MSA Safety Incorporated (MSA) Earnings Call Transcript & Summary

All right. We're going to get started. Good morning, everybody. Thanks for joining us today for the MSA Safety presentation. I'm Larry De Maria, the analyst here at William Blair that follows MSA Safety. And for a full list of potential conflicts of interest and research disclosures, please visit our website at www.williamblair.com. As many of you know, MSA Safety is a global manufacturer of sophisticated safety products that help workers and facility infrastructure. MSA was founded in 1914 and is based in Cranberry Township, Pennsylvania. Today, from MSA, we have Nish Vartanian, President, Chairman and CEO; and Lee McChesney, Chief Financial Officer. With that, I'll turn it over to Nish. Thank you.

Thanks, Larry. I appreciate your time today and appreciate everybody spending some time with us this morning to learn a little bit more about MSA Safety. I'll kick things off and then have Lee come up and close out the presentation for us. Just to kick things off, safe harbor, just a short reminder for everybody. It's interesting. I just looked at that and saw the Reform Act of 1995. 1995, the year, 2 CEOs ago started with MSA. And I think back to the stock price then, it was about $4 a share. And then in 2000, it was $7 a share; 2010, $25 a share. Today, it's about $140 a share. And we've paid an increasing dividend for over 50-plus years. So MSA has done quite well by doing good for society. We are a mission-based company, where we protect -- our sole mission since 1914 is to protect lives. Our company was founded by 2 mine rescue engineers, and we've evolved into the leading manufacturer of tech -- of safety equipment throughout the world. And as you can see some of the data, we have had a lot of success, a good gross margin company at 44.7% in trailing 12 months. We've done a very nice job of staying ahead of the price cost situation where we've increased pricing. Our price increases stick because we bring tremendous value to our customers, and I'll spend a little bit of time with that. We're a global business. As you can see, about 70% of our business is in the Americas, 30% international. If you break things out by the U.S. and international, that breaks out to about a 60-40 mix in our business. And we serve markets and how we look at the business as firefighter safety represents about 38% of our business. So we're not a pure industrial play. When you think about pure industrials, most industrials don't have as much business in the municipal space. And we look at that 38% of our business in the municipal fire service market as a real stabilizer when the industrial business turns down, and I'll talk more about that as we get into the business segments. Gas detection represents about 35% of our business. That's both portable gas detection and fixed gas and flame detection products and then industrial PPE, about 27% of our business. So when we look at our business, we think about it as being diversified by geography, by product and by market while we're dedicated solely on safety. As I mentioned, we're a purpose-led company driven by our mission. We recruit, retain and motivate our organization through that mission of protecting people's lives. When we get up in the morning, our feet hit the ground, what we're thinking about day in, and day out is how can we bring value to our customers through new, unique, and differentiated products that protect people's lives in the markets we serve. We stay very close to our customers to ensure that we understand their pain points, their needs, and we have over 400 engineers that work globally to develop new products for us to enhance our position in the marketplace. What I'm most proud of when we think about ESG is the diversity among MSA throughout the organization. My direct report standpoint, 3 of my direct reports out of 8 are diverse. When you look at our key executives, we have 30% diversity, 30% diversity on our Board. But when you get down into management further into the organization, we run around 45% diverse. And when we think about our talent, that's really helped us talent wise. In this competitive environment, MSA is a place where diverse candidates can come work and there's certainly not a glass ceiling at MSA where there's some great opportunity going forward. From an ESG standpoint, also, we have a 1.5 Celsius carbon reduction target on 42% reduction by 2030. And some interesting products that were introduced 401 monitor for rapid leak detection for refrigerant applicants. The refrigerants are horrible for the environment, number one; and then number two, the refrigerants are expensive to replace. So whether you're walking past the Whole Foods or a Costco or anybody who's refrigerate -- has refrigeration systems, they're using those materials to drive the refrigeration and we monitor for leak detection in that area. So when we made that acquisition of Bacharach. We saw that as a better diversification of our business away from oil and gas and into an environmental protection type play for the company. So we're a leader in safety technologies and solutions. So we have strong positions across our product portfolio in diverse markets. And I'll take you through some of those markets and how we take the products to market around the world. So number one, the fire service safety. So we protect the firefighter from head to toe. We manufacture firefighting helmets, breathing apparatus, clothing turnout gear, and then some other unique devices such as thermal imaging cameras or LUNAR, which gets into our protect -- our connected device products. We're a leader across the product lines. So we're #1 in the world in each of those categories and have a very strong position here in the Americas. We -- there are tremendous moats around a lot of this business. So the breathing apparatus itself -- there are only 4 competitors in the North American market that compete for that business. A couple of our competitors have exited the market because those standards change every 5 years for breathing apparatus and it requires engineering, research and development to stay on top of the changing standards for self-contained breathing apparatus. And to give you an idea on our G1 breathing apparatus, which is the product that we compete with in the Americas, that was a 5-year $50 million investment we made. And when we introduced that product in 2015, since then, our market share has doubled and 1 out of every 2 departments that we're winning today is a competitive conversion. So we continue to take some market share. We're expanding our pricing in that space where we're leading when it comes to a pricing advantage in the marketplace and winning business. We developed a product called the M1 breathing apparatus for the international market that meets EN standards and that's a spin-off from the G1. And that's not quite a sophisticated piece of product and that doesn't have the electronics that are required for NFPA standards here in the North American market. And we're having very good success from an international standpoint. In the U.K., we didn't have any breathing apparatus business whatsoever. We leveraged some relationships we had with turnout gear in clothing and just recently won the London Fire Brigade. And since then, we're beginning to win other fire departments in the U.K. and have opportunities throughout Europe and other areas based off that win. Firefighting helmets, there's 2 brands that we have. Those came to us through acquisitions over 10 years ago. The Gallet helmet, which is made in France. It's that jet-style helmet that you see used by European and international firefighters. That's #1 throughout the international market, a leading brand. And then the Cairns fire helmet, which is a product that we bought. It's an iconic brand, a helmet that we bought here in the U.S. market. And of course, we continue to have leading positions in those areas. Those products also have to meet standards that are updated on a regular basis, and we continue to innovate in those product areas to make those products lighter, better communication through especially the jet style helmet, adding some lights to them and additional features where we can bring better protection to the firefighter. And then turnout gear. Turnout gear, which is the clothing of firefighter wearers really, we don't own the technology there. That's kind of a unique area for us. All we're doing with that is cutting and sewing material to our style, and we have some patents around how we do some of the stitching around the seams and proprietary work there. But that's a leading brand. And the beauty there is we were able to take that brand, which is, again, an iconic brand in the fire service industry, tie it together with the rest of our product line, strengthen our distribution network and then leverage what we have from a product offering within departments. So the philosophy is it's much easier to sell to a customer who's already a customer of yours. So when you think about our market position with these products, head protection, clothing, the breathing apparatus, thermal imaging camera, portable gas detection sells into this area. We estimate that 95% of the 27,000 fire departments in the U.S. use at least one MSA product. So that provides us with an avenue to go into those fire departments and win additional business, which is exactly what we did with LA County and LA City fire departments, Boston fire department, Chicago fire departments and others. These are departments that we have had one product in those departments, and we continue to expand our presence in those departments by bringing greater value to the departments by better protecting firefighters. The way we go to market varies based upon the geography and how the fire protection systems built by country. So here in the U.S., as I mentioned, there's about 27,000 fire departments. Just in Illinois alone, there's 1,100 fire departments. It's really tough for a manufacturer to get to those departments on a direct basis. So we have unique fire service distributors, about 72 dedicated fire service distributors that solely sell MSA products that develop relationships and sell into those departments. As you would imagine, the fire service business, which is made up of approximately 70% of the 1.1 million firefighters are volunteers. And those are your electricians, your plumbers, your hardware store owners. So relationships matter to them. So that's why we set up a distribution network that's solely dedicated to the fire service. A lot of the salespeople for those organizations are firefighters, and they have a good understanding of what those fire service -- fire departments are looking for, build those relationships and we sell our products through them with obviously help of our own sales force. The fire service business has been good for us. The funding is fantastic. Municipal budgets are strong. We also benefit from federal funding on an annual basis. There's the assistance of firefighter grant money that was created after 9/11 and that money continues to flow to fire department so that they can continue to update their equipment to meet the latest standards and regulations that are out there. So we see that business as a real stabilizer for MSA as you go into an economic downturn because that business is not impacted whatsoever by general economic moves because as you would imagine, the -- protecting the heroes of our communities, the people who we need most when we're in trouble, no politician is going to pull money from them to buy breathing apparatus, helmets, turnout gear, et cetera. Typically, if they're going to trim budgets for the fire apartments, they'll save the money in some other areas, whether it's paving the parking lot, putting a new roof on a building or some other areas. So funding remains pretty stable in that area. Our Gas Detection segment, our gas detection business dates back to the time when we took the canary out of the coal mine. We develop carbon monoxide detectors, and that's expanded through the years to where that's 35% of our business. The key around gas detection we're protecting people. So whether it's a Con Edison employee who's going into a confined space and they're wearing a portable gas detector that's looking for, listening for, smelling for leaks or gas or oxygen content, they're going into either confined spaces or other areas, you're protecting individuals or people. And then the fixed gas and flame detection segment of the business is where we're installing product within process control, in a facility. So we're really protecting assets. So you think of a multibillion-dollar refinery or an LNG plant pipelines, there's a heavy regulation around some of that business and what's important to the customer is response time, right? They call it T90. It's how fast the product will respond to the hazard that's in the environment. So when it comes to fixed gas and flame where you can shut down systems. So just think about pipelines, a real simple example of this is pipelines run throughout the country, moving product whether it's gas or oil throughout the country. About every 50 to 100 miles, you need a pump station. And those pump stations are -- have a lot of gas detection in there to make sure that you don't have any spark or flame and a problem can -- [ can't ] be created there. So if we do detect a problem, it shuts down that pipeline. So hazard stops flowing and a fire won't spread. That's all regulated by the Department of Transportation. So they'll come in and test equipment. So once we get standardized and specked into that type of application, that business becomes really sticky. And so, we're constant we're replacing sensors, providing calibration gas and service around those products. Recent new introduction that we've had there, we've done some real good work around sensor development. Our sensors last longer than competitive sensors. We can go longer between calibration times. So that means there's less maintenance, less cost to maintain. If you think about a major refinery, you can go into some Middle East refineries that have 500 and 600 points of detection that are installed throughout a refinery and somebody spending their full career going around and calibrating those devices. So now we're able to go from 30 days to 180 days between calibration time, that saves the end user a tremendous amount of money and labor. And that's exactly what we did with the X&S 5000, where we've developed sensors that can go longer between calibration time, and self-test to make sure that they're working properly between those cal times. And so, the X&S 5000 has been really successful going forward. On the portable gas detection side, that's really where we've done a nice job on the connected worker piece. And those of you who are meeting with us one-on-one, we have Gustavo Lopez with us. Gustavo is leading our connected worker effort, and he's able to talk in detail about what we're doing there, but it's only a natural entrance to portable gas detection. You'll have utility workers that are working by themselves. We can -- the -- the company, the safety department can track those individuals through GPS as to where they're located. They're able to monitor and have all the readings of that portable gas detected downloaded onto their system and watch it real time. So it really helps them from a documentation wise to make sure that, that worker is protected and obviously, a number of other features to enhance protection. The most recent acquisition we made in this area is Bacharach. Bacharach gets us into that HVAC business, HVAC and refrigeration business. That was about a $15 million segment for MSA. Bacharach is a $75 million company that's really focused in that area. So that really enhanced our position within the HVAC and refrigeration market. But in general, when you look at gas detection, about 50% of that business is tied to the oil and gas industry. The balance is in other industries. Anything from monitoring air quality within the Smithsonian institutions to hydrogen detection in space station. So there's a broad use of -- for our products across a number of areas. The way we go to market with the gas detection, 2 different areas, the fixed gas is through dedicated reps. The dedicated reps have a bigger portion of the solution within process control for our customers, and they add our gas detection and as part of that overall process control. And so that's kind of a direct sale for us, right? So we're selling direct. We're billing the customer, and then we commission these reps that we have, network of reps that we have throughout the world who help specify our product and projects and jobs. Portable gas detection is sold through the PPE industrial part, and I'll talk a little bit more about that business next. So the PPE industrial represents about 27% of our business. That's industrial hard hats and fall protection, air-purifying respirators. We sell those products through a network of local regional distributors and the national distributors. Some of the national distributors you'll know such as Grainger, United Rentals, Airgas and some of the others. We have leading positions in those areas. We're either #1 or #2 with the exception of fall protection. We're #3 in the fall protection arena, which happens to be the biggest space we compete in, and we think it's the greatest opportunity for growth. Pre-COVID, we had 3 straight years of double-digit growth in fall protection. COVID really got us tripped up, then we had challenges with supply chain and other issues. But we're back to double-digit growth with fall protection, and we think we can continue to make gains there. Hard hats, we have a real strong position on a global basis. We're clearly #1 in North America. Some people estimate we have 60% of the hard hat business. What I asked you to do is when you walk around, when you're driving around town just take a look at the hard hats. If you see a V molded in the top of a hard hat, that's our iconic V-Gard hard hat, that's trademarked to MSA. You'll see that on construction road workers, high-rise buildings that are being built. It's pretty much part of the work uniform in the oil and gas industry. that product, and we logo over half of those. We manufacture about 10 million hard hats a year, and we logo about 5 million of those a year with -- whether it's again a utility or a contractor, et cetera. Then there's a Skullgard hard hat. Skullgard hard hat, believe it or not, goes back to 1929. It was developed for the Golden Gate Bridge, which was the first construction site in the U.S. that required hard hats. And today, steel workers proudly wear that hard hat, it's 7 layers of phenolic material, made very similar to the way it was in 1929. They'll buy that hard hat with their second paycheck because that identifies them on a job site as a union steel worker on that job site and they pay a pretty good premium for that hard hat. It's pretty expensive to manufacture. Fall protection, as I mentioned, is a nice growth opportunity for us as we go forward with our business. We've made some good investment in that area to develop new products, to bring new solutions to the market, looking for greater comfort for workers, also easier to set up and break down for workers. And so, we continue to find those pain points in the areas of fall protection to better protect workers. Falls are the #1 killers -- killer for workers in the U.S., and it's specifically bad in the construction environment. So we're working with our construction, our contractors that use our hard hats and respirators and gas detection to try to find better solutions to help them better protect their workers so they use those products as we go forward. We invest about 4 -- there was a slide earlier, 4% of our revenue or $70 million in R&D. When we develop new product that enhances our market position, it improves our margins. and obviously helps our revenue. And so we continue to find those unique solutions. If you come to visit MSA, you walk through the halls, you'll see patents lining walls. We've got a number of patents throughout all of our products. So we're consistently at the forefront of safety and innovation, as I mentioned. We have steady end market demand and resilient organic growth in the business. We consider ourselves a mid-single-digit growth company. And then we have incremental margins of 30% to 40%, and that's been pretty consistent. So if you look at our business over the last few years, in 2016 -- our adjusted op margin was 15% in 2016. Trailing 12 months, we're at about 19.5%. We're really confident we can get our margins up above 20%. And first quarter growth was about 20%. That was kind of unusual. We don't -- certainly don't promote ourselves to be a 20% grower, but it's nice to have a quarter like that. As I mentioned, strong innovation. We also have disciplined M&A. We made several acquisitions over the last 4 or 5 years to add to the gas detection space and then turnout gear space, firefighting clothing. So typically, our acquisitions are accretive to margins, and we're able to integrate those fairly quickly. And with that, I'll turn things over to Lee. The last thing I want to mention is I'm not going to be here this afternoon for the one-on-one meetings. So if you want to get a chance to get together, I welcome all of you to come to Pittsburgh to visit with the people behind those letters MSA to get to know us a little bit better. It's a pretty exciting place to work and an exciting place to visit. Thank you. Lee?

See we're a safety company. We're very focused on safety. So good morning, everyone. So I just talked about here, a really, really strong, resilient business. Been in business for over 100 years. But what you saw in the prior couple of slides that Nish just walked you through is just this focus we have in these 3 businesses. There's been a discipline over the last 10 years to just continually develop this business, stay within this lane. And then accordingly, it turns into a really good business model. So there's anything I can think about today is just resiliency, the stickiness, but also our focus on what we're trying to do here, all right? So just to kind of harbor back to where are we today, where do we want to go to in the future here. So number one, organic growth, you just heard about mid-single digits. It used to be a little bit lower than that. Based on the strength of business, we've been able to elevate that to a mid-single-digit growth. It is absolutely fueled by our investment in innovation. When you talk to us, you're always going to think about, how do we find the next, the best safest solution for our users. So we have over 35% sales vitality when you measure over a 5-year basis. And when you think about the business in that mid-single-digit growth, the fastest-growing business is going to be the gas business. So typically, it will be a little bit higher than that. It's a growing market. It's just -- there's more -- the dynamics, the macro dynamics are positive there. That fire business, again, based on the strength we've built there, head-to-toe protection [ to ] firefighter, interacting with -- leveraging our #1 position there. That's moved up to being a consistent mid-single-digit growth. And then the fall protection business, that can be -- depending on what goes on with the economy, right? So that sometimes can actually be higher than mid-single digits, and that can actually be a little bit lower just depending on what's on the economy. But when you bring it all together, we're consistently going to deliver mid-single-digit organic growth. So that's what we think about for this year, that's what we think about next year, even with the macro environment out there that just speaks to what makes up MSA. So with that said, we have absolutely a focus on operational excellence. We like to talk about it from a business system perspective. It started in the operations world, and now it's really expanded to an opportunity across the entire organization. One thing I would say, we made some really good progress, Nish mentioned earlier with our operating margin, moving it from the mid-teens to now, which is just shy of 20%. That's really a nice balance of both gross margin focus and SG&A excellence as well. And so as we look forward, we still think there's quite a bit of opportunity there as well. When you do that, when we serve our mission, you deliver the P&L we're looking at there. We do have a very strong balance sheet. It's a core part of what we do. We're proud of our history of what we've done with the dividend. The consistency of increasing our dividend after investing in the business. And we have a very strong balance sheet. We typically are below [ 2 ] debt-to-EBITDA. We do flex up because we do a consistent set of bolt-on acquisitions typically. And we've done a number of those over the years. You heard Nish referenced those. They're done, again, very much focused on the core 3 businesses that make up MSA. So with that said, the example of that coming to life, and Nish just touched on this, we are having a very strong 2023. Early in the year, we talked about a mid-single-digit growth outlook. We recently updated that to high single digits to low double digits. That's based on really -- certainly a very robust look for the first half of the year. Again, we had 20% growth in the first quarter. Half of that was price, half of that was units. We had very strong margins, really good cash flow conversion. And at that point, we also updated our outlook for the second quarter. We've talked about kind of a mid-teens outlook for the second quarter. And then for the back half, we're being cautious just given the macro environment. But we're also -- we like to say, responsibly optimistic for the full year. What we haven't -- what we've done is we assume that the fire business is going to continue to perform well. That gas business that Nish talked about is going to perform well. And then we'll see what happens with the short-cycle business. Now so far this year, those have turned out not only to be -- not even slowly, it turned out to be quite positive, and that's certainly still what's going on today in the marketplace. And then finally, we haven't assumed the supply chain is going to get better. And we haven't assumed we're really going to even start any of our elevated backlog. So hey, if there is a bit of a harder landing, we feel like we're in a really good position still to deliver kind of mid-single-digit growth for the back half of the year. And then if things turned out to be a little bit better than that, there's an opportunity to do better. So I think that's our outlook for the year here. Looking beyond that as well, again, a good, really strong 2023. But when you look towards 2024 or '25 for MSA, you just heard from Nish and myself, a very resilient, sticky business. We have this foundation in the fire business that's going to perform well, really no matter what happens in the economy, the fixed gas business, the same type of thing. We have an installed base. There's a significant amount of that business is replenishment orders, configurations. You name it. And then even it happens, even if there's a bit of a hard landing on the short cycle, we're still going to do well. We're still going to have organic growth. If you look in our history, that's what's happened when we had challenged economics, we still delivered and still performed. So with that, maybe we have a minute for a question or 2.

Yes. Thanks very much, Lee. Thanks, Nish. A quick question. I think last week, you made an announcement that Steve is going to become COO -- promotion form. Can you maybe elaborate on what you see as his role over the next year or so?

Sure, Larry. Yes. So Steve Blanco, who has been with us about 11 years. He came to us from Eaton Electronics where he ran operations there. He came to MSA as Vice President of Operations for MSA. He did a fantastic job when he came into the company to bring the MSA operating system to MSA, where he standardized. What we did throughout our manufacturing plants around the world, standardizing our processes, our KPIs, and how we drove the business from an operational standpoint throughout the world. When I was promoted to COO, myself, we moved Steven to a business role. He was running the Americas and most recently, the President of the Americas, where he's done a nice job in expanding margins in the Americas and continuing to broaden our market position in that area. So now moving in the COO position. What his primary focus is going to be is taking the MSA operating system into the MSA business system and pushing that throughout the organization to drive further improvement in our business, whether as Lee talked about, on a gross margin line and the SG&A line, where we could drive greater efficiencies and effectiveness throughout the organization. And Steve proven to be a real strong operator, and we want to see him continue that in the role of Chief Operating Officer going forward.

Terrific. Thanks very much. We're going to go upstairs to the Adler room. Welcome you to join us up there. Thank you.

Thank you.

Thank you.