MSA Safety Incorporated (MSA) Earnings Call Transcript & Summary

Good afternoon and welcome. Thanks to Nish, Lee, Chris and Steve for joining us today. I'm Patrick Schuchard with Oppenheimer. The MSA Safety team has a presentation for us, and then we'll open it up for Q&A. There is a function for submitting questions. So any investors who would like to submit a question, please do so. I'll see the portal, and I'll work it right into the discussion. So with that, I'll turn it over to Nish and Lee, you guys take it away.

Thank you, Patrick. And Chris, if you can move to Slide 3. First and foremost, what I'd like to do is just kick things off by focusing on the fact that we're a purpose-driven company. We have a tremendous mission at MSA of protecting lives and the environment. It's been the same mission we've had for over 108 years. We're dedicated to safety with 100% of our business. It's a company that has very strong margins, a good profile of margins, good position in our key markets and improve value fruit -- value and driving and track record of driving value for our customers. On the next slide, we're a purpose-driven company that's driven by our mission of safety, our worker and workplace safety is at the heart of what we do. Our talented associates around the world, arrive at work each and every day with the mission of protecting workers. Our sustainability pillars revolve around our products, our people and our planet. And we take great pride in the investments we're making across these 3 pillars from new product development, investments in our talent, our communities and most recently, the carbon reduction target that we've set for the organization. The next slide. We're a leader in innovation around safety products. So while we're dedicated to safety, we're diversified by market, by product and by geography. So when you look at the markets that we serve, firefighter safety is the largest segment that we play in. It's about 38% of our business. We protect a firefighter from head to toe. A lot of those products are highly engineered with standards and regulations around those products, and we continue to perform well from a market share standpoint and growing that business. Gas Detection business is our second largest segment, that's broken into 2 different areas: fixed gas and flame detection products, which are installed in facilities as part of infrastructure protection and then personal gas detection, which are monitors that are used on individuals, and we're building our connected worker platform off of those portable gas detection devices, which continues to be a growth opportunity for us as we go into the future. And then, of course, industrial, personal protective equipment represents about 27% of our business, and that's really around industrial head protection and fall protection and respiratory protection is also in that category, which is used across a diverse segment of markets, whether it's oil and gas, general industry or the utility business, there's a broad range of applications for those products. And I'll turn things over to Lee for the next slide.

Thank you. So I think one of the things I'd harp on, just to start off with, we're a very disciplined company, we're very much focused on execution. As Nish mentioned, innovation is an incredible part of our strategy. We invest $50 million a year in R&D. That's translated into an industry-leading product sales mortality of 35%. We've also complemented that with some really nice strategic acquisitions, over $400 million has been invested in the last 4 years, things like Bacharach, Bristol Uniforms, both of which are very much attached core to us in terms of gas protection and firefighter safety. Certainly, our financial position is very strong. We have really nice momentum in margins and cash flow generation. Our net debt to EBITDA at the end of the quarter was 2.0x, and we've been paying a dividend -- increasing dividend for 53 years now. And we've -- all that brought to life with this incredible operational excellence that seeks to drive both gross margin and SG&A improvements and at least overall to a consistent 30% to 40% incremental margin target. So that's how we do things. If we then pivot to the next slide, certainly, all of that and more is coming to life in the first quarter, though frankly in the last 12 months. So we've certainly transitioned into more of a -- we say we like to see on a long-term basis mid-single digits, but we're -- we've raised our outlook for the year to be high single digits, low double digits. Certainly, that's reflective of a very strong first quarter, some good visibility we have into the second quarter. And then we're calling a responsible optimism we have for the back half, but we're going to see how that all plays out. What's nice is we had 20% sales growth in the first quarter, and we also had a positive book-to-bill. So a very strong, healthy orders environment. Our backlog is still very much in the same place as we went into the year. It could be an opportunity to give us confidence in the quarter or if things were to soften, we could sort of utilize that backlog to still grow throughout the year here. Our margin story, as I just mentioned in the prior page, it's a nice one at 19.4%. The first quarter is typically our lowest margin, 310 basis points year-over-year. So it's a nice 35% incremental margin. And typically, cash flow is a little bit of a draw in the first quarter. We've brought an increased focus there. And we had, as you can see in the chart, 97% free cash flow generation, which puts us in a very strong position as we go after our full year goals. So again, we are optimistic here for the year, but also being pragmatic given the macro environment, the nice thing with our business, it's very resilient. It's been resilient in the past, and the fire business, the fixed gas business, make up over 60% of our sales, they do well, really no matter what's going on in the macro environment. So we're in a good place here. So if we just go to the last slide, I'll turn it back to Patrick. We certainly, as Nish said, very much a mission-driven culture. We're focused on executing or executing for the medium term and the long term, and that's certainly what we're about with a great amount of discipline. But Patrick, I'll pass it back to you.

Thanks, guys. I know you just reported last week. I was wondering if maybe you could talk about the drivers of growth in your first quarter results?

Sure, Patrick. It was really broad-based. We had broad-based growth throughout the business. Good demand for our product. As we mentioned in the quarter, the book-to-bill was over 1.1%. Backlog remains very strong. When you really saw the over performances, I would say, in the quarter, that was driven by 2 things: probably realize about $15 million in additional revenue from a stronger market for the PPE industrial market than we anticipated. And then secondly, supply chain was much better than anticipated for both turnout gear and portable gas detection. And so that drove probably another $15 million or so. So that's where you saw the big beat in the quarter. Things were just much better than anticipated, and we're optimistic going into Q2.

I just want to note real quick for anyone listening, if you want to ask a question, now is the time to put them in, I can see him over here and I'll work them in. But I'll just go ahead with another one. Just wanted to know what you're seeing on the demand side so far this year and into the second quarter?

So business remains good. As we mentioned, our book-to-bill was strong in Q1, that remained strong across the product portfolio. We -- the fire service business, we have conviction. That business will be solid for us throughout the year. The AFG funding grants will start to release over the summer, and that will be good for us in the back part of the year to second half of the year as it was last year. The gas detection business remains strong as there's good investment in the oil and gas market. And then also the Bacharach business is doing quite nicely for us, and the outlook for that business is strong. And industrial PPE is actually better than we anticipated. That was one of the spaces when people talk about a recession or a pullback, that business typically comes in and goes out the door in the same quarter. That business was stronger than we anticipated and continues to do well. So we're really pleased with the demand from our end markets and what we're seeing in the marketplace.

You guys had some recent large wins in your fire service business. Can you talk about what you're seeing there and what is driving customers to choose MSA over your competition?

Why don't I flip that over to Steve Blanco, he's President of the Americas, where we've had some of those nice wins.

Yes, I'd be glad to speak to that. So when you think of the fire service, we've been in a really good position, especially when we think of 2 product categories that I would ask you to think about and focus on. One -- the first one is self contained breathing apparatus. So when we launched a new product category or actually a new product platform, gosh, about 7 or 8 years ago, we really tried to change the thesis from a discussion about breathing air only to a platform of safety for the firefighters. And we used an extensive amount of voice of customer with that. And since that time, this is a solution that's continued to grow because of the technology and the software that we've included in that SCBA as we call it. That's enabled us to continue to grow our market share. And we've seen that really replicated across the regions because of our ability to grow in certain regions. It takes time because a fire department typically keeps their breathing apparatus 10 to 15 years. But as we've seen, we've continued to compete very well, and we've had a number of conversions to the G1 SCBA, which is what a big part of those wins have been in the Americas. And in our International segment, we recently launched M1, which is another derivative of the self contained breathing apparatus for our international markets, and we're seeing some great progress there as well. Most recently, London was a significant win for us, and we're looking forward to some others that are in the pipeline coming down the [ bin ].

Thanks, Steve. Again, if anyone wants to ask a question, just go ahead and put them in. I can see them, and I'll work them in when I can. Maybe you guys can talk about -- with all the macro uncertainty, can you talk about the current state of your end markets? And how are you guys seeing the balance of the year play out?

Lee, why don't you take that?

Sure. So Patrick, great question. It's interesting to think about how the first quarter played out in the macro environment, right? If we all go back to beginning of the year, I think the universal sentiment was be cautious. And I think we've done a nice job of being prepared for the cautiousness out there, but also running our business and controlling the things that we control. So certainly, if you think about the first quarter results, 20% growth, the book-to-bill being positive, the margin is expanding. I think point one is that none of that was a pull forward or decreases it. It's all in the books. It's now an elevated part of our increased outlook for the sales side. A lot of those trends, we think, will play out again here in the second quarter. So just to make sure we hit those clearly. The fire business is doing well. The fixed and portable gas business is doing well. And then we're not going to count on the industrial PPE being as strong as it was. It was almost a 30% growth in the first quarter. But that -- it will still be positive, better than we all probably thought in January and February. So that probably puts us in a place where growth is in the mid-teens, which is still a strong result. Similar incrementals, 30% to 40% incrementals. And then the cash flow will be on a seasonally adjusted basis, it will be a good cash flow quarter. There's always a little bit of a build because just frankly, the AR goes up in the second quarter just for higher sales. Now for the back half, we're taking a balanced perspective. I've said this all year, we're not going to count on our backlog coming down. We're not going to count on the supply chain getting materially better. So it's a bit more of a match of what you see from us on a long-term basis, look at mid-single digits, similar types of incrementals and again, continued cash flow. So hey, if the macro was to get worse sooner, I think things like the supply chain, the backlogs, which would be opportunities to still frankly, be very comfortable with that sales outlook. And then if it doesn't turn out to be the -- whether it's a hard landing, soft landing, the timing of it pushes out, there could be an opportunity for more. But we're going to take it 90 days at a time because the one thing we've all learned the last couple of years is you probably understand about the next 90 days right now. But here's what I would tell you, again, is we're prepared for both. We're making choices like, for example, we're focused on inventory improvements in our mix, but we're not doing anything to -- we make premium safety products. When someone has a need for safety products, we want to deliver it to them on time. Same token, hey, if the macro was to get more challenged, we have a playbook we've used in the past to make sure we deliver well. I mean we have really nice incrementals. We also have a history of having some really kind of leading decrementals in terms of being really, really low numbers compared to what sometimes happens in a challenged environment. So I think we found the right balance. We like the term responsibly optimistic, and that's really how we're trying to run the operation here. And it's been now a nice year, frankly, of really strong results on average double digits incrementals in the 30% to 40% zone. And once you kind of got the supply chain to calm down or back to just generating really strong cash flow.