MSA Safety Incorporated (MSA) Earnings Call Transcript & Summary

Okay. Good morning. We're going to go ahead and get started. Thanks for coming out for the MSA Safety session. I'm Rob Mason, the senior analyst at Baird that covers advanced industrial technology. Many of you may know MSA Safety is a pure-play provider of sophisticated safety equipment globally and a market leader across most of the portions it competes in. Very glad to have Steve Blanco, the CEO, with us here today; as well as Julie Beck, CFO. Steve is going to open with a few remarks, and then we'll go to Q&A. I'll hand it off to you.

Thanks, Rob. Thanks for having us, and thanks for everybody's interest in MSA. I appreciate it. I'll just go through a couple of things to help everybody understand the company a little bit if we can get this technology to work. So MSA is a pure-play purpose-driven safety company. And what you think about with that is we've had the same mission for 111 years. And that mission is the men and women may work in safety, they, their families and communities may live in health throughout the world. We got them. So start with the safe harbor stuff. You know that. So -- and given that mission, I think what I'd start with, and some of you have heard this story, but we're really proud of this and the entire family of associates at MSA is grounded in this. And when we were founded 111 years ago was by 2 mining engineers who continue to see and have to go to a number of mining disasters where there are explosions. Those explosions were caused by flames, right? And everybody at the time had flames on their caps because that's how they were able to see. But that, obviously, when you had high levels of methane or coal dust, you create an explosion and the canary wouldn't necessarily save them. So these 2 gentlemen worked with a guy you may have heard of named Thomas Edison and convinced him that they needed to design an electric cap lamp. So that electric cap lamp once it was implemented over the next 10 years, mining deaths went down over 75%. And MSA has been innovating ever since. And it's all focused on that mission of how we protect people across the world. And so what that's turned into is an industrial safety technology company. We innovate to lead across our different product categories. As you can see in the center, we have 2 segments we report to. One is the Americas, which is a little over 2/3 and then international, which is everything outside of the Americas. Our product categories of detection, fire service and industrial PPE and really how we go to market. So we've got a very resilient business, detection includes instrumentation that people would wear. So we would call it wearable detection or portable and then instrumentation that's fixed. It protects assets, refrigeration, monitoring and the like. Fire service is just what you would expect. It's head-to-toe protective apparel for the firefighters as well as the breathing apparatus and then certainly the helmets. And then industrial PPEs, a number of different product categories. The ones that we center on strategically are head protection and fall protection. We have a couple of other categories where we have some nice margin and cash generation. Doing that helps us protect over 40 million people annually across the globe. So we're really proud of that. And if you look at our strategy, we've got 4 key pillars that we'll probably talk a little bit about here, and I won't go through the details, except that this is how we believe we can set ourselves up for continual growth into the future and leverage the technology that we have and our voice of customer to really take advantage of the market position we have and where we see the macroeconomic and market dynamics taking us into the future. We'll continue to allocate capital as we have very effectively. We've leaned into this with this strategy that we announced in mid '24 to really focus more on M&A as well as the organic growth we have been focused on. And certainly, we'll continue to return back to the shareholders through our dividend and obviously, share buybacks, which we're in the middle of right now as well. We're active on the market in that category. And then lastly, if you look at this year, I would just reference that what we said a couple of weeks ago in the earnings call, we've about 2% organic growth year-to-date. We have about a 1% for the year headwind with the government shutdown because of the fire service, which we continue to expect to be around that ZIP code. Fortunately, we did receive NFPA approval, which we announced which was a really nice milestone that the team is excited about, and we are now capable of taking orders from our customers. So with that we'll go to Q&A.

Again, if you have any questions, send those up and we'll work those in the discussion. Steve, maybe just we'll start where you kind of left off there in the fourth quarter. Typically, you do see some seasonal lift in the business, fire service is usually a component of that. So maybe just setting that aside, given some timing dynamics. How about the rest of the business in terms of what you're seeing as you go into the fourth quarter, what looks normal, abnormal, anything you'd call out?

I think if we look at the rest of the business, I'd start with detection. And as we've talked detection, it's been a really good business for us. And I would reference the ACCELERATE strategy. We talked then that we thought that '25 would be a challenging year on the fire service. But as we leaned into some of the activities we have going on in detection, we thought we'd accelerate growth there. And we've intentionally focused on what the customer needs are. Again, this is that solution base I talk about. And when we've done that and how we've done that has enabled us to have really nice growth in detection matching up with that strategy. And I think that's going to continue. If we look at the market dynamics in detection, we're outgrowing the markets at this stage. We're really pleased with the growth we've seen across the globe, the portable detection, MSA+, it's been a fantastic grower, small base. Certainly, it's about 10% of the portables, which is about 1/3 of the overall detection space. But it's been a really nice catalyst in so much as it's also helped the rest of the portable business continue to grow. The customer base, even when they choose the existing platform, they've got the choice from us and they look at us as a trusted adviser and say, "Hey, you guys have all of the solutions we need." So they're -- we're getting growth on the core traditional platform as well, which we frankly thought we might cannibalize more than we have. The market dynamics are pretty good. I mean they're choppy. I would say the industrial PPE, we're continuing to see somewhat choppy market dynamics. The growth there, which we expect to continue in the fourth quarter has been really centered on our fall protection strategy and how we've really put a laser focus on what we believe is a nice set of solutions for the customer. So I think we think that's going to continue, and we're seeing that thus far.

Okay. And just maybe speak to -- we're still discussing it just as we're playing still maybe a little bit of catch-up around tariffs and price contribution. How do you see that rolling in both the second half of this year, first part of next year is often when you take a normal price increase and bring us up to date on price cost effectively.

Yes. So it's a good question. When we looked at the year and we talked earlier in the year, we indicated and have seen that there's acceleration in that cost impact to our P&L in the second half of the year, and we saw that in the third quarter. We'll see that in the fourth quarter. We have instituted some targeted price increases throughout the year in both segments, off-cycle is what we would call them because we typically do them in the first quarter. Those price increases haven't been the same in each region. And what we've tried to do, we really take the long view on this. So when we do a price increase, our intent is that stays. So we tried to make sure we see some normalization of what that tariff rate might be so that when we go to the market, it stays in there. And so -- then the second piece of that is when do you think you kind of get this rightsized and get rid of the noise we've had in '25. And we think the first half of '26, you should see that. We expect to -- and we'll continue to see that improve early in '26. But we believe we're in a good position where that's going to rightsize itself and we'll be in the right space.

Okay. You just -- you made mention earlier just around the government shutdown dynamics. Any noise in other parts of your business besides fire service?

A little but not -- I mean, not as significant as fire services. I mean we have a couple of orders that we know have been pushed, but minor.

Okay. And then on fire service, you made mention NFPA approvals are out. I would assume that's the case across all of the vendors in the industry.

Well, we know ours are out, we know 1 others is out. We would assume the other one will announce their approval at some point. But we're focused on ours and how we compete.

Now you can move forward with the NFPA compliant product.

Correct.

How does that kind of impact the order dynamics here in the fourth quarter then. Have there been some customers holding back?

Well, there certainly are customers that were waiting for the new approval -- the new standard approval. As we've expected sometime late this year, early next. We were really pleased with when it did come out because it allows us, we've got certainly customers that have already indicated and have ordered the current version, but we think that this is going to help customers really think about, okay, now I can get this new version. There's no more noise for them to worry about. Now the timing with, again, the government shutdown and the AFG funding has kind of held a little bit, probably not much of an impact in the fourth quarter. It's still going to be what we expect for next year.

Okay. But just the mechanics, I mean, if we do have line of sight on a reopening maybe in the next week or two, the mechanics of what needs to happen around AFG is you would expect those. The awards have been made, you would expect then what the submissions for those awards into AFG and then they reimburse and start the dollar.

Right. So the process is, if you're a fire department, you receive a notification that you have an award. So that happened at the end of September, last few days. And then it's -- the government shut down. And so you can't get on the website and go and basically...

Claim your award.

Accept this award and then to receive the funding, you have to have a purchase order to give back to -- basically, here's my PO and then you'll get the funding based on that PO. So fire departments first can't go in there to check and sign off and say, "Yes, I received my award or I'm accepting it." So that, obviously, once the government comes back, they'll be able to do that. And then the next piece is the time line of them then issuing the PO. Some of them will go through an evaluation and planned to do that. Some of them have already determined the manufacturer that they're going to choose, and they'll just move through that process. That's -- we're still in the same ZIP code with what we expected a couple of weeks ago. I don't think that changes with what we've seen. On the time line, I would say that next year, you're probably going to see as that kind of rolls back in, right, it's because it's all about timing. So that point is probably a first half. It's probably not all going to drop in the first quarter, again, based on those dynamics I just talked about. It's important to realize that the funding, the award notifications were the end of September, which is the latest historically we've ever seen, and they did it in a very short window. So typically, you see that occur through August and September. September is lighter. Usually, you get the big tranche in August or even typically, it starts in July. But the big tranche is usually early mid-August. So that -- all that timing I'm talking about is going through the process of them going through the process is happening in late October or late August, September and October. So that's going to be delayed into the future.

And just on your last call as you were framing out the maybe setting the timing dynamics aside, just the pace of demand in that environment or that market, at least domestically anyway, kind of steady -- underneath that kind of steady through '26, but you seem to have some optimism beyond '26.

I do. I think we're in a place where we're having kind of a solid state kind of consistent market size currently. We expect similar dynamics next year with a little bit of movement based on this funding thing perhaps. But as you look forward, the cycle and the quantity of SCBA that the market had the market size of SCBAs shipped in 2015, '16, '17, '18 was really large. And now we're really at that I'd say, a little bit of a normalized lower point. There's kind of like the -- we call it that replacement cycle, which you're very familiar with. You've talked to us a lot about. And we didn't see it drop off precipitously like maybe in the past, and part of that is because of the value of the SCBA has helped with that, right, because the value of our SCBA is much different than it was 10-plus years ago. But as you think about the time line of a fire department, they replace them every 12 to 15 years. So you get into '28, '29, '30, then you've got these large volumes coming back and yes, so we're prepared for that. We're planning for that. And it's certainly something, I think, bodes well for the future of the fire service.

Going back to the detection. Again, that's -- you've been pleased with the performance there. And that has been a market that you've targeted market outgrowth in as well. And you talked a little bit about why that is. Just -- but again, those markets can be diverse. I think externally from our standpoint, RC is sometimes hard to understand exactly what's driving that market. Any couple of items that you would call out from a market standpoint and then where you think you been particularly successful?

Sure. Well, energy has continued to be a really strong market for us. Traditionally, the oil and gas industry, we've done well in that industry. But that industry has not gone away. So it's continued to be solid for us, not as big of a contributor because a lot of this outgrowth is us expanding our market coverage to other places, other markets, quite frankly. Energy has expanded first and foremost, as we've talked about clean energy, some of this carbon capture has been very beneficial in some of the activity. And there's areas, for example, in Europe, they really are in the early stages of some of the activity they're doing on carbon capture, but are needing to do that. And they're recognizing the need to do that. So that clean -- that total energy package, if you will, of business has been really strong, and we think will continue to be strong even with the oil prices hovering around the 6-ish spot because I would expect from what we've seen and what we're hearing that there's going to be continued investment, especially in the Middle East and North America. And Latin America is not far behind. They're investing heavily too. So those markets are investing. Europe is really more of a maintain at best from an investment perspective. There's a little more investment expected next year. But those big markets really, we're looking at those as a growing category into the future. Probably when you add all those things up, you probably have oil and gas traditionally growing at 2% to 3%, then you have the clean energy on top of that, you're looking at a market growth that's high mid-single digit or up or high-single-digit growth in the next 5 to 7 years. And that's just becoming more of an issue because of what we're seeing with the data centers, right, with AI and we play in that, too. It's a nice space for our Bacharach business. We've had some nice wins on a couple of data centers that we're leaning into, and we expect that to be a nice tailwind as well. So it's been really cross functional. We've got some activity that we recently won in the pharmaceutical side on fixed gas business. These are things that we identified to really open up the aperture of opportunities when we went through the strategy. So we're really good at this stuff. We have solution sets that can hit these other markets, we've got to be intentional about these markets and show the customer our solutions to do that, and that's paying off.

Yes. the M&C acquisition that you did as well. I mean we think about your M&A history here, maybe not the typical personal safety acquisition that you would have done it gets you somewhat into the process stream, just maybe talk about what that brings. And again, you kind of open the aperture around a market that it plays in, what does it present in terms of expansion adjacencies, bolt-on type opportunities?

When we think of M&A, we're still going to stay true to that mission that I talked about earlier. So the mission really grounds us in everything we do. And if you remember what I said, it's men and women may work in safety and they, their families and communities live in health throughout the world. So that, for us, provides a nice foundation of how we look at M&A and opportunities to expand the addressable markets we participate in. So M&C is an extension of that similar to what Bacharach was. So Bacharach is an example where we understood the technologies very well. They're very well aligned with MSA's technologies and solutions set. And it was a market we participated in, in a very small way. And so we've expanded that. This is this refrigeration market and HVAC markets that we're now in with Bacharach, M&C is a similar example of that. Now we had not done much on the processing side and now the processing analysis side. And we saw M&C is a really, really good opportunity because it's managing and measuring processes in ways to ensure that you have the right controls in place. And so this is, again, around instrumentation in the fixed monitoring space that we felt was -- we know the technology really well. We know some of the customer base pretty well, but it's in a different space that we don't participate in. So it's been a really nice add. It's -- the M&C family is doing a great job with the integration. Our team is doing a great job. We're really pleased with where it's at, halfway through 1 year, but it's doing really nice. And foundationally, it allows us now to really launch off that platform because there's a lot of space in this processing model. And there's a lot of opportunistic areas, we think we can go after and expand that.

Yes. Okay. We'll just maybe touch quickly on the industrial PP&E side. You said it's been choppy, but you've leaned into the fall protection. Just talk about kind of what's enabled some -- what looks like market share gains, market outgrowth anyway there. It's been somewhat my sense on the innovation side, but also just kind of execution, supply chain and the like.

You're right. It's really -- it's around how we've innovated the suite of products and solutions we have in fall protection, we've turned over and really done a nice job putting our innovation engine to work on fall protection. Commercially, the way we go to market with our customer support has been a big play in this and the brand equity we have. And then third is how we have improved our ability to deliver to the customer. This is one where we've had nice double-digit growth for, I think, 7 years, minus 1 in North America, and we're really trying to do that globally as well in which we have, and you saw that in the third quarter. The interesting thing for fall protection is it's really -- as we look at it, the customer needs it right now. They don't typically plan ahead in many cases for fall protection when they want it, they expect it right away. So it's a shorter cycle requirement for the customer. And if you don't have the appropriate inventory on hand, you're not going to get that order even if you have the best solution. So we've really leaned into making sure we have the availability for those products for the customer. What's interesting, though, is we've stumbled on that a couple of times, right, where we certainly, part of it was as we came back with the supply chain challenges post COVID. So we stumbled there. And so we had this great growth, and then we stepped back and the customer went elsewhere, right? And then we had last year, we had the same thing we closed the factory intentionally as we moved production to a different facility and rationalized our footprint. And the same thing happened. The customer came back. It's still -- it's a real testament to the brand and the capability of how we have that connection to the customer. I've never seen a category where they come back multiple times. You usually can lose them once. But if they can't -- if you can't build that trust, coming back that second or third time, it's very difficult. So what we've done now has been very intentional to say we're going to put this in play. We're going to make sure we have all of the required inventory to ensure we keep it. And now we've built that credibility because they've seen it stay and it's just building momentum on that entire business front.

Yes. What about some of the other areas within industrial PPE, the head protection ballistics is kind of a noncore business, but it does cycle up and down. And actually, I think, has been little healthier for you.

Ballistics we expect to continue to be healthier. Ballistics is an area. It's protective ballistic helmets. And it's a European business that a lot of the European countries and governments have really leaned in to try to increase their defense spending. And that's an area, certainly, we're on the protective side of that. We expect that business to continue to do well. It's doing well now. We think it will continue to do well into the foreseeable future with a little bit of lift of this funding transition that the governments have made in that area. Our traditional head protection has been a solid business. We just launched the Type 2 Hard Hat, the H2 Full Brim in the United States, and we expect that market to continue to be a nice contributor. The thing about the Type 2 helmet is the price point's like 3.5x of the Type 1. So if the market continues to shift, as we're starting to see to a Type 2 solution, that could be a really nice tailwind on the revenue growth in industrial PPE.

What would drive kind of that shift?

The customer -- there's a belief by the customers that while 1 -- both of them meet the standard and are protected for that individual, there are some applications where customers want that side impact protection, which is a Type 2 versus the head -- the top impact protection. And so there are some organizations that are moving to, hey, I don't want to have 2 different helmets on site. I really want to make sure I streamline and if I'm going to streamline, I have to go to the 1 solution that is able to take care of every situation I'm in.

Okay. Just wanted to shift to your profitability, your margin profile and basically kind of the margin algorithm that you've set out, kind of 30% to 40% type incrementals what we're striving for. It will help to get on the positive side of the tariff equation, FX as well. Maybe that's just a matter of timing as long as currency stays stable. But just maybe Julie comment on where you think margin pathway looks as we exit the year?

Yes.. So we improved margins from the third quarter from the second quarter, and we expect the margins to improve in the fourth quarter as well as some of these pricing actions take place. So we expect that we will be in that 47% margin -- gross margin range, which is a nice margin. And in 2026, we expect improvement going forward as well.

Okay. Have you -- we get this question a lot around AI. Any early implementations of AI internally that you've been able to execute on?

We've been doing -- the teams -- well, we love innovation. So we've done some really cool things on both how we interact with the customer and how we drive efficiency internally. We're -- and I believe we're in the early stages like most people. The things we've done around our SIOP process and how we evaluate inventory using AI tools is fantastic. As a matter of fact, our supply chain team was awarded innovation, something -- use of technology award, Jose Sanchez and his team just did a phenomenal job with implementing that and taking technology to make us more effective in the fall protection is a great example of that. We have -- with our MSA+, we just went out with our first pilot of a large language model for our customers to use to help them on how they are able to take a fleet of io 4s and utilize those effectively and communicate with MSA on any questions they have and things that they want to learn more about. And then we've launched what we call Edison internally, which is something that enables our teams to look at innovation and use AI to help streamline any work flow that they have going on. So we see it as an opportunity. I mean, AI, we're still learning. But as I'm sure everybody knows, AI is really that understanding and utilization of data and it's becoming much, much more effective and more streamlined, and we wanted to make sure we take advantage of that.

Absolutely. Real quickly is maybe speed round here. The -- you've already made mention eyes on, at least with respect to M&A detection, focus area. Any other areas of the portfolio that you're evaluating for inorganic?

All of them, if they're core.

Even fire service?

Well, even fire service, I would say the fire service in the spaces we're in, it would have to be very -- it's very difficult because we have leading position. We have to expand that, but we know the markets very well. So I wouldn't say no. We're looking for categories that we believe can minimum meet our growth expectations for the future or add to those growth expectations. Again, it's either going to be technologies that we understand and/or markets we feel very, very comfortable with. If it's both, great, but that's what we look at.

All right. Fantastic. We're at time. We'll stop there. There is a breakout session upstairs in the Chestnut room. So if you have any questions, meet us up there. Thank you.

Thank you.