And of course, we've leveraged that to the bottom line to grow our profitability at a multiple of the revenues. And that's around some discipline with our pricing, with what we're doing with leveraging our systems and processes to improve the efficiency of the organization, and we continue to see some opportunity to have some improvement in that area as we go forward. We talk often about the operational improvements that we have been driving in Europe and there's room to run in that area as we go forward. We talked about improving this business and the op margin of this business to have a to-handle on our op margin and we think that as we come out of COVID and we get into the next several years, we have some nice opportunity to do that. And we continue to have a strong balance sheet, and we're committed to a balanced capital deployment. We'll buy back share to reduce the dilution. And then, of course, we'll make some acquisitions where they make some sense. And then of course, we made the recent Bristol acquisition. And now we're lined up for the Bacharach acquisition as we go forward. And even with those 2 acquisitions, our debt-to-EBITDA will be in the range of 2. So from a balance sheet standpoint, we're in really good shape and obviously well positioned if we -- if another opportunity were to come forward to us. Next slide, please, Elyse. So as a business update, the second area we really want to focus on, in Q1, our quarterly revenue was down, and that's just old news for all of you. We had a very difficult comparison. 2020, Q1 was pre-pandemic for MSA. We talked about the fact that January and February, we had some challenges from a production standpoint, and the incoming business was a bit soft, but we really saw the business strengthen from an incoming standpoint in the months of March, April and now May. So when we look at the incoming business for MSA and the demand for our products, we've seen some real nice improvement. In fact, we're beginning to compare ourselves to 2019 and getting more confidence in the fact that we're going to get back to some nice growth as we go forward. As with everybody, we're having some supply chain issues. So we've seen some issues around resins with inflation around some resins. And of course, some supply chain issues around resins. But we're working through that, and we expect that to improve significantly as we go through the second quarter and into the third quarter. The electronic components are also a challenge for us as they are with others, and those impact, of course, our portable, fixed gas and flame detection and self-contained breathing apparatus products. Those issues have been spotty for us. We've been able to work around most of those, but we continue to see those to be a challenge for us through 2021. So we don't have clear line of sight of things improving, like we do at the resins around the electronic components, but we've been able to work through that where we haven't had any work stoppages in any area for any significant period of time like the automobile manufacturers. So we continue to work through that. But we have growing confidence in the fact that the demand for our products is improving. We think that we're going to continue to track real well against what we anticipated to happen and some of the messaging we had around our Q1 performance and what we had said in April. The business remains very much on track. Elyse, next slide. So the Bacharach acquisition is really a nice opportunity for us. So as I mentioned earlier, this is another opportunity for us to diversify our business in an area that we don't have a lot of strength, and that's in the HVAC refrigeration market. So as you know, we're fairly strong in a number of other markets with both our portable and fixed gas and flame detection products. While this technology is right in the middle of the fairway for MSA from a technology standpoint and production standpoint. The fact of the matter is, we have never really focused heavily on HVAC and refrigeration. We've generated in ballpark of $8 million to $10 million a year of revenue in that space. And so Bacharach provides us with a significant opportunity to really expand our business into another area, which further diversifies our footprint. Next slide. So key messages. As I talk about workplace safety, it's more relevant than ever in the work environment. And obviously, the global pandemic has brought that to the forefront for everybody. We continue to invest in new product development. In fact, we spent over 4% of our revenue in NPD. So from an organic standpoint, we're able to address market opportunities. And then of course, we don't shy away from deploying some capital for inorganic opportunities to grow our business and expand into either some geographies that we're not in or some product areas that might help us and, of course, some markets. And we continue to see some real strength in our order book through May. And so we look forward to that demand for our products continuing to improve through 2021, where we can get back on track with that mid-single-digit growth and, of course, leveraging that to the bottom line. Next slide, Elyse. And I think that wraps it up. So Larry, I'll turn things back over to you for Q&A session.

Thanks, Nish. So obviously, you talked a little bit about current quarters and things being a bit better. We started off the year a little bit slow and then had a nice recovery. Can you guys give maybe a little bit more tangible color on orders in terms of making year-over-year growth, are they accelerating? And is some of the strength in orders? Is it possible they're preguided for price increases or concern around supply chain? So just trying to cut to the really core of the orders in terms of what's the actual growth numbers. And is it really an acceleration in orders? Or is there some noise with obviously buying because of supply chain?

Ken, why don't you go ahead and take that? And you're on mute.

Thank you for the question. The business is doing really well. A couple of points I just wanted to take the time to highlight with respect to your questions are: One, as we talked about in April, our order pace and our business, the volume in our business is back at or slightly ahead of 2019 levels. And so we've seen a really nice acceleration in growth from the really weak start to the year in January and February prior to the vaccine being rolled out here in the U.S. as effectively as it has been over the last couple of months. So we've seen a really nice growth in the business, return to 2019 levels. But as I had indicated in April, on the call that we had after the first quarter, we do see some challenges in our ability to deliver at 2019 levels in Q2. That doesn't mean that we're not going to be able to do that in Q3 or Q4. But in Q2, there certainly are some supply chain challenges that are preventing us from delivering at the level that we had in 2019. We should see growth year-over-year certainly from 2020 to 2021, but getting back to 2019 levels, is a bit of a stretch in Q2 because of the challenges. The book-to-bill is well north of 1x in Q2. And so we've built some nice backlog. We're not seeing any cancellation. We continue to see actually increase in interest in our business. And it's not just in one product category. But it's really across a broad array of product categories from head protection to fixed gas, to portable, to SCBAs. And so we really feel like we're very well positioned to start the second half here in about a month, and to deliver some good growth in the second half. There's always a lot of unknowns and variables that are out of our control, but we feel good about it. We've started to be more proactive on the pricing because as supply chain challenges exist, inflation starts to ramp up, and I think a lot of folks are seeing that. So we are trying to be as proactive as we can with pricing, very similar to the way that we managed the tariff issues just a few short years ago. And so we feel pretty good about that. That will probably start to stick and you'll start to see some of that in Q3. But we feel pretty good right now about demand levels in the business, especially here in the U.S.

Ken, so as it relates to pricing, are there new price increases going in that hit for 3Q? Or are we just constantly adjusting based on the outlook?

There are new price increases that we just launched here recently, and there will be -- it takes time. There's a notification period, of course, on some of those. And it takes time to work its way through the system. But we'll start to expect to see those stick here in Q3.

We get this question a lot about you guys but about other companies as well. What do you guys think is competitive moat for MSA? Obviously, safety seems to be a good moat. Things there change very often. But how do you guys think about it? You're not alone, there's competitors out there. So what do you think is your competitive moat?

Yes. So there are several things that play into that, Larry. Number one, it's a highly regulated business. And when you're in a highly regulated business, customers typically don't want to change product out in a significant way. So we have really strong market share across a number of our product lines, and we continue to work effectively to find new solutions for customers' pain points. So we work really hard, as I talked about, leveraging the latest technology to bring solutions to our customers' problems, to bring those latest solutions to our customers. And we get those products specced in. And once we spec product into customers, and they gain confidence in using those products, so the business remains pretty sticky. There's a nice replacement component to it, and customers have a lot of products in a product that has strong brand recognition. So in the safety space, you want to provide products to workers that workers have confidence in. And being here for 107 years when workers see those 3 letters of MSA on the side of a product, they have a lot of confidence that, that product will help protect their lives.

Thank you. I think there was some -- obviously, some stimulus money out there. And obviously, [indiscernible] have gotten some cash, government, et cetera. So the SCBA cycle feels kind of good, but also feels a little long in the tooth. And so can you just help us kind of bridge the gap and kind of understand how much longer can this -- you want the SCBA cycle go on for? Probably every year, you're excited as it keeps going. But can you maybe flush it out? Also maybe talk about where you're getting wins?

Yes. So in the fire service, the fire service business remains very healthy for us. That was one of the strong areas through 2020. The replacement cycle for breathing apparatus continues. We -- the pipeline for business remains very strong for us. So we think 2021, 2022 will continue to be good years for us. And we're excited about the fact that we're bringing new products to market like LUNAR. We're enhancing our position in the market with the acquisition of Bristol, which will help us on a global basis the way Globe helped us here domestically with obviously, enhancing our channels of distribution and getting more points of contact with some customers. So we think that there's some nice opportunity to grow our business in the fire service, which really represents a little over 1/3 of our business, and it provides good balance for us when you see those industrial market downturns. So we think there's some nice opportunity there. From an administration standpoint, I think President Biden has been pretty vocal about his support around the fire service. He launched his campaign, in fact from Pittsburgh local union #1. And I think he recently revealed in his tax filings that he made a $10,000 donation to the International Association of Firefighters. So I would certainly expect funding from the federal level for firefighters to continue to be robust and maybe improved as we go forward. So there's some nice opportunity there. And then the additional wind to our back in the fire service is, as firefighters learn more about turnout gear and wanting to change out turnout year, getting into a fire and having that turnout gear covered with debris instead of returning to the station, hanging it up to dry and putting it back on for the next fire, in a lot of cases, they're buying a second set of turnout gear, which helps our Globe business and will probably help the Bristol business. So there's some nice opportunity there with the fire service. Across the wider spectrum of our business, typically, what we've seen over the years is a democratic administration will drive more regulation and more standards. And you'll probably see some more regulations and standards around fall protection and other industrial areas, which helps our business. Those standards and regulations drive customers whether -- they are driving customers to a higher level of compliance. Falls remain the #1 killer of construction workers in the United States. It's the fastest-growing category that we're in. It's the category that's cited most by OSHA, and the fines are most by OSHA. So there's opportunity to help those workers in the fall protection space, and I believe that the government will probably come through with some standards to help along with that.