MSA Safety Incorporated (MSA) Earnings Call Transcript & Summary

All right. I think we're going to get restarted here. Good afternoon, everybody. My name is Brian Brophy, I'm a research analyst here at Stifel. Very pleased to have MSA Safety join us today. We have Lee McChesney, the CFO. Lee, welcome.

Thank you. Thanks for having us.

Absolutely. So for those less familiar with MSA, can you give us an overview of what you do, some of your key products and markets you serve?

Yes. Thank you, Brian. So sure, I'll hit some quick points here for the sake of time. But the company is 110 years old, based in Western Pennsylvania. And we're all about safety as the name may imply, MSA Safety. So I always like to tell our first product was basically to keep people safe in mines. It was basically electric cap light for mines, 2 mine engineers and Thomas Edison created the product. And that really began our journey about keeping people safe so they can go home each and every day to their family and to their communities. And that mission is what we've been following here 110 years later. Certainly, over the last 10 years, we've had a focused strategy really around 3 businesses. So we're proud to certainly, really protect firefighters all over the globe, what they wear, what they use to breathe. So it's a large business, it's a business that almost doubled in size over the last decade. Next up is the Detection business. Detection business, think about there's a fixed component to it, and there's also a portable piece. So basically, imagine protecting people to make sure they don't breathe things they shouldn't breathe, or some type of thing that could lead to a combustible event. So we make all types of sensors in different applications across many diverse industries. Big [ second ] in our business as well. And then finally, Industrial head protection and fall protection as part of our Industrial PPE are 2 biggest categories there. We're certainly known for hard hats, depending where we are in the world. And very likely that if you go look at a job site of some sort or any type of environment where work is done, they're probably wearing an MSA hard hat. But the business, we've really been focused on growing even more over the last several years has been the fall protection business, and we do that because still today, fall is the #1 thing that really every company is trying to come to grips with how do we improve that scenario. So we do all that in those 3 businesses. I think I started with the mission. I mentioned the businesses. Where we focus, how we do this is really by focusing on innovation. Again, it's a company only focused on safety. In many cases, if you go to those segments we're in, we're known as having really the -- probably the best solution out there. And it's why we really have a strong market position in all those areas. And that's really, ultimately, how we serve that mission keeping people safe, just keep coming up with better ways to protect people.

That's great. Yes, we're going to dive into each of those segments, you mentioned. First, I wanted to start it off with safety standards. Obviously, safety is really a big part of the story. Can you talk about the regulatory environment around safety standards, compliance standards? Are they changing over time? And what does that mean in terms of a growth driver for your business?

Yes, sure. So I mean, safety regulations are certainly helpful to our business. You certainly have seen a combination of some increasing standards based on some events that maybe have happened in the world on an unfortunate level. But you also just see broadly more focus on safety. So protecting the employee. So I think that was even happening kind of pre-COVID. I think COVID has even accelerated that more today. So again, whether it's being mandated by local or federal law or it's frankly a company saying, "Hey, our safety standards around the globe are going to be the same." So that site, no matter where that plant is, has to have the same safety standard, we're going to really rally the organization around that so we can improve our safety rates and things like that. That -- again, that is a positive. I think we don't really care where the source is. We just love the fact that there's more focus on safety today. And I'd say there's just a broader evolution as well where it used to be a little bit just, "Hey, let's make sure if something happens, people are protected to make sure they're wearing the right gear." There's a lot of also focus on how do we prevent these incidents from ever occurring. So yes, we'll protect them in the case you do, but that's really cut down on these incidents from ever occurring and things like our Detection line are really helpful. So it's just some really good trends overall as we look forward.

That's great. I'm going to dive into the segments here. So starting off with fire safety. I wanted to talk about that, SCBA replacement cycle. Can you talk about where that is today? Obviously, we saw a big surge in the cycle post 9/11, it another surge post the G1 announcement and introduction about 10 years ago. Typically, firehouses talk about replacing SCBAs every 12 to 15 years. How do you think about the replacement cycle today? And how should investors be thinking about it?

Yes. So it's certainly important to note. It can certainly -- in the end, as new -- each new standard comes out as goes actually lots of the things we just talked about, there's likely an area that has been identified for -- that has the benefits from a safety perspective, maybe from a an ease of use, you need, right? In the end, these standards come together by getting input from the manufacturers to then ultimately, the users, the firefighters, the representatives coming together and defining what the standard is. So as you said, this happens about every 5 or 6 years. You mentioned in 2014, there was a pretty significant change in what was required to sell an SCBA that met that standard. That was, in the end, a really good thing for us. It required quite a transformation of what the SCBA did. Ourselves and Scott were initially really the only groups that could meet that standard. And that was certainly, I think, good for both groups. Though what will happen as you noted, every 5 or 6 years there will be a change. So that we are coming to a point just about this year where there will be an alignment on a new standard for the SCBA. That will get announced there is a period of time for transition. What we see right now is it's one that's more incremental than a significant one. So if you're in the marketplace today, you would still likely buy what's available today. But at some point, you could have a pause where you might say, I'm going to wait until everyone is providing something at that next standard. Because generally, the larger departments don't want to be really more than 2 specifications out with what their -- a firefighter is using and things like that. So it will come to market. It will not have the same effect as it did in 2014. Maybe the next one after that will be, but there's things in there about cleaning, ease of use and things like that. We're ready to meet that standard as soon as it gets finalized here.

That's great. Yes, that's really helpful. Just wanted to talk about the funding environment as it relates to fire safety. What is the general environment at the moment? You guys have also talked about AFG funding, a little bit of timing movement there, potentially impacting the back half of this year, can you give us an update there?

Sure. Yes. So around the world, funding for firefighters is typically coming from a mix of different governmental sources. So it could be at the federal level. Again, it varies by country. In some cases, the fire department is part of the military. In some cases, it's obviously local. But you have funding at the federal level, you have funding at the state level, in some cases at the city level. Big sources in the largest market today, certainly a federal component and then there's obviously dollars at the local level. We just talked about this recently in July, the dollars for the Assistance to Firefighters Grant, which is a big dollar flow that we have in the U.S., which the dollars are just released for use this year. This year, it's a little bit later than it was last year, but I wouldn't say it's unusually late compared to an average year or things like that. That can be a little bit challenging this year versus last year because it just closes down the time frame of how quickly can the dollars be released, people place orders, can we manufacture in time and get a certain amount into the third quarter and the fourth quarter, in the end that the projects will come because the dollars are there. The other thing that was good with that funding approval, there's also subsequently an agreement to really keep that same dollar flows occurring for the next 3 years. So just broadly across the globe, firefighters are usually supported no matter what's going on with the economy. So it's a good thing for us because it means this -- that part of the business for MSA is fairly resilient. So barring maybe some of this timing, it can happen from quarter-to-quarter. If you step back for us, that environment really gives us this mindset we can have more mid-single-digit growth consistently in the firefighter business. So at this point funding is secure and just got to navigate the market in terms of timing and things like that.

Yes. Another topic I wanted to talk on timing. You announced a large win with the Air Force on the SCBA side. Can you give us a sense of size of that order cadence? How much have you realized to date? How much is left? How does it impact comps and growth rates? How should we think about that?

Sure, sure. So like a lot of groups, there's an interest to have a standard. A lot of things done in the safety standard by organizations, whether they're government organizations, whether they're corporations is, safety is really about establishing a standard and making sure people follow that standard. So one of the things that certainly Air Force is trying to do is, is to find the next standard and then universally across any Air Force base you went to make sure you have the same breathing apparatus for all the firefighters to use because certainly, you can imagine people ebb and flow from different sites depending on what's going on. So what's happened to date is we did win the first tranche of $35 million last year, that came through our results in the third and fourth quarter of last year and the first quarter of this year. And then we had built into our outlook there would be a second tranche because we won the first tranche, they're going to standardize around that seems like a safe assumption. But like always, the timing can be a little bit flexible. So right before we had our second quarter earnings release, we got notification we won another $28 million of business from the Air Force. And right now, we're just working through when that will ship. So we had obviously a generic assumption in our math. We don't give out quarterly guidance. We kind of give out more a bit longer term. So we know the $28 million is coming. Some will be in 3Q, some will be in 4Q, maybe even some will be in the first quarter of '25. But we're delighted that we were selected to do this. And we're focused on making sure we deliver it to the government schedule. And then there's always a part of this where it's making sure they come up to speed training-wise and things like that, so that as soon as they want to we help them really get ready to bring it to market.

Yes, that's great. That's really helpful color. I want to pivot, stay within fire safety, talk about turnout gear for a second. What are you seeing from a growth standpoint there? It also seems like there's been a discussion for a while about firefighters potentially getting 2 sets of gear, some of the PFAS impact is playing into that as well. Maybe that's something you can touch on. But what is driving some of the factors in turnout gear that we're seeing today?

Sure. So to give a little bit of history. So in the -- if you go back 10 years ago, we are primarily, from firefighting perspective, really focused on the breathing apparatus. And what we've done over the last decade is add a couple of acquisitions. So we added here in Europe. We added Bristol for their gear and then we added Globe in the United States. And I love the characteristics of the business, right? So imagine, in the past, we would go and help them on the SCBA front, the gear is a regular interaction, you may interact with the different department quarterly through our distribution network and what they need to keep that going. So we like that, number one, just the kind of recurring nature of that business. It's a deeper relationship with the end user. That business has been really a good growth driver for us. So there have been a couple of challenges from the supply chain over the last few years. It's amazing. You might not think that a reflective material with certain threads would be challenged by the COVID era, but they certainly were. So other than that, we've had a really nice growth out of that business. It's actually been probably one of our faster-growing categories over the last several years. Now I think that's a mix of reasons. That's competing in the marketplace and trying to win market share. But as you said as well, there has been more focused on the idea of cleaning the gear more often. So certain parts of the world, certain cities in the world have a protocol where they have a second set of gear. Again, in order to wash the material, you need to have a second set of gear because you got to be ready any day of the year. And I think we have seen that come through. I think there will potentially be more that over time here. You mentioned the topic of PFAS as well. So today to meet the standard for safety, so that gear perseveres through a fire, protects the firefighter and things like that, it's a very high spec. So in the U.S. today, to meet that spec, we have to buy from third-party suppliers to make materials, a vapor-barrier layer that has PFAS added to it to hit that standard. We were trying to do when possible to work through a PFAS-free solution. At this point today, there's a couple of companies saying there's a material coming out that will do that. I think that will be a transition that happens over the next few years. Certainly, when that happens, I think there will be a transition over time to using that type of material. And then accordingly, I think there'll be a continuation of this idea that maybe every firefighter should have a couple of sets of gear as well. So that could be, certainly, a good commercial opportunity in the long run as well.

Yes, it could be a nice replacement cycle for you guys there as well as growth in the TAM. So I wanted to pivot a little bit, talk about Detection. What are some of the markets that product addresses? What are some of the major opportunities you see in that business?

Yes. So -- no, perfect. So Detection business has been a big part of our journey in the last decade as well. It's a group that's almost doubled in size, certainly, some really strong organic growth. It has been our fastest-growing segment organically. And then we've done some nice acquisitions, some really meaty acquisitions in that group as well today. So to keep it simple, really anything other than probably a kind of residential consumer, there's potentially an opportunity for a Detection solution. So again, imagine energy creation, utilities, food processing, really any type of processing area where you could have an exposure, to something you shouldn't breathe or something that could become flammable. That's what we're focused on. Now we certainly have an origin that started out in the energy market. Certainly, we look forward to kind of the growth in green energy. The good thing for us is our solutions work no matter what form of energy we're going for. In the end, you have to still detect the same type of components. We've certainly done a lot in some of these process industries in terms of diversifying what we do in the Detection business. More recently, we got deeper into the HVAC space. So just imagine the premise of monitoring refrigerants, making sure there's no leak, trying to do that as fast as possible with our different tools, different sensors so that you can minimize, frankly, any type of environmental issue, but also there's a significant cost issue to a user as well. So I mean basically, for us, the Detection business has been a good growth engine. There's still other categories and other adjacencies to what we do today that could actually drive that organically or through acquisition as well. In our most recent Investor Day, we talked about that business being -- continuing to be our largest growth segment over the next 5 years as well.

Yes, that's great. I wanted to talk on one piece of the Detection business, your sensor IP. You guys have talked about how you manufacture your own sensors. Can you talk about why that's so important and why that's a differentiator for you guys?

Yes. No, I'd love that. So I mean, it's interesting but -- so for really the whole time we've been in this business for the last -- more than 10 years, we have prioritized making sure we make our own sensors. And not only do we design them, but we also manufacture them ourselves. And again, it goes back to this -- really the mission of MSA Safety is really to lead with innovation. And what's really important and critical to the user is that you have a sensor that not only detects, limits false alarms, but the speed. Again, you think about examples, as I said about making sure people don't breathe things, people aren't exposed to combustible events. We're known for having sensors that really -- we lead the market in that space. And it's because we're fortunate to have people who have been working on this for decades to develop these sensors. It's something we keep very safely locked down within our facilities. So it's actually not even openly available to all employees. And -- because it's IP and it's also, I'd just say, a lot of trade secret in terms of how you can consistently manufacture as well. And what that gives us is, obviously, a marketplace position to have great sensors. But then as this market evolves, into things like, all the way to today, where, for example, you have a fully connected portable solution. Again, you have a leading sensor. You got that advantage in the marketplace, but now you've also coupled it with a leading connected solution as well. So you're really kind of -- depending on what the user is looking for, we potentially have an offering that really can address anything from just the safety standard to whether it's documentation or frankly, we can drive productivity for the end user because in the end, safety has a burden to it. So if you can make it a little bit less burdensome to the end user, that's appealing to some customers, depending, again, what they're trying to solve.

Yes, that's great. I wanted to definitely touch on some of the connectivity opportunities here in a minute. First wanted to pivot Industrial PPE, PMIs have obviously been sub-50 for a while now. I think folks would have expected that probably impacting that business on the hard hat, fall protection side. Can you talk about what you're seeing in terms of trends in that end market at the moment?

Yes. So Industrial PPE I think is the category that everyone has expected to go negative for the last 2 years, and it really hasn't. So a bit of a reminder, last year it was actually quite positive in the first half of the year. It did slow down a bit in the back half of the year. And so we thought this year, Industrial PPE would be somewhere between kind of flat to negative and that was certainly part of our outlook. We've seen it be a bit better than that. And so for us, that's primarily, again, head protection and fall protection. And I think it's a combination of 2 things. Yes, PMI has been negative. So I think if you're in a part of the world where maybe -- or a city that's heavy manufacturing, and not getting maybe the benefit from still the continued investment in energy creation or in the U.S., you have some additional dollars being spent on infrastructure. Those key investments are, in some cases, offsetting what would be naturally a headwind. So I think that's part of it. And I also think for us, as we talked about a little bit earlier, we're focused on innovation, it doesn't really matter what the market is doing, if you have a compelling solution and you have a good supply chain, you can take some share. So I think a little bit of all that goes into, for us, why the math has probably been a bit better. Which in today's environment, I think that's a win because if you looked at past economic cycles, this would be part of the business that might be a bit more cyclical for us. And it just hasn't been the pressure point that we've seen in the past. So I think a good mix of factors there.

Yes. No, that's obviously great to hear. I wanted to touch a little bit on fall protection, go deeper there. You guys have had a leading position in hard hats for a very long time. Your position isn't quite as strong in fall protection. Can you talk about the opportunities? Where are you positioned currently and talk about the opportunities to take share?

Yes. So -- and we highlight this, I think, pretty well a couple of times this year so far. We, over 5 years ago, said we want to really double down in fall protection. And again, the reason why still the #1 issue trying to be solved on job sites, again, whether it's a construction site, whether it's a distribution center, it's just -- it's still the topic at hand. So we have this expertise. We have this, certainly, relationships with the market on head protection. So it's a natural correlation into fall protection. So what we've done is really bring innovation to fall protection. And in many cases, with a lot of things that people have to wear on a safety perspective, they want it to be more comfortable. Can you make the ultimate solution be easier to use. We have examples where the leading-edge safety protocol. There's a lot of applications out there requires 2 people with quite a bit of strength to put things in place. We've come out with innovation solutions where one person can set it up for themselves. Like something like that -- it's more likely going to happen from a safety perspective, and it's also driving productivity for an end user and things like that. So we've had success. Now I will say we've more than doubled our share but there's still a lot of TAM in front of us because there's a couple of bigger guys in front of us that we can go after. So we're really excited about that. Just from an organic perspective, we can drive a lot of growth over the next 5 years. It's certainly from a just available TAM perspective, one of the bigger dollar opportunities, and we're certainly encouraged by the progress we've made over the last 5 years.

Yes, that's great. Share has certainly been a really important part of the story. I want to pivot a little bit, talk about some of your connectivity subscription business. So first, just starting off with the subscription side or MSA+, as you oftentimes refer to it. How does that relate to some of your connected product offerings? What kind of traction are you guys getting there? Where are you having the most success? And what kind of runway is left?

Yes. So good question. So -- again, look there's a theme here. We're very focused on leading with innovation. So our team about 5 years ago -- so we have these great products in the marketplace, we have a wonderful position, but there's going to be a natural transition here from just a product to really a total solution. And that really became the foundation for driving this connected solutions mindset. And really the idea being it could help the fire business, it could help the Industrial business, including Detection. And so we went to work, a couple of year journey to get to a good place. Now why was that? We're very focused on getting end user feedback and being very careful not to just develop things that were really interesting and cool, really focused on what the end user says will be a solution to them. So we brought some of those to market over the last couple of years. So you probably heard us if you followed us in the past, talking about a connected firefighter, a connected worker. Certainly, we've created unique solutions for each of those spaces. We even more recently found an application in fall protection so that someone doesn't go up on a lift, for example, without having a confirmation that they're tied in because again, people wear equipment, I tell you if you look around too often, people aren't tied in. How do you make that really not a choice, but it has to happen and things like that. So in the end here, we're seeing different levels of receptivity, which is probably what you imagine. So I think we've certainly seen the industrial space. One of the more recent things we've done there is come up with a fully connected portable detector called io 4. And in the past, where we have a significant business that has portable detectors before, but they weren't connected, we've seen really -- some really significant interest in that. It's certainly a commercial success, where we've been for the last really now 2 years bringing that to market and growing that. Now we've done that primarily under the MSA+ banner. So really, if you think about it from a subscription basis, something we can extend to different areas, but certainly, it made a natural fit here. So if you want that latest fully connected, essentially, you buy it as a subscription model, somewhere between 2 and 4 years. And you get from that, obviously, all the benefits of having the products, but now you get all the assurances of -- if there's any type of issues, we're going to give your replacement but you're also getting into a standard set of suite of reporting and analytics that we can bring to -- we can talk about inventory control. Today, before things like that came along, a lot of this was manually done. So you can imagine the productivity for supervisor of safety who's overseeing 50 workers a day on the job site, converting it from pretty much a manual process to really an automated process can be really valuable. So we're seeing good momentum there. Certainly, it's helped us in fire as well. Today, when we sell the SCBA, it has that fully connected capability. We've certainly won good share in the firefighter space. I often get asked the question, is it because of the SCBA, is it because it's connected? Is it because of the full suite? And I say, it's a little bit of all that. Certainly, it's helped there. And I would say for the larger departments who are a bit more open to the connected journey sooner than later, we're seeing they're not only buy it because it has that, but they're now -- honestly it's like great amount of data coming in and we're continuing to refine what the data set is, how can we use that for good reporting, inventory control, hours of use and make it easy for them to manage their fleet of SCBA for all their firefighters and things like that. So with that said, it's still early. It's part of our goal to drive recurring revenue up over time here. So we're in the mid-teens today. We have a goal to get that to 20%. That's certainly one of the components that will do that.

Yes, that's great. I wanted to talk about pricing on some of these connected products. As you mentioned, there's productivity savings associated with a lot of these. How are you thinking about the pricing equation given the value you're delivering on the productivity side?

Well, the answer is in your question there, that's pretty good. So I mean, from a pricing perspective, we've always had a mindset to really price based on the value we create for the customer. So yes, our focus on driving a premium solution that can really help kind of continue to elevate the industry what the solution is. We're certainly going to factor that into the pricing, but it's not just that pricing on day 1. What does it do to help you over time? So for example, in some of our Detection devices today, we brought out features like auto-calibration. So again, if you use our product today, maybe instead of having to go out there monthly to do it, it's auto-doing it, maybe once a quarter, you now to do that. But imagine you're going to hundreds if not thousands of touch points if you buy the competitor, I mean that's a real value to the user. And then certainly, if you get into the connected solutions, not only there's value and obviously, potentially elevated safety side, but really there's a productivity element. All the things that safety typically have to be tracked, so you can do that. So we're trying to bring that into the market -- bring that to consideration as you go to market. So oftentimes, you're right, we are sometimes a bit more higher priced than someone else on day 1, but we can show that over time, you certainly get all that value and more. And that's always been our mindset with really anything, certainly the connected piece of it is just another way to take that journey to the next level.

That's great. And you mentioned recurring revenue, about 15% of mix, goal to get it to 20%, hopefully higher longer term. I would assume these are all margin-accretive-type things you're doing, but maybe you can shed some insight there.

Yes. So yes, a couple of topics in there. So number one, we're in the mid-teens today for recurring revenue. I call that the classic spare parts, services, training and then certainly, the software solutions we've talked about. The goal is to -- we shared this in Investor Day is to get to -- start with the #2. I think the one thing we were very cautious on is we're going to follow the market. Just like I touched on some of those connected solutions, some are going to go faster than others. So -- but that drive from mid-teens to 20% is certainly the software solutions, but also, I'd say it's a bigger focus on just service overall as well driving that. Yes. And I think generally, what we've been doing in terms of what it does to margins. everything we're trying to do is at or above where we are today. And certainly, that's the case when -- why do you like recurring revenue business? Well, because it has the opportunity to be margin accretive. But again, it adds to this kind of resiliency that our business already has today and brings it to the next level. And obviously, things like that there's less discussion. You're essentially locking in a price agreement for multiple years. So as long as you can run your business well, that becomes a margin opportunity for us. So that's the mindset. I think, the one thing I would add just to what we talked about is while the traditional definition of recurring revenue is the math I walked you through, keep in mind that the fire business has this very stable funding model like we talked about. The Detection business, and particularly the fixed portion of it, about 1/3 of that is new projects. But once those projects are installed, you ultimately have a customer for almost a decade because they're going to buy the spare parts we mentioned before, there's going to be calibration. And then really, as I do anything to modify that site as they potentially change and roll out different products and things like that, they're going to continue to come back to you. So it's a pretty good -- I don't call it recurring, but it's certainly repeating business that comes as well. For us, you add up the fire and the fixed piece, almost 60% of our business has a very sticky, stable nature, which is why -- and I bring this up is, yes, we're an industrial but we don't have all the same cyclicality that a lot of industrials have because really, the resiliency we have in our business today. And certainly, the recurring revenue objective potentially only increases that as we go forward here.

Yes. No, that's great. You guys have certainly transitioned the business away from less of the hard hats, cyclical stuff over time, which I think is really important. I want to touch on 2028 financial targets. You recently came out with these targets. A few months ago, organic sales of 3% to 5%, 30 to 50 basis points of margin expansion per year. Can you -- this is really the first time you've put out long-term targets for investors. So I guess why now, what is giving you guys the confidence?

Yes. So I think it starts in the history. So as you said, we had an Investor Day back in May, and we highlighted, go look at us on a 5-year basis, 10-year basis, some pretty good numbers despite a lot of things that happened in the world, right? So we had a 5% growth CAGR over that time frame. Operating margins moved from the low teens to the low 20s, and we've maintained a really strong return on capital employed. There's been a lot of evolution in the organization. We spoke today about really focusing on these 3 areas. We haven't really spoken about the business system coming to life, and that's really this lean concept to everything we do and really bringing a standard set of work across the organization. So it's having a global pricing team, that's having clear productivity standards. It's making sure the innovation we talked about comes at an accretive rate. And certainly, we've done -- even that's come through in the financials. So why now? Because the business is really kind of building a momentum. And what we've put out there, I would note is the organic objectives for the next number of -- next 5 years. What we just shared is certainly in line with what we've just done. Excited with kind of where we are today in terms of that Detection and fire business. We talked obviously a lot about the growth we can see in fall protection as well. And then the other complement could be the amount of dollars we have available for M&A. So M&A was an important part of our journey as well over the last 10 years. But that -- those goals we put out there didn't include any of the dollars. But really we have to get through a capital allocation strategy that has us investing in CapEx, has us paying a strong dividend. We still have $1.5 billion to deploy for M&A. So whether to reinforce those targets are, frankly, taken to a higher level. Just a lot of confidence, so we've got more options that are disposed than we've ever had in our past.

That's great. We've got a couple of more minutes here. I'm going to try and squeeze one more in. So you've talked about reducing working capital. You've made meaningful improvements there. Can you talk about what the drivers have been? How much runway do you see? And how important is that subscription business growing into driving some of the working capital improvements?

Yes. So -- great, question. So I mean, ultimately, it's one of our messages as well is we certainly had a good P&L story, but we've also had a really good cash flow story. And our view, again, think about the business system is there's always more to do on the working capital element. So the one thing we try to bring to life under the business system banner with working capital mind is, ultimately, we're looking for driving efficiency and returns of the business. So ultimately, what keep finding the right level of inventory, continue to look at the data point, continue to flex. The win is I pull down the amount of inventory I have as a percentage of sales, and I improve my fill rate. And I think there's no better example of kind of living our mission here of keeping people safe. We're not going to make aggressive bets at the risk of fill rate because it goes against what we're trying to do here. So what that means is we drive working capital efficiency, and we're very focused on long-term sustainable projects. So if you look even just the last 1.5 years, you haven't seen us rapidly improve any quarter. It's kind of identify the projects to improve working capital that are sustainable and that's bring them to life one quarter after time and then keep coming up with new ideas behind that and keep working on that. So what I said in the Investor Day is we think it's reasonable, similar to the operating margin opportunity. There's probably 30 to 50 basis points of working capital efficiency that can come to life each year and certainly be part of our cash flow story as well. Certainly, your recurring revenue is helpful there. The more you have predictable future, there's less volatility to solve for. So I think it's just going to be a nice enhancement to the journey as we go forward here as well.

That's great. We're out of time here. Thanks, everybody. Appreciate it.

Thank you. Thanks, Brian.