MSA Safety Incorporated (MSA) Earnings Call Transcript & Summary

My name is Saree Boroditsky. I cover multi-industrials at Jefferies. I'm really excited to announce we have MSA safety here with us today, including Steve Blanco, COO. With that, I'm going to turn it over to him.

Thank you, Saree. And thanks, everybody, for your interest in MSA. We're glad to be here, and thanks for Jefferies for hosting this conference. During my discussion today, there's a few takeaways I'm going to ask you to think about. First and foremost, we're purpose-driven. We do safety and we only do safety. That's what we're about. That's our mission, and I'll talk a little bit more about that, but that's the space we play in. Secondly, we're in what we believe a very resilient business with very defensible positions. We have 3 core market product categories, if you will. We participate in a number of products and solutions in the sophisticated safety space across the globe and in our key geographies, we think we've got a really good position. And third, we have a strong financial position. We focus on going forward mid-single-digit organic growth, 30% to 40% incremental margins and continuing to have strong cash conversion. So those are the things I'd like you to think about as we go forward. Just a reminder, some housekeeping items. First, be mindful of the safe harbor statements as noted in this slide. And secondly, the presentation is being webcast and will be available on our Investor Relations website as well. So a little bit about MSA. MSA is, as I said, a purpose-driven safety company, and that's been since our inception in 1914. We had -- our history is pretty unique. So in 1914, 2 engineers in mining were really concerned and absolutely just taken aback by the number of deaths from explosions in the mining industry. So they were trying to come up with a solution. And at that time, if you wore a cap, it had a flame, and those caused the explosion. So they happen to get with this inventor. You may have recognized or heard of named Thomas Edison and created the first electric cap lamp. That cap lamp once it was launched over the next 25 years, reduced mining deaths by over 75%. So we've been innovating ever since. That's really what we focus on is how we innovate to improve the lives of those customers we have and ensure their safety with the solutions we provide. We're about $1.7 billion in sales. We have strong operating and gross margins. We invest about $70 million in R&D, and that really provides us a product vitality of what we see in the last 5 years of products launched of 35-plus percent, and we focus on that, obviously, fairly firmly. We've got 2 business segments that we participate in. One we call the Americas, and it's just what you would expect. It's basically from North America all the way through Latin America, right, North pole to South pole. And that encompasses just over 2/3 of our revenue. And then we have the remaining is what we call all other international, Europe, Middle East, Asia Pacific, Looked at differently, the U.S. accounts for about 60% of our revenue, and the rest of the world accounts for about 40%. And then we have 3 business categories we participate in, firefighter safety, gas detection and industrial PPE. When you think about ESG, we really are committed to advancing the ESG strategy we have. For us, it's a little bit unique because as we've had shareholders tell us your foundation is ESG driven. You protect people. There isn't anything really more important than that, and we feel very strongly about that as well. But we also want to continue to do our part across other avenues. And we've committed to a 1.5-degree Celsius reduction by 2030. We've got defined initiatives to make that happen. We did just launch or recently published our latest impact report, so you're welcome to get in there, and I would highly encourage you to look at that. But I would maybe hone in a little bit on one category that we feel very strongly about, and that's our people. We have over 5,000 associates that are committed every single day they get up and put their feet on the ground to make sure that we're providing safety solutions to our customers on their biggest challenges. And these are in the tough markets that we serve where people go into very, very difficult situations, and they do a phenomenal job of that. We have a diverse workforce. 30% of our Board is diverse, 36% of our executive management. And if you go to just management and above, we're in the high 40s on a diversity perspective. So we feel like that gives us creativity. Again, when you think of an organization like us, innovation is in the lifeblood of what we do. So for us, we think that's super important. Looking at our 3 product categories. I'll talk a little bit more about these. But first, as you think of this broadly, when we participate in these product categories, there are products and solutions that, as I said, we think of as sophisticated safety space, and they do things that protect workers in the most extreme environments. We're 1 and 2 in almost every one of these categories, which gives us enormous influence in the marketplace, and we want to continue to have that and I'm talking on a global basis for these different categories. The first of which is firefighter safety. And in firefighter safety, think of the self-contained breathing apparatus that a firefighter wears, but also the head-to-toe PPE gear. So you think of protective apparel or what the fire service would call turnout gear, we produce that. We have manufacturing, and we have companies that we've acquired within the last 8 years in the United States and in international, which put us at the #1 position. And we also have fire helmets, so we're #1 in fire helmets, we're #1 in turnout gear, and we're #1 in SCBA. The beauty of this is when you think of this entire suite of products we have, we're now participating in a way where almost the number of fire departments we're in and able to go in with our other products has gone up exponentially. So in the United States, for example, 90% to 95% of all fire departments have some MSA product that enables us to go in and sell other MSA products. So most recently, we were honored to win L.A. county and L.A. city earlier this year. They had our turnout gear, and we were able to participate and win the SCBA contracts. We also, earlier this year, announced a great win in London for the U.K. That was our first ever SCBA win in the U.K., but we had that turnout gear contract with that department. So -- and we're seeing that propagate and continue to expand across our markets, so there's just a lot of opportunity in that category. The other thing I think is really critical is when we launched the G1 SCBA in, gosh, 8 plus years ago, up to that point, every competitor in MSA really looked at this as breathing air. What we did with that launch is we went back to the customer and understood their challenges, and through voice of customer, created a platform of safety, which created a lot of technological needs. I think we had 14 patents on it when it was launched, and that product has really changed the entire game. From that approval process, we went from 6 core competitors to, really, 3 now. So the space is really narrowed. There's 2 that have about 90% of the share in North America, and we're a share leader, as I said globally. Technology and the connected worker in the space of Fire Service and in industrial, which I'll talk about later, is a real trend that we're on the leading edge of. The second category is gas detection. When you think of gas detection for MSA, we have what we consider fixed gas detection, so that's protecting assets and infrastructure. So if you are in a processing plant, LNG facility, they might have hundreds of points of detection, right, so these individual gas detection devices across that facility. And then when you think of portable gas detection, that's a wearable for an end user, an individual that's in a work space that potentially could have hazardous, flammable, explosive gases or toxic gases, and we make sure we monitor for those. Think of somebody that might be in a -- could be an oil and gas refinery, could be somebody in a confined space utilities. So those are the types of areas we participate in and have leading positions. These are very, very highly driven markets that technology matters, but they're also very sticky. So for example, on the fixed gas side, that product stays in service 10-plus years. And throughout that life cycle, we're replacing sensors and replacing other repair components, so there's a high component of recurring revenue within that space. And the portables is the same way. That's more like a 5- to 7-year life cycle, but very similar. We did launch another new product on the connected space called the io 4 last year, which is having an incredible take rate in the market. This is a subscription-based product, and again, it's about ensuring the safety of the end user and, just as importantly, making sure that we make productivity for them a key play. Our third leg is really what we would consider the Industrial PPE space, so this is personal protective equipment. And the 2 categories I mentioned here are industrial head protection and fall protection. There's also air-purifying respirators in this space as well. We're #1 globally in industrial head protection, and we continue to see some strong progress there. Innovation, this is a space you think of head protection. There's not as much innovation, but that's actually not true. For example, within the last year, we've launched what we call the C1 Hard Hat, which the wearer, in a hot environment, has a reduction of temperature, core head temperature, by up to 20 degrees F. That's really critical as we think of heat stress, and those are the types of solutions when we find out from our customers their needs and talking to them, we come up with. Fall protection is another category. We're not #1 in fall protection, but we do have a strong share position and we're seeing double-digit growth and share gain. We had a gap during COVID. We had 3 years of double-digit growth prior to COVID. Our supply chain got sideways during COVID, so that was a little bit of a bump. But now, we've gotten back to where we are seeing double-digit growth in that share gain we expected. Fall protection is the fastest-growing safety segment across the world, so it's a really important space and we're really well positioned to take advantage of that. And speaking of taking advantage, we think the macro environment is really well-aligned with where MSA plays and where we participate today. As you think of these different categories, there's just a real strong focus around safety by our customers, and we expect that to continue. And I'm sure you see the same thing. There are many firms, and I'm sure you see some of them, that lead off their calls talking about safety. And that's a change in the last 5 to 10 years, as they lean in and ensure that they get the very best and make sure that they have what they need to ensure the safety of their workforce, and we're participating in that. We help them do that. We're really, again, focused on that mid-single-digit growth going forward, and it's driven through a combination of price, market share growth and overall market growth. And we feel good when you look across these. Our customers' journey, as I said, isn't about safety alone. It's about productivity. And the solutions we're providing, especially on the connected worker front, help us really achieve those needs that they have. So that leads to really value creation. I talked a lot about how we drive organic growth. That innovative engine for us is really important, as well as the strong ongoing demand for safety equipment that we continue to see. Acquisitions is another area that we feel is really an opportunity. We've employed about $400 million of capital over the last few years in core markets of gas detection and fire service, and we have a strong pipeline. We continue to look at acquisitions as an opportunity to add value to the business, and as we move forward, we expect it to continue to be a core element of our strategy. When we think of our balance sheet, we've got a strong financial position and we really focus on effective use of cash. Certainly, with our organic growth, as I talked about in the investments there, and acquisitions are super critical, but we also focus on returning our capital to shareholders. And we've had over 50 years of consecutive dividend increases to our shareholders, which we plan to continue. And then the last leg here is really operational excellence. When we think of operational excellence, we really think of continuous improvement, which is a journey we've been on for the last decade or so. And in the last couple of years, we've launched what we call the MSA Business System, which is an evolution of what we had before, which was the MSA Operating System. It's a lean principle-based continuous improvement platform, and it's enterprise-wide. The nice thing here, what we've seen recently with some of the activity, is just tremendous productivity gains that have helped us improve lead times to our customers, but we're in the early innings. We think this is going to have a lot of tailwinds on our ability to improve productivity in the organization. If you think about our business, just thinking recent performance in 2023, in the second quarter, we delivered another quarter of strong results with double-digit sales growth, healthy margin expansion and robust cash flow, as I noted. We saw growth across all of our core geographies and product groups, and the margin expansion was very healthy as well, driven by higher volumes, productivity and price cost management. As we enter the second half of the year, we continue to be responsibly optimistic. Our end markets remain very healthy, the macroeconomic uncertainty is challenging, and we're certainly staying on top of that. Based on the first half and the expectations for the balance of the year, we increased our full year guidance outlook to low double digits on sales. And overall, the business is performing very well, and I'm super proud of how the team continues to execute. So to wrap up, I would really talk about a few key takeaways that I referenced to start with. First, we continue to focus on driving value for our shareholders. We think we've made some excellent progress over the past several years. We've really changed the dynamic of how we look at profitability and the growth we've seen in the organization regardless of the challenges we've seen with supply chain or COVID and how we're positioned going forward, as you see with the macro trends and our strategy, we feel very well positioned. As I said in the beginning, we got a really resilient business, with moats around each of those businesses. This is not an easy business to get into. There is very high regulatory compliance requirements in each of these businesses which helps protect us in some cases, as noted on the SCBA. We've seen participants, big participants bow out because of the difficulty to meet some of these regulatory requirements. And our investment in R&D continues to be a strength for us. We feel really, really strongly about our intimacy with the customer and our ability to understand their needs because that really drives that engine of innovation, looking at solutions to the challenges they have in safety, not only compliance, right? It was -- initially, this was about compliance, but now we've seen a real shift which is to our advantage, and we're very pleased with to -- one about behavior-based safety. So that's the kind of thing we want to participate in and provide solutions for that, productive solutions. So we'll continue to do that. And we've got a relentless focus on profitable growth and maintaining that strong financial profile I referenced earlier. As I said, our goal is to deliver mid-single-digit growth organically, healthy incremental margins and robust cash conversion. So I appreciate once again your interest in MSA, and thank you for the discussion. With that, we conclude the presentation. Thank you.