MSA Safety Incorporated (MSA) Earnings Call Transcript & Summary

Well, good morning, everyone. Thank you all for joining us for this session. We have MSA Safety here today to talk about their business. We are very pleased to have Nish Vartanian, President and CEO; Ken Krause, Chief Financial Officer, here with the company today. This has been a regular occurrence here at CSI. So thank you both for attending. We really appreciate it. Nish I guess, starting off, for those maybe unfamiliar with the business or the company, a high level, we'd love to kind of get your take on -- and help some of these investors learn a little bit more about the products and some of the end markets that you all are serving.

Thanks, Stan. Well, sure. And obviously, you guys are listening to a lot of these presentations throughout these couple of days and my sense is, a lot of these presentations really blend together. So what I'd like to do is just cut to the chase on a few key items. And if ESG and execution matters to you, there's really 3 key things that I want you to know about MSA. So number one is our mission. 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 really how we recruit top talent, engage and motivate our diversified workforce. Men and women of all backgrounds are really attracted to our mission. From the time Thomas Edison invented our first product, the flameless lamp to today, we strive to leverage the latest technology to create great products that solves customers' most difficult challenges. And we take tremendous pride in being recognized as a top workplace in Western PA. In fact, we were voted the #1 workplace in 2020 for large companies by the Pittsburgh Post-Gazette by our own employees. And recently ranked #12 by Forbes Magazine as a top workplace for new college graduates. And #16 by Fords for a top midsized employer. So we take tremendous pride in that and the culture that we've built here around the mission of protecting workers. Number two, while we have a singular focus of safety, our business is very diversified. We're diversified by market, by geography and by products. And some of those products are short-cycle leading indicator type products and others are lagging indicators and CapEx aligned. So you only have to look as far back as 2015 during the industrial recession to see how our fixed gas and flame detection products and the fire service-related products really insulated us from significant top line revenue declines. In fact, our decline was flat during that recession. And during the pandemic in 2020, we had a 3% decline while other industrials had 8% and 10% decline. And during the pandemic of 2020, our APR business, air-purifying respirator business and the fire service business helped to offset that slowdown. So we often say that our success is not reliant on a single product line or a single growth program, and we have a pipeline of opportunities that we pursue across our business from new product development, a broad range of markets that really keep us balanced. And our agreement to purchase Bacharach, will only further diversify our portfolio at a very healthy margin profile, and we'll talk a bit about that a little later, I'm sure. And number three, we play to win. And winning for us is defined by mid-single-digit revenue growth and pulling that growth down to the bottom line with leverage. So if you take a look at the last 5 years, we've had about a 4% revenue CAGR and 13% earnings growth. So what that means for us is we're able to invest more on our mission of protecting lives, delivering value for our shareholder base, which, in part, includes a dividend that we've increased for over 50 years. We're also able to help our communities, either through employee volunteer work or financial support. And I can tell you that it's humbling having the opportunity to lead a company that's only had 9 CEOs, and 6 chairmans over 107 years. There are 2 recent events that have kind of crossed me in real nice complements to what we do as a company. I had a CEO visit a few weeks ago, a much larger company than MSA, but he just wanted to visit to share a few things about the learnings we had of COVID, and how we've handled some things here at MSA. And I had to have a break from that meeting. And I had our Vice President of R&D, take that CEO on a tour of our engineering center. And when he returned about 45 minutes later, he said, Nish, you've got every CEO's dream here. He said, I met an incredibly bright and motivated group of people who love the work they do. They know the relation of their work for your mission and the importance of what they're doing. He said, you're just in a great spot from that standpoint. And then a second instance where a comment came from one of your peers. At an investor conference, he made the comment to me, if you're an investor who has any focus on ESG, with MSA's level of performance and the mission that you have, it's borderline negligence to not have some level of investment in MSA. And really, I found those to be rewarding type comments where our message is clearly getting through to our workforce and obviously, our investment community, which is really rewarding for us. So with that, Stanley, I'll turn things over to you for question-and-answer. Ken's here with us who will also -- will chime in on some answers for us.

Thank you very much, that, right, because I think that a lot of the investors that are listening on the call are very familiar with a lot of the products that you also have -- that you have. But sometimes it's the culture piece, which I think is such an important part of the story. They may not be quite familiar with that. So I appreciate the overview. I would love to kind of jump right in and start the discussion around how Q2 is shaping up. You had very strong order books in March that have continued into the April time frame. Is that market recovery? Is it sustainable? Is this a level of restocking that was seen and that is not -- would love to kind of get a cadence for what you're seeing across the marketplace.

Ken, why don't you handle that?

Sure, Nish. Thanks for the question, Stanley. Appreciate that. As I had indicated back in April on the investor call, we had talked about our comparison of our business to 2019. And at that point in time, I'd indicated that we are at or above the 2019 levels. And we continue to be, from a bookings perspective, from an incoming business perspective, April and May and into June have been very strong. In fact, last night, we booked one of our largest FGFD orders in our history. So it's really good to see the flow of orders across all aspects of our business. The challenge we have, like many others, is in the supply chain, is responding to some of the supply chain constraints that we're all facing. And I've talked about that in April that, that was going to hinder our ability to deliver revenue that was in excess of the 2019 levels. Our orders, I stated again, our orders are certainly above the 2019 levels. Our revenue should be probably in the range of $325 million to $330 million for the quarter. But we feel pretty good about our ability to deliver into the second half. That backlog that we have today continues to be very healthy. Our book-to-bill is north of 110%. If I go back to 2019, the book-to-bill in the second quarter was 95%. So we're really an expansionary cycle, continuing to see good flow of orders and good flow of business across a number of product categories, not just one area, but really a broad-based recovery. Overall profitability continues to be very much a priority for us. We continue to focus on our cost structure and managing margins. We announced off-cycle price increases to respond to the inflation that many of us are seeing here in the U.S. And we continue to work towards closing the most recent Bacharach acquisition, hopefully, in early July. If we do close that in July and it looks like we are on track to do that. We would expect to incur about $3 million to $4 million of noncash PSU expense in Q2 related to that acquisition as we step up some of our performance-related compensation. As we get closer to that date, we'll certainly refine that and provide a bit more when we would publicly announce the closing of the acquisition, hopefully, on or around July 1. But just so you know, we are tracking very well with the acquisition. The team is starting to ramp up some integration work and really starting to really do a lot of planning as we anticipate and get closer to that July 1 time frame. So looking forward to bringing that into the fold as we move into the second half. I'll open it up for any questions you might have, Stanley.

Yes. That's a great overview. And in terms of the inflation piece and kind of the mid-cycle kind of price increase, do we think that the price cost case for you all will be positive? Will you be able to cover it? Will it be a bit of a headwind because of what's happening in the supply chain? How should investors think about that in terms of kind of the margin opportunity as we sit here today?

Stanley, historically, we've done a nice job of offsetting price increases and right? So the last situation where you kind of had a midyear price increase was during the tariffs. When the tariffs were put in place, and we execute on a midyear price increase and had a lot of success with that, and that's -- those price increases stuck. And that's what we're doing on this go around. So we tightened up on special price requests in the second quarter. And then, of course, we have this midyear price increase going into play. So we think we'll do an effective job in offsetting the increases that we'll have, and we'll start to see some of that benefit in the third quarter and into the fourth quarter. We're hoping that the price increases for the resins are temporary and that those will roll off as the backlog and supply chain gets squared away on the resins and hopefully see some relief into the -- this third and fourth quarters on pricing in that area. As far as the electronic components, I think that's going to be with us for a while. And we continue to work hard to offset that. The portable gas detection, which is the area that impact's -- that has impacted most by those electronic components. That's our -- those are some of our highest gross margin areas. And we worked hard to get to where we are, and we're going to continue to work hard to make sure we maintain those high levels of profitability in those areas.

Historically through the business, though, you all have been able to put on to price because of the kind of the value-add kind of total cost of ownership sort of approach, we shouldn't expect anything different given the industry dynamics you're seeing, especially with firm market tailwinds?

No, absolutely not. When you consider safety today from an ESG standpoint, protecting your workers is it's more important than ever, COVID only underscored how important it is that we make sure that we protect our workers, keep them safe. And so you just don't see companies pinching pennies when it comes to safety. And MSA has been fortunate enough to be around for 107 years. We've built a tremendous brand where many times workers see those 3 letters on the side of a product and have just a tremendous amount of confidence that, that product will do that it's supposed to do and protect them and get them home safe at the end of the day. And so when you build that brand and that value and the confidence that people have, those products are really sticky. And so we're able to get respectable margin for those products, especially when you're solving some of the customers greatest challenges. And we do some things to really help their productivity and reduce their overall cost of ownership. So we get compensated for that in a nice way by our customers.

Other forms of cost savings. I mean you've got a restructuring program announced last year. Remind us again, what sort of benefit you should start to see on your -- or realized on our P&L kind of in the second half of this year and then flowing into '22?

Sure. Ken, why don't you go ahead and take that?

Sure. Yes. The numbers that we have spoke about in the past are around $10 million to $15 million of cost out in 2021 here and growing up to the $20 million range. We're excited about the investments we're making in our restructuring programs. One area that I wanted to comment on is our center of excellence. We announced the investment in the gas detection center of excellence here in Pittsburgh. Just over my shoulder here in the Cranberry facility. And we're really excited about how that's pacing and our ability to bring in some of our manufacturing from other locations and really try to leverage that here in our Cranberry center of excellence, where we manufacture a lot of our sensor detection and products for gas detection. And so looking forward to that. But all of the savings are very much on track to what we've communicated in the past. And we continue to execute that spirit of continuous improvement. We continue to look for ways to improve our business model and to generate improvements in our margin profile. And I'm hopeful that we'll be able to uncover more of those as we move forward into future quarters.

Okay. You mentioned the center for excellence, that's probably a nice segue into the recent news, we had a weak, very exciting news. You announced the Bacharach acquisition, largest in the company history. Can you discuss how that's going to fit into your overall portfolio? And then the overall strategy in terms of asset protection?

Sure. Why don't I touch on that and then Ken add some more color. So obviously, the Bacharach acquisition, that's 1 target that's been on our sheets for quite a few years. And so it's -- we just see that as a nice opportunity within that gas detection segment of our business, which is obviously core to us and highly profitable, as you know, to where that fits in quite nicely from a technology standpoint, right? So they use a lot of similar technologies that we do at MSA. What they've done differently is they've really focused on that HVAC refrigeration market, where we had focused historically an awful lot on confined space entry and general construction in the oil and gas industry, which we've done quite well in. And general industry, be it utilities and other areas where gas detection is used. So this really takes a technology and it expands us into a market area that provides greater diversification for our business. And on top of it, it's a real nice margin business and being in our backyard, the integration of it should be a little bit easier than 1 that may be across the country or in a different part of the world. So we're excited to have this. We think that there's some nice opportunity with it. And as I mentioned, Ken is the executive sponsor for this integration work and what we're doing with Bacharach. And Ken, why don't you add some comments too.

Yes, I'm super excited to be a part of that. When Nish had asked me to participate in that. I certainly was excited to step up and to do that. This is a great acquisition for MSA. When we look at the business, the gas detection business, I really like that business. It's a good business to invest in. It's a nice, sticky business. It's got great technologies and in a very attractive margin profile. It's hard to find businesses that are accretive to margins to the MSA margin profile and Bacharach is accretive to margins. They're accretive to cash flows, and we expect some improvements in the overall earnings as well as we move forward. Really, when we look at the Bacharach acquisition, there's 2 or 3 areas of focus and major themes and I think it's about how do we help them simplify their business model. How do we help them reduce the complexity that they have in their business model and how do we invest for growth? How do we help that business model reach its full potential? And we feel like there's great opportunities to really execute on all 3 of those major themes as we move forward, Stanley.

Well, I think it will sit nicely adjacent to some of the other things you're already doing on the fixed gas side as well. I provided a steady stream of earnings opportunity. You mentioned earlier on the large -- on the FGFD business, 1 of the larger orders that you'll had received, seem to be a pretty good barometer for how people in the oil and gas markets are actually feeling about conditions as we sit here today. Or is this kind of new product wins for you all? Just curious if you could flesh that out at a high level.

It's a combination of both Stanley family, right? So it's a large project that we've been tracking for probably 6 years now. And the team has done a really nice job in working with the contractors and the engineering firms to spec in the new MSA products, the X&S 5000 transmitters, which has a lot of those new technologies around faster response times and sensor, longer sensor life, longest time between calibration times. So the customer really saw tremendous value in this and paid a premium, quite frankly, to spec in the MSA product for that order. And so it was nice to win the business, number 1, which was very competitive, and then number 2, it is a good, clear indication that people are looking to expand production, oil and gas production. And this is an expansion project, which obviously, we're getting in ground floor of a new project. And so you're starting to see some of those funds released. And we're seeing this in different parts of the world. So whether it's the Middle East or Latin America, quite frankly, MX has been fairly strong for us this year. So as you see the oil price up in that above $70 range, you're probably going to see some new projects come to market to make sure that oil capacity, meet the expanding global economy. So there's certainly some opportunity there, and we're excited to see that business come back. That business will probably shift in the fourth quarter, most likely what the timing is for that. As you know, that's kind of that long cycle type product. So we'll see that later this year, but we're excited to get that order. And hopefully, we'll realize a few more that are in the pipeline.

The longer duration of the FGFD and the kind of backlog nature, it's nice to see kind of validating what you're seeing on the short-cycle side as well. Is there any risk on the short-cycle or shorter-cycle businesses within the orders that you would see any cancellations at all. Historically, has that been an issue? My guess is that everybody is kind of facing the same challenges. And so it's just a matter of getting product out the door. But curious if you have any color there?

No, we haven't seen any cancellation of order. And typically, we don't. Those are -- as you mentioned, they're short-cycle products. We're doing a pretty good job around hard hats and getting that out the door, we're able to ramp up the production in there very quickly. And we've been able to manage the polyethylene supply chain to make sure we keep enough product to keep that flowing. So we're in really good shape with hard hats. Where we're -- obviously, at a portable gas detection that we're working through and prioritizing orders. We haven't seen any cancellation of orders, don't expect cancellation of orders. You have a pretty good loyal customer base there. And we think that we can do a nice job in juggling orders to make sure we keep our customers at bay. While the volumes won't be as high as we anticipated, especially on portables, we'll work through some of that. And fall protection, quite honestly, get that supply chain ramped up on fall protection has taken a little bit of time, but we expect that to continue to improve throughout the year. So so we think the business will hold up nicely and as employment builds around the world, right? We've seen the improvement in the U.S. and Asia. We hope to start to see some nice improvement in Europe and the Middle East. As COVID gets under control, we expect to see the business pick up there, too.

You all have done a nice job of new product development over the years. Can you talk about kind of what's in the pipeline, what investors should expect? And I'd love for you to touch on and highlight the level of technology that you're putting into the assets now that connectivity?

Yes. So we talk about the fact that we invest a little over 4% of our revenue in R&D having our strong balance sheet certainly helps us to deploy those assets in a responsible way, right? So we have a very balanced approach. We talked about some of the inorganic growth that we invest in with the acquisition of Bristol to turnout gear. And then, of course, with Bacharach. We increased the dividend slightly and then -- and also try to reinvest from an R&D standpoint. So we have a very robust process around R&D. Our global product business directors, you've met most all of them. Who really do a nice job in driving meetings around the world with the sales and marketing teams to really understand some of our customers' needs and some of their pain points. And then we go through a very disciplined prioritization process of the new products we're going to work on and where we're going to make our significant investments and really tracking our progress around the top 20 projects that we have. The new products we bring to market have done a really nice job. We have a nice track record from the standpoint of market penetration and improving our profitability. So we -- the return on investment from an organic growth standpoint on those new products is fantastic as you recognize. So LUNAR is 1 of those recent breakthrough products. So that's an entirely new product that we're introducing in the fire service to help protect firefighters, making sure that they get home safe at night. We're excited about the prospects for that product where you don't have to have an MSA breathing apparatus, you can use that independent of your breathing apparatus. So that allows us to get in some competitive departments. We may be using. another brand a breathing apparatus to sell LUNAR. As I mentioned, on the X&S 5000 transmitters, which was a nice investment. And obviously, the G1, the M1 breathing apparatus, which has made some nice headway. And we're working on an M8 breathing apparatus, which is for the Chinese market, very specific for China. So we have some nice opportunities in the pipeline with what we've introduced. We continue to make investment across the portfolio, and we think we have some nice opportunities in the future with us. Ken, do you want to add anything to that?

Yes. The only thing I would add is back at our last Investor Day, we had talked about safety technologies, and that's really our focus. Greg Martin, our Head of R&D, does an exceptional job at really taking a fresh look at our product portfolio and really incorporating these state of the art technologies into the portfolio. The fire service is a good example, and Nish touched upon LUNAR. A few years back, we talked about the replacement cycle. And a lot of people still remember the replacement cycle. Quite frankly, I've moved on from the replacement cycle. I think we have a tremendous opportunity to continue to grow this business regardless of the replacement cycle because of all the technologies we're incorporating into the portfolio and all the new devices that we're launching. Not only are we investing in LUNAR, but we're looking at other state of the art technologies that we continue to integrate into our portfolio of fire service products as well as some of the other areas of the business. So I feel like we're positioned extremely well from a technology perspective, and it is certainly front and center focus for us as we head -- as we go forward, so.

And that's interesting, kind of to question about the replacement cycle. But yes, I guess just what I was thinking about is with Globe, with Bristol, with LUNAR. I mean you have been taking a tremendous amount of share in the marketplace as is. But it seems like that all of these acquisitions and all of these products are opening have new opportunity sets for you all to at least have a conversation with a customer about some of the -- things that you all can provide. And then along those lines, you having a third plus of your business tied to a fire service, which we think is fairly less cyclical than some of the other markets, especially some of your other industrial peers, is a nice mix to add to the overall portfolio.

A real good way to look at it, Stanley. We -- the -- when we look at what we did with the Globe acquisition. The Globe acquisition really helped us to strengthen our channels of distribution in the North American market and get greater reach than we have. And between the Globe brand, the Cairns fire helmet brand and our G1 breathing apparatus and portable gas detection. You have to go far and wide to find a fire department that's not using at least 1 MSA product. And as you work your way into that fire department, you're able to spring more products into that fire department. And that strategy served us well. And that's really what led us to the acquisition of Bristol. Where we don't -- really don't have a platform for turnout gear on the international market, and this provides that platform for us to build a greater channel of distribution on an international basis. And then obviously bring turnout gear into those loyal MSA users of our fire helmets and, of course, our breathing apparatus. So we have some -- a nice opportunity, we think, to continue to leverage and grow and then bringing LUNAR in as a new product, certainly helps to grow that business. And there are some other opportunities where we...

I guess kind of wrapping it up. M&A has always been such an important part of the story. You guys have done a very nice job of expanding and delivering on what you have promised to investors. How does the M&A market look right now? My guess is you're somewhat constrained given these acquisitions, Bristol and then Bacharach earlier this year, but I imagine you still a fairly active pipeline. We'd be curious to kind of think about or hear how you think about using the balance sheet on that front down the road?

Sure. So we do. We have a very active pipeline today. But obviously, with the Bristol acquisition earlier this year, now we haven't even closed yet on the Bacharach deal. We'll close on that, hopefully, in July, as Ken mentioned. From a balance sheet perspective, we're still in a solid spot where we could make further acquisition. But we probably want to get a little time under our belt with these 2 acquisitions and then reenter the market unless something really attractive comes across our screen. So we continue to motor opportunities. We're certainly looking at those opportunities as we go forward. That's going to continue to be, acquisitions will continue to be a part of our growth strategy as we go forward.

We're getting close to being out of time. So with that, I will let say Nish, Ken and Elyse. Thank you all very much for participating. Great to have you here again and hear the story. And also thanks to all the investors that have seen it virtually. I hope to see you next year in person in Boston. Until then, take care. Thank you.

Thank you, Stanley.

Thank you.