MSA Safety Incorporated (MSA) Earnings Call Transcript & Summary

Okay. Hey, good morning, everyone. Thanks for joining us for the MSA Safety presentation. I'm Rob Mason, the senior analyst at Baird that covers advanced industrial equipment, which includes MSA Safety. For those less familiar, just real quick, MSA Safety is a pure-play provider of sophisticated safety equipment globally and the market leader across a large portion of the product segments that it participates. The company is known as an innovation and technology leader in personal safety, which we think helps drive and sustain the market leadership that it sees in the premium segment of the sophisticated safety market. I'm very pleased to have Lee McChesney, the Chief Financial Officer with MSA, with us today. So Lee is going to start off with a few opening comments, and then we'll move to Q&A. And again, a reminder to send your questions up if you have any, and we'll work those in.

Perfect. Thank you, Rob. So good morning, everyone. Thanks for spending a few minutes with us. So thank you to Rob and Baird for inviting us again this year. A couple of comments, as Rob said, I'll walk us through a couple of slides, but then we'll quickly get to Q&A. Before I do that, I also do want to remind everyone, we did have an Investor Day a couple of years ago -- it seemed like a couple of years ago, a couple of weeks ago. And all that content is available online as well if you want to dive into a whole bunch of things for hours of all things MSA. So with that said, just a reminder, if we get the -- there we go. Certainly, just our normal cautionary statements about forward-looking statements, things I got to keep in mind as well. All right. So let's just spend a minute on MSA. So number one, as Rob said, safety is all we do. In this format, I'll give the shorter version of what we're about. I mean, in simple terms, we want to make sure that when people go to work each day, they come home safe. That is what fuels the company. This month -- this week, actually, is our 110th anniversary. And that same mission that was created then is the same mission we follow today, and it really drives the organization. It's really a competitive advantage. It enables people to stay. They just like working for MSA. It worked for me, it's worked for many of my colleagues. We have really low attrition rates. And oftentimes, when you talk to someone at MSA, they haven't worked there for a couple of years, they worked there for and measured in decades. And it gives us -- again, we're just continually focused on that mission and how we serve it. So just a couple of numbers to give everyone baseline if you're not that familiar with the story. So about $1.8 billion in sales last LTM. As I mentioned, we're focused on keeping people safe. How we do that is fueled by innovation. And so we spend close to $80 million a year to fuel that vision of keeping people safe, coming up with the best-in-class products in the businesses that we've chosen to focus on. It gives us a pretty robust, for an industrial, 37% vitality rate. And again, just our continued focus on how do we keep people safe and really serving the market. It's a good profitability business, 48%. We'll talk about the business system oftentimes. We've built this capability really just how do we drive this business in a more consistent way, whether it's classic productivity, whether it's working what we do with the work on our base cost, efficiency, driving -- making sure we have good capacity with pricing to offset inflation. All that comes through in this healthy gross margin that we've spoken about continuing to improve as we look forward here as well. Our leverage has always been a strength of who we are. Today, it sits at 1.0. We shared recently a mindset that we want to keep it in the 1.5 to 2.5 zone, which means, certainly, we're in a good position today, have a lot of optionality to continue to add to the portfolio, get great organic trajectory, but also we have done a nice job of enhancing that with selective M&A. And certainly, our mindset is we can do that and probably even more just based on the state of the business today. And then finally, from a shareholder perspective, 54 years of an increasing dividend. We just announced our most recent, which was an 8.5% increase. And then we also just -- the Board just recently authorized a $200 million share buyback, which we were in the market with recently, and that was to make sure we offset the dilution from employee compensation programs and things like that. The business, you can see we have 2 reported P&Ls externally. So we have our Americas business, I mean, you can imagine there going from Canada all the way down to South America. And then really everything else fits into International. So 3 business segments, leading in terms of size is Fire Services. So this is a business that really everything -- you can imagine a firefighter wears from their head down to their boots and then different gear they use to fight a fire. So the largest product being what we call the SCBA, the self-contained breathing apparatus. And that's -- this is a business that we've -- kind of what we're known for. Again, it's a good example of what we've done organically and then we've advanced through some really nice, smart acquisitions to broaden that play. Very sticky business. There's pretty consistent support for firefighters around the world, really no matter what's happening in the economy. Detection is certainly a growing part of the portfolio. So this is really, in simple terms, 2 categories. This is what we call fixed detection, so this is what it gets attached to in a building, a ship. But basically, it's looking through the air, looking for contaminants that could lead to people breathing the wrong thing or some type of explosion risk. So different types of technologies in play there. It's a business that we've been in for decades and, again, one that we've enhanced with M&A over the past decade as well. And then you have portable as well, and it uses the same sensor technology, but these are what workers wear. So you can imagine them wearing this in at-risk environments, which could also extend into where they go to do their role, imagine in small environments, limited airspace and things like that. It's a business that one of our distinct ways to go to market, again, from an innovation perspective is we make all of our sensors. So we come up with those sensors and we manufacture those sensors. We are not sourcing from other places. And our sensors are known for, in many cases, being the fastest at detecting, which is pretty important when you think about the mission of what's going on in the detection space. And then finally, Industrial PPE, a business that's certainly been in for years. In head protection, certainly a leading share there really in all things, except for residential construction, you'll see our hard hats. And then fall protection has been a big focus for us, particularly for the last decade. We almost doubled our share there, but still a lot of growth opportunities for us as well there. So a little bit of the numbers. Maybe just with this conference in mind and technology innovation, as I said, innovation is how we service that mission of keeping people safe. So over -- very much a long-term mindset to what we do in investments here. We're investing, in many cases, they come out with products that we could sell for decades. So there's quite a bit of technology or tech stack, again, that we built up across this here. So -- but there's an evolution going on. So historically, in the safety space, you think about what people wear to keep them safe. But what is evolving is how do we, again, scan an environment, whether it's through detection technology, whether it's through software solutions, to prevent these incidents from ever occurring. So again, imagine today that a lot of this stuff can be brought to life through a connected capability, and you can look over a job site and see a data pattern that before was never noticed. And again, we're going to have -- we're still going to have the PPE, but now we can have solutions that really help detect these incidents from ever occurring. So certainly, that's been a focus. We talk here also about just behavior-based safety, which is really an evolving element that's going on in safety as well that we spend a good amount of time in here. We're just, again, using this data to understand how people are using their gear or how they're doing a job to once again really prevent these events from ever occurring. We have spent -- a lot of this has been enabled by the Connected Worker strategy. So for the last 5 years, we've been building out a cloud-based software platform that we can leverage across all of our portfolio today. So today, for example, that portable detector, you can buy with an ALTAIR io 4 that's fully connected through the cellular network, cloud-based. It comes back to what we call Grid software. And today, instead of just someone checking something out in the morning and being off on the job site, their manager knows where they are. They can see if there's any incidents. Again, this has been an investment made over years to bring to life. In the industrial space, it's really resonating well quickly because not only is it a great safety solution, but you're giving them productivity or giving them recordkeeping, which is certainly important traits that's going on in the safety space. And then certainly, with all that said, just the importance of safety across the world, I think, has never been at a higher level than it is today. So whether that was already going on before because it was important to a company or you think about what we've all learned about just the importance of keeping people safe during the pandemic, you just see more dollars being spent on each worker. I think all this spent time interacting with lots of different companies here, oftentimes you hear people talking about their safety track record and what they're doing to improve it. As you know, you don't want to improve safety track records without really investing in, in new ideas. So all that comes to life, and it's certainly a nice match for who we are. The last thing I'll just do for today is, again, we had our Investor Day a couple of weeks ago. We did put out 2028 targets. That's something we had not done before. We thought it was important as we really made a nice acceleration in the performance of the business over the last decade to also show really the confidence in where we are today and where we think we can go certainly over the next 5 years. We have leading share really in almost everything we do, and those businesses are in a really nice place as we look forward here as well. So certainly, we're reiterating here the mid-single-digit growth. We've oftentimes talked about a 30% to 40% incremental. We've consistently delivered that. Certainly, this operating margin and EPS target are really kind of squarely in the center of that. And those are the organic growth targets. As I mentioned a little bit earlier, we certainly have a strong balance sheet, a lot of capacity. When you look at our returns over the last several years, it has been enhanced by M&A, and we've actually done better than these levels at an all-in level. So again, we want to make sure everyone knew we still have a lot of confidence in where we're going here. And certainly, that's the foundation for these targets as we look forward. And with that said, back to Rob.

Perfect.

I'll just dive in here. Maybe just start real quickly on this year, MSA doesn't formally guide per se, but you've endorsed a mid-single digit -- at least a mid-single-digit growth top line. You reiterated that as recently as a couple of weeks ago at the Investor Day. Just -- and you started off, I should say, in the first quarter in that zone. So -- but as you think about the rest of the year playing out, there were some divergences in the product lines, growth rates, you go up against some tough comps from last year in Detection. How are we thinking we deliver that mid-single-digit growth relative to the different product categories?

Yes. Thank you, Rob. So yes, so a good question. So in the first quarter, just to kind of get everyone baseline, we did have mid-single-digit growth. We did have incrementals actually even higher than the 30% to 40% target level and really good EPS growth. But to Rob's point, we did have a scenario where in 1 quarter, which can happen with our business because there can be some lumpiness with orders and things like that, where the Fire Services was actually in the teens and the Detection business and Industrial PPE were slightly negative. Part of that is we were dealing with a very significant comp. But also, we did have a couple of things on the supply chain we had to battle. And again, a long-cycle business. We're just running the business, I always say to people, don't overreact to 1 quarter for us. You really should measure us kind of over a 6-month time period. So I think one of the things I tried to say when we released the earnings is, I think you'll see that quickly come back to what we're looking for, for the year. When you step back and look at the first 2 quarters, where the Fire business will be squarely in the mid-single digit, it might be a little bit higher given what happens with our Air Force second order we're waiting on, and certainly, Detection will turn again positive. One of the things that was also strong in the first quarter, we actually had really good order trends there. Again, I was just getting it all out in the final form. And then certainly, Industrial PPE has continued to be better than I think we all expected. I think that speaks to maybe some of the secular trends I just mentioned, but I also think things like infrastructure and things like that are going to play out well. So we're sitting here through May. The order pattern is, as we laid out, that give confidence in that mid-single-digit growth is everything we are expecting to see. So we still feel like we're in a good place. We're still optimistic with some of the large orders we have out there for the back half of the year. And we're -- again, this is a year you've got to be a bit more cautious, but we're still very confident in that outlook for the year.

And how are -- the Industrial PPE business, in particular, to the extent that's probably performed better than you would think relative to historical correlation to PMIs and industrial production and the like. So are there some discrete factors -- or I should maybe rather, in market exposures, you mentioned infrastructure, but just help us understand what comprises that business today and maybe why it's not as cyclical as its name may imply?

Yes. Yes, that's true. So I think a couple of things for us. You're right, the Industrial PPE business for us for the last 1.5 years, I think, has been better than we all thought. It's slowed, but it's still trending usually to being a net positive. And so I think for us, we certainly serve a wide mix of the marketplace. We're not really overly indexed into any one place. So I think that helps. And oftentimes, when you see our business, again, it's not your typical cyclicality you see in industrial, again, partly because of the other segments, but also even in the Industrial PPE business, it's a pretty wide swath of what we do. So with that said, I do think you have some other trends that I think many of us are seeing, certainly the infrastructure spend, things to go on in terms of strengthening the grid and things like that, those are positive elements. I think that they are helping our business. And then this focus on the employment level still -- unemployment level is still quite low. And that's certainly, when you think about gear that people wear, if there was to be a slowdown there in terms of higher unemployment levels, but just we haven't seen that. So I'd like to say, I think we all kind of have expectations of what's happened in past cycles. And so far, it just hasn't played out to that extreme in that area there.

Yes. You made mention Air Force, that's a large SCBA win that dates back to last year that you started filling on. It's not unusual to have large orders at MSA. This one seems a little larger than typical. How are you thinking about delivering that over the next 6 to 12 months? And to the extent it's -- will it create a tough comp for you at some point in the future? Or do you see other large orders that would offset that?

Sure. So to your point, it's not every day we get potentially up to $70 million of orders from one customer. It's actually -- it's unusual for us in some ways to get something that large other than some of these pillar city wins in the Fire business and things like that. Just to get on a recap, so we've already realized about $35 million of that volume. We started shipping that in the third quarter of last year, and we just completed the first span of that in the first quarter of this year. That was really about half of what we're expecting tied to this. Again, imagine they want to have the same solution at all bases so that as people move around, there's one way to do this. And we are optimistic that the second order will come as well. The one we don't control in some of these large orders is the exact timing. So our best estimate is a good portion of this will happen in the second half of this year. And obviously, we don't control all those factors. Some of those could be geopolitical and things like that. But here's what we do know is we're confident in the order, and it will come. And I think it's one of the things, again, with our businesses, we're going to serve the market. And from time to time, there can be a little noise from one quarter to the next. But again, when you typically step back, you look at over a 6-month or larger basis, we consistently are who we are. Now to your last point of, sure, there -- in the end, there's potentially up to $70 million of volume running through our Fire business. That's a good size. So that could be a challenging comp. But also, I'd say, look at the rest of the business, there's a good counter to that. So part of our outlook for the next 5 years is based on the foundation of having that entire order. So sure, there might be a small period of time where you have a tough comp, but otherwise, we're still very confident in this mid-single-digit growth outlook for the next 5 years.

Well, maybe let's go there. We'll zoom out of '24 and kind of referencing the target -- long-term 2028 targets you put out, you walked through in some detail what makes up that 3% to 5% across the businesses. But what stood out was Detection is where you expect the highest growth and growth above the market as well, I should say. So 5% to 7% growth for perspective is kind of what MSA is targeting a point or 2 above the market. One, I guess, why is your growth going to be better there? And what drives that market?

Yes. So it's a good question. So I guess the first place I would talk to you is those numbers that are out there are based on our experience. We've actually grown at that level or more over the last decade. So somebody goes into the factors I mentioned in the kickoff here, there's just -- there's a move towards, again, preventing incidents from occurring. So adding detection solutions at sites or bringing forward even enhanced solutions to that. So in -- if you think about the portable space today, and that's just -- it's growing more than average because you see this mindset that this solution is better than what we had before. It certainly comes at a higher price point, but it also comes with more feature sets. So we just think like, for example, it's going through a heightened acceleration and growth, even more than the numbers you quoted, so really helping pull that segment forward here. And then oftentimes, again, you go back to the fixed business. There are some good sizable projects going on around the world, and we have a leading position there in the fixed with our solutions. And we continue to, I'll say, do a nice job navigating that market perspective and continuing to win share as well. So again, it's -- we're well positioned in that business. And also when you look at the -- within the secular trends of safety, there's more of a move towards that area. So again, that's why it's been a focus and it will be going forward. The last piece I would just mention, too, is there's still an opportunity for further consolidation in that space. So we have done some acquisitions. Our most recent was Bacharach. Again, we were in the HVAC space before, but they were another, frankly, leading platform, and they're very similar with MSA, a leading platform known for innovation. And it's really a nice further diversification of the business as well. That business is off and rolling for us. We had to navigate through the supply chain like a lot of groups do, and now it's been posting, again, above-average growth for us.

Could you give us a sense -- you have leading market shares in many of your categories, but including gas -- or detection, what's the relative share makeup there amongst the larger players? How concentrated is it?

Yes. So I'll give you a higher-level version of that. So in -- if we go through the businesses, so in Fire Services, today, in terms of the products where we focus, it's primarily ourselves, it's 3M Scott, I think this is primarily talking to SCBA, and then Dräger in Europe. Certainly, the history is today that certainly 3M and us have the largest share, we'll say that. If you go into -- I'll jump all the way to Industrial PPE, primarily today, again, leading position in head protection and fall protection. We're focused on growing there. We've been consistently growing double digits, but you're still competing with -- against Honeywell and 3M in that space, primarily for us around the world. And then in the detection space for the group here today, a little bit of a different mix between fixed and portables, but you're getting into, in some cases, Honeywell or Dräger, Emerson, Fortive, again, depending on the product lines there. But -- so it's -- generally, it's a good group of companies that do -- I think run the business as well. And then if you can lead with innovation, you do a good job of protecting your share and then maybe gaining some share as well. That's certainly our mindset.

Right. You mentioned refrigeration or HVAC-R. Again, traditionally, I think the investors think of that as more of an oil and gas-centric business, but there's clearly other detection elements, even decarbonization themes running through that business as well.

Yes, I mean, I'll give a little color because I talked about the diversification of the business. We continue to focus on diversifying the business more and more. Certainly, we have what we were known for historically. In the detection space, specifically, Rob, you're right, we did a lot in the energy space or the origins of the group. But we can -- again, if you think about the trends going on with safety, there's still these other segments that we're -- we have many of our solutions working as well. So certainly, we talked about HVAC, but utilities, waste, clean type of fluid solutions, all those need some type of solution. You get into electronics fabrication or chips, there's some element out there. And then there's, frankly, other groups out there that maybe do a specific product that could be an interesting addition to us over time.

Yes, yes. Just real quick on the Fire Services business. You've had a lot of success with some of these you call them pillar cities wins over the last several years. How are you seeing the opportunity set for those type of opportunities going forward?

Yes, sure. So just a little bit of color on that here. So yes, we've had some good work, good progress in the Fire business, particularly when we talk about SCBA, so again, the breathing apparatus. So in 2014, we launched really what was leading for its time the G1. So it was to meet a new specification that was required, and we've had a really good run with that. That product, again, approaching 10 years today, but it's continuing to evolve. And when we made those improvements, we also made them backwards compatible, so it's good for all. We've had a good response to that around the world. So a pillar city to us is a large department that goes through a pretty sophisticated evaluation and can lead to certainly a good commercial win for us, but it can also help influence departments around them. So recent wins we had were in London. So that was a department that had a competitive product. We went through a pretty extensive process and won the London Fire Brigade. And since then, there's been several other decisions made across the U.K., and that certainly helped us win a good share of those. And again, that was a place we had very low market share with the evolution of our G1 in Europe, specifically M1, which is an evolution of the G1 for the European market. And then a similar path has helped out in the L.A. Like we have corridors in the U.S. where we have historically had strong share. The West is a nice growth opportunity for us. So it's been nice to win there and then obviously see other departments come. As we look forward, there's certainly a good number coming. You don't get Londons and L.A.s every day. A pillar city could be a $3 million in some cities and help around that. For this year, it's probably more in the, I'll say, the small midsized groups to come, but there are some pretty significant departments that will come over the next couple of years as well. And again, just given the share we have, those are certainly, in many cases, opportunities we're going to compete with. And we're optimistic with what we can do just based on what we've done historically.

Yes, yes. And clearly, I think London is a great example where you did use innovation technology to help secure that win. So maybe shifting the discussion a little bit. You put the number up there, 37% vitality target is a high number for an industrial company. Just help us understand where R&D has been prioritized here over the last, I don't know, 12, 24 months. I don't know how new product development cycle runs for you, but just where the priority has been?

Yes, it's a good question. So again, just the base line, so we've been spending about 4.5% in R&D. It's fundamental to what we do. If you look over the last 5 years, think about the different things we manage, we continue to invest even in challenged economic times because it's just -- it's core to who we are. With that said, it's not equal for all. We're very focused on linking it to our strategy, and you saw highlights of that the last couple of weeks in our Investor Day. So certainly, things like detection advancements in the fire side, they'll get a higher piece of that. And then you have some of these other product lines. But like in fall protection, we've invested significantly into it, but then there is a good long run with it as well. But -- so there's elements like that. And then some of these longer things that we talked about earlier in terms of the Connected Worker, things like that, that's definitely a multiyear investment. And that's already paying dividends for us today, but I think it will pay more, and we continue to add feature sets to make this solution even a better match for end users. Because in the end, the products we come up with are really being fueled by what our end users are telling us because we're consistently engaging with the end users to really help them improve what they're looking for in terms of solutions.

Yes, very good. And there's probably a design for cost element there, too, in this -- maybe this is rapid fire given how much time we have left. But how should we think within that, say, 30% to 40% incremental margin range, the driver, is that more gross margin or OpEx average?

Yes. I think it's a good balance. Yes, so we've talked about 30 to 50 basis points of operating margin improvement each year in addition, 30 to 50 basis points of working capital efficiency each year. I think it's what you've seen in the past. It's a nice balance of gross margin and SG&A. And I think that will be the path going forward here as well.

Yes. I did want to work in one question that we have from the audience, which gets into capital allocation. You've obviously -- you're starting to lean more into the M&A opportunity set, still remaining disciplined. You did remove some legacy liabilities early last year. How does that influence kind of available cash flow on a go-forward basis?

It's a good thing. I know I'm sensitive of the time. Balance sheet has never been stronger for us. We talk about really 1/3 going into organic growth. We're focusing on customer engagement, 1/3 going to shareholders. I mentioned earlier the focus on paying an increase in dividend and doing the share buybacks. And then you're right, we have certainly a good 1/3 available for inorganic growth. And just based on where the balance sheet stands today, the available debt capacity, we've never had more dollars to put back into inorganic growth. That's what we're focused on doing. And because -- again, we've shown really a nice ability to do that historically.

Excellent. Well, we need to pull up there. We're out of time, but thank you, Lee.

Thank you, guys.