MSA Safety Incorporated ($MSA)

To begin, I'm reminded to inform you that for a full list of research disclosures and potential conflicts of interest, you can visit our website at williamblair.com. Today from MSA, we have Julie Beck, CFO; and Larry De Maria, Chief Executive Director of IR. As a brief background, MSA is a leading manufacturer of safety products across the firefighter, gas detection and broader industrials globally. So with that, I'll turn it over to Julie for some opening remarks before moving to Q&A. Thank you.

Thanks, everyone. Good morning. Thanks for your interest in MSA Safety. I'm privileged to be here on the behalf of all of the MSA employees and team members. Really excited to -- it's an honor to be the CFO of MSA. I started there in August of last year. So I've been here about 9 to 10 months. So it's very exciting. I start off with our legal language, disclaimer language, and please become familiar with that. And now I'm going to go forward and with me today is Larry De Maria. He is our Vice President of Investor Relations. So it's really important to talk about MSA. The really important thing is the mission. The mission is incredibly important. It's been in existence since 1914, that men and women can go home safely to their communities and live productive lives and good lives in their communities. And we are dedicated to that mission, and you feel it when you come to our offices, everyone takes this responsibility extremely, extremely personally. And it's our privilege to do this. And so it started in 1914 with 2 founders that that were at a mining accident and dedicated their lives to making that better. And so they partnered with Thomas Edison, and they came up with the first lighted safety helmet mining helmet and deaths went down over 70% in the next 15 years. And Thomas Edison would go on to say it was the most meaningful invention of his career because it impacted and saved the most lives. And so we're dedicated to that, our mission we take seriously, and we protect over 40 million workers in the workforce. We have driven this company from a safety equipment company to a safety technology company, and that's a really important feature. And so we -- innovation is how we started the company. Innovation and the voice of the customer continues to be the strength of our company. We invest over 4.6% of our sales in R&D. And we -- and our innovation, it results in a higher price point and higher margins, and it saves our customers, and that's what's really important. And so overall, we're about $1.9 billion in revenues in 2025, about 5,300 associates that work with me at MSA with Larry and I. And we have gross margins of 46.8%. Operating margins adjusted of 22.3%. We generate lots of free cash flow. So it was 106% of free cash flow last year generation. And so we -- it's a really terrific story. We have -- we -- our segments are 2. Our Americas segment consists of North America, Latin America, Mexico and South America, and the rest of the world is international. About 67% of our sales go through the Americas and about 1/3 outside. We go to -- we have 3 main product categories that we're going to talk to you about today. Our Detection business represented about 41%. Our Fire Service business is 34% and industrial PPE is roughly 25%. So that's MSA at a glance. We are building -- we're an industrial compounder is what we are. So we're compounding, we're compounding from a sales perspective, from an earnings perspective and from an M&A, a flywheel as well. And so if you look at our sales, you'll see that over the 10-year period, we had about a 6% CAGR over the last 10 years. We've had a 700 basis point -- over 700 basis point improvement in margins. That's due to many things. It's due to new innovations, it's due to productivity and lots of initiatives in our factories and in our SG&A. We have continuous improvement is part of our DNA. We have an MSA business system, and that's absolutely critical to how we operate. So at any one point in time, we have hundreds-plus projects that we're tracking in our MSA business system in order to improve margins. And so it's been a really nice successful story. And we've migrated our sales over time where detection, which is our highest margin products, becomes a larger portion of the pie over time. And so that's helped us as well. We also have a really nice adjusted return on invested capital where we have over 20%. And so we're really proud of the returns that we've been able to generate. We have targets out there where we want to improve our margins 30 to 50 basis points every year. We want to have cash flow generation of 90% to 100% every year, and we have an incremental margin target between 30% and 40%. So it's a really fantastic story financially. One of the things that attracted me to MSA was a strong balance sheet. So it's an incredibly strong balance sheet with plenty of liquidity, low leverage, which gives us optionality, and we can choose to do what we do -- what we want to invest in over time. We have an Accelerate strategy. So in 2024, the management team had an Investor Day, and we talked about our accelerator strategy. And so we want to continue to be the leader in premium safety solutions okay? So we're getting more and more into systems and solutions, again, moving away from just being products, but going into a technology marketplace. We want to implement targeted growth accelerators. So you talk about us talking about a connected worker or a connected fire service and technology advancements and all of that, which makes us -- which accelerates our growth. We've also redesigned our fall protection product line, which has allowed us to become larger and larger, and that's been a fast-growing marketplace for us. We also announced a type 2 head protection, which instead of just providing protection at the top like our traditional V-Gard, which is the market industry leader, it also allows for protection of the side. So those types of things that are part of our accelerate growth strategy that's going to allow us to outgrow the market over time. And then we talk about our MSA business system, MBS, we call it, MSA business system. Really important. It's how we do business. It's how our cadence goes with our meeting cadence, how we monitor things, the KPIs that we track, the continuous improvement and all of the initiatives that we have going on in the business, which enables that. And we can deploy capital effectively. So those are -- and I talked about our nice balance sheet. So we have an organic target of $2.1 billion to $2.3 billion in 2028 as well as operating margins approaching 25%, continued EPS compounding, which we've seen and our capital deployment gives us lots of optionality, $1.5 billion of liquidity at the end of the year. So we're really, really pleased -- $1.5 billion of cash generated over that time. So it's a great story, and we reconfirm our 2028 targets. We're going to meet or beat those targets at this point. So we want to -- capital allocation an important part of our strategy. We're very disciplined. And when we think about our capital allocation strategy, we prioritize growth. So again, we invest in new product development and innovation, which is absolutely critical. We'll invest in high-growth capital expenditures that allow us to grow. And we also have an M&A pipeline, and that pipeline is really strong, and we continue to monitor it every single -- we talk about it as a management team on a monthly basis. And we have lots of things in the pipeline. And we've been very disciplined in our M&A. And that M&A story, if you look at our MSA recently, 3 of the last 4 acquisitions, including the one that we just announced with our earnings call in May, have been in the detection space, where we have some of the highest margins and think that we can grow faster and accelerate our growth. We have lots of -- we have financial strength even with the acquisition when we closed on that, which we have not closed on yet, we expect to close in Q3. Our pro forma leverage would be about 2x. We talk about being comfortable in a leverage target of 1.5 to 2.5x. So we have capacity to do more. In addition, we want to return capital to our shareholders. So we have the privilege of increasing our dividend every year for 56 years. So it's a really fantastic story. And we also buy back shares. So in 2025, we bought back $80 million worth of shares. In the first quarter, we bought back 50 million shares, and we launched a new share buyback of $500 million. So really a tremendous capacity in our balance sheet, which is a great strength for us and provides us optionality. We announced the acquisition in our earnings call. This is Autronica. This is a company we've had our eye on for quite some time. So we were really pleased that it became available. It's in an adjacent marketplace. So we are in the flame detection business and fixed detection business, and this opens up a new total addressable market for us of about $3 billion. It is in the fire detection business, and it also has the control systems that bring all this fire detection together. And it's a really important addressable market that's just adjacent to us. And so we're going to be able to use our current sales channels to increase the sales. If you look at their markets, I'll show you in a minute, it's a great mix for us because they are really strong in the European markets. They have a presence in North America and the Middle East, but we have a stronger presence there. And so we're going to be able to use our existing channels to sell this product. We were able to -- we're in a regulatory approval period right now. We expect to be able to close on this transaction in the third quarter. We're going to fund this transaction with existing cash on hand in the balance sheet as well as the revolver, which is terrific. And we have identified about 6% of the purchase price in synergies. And those are just the cost synergies. We didn't underwrite any of the sales synergies, any sales synergies that we expect to get are above and beyond that. And when we think about the synergies, we think about the traditional, whether it's operational, whether it's supply chain synergies, whether it's certain offices, back office kinds of things, that's the 6%. And really important as well, as I talked about our mission, is their mission as well. Their culture fits really nicely. That's an important criteria for us when we're evaluating an M&A candidate, and they have a zero harm, zero safety incident culture as well. So that was really important to us. They're a leading manufacturer. They've been in business since the 1950s. They're based in Trondheim, Norway, which is -- has an outstanding university in terms of technology and a leading technology in that part of the world. They are very big in the Nordic countries. And as I mentioned before, a little bit smaller in the U.S. and North America, Latin America, South America and the Middle East. So we're really excited. Our salespeople are really excited about this. And so what it does is it allows us for some of these big project works it allows us to be able to get earlier in the EPC bidding process because fire detection starts earlier than some of our other fixed gas detection. So if we can get in some of these projects earlier, we can pull in other MSA products as we go through in some of these bids, which is really important. The business also operates in the marine segment, and that is one where MSA is not as strong as well. And so that opens up another new marketplace for us. We expect these margins to be accretive with the synergies. And we expect that, that's going to improve our international margins significantly as we go forward as well. So really excited about this ecosystem and this fire protection and really excited to welcome the Autronica family to MSA going forward. So we had a great first quarter, and a big thanks to my MSA associates for that. It's a privilege. We were able to bring in sales up about 10%. Part of that was an M&C acquisition that we did. We did an acquisition in Detection just about a year ago at this time in May of 2025. That is a new -- was a new market for us as well. They're based in Germany, and they're a process Detection business, our first entree into process. And so it's adjacent to us, but something that we didn't have before in the detection business. We are really pleased. They're ahead in the first year of ownership. They're ahead of our business model that we went -- that we created at the time of the acquisition, and they're performing extremely well. And then we had growth -- organic growth as well in the first quarter, so comprised of all of those. Our adjusted operating income up nicely. And so we have -- we're in margin expansion. We've recovered from all the tariffs and all of those things, and we're in margin expansion, which is what we expect. We had nice strong adjusted operating margins. EPS, earnings per share was up 18%, and our free cash flow conversion was terrific in the first quarter and was significantly higher as well. And we also had a 32% incremental margin. So we made that target as well. So all of those things that we talked about for our 2028 targets, we did really well in the first quarter. So it was a nice start. And so we were able to maintain our mid-single digits. So again, we want to be that industrial compounder. We want to bring in increased sales. And every year, we want to increase our margins by 30 or 50 basis points, have 30% to 40% incremental margins, and we're well on our way as well as some nice free cash flow conversion in that 90% to 100% range. So here we are, just to end up, we have a -- we're really a mission-driven innovation company. We always listen to our customers. Our customers -- we don't innovate for the sake of innovation sake. We innovate because our customer wants it and needs something. And we do -- we take our responsibility to society to keep our workers safe very, very, very seriously. We have lots of stories of safe stories where customers will write into our team members and tell us about how our equipment performed, which is very well, and that motivates all of us to -- and it's a strong motivation to keep continuing. It's a great story. Our Accelerate strategy is working, and we're showing that growth and on our way to meeting those financial targets. And so -- and we -- our innovation is also making us a safety technology company. Moving from an equipment manufacturer to a safety technology company. We have leading positions in our market share. We're #1 and #2 in most of our major -- all of our major markets for probably one, which is fall protection, and that's a really fast-growing market for us and was one of our accelerators in our Accelerate strategy and growing nicely for us. And we have the MBS MSA business system, which promotes that continuous improvement mindset. So one of the great things that I love about the culture is that we performed well, but we all know we can do better and people are open to doing things differently and making it better, which is terrific, a great place to be. And we have a nice disciplined capital allocation strategy and the capital to make sure that we have choices. We can choose what we want to do, whether we want to buy back shares, whether we want to do M&A. Now with our leverage going up to about 2, we will -- we purchased $50 million in the first quarter. We will concentrate -- we'll continue to buy shares but we will also concentrate on paying down debt, which we can do with our free cash flow generation. So it's a great story, and I'm happy to be here. And with that, I guess I'll go back to Ross.

So maybe kicking off with the Autronica acquisition. This is your second acquisition in 2 years, and you guys are clearly making progress on executing towards the M&A component of your 2028 targets. But can you maybe just help us think through how your understanding has evolved of the broader white space opportunity for M&A as we think about your ability to build that pipeline and that M&A working muscle?

Sure. So we have an outstanding individual in corporate development, who knows our business extremely well. And he has a pipeline, and he monitors it on an ongoing basis. Our sales force brings in ideas of things for M&A as well as our engineering groups and watching technology. And so there's a deliberate process and effort. It's another process that's part of our MDS system, which is evaluating M&A alternatives. And I would say that the pipeline is really big and active. Not everything, of course, is actionable. And as you know, we all know that you have to look at various different things to make sure things fit. And so we -- our CEO, Steve, has been vocal about one that we looked at where the culture just didn't work. And so we take all that seriously. We're disciplined. So when we think about an M&A target, we think we want a well-running business. We don't particularly like to do fixer uppers. We wanted to have a nice management team. We wanted to increase our -- either expand us into a product line that's important to us whether it's a geography that's important to us, the technology that's important to us. We want to make sure that it's accretive from an EPS perspective and an EBITDA margin perspective and that it outearns its cost of capital in a relatively short time, a 3-, 4-year period or so is the criteria. And so there are things out there, and we'll continue to monitor them, and we want to be known as a compounder in M&A as well and doing things more systematically than sporadically like it may have been in the past.

Well, I mean it's still pending, so you haven't had time under the hood, but can you maybe just help us think through the synergy targets on the cost side, some of those buckets and also R&D and cross-selling opportunities? I mean, just high level, it feels like they're pretty conservative targets.

Sure. So from a synergies perspective, we identified 6% of sales as being a cost synergy. And so those cost synergies include everything from supply chain savings to maybe some operational improvements, some back-office consolidation. Maybe there might be a sales office or a service office that might be in the same markets where we can share those types of things. And so when we think about -- and so that's the 6%. That 6% doesn't include any revenue synergies. And so the revenue synergies are very exciting. And I love it because when we announced this acquisition, our sales folks from all over the world saying, "Hey, when can we sell it? When can we get together?" Well, of course, we can't yet, but the enthusiasm for this acquisition is incredibly strong internally, and that's really important for a successful acquisition as well. So we're well on our way. But remember, we haven't -- there's only so much we can do right now. We haven't closed on the transaction. So -- and we can't -- there are regulatory approvals that we need. And as we go through that, we'll be talking about those more later.

All right. There was some disruption on the fire side last year, and we're starting to move past that. But just any updates on if you're seeing this government funding start to flow? SBAs.

So the SCBA is -- we think that our brand, the MSA brand means something and means quality, and we have a really leading market position in SCBAs. And we think we have the best product and probably the best distribution network. So it's really important to say that. After September 11, the government created a fund for firefighters to make sure that our firefighters were protected after September 11. And the value of that funding is roughly $300 million per year from the federal government. Of that $300 million, about $100 million relates to PPE for a fire department. And so that would include the SCBA. And remember, we are one of the only product. I think we are the only fire provider that services our firefighters head to toe, the SCBA, the hat, the turnout gear, the boots, the whole thing. And so this funding goes primarily to more rural departments for funding of theirs and about $100 million of it relates to that PPE for the firefighter. And so we would estimate that, that means $30 million to $40 million of revenue per year to MSA if you just take our relative market share in SCBA. And so what happened is that the government was late to announce who got AFG funding last year in fiscal 2025. They announced on the last day of the fiscal year, which departments got the funding. So these fire departments supply and they announced who got it. But then the fire, if you remember correctly, that the government shut down for 6 weeks or so. So normally, they would announce who gets these awards in the summertime, the early fall, and then we would ship a lot of things in the fourth quarter. But in the fourth quarter, we weren't able to ship because people weren't able to access their funds. And so what happens is when a fire department gets notified that they received a fund, they need to cut a purchase order with their supplier and then they need to submit it to get the funding, and they weren't able to do that process with the government being shut down. So that does not impact demand for our product at all. It just impacted the timing of when we receive it because we didn't receive as much in Q3 and Q4 as we would have anticipated, and that has pushed into 2026. So we think we got about 1/3 of that in the first quarter of this year, and we would expect to get the rest of the 2/3 of it in the second and third quarter.

I think, Ross, what we've seen is a little bit more choppiness than we've seen historically in the fire service, but that's been all driven by -- mostly driven by the government shutdown, AFG grant situation and things beyond our control. The message we've seen that we want to get across is it's a very healthy business with a good pipeline. So there can be short-term timing challenges and things like this, but it's a very healthy business. And now the DHS is open and now for the next grant year, fire departments are putting in their applications for grants now. So things are operating a little bit more normally going forward, which tends to lead towards obviously a second half sales cycle.

Yes. Maybe just speaking to the visibility there. not impacted. Do you think 2/3 are going to catch up. But we do have a replacement cycle coming just based off the last standard changes. So maybe just speak to kind of that go-to-market and what provides that confidence on.

So we announced a really industry-leading product in -- called the G1 in 2014 and 2015. And we gained some nice market share at that point. And when you think about an SCBA, it has a useful life of somewhere between 12 and 15 years. And so that -- and it's important also to know that fire departments don't want to be more than 2 standards behind. And so a new standard comes out about every 5 years. And so that puts you in that replacement cycle and the cylinders last about that useful life as well. And so if you look at the volumes that we got in a 3- or 4-year period after that announcement, those units would be coming up for renewal. And so we would think that, that would happen in '27, '28, '29 and that we would see a nice bump in our Fire Service sales just for replacement cycle alone.

I think our expectation is maintain a relatively lower expectation on '27 bump, but it should accelerate into the latter part of the decade as we replace those aging units at obviously a higher price point.

Yes. I mean there's been some competitive developments in the market in North America with some of your large competitors. And then also, we're hearing that there's a recent push from your large European competitor as well. Can you maybe just speak to how you see the landscape evolving there?

So when we think about the North America fire department, U.S. and Canada, you would think about 3 major players. It would be -- it would be MSA and Scott, which would lead in market share. Scott, a very good competitor. Scott has been owned by 3M recently, and they're going to be spun out in part of Bain Capital with Madison Safety. And then you think about Drager and Drager is a German competitor that we see in Europe. Drager has not historically been strong in the U.S., primarily because they haven't had as strong a distribution channel as Scott or MSA has had. They have announced a new product. They've added some technology, and they displayed a new product in April. We still think ours is superior. We understand that they have increased their selling price on that to be closer to ours. They also are signed a distribution agreement with MES and MES also distributes Scott. So MES will be selling and servicing both Scott and Drager. We -- our distributors are all exclusive to us, and we think that that's a great advantage.

All right. We're about out of time here. Thank you again for joining us, and we'll be holding a breakout session in Ginnie A beginning at 10:40.

Thank you so much for your interest, everyone. Appreciate you being here.