MSA Safety Incorporated ($MSA)

Good morning, everyone. Welcome to the session for MSA Safety. I'm Quinn Fredrickson, senior research analyst at Baird, covering advanced industrial technology. Many of you know MSA Safety is a pure-play provider of sophisticated safety equipment globally and market leader across a large portion of product lines in the sophisticated personal safety field, including fire service, fixed and portable gas detection, industrial PPE and fall protection. We're pleased to have Gustavo and Larry here with us this morning to discuss MSA. Gustavo Lopez is the Senior Vice President of Product Strategy and Development; and Larry De Maria is the Executive Director of Investor Relations. So I'm going to hand it over to Larry first to provide us with some opening remarks, and then we'll come back for Q&A.

Thanks, Glenn. Just going to go through the safe harbor statements here and then put up our business. I don't know how familiar everybody is with our business, but we're a mission-driven company around safety and with about 2/3 of our business in the Americas and 1/3 international, which encompasses Europe, the Middle East and Asia Pacific. The Americas business is all North America as well as South America. Over time, the mix has shifted a little bit. Now 41% of our business is detection, which is really high-value instrumentation, both fixed, which goes on into infrastructure and portables. And within there, there's connected portables as well. That's become 41% of the business. And we just announced recently a deal to buy a company called Autronica based in Norway. So pro forma, that 41% will go to 45%. So you're really seeing that mix shift into the higher growth, higher-margin businesses margin businesses. Fire service has always been core to our company, now in the mid-30s. We have the flagship premier G1 SCBA, best product in the marketplace and a very, very strong position. Industrial PPE is really part of our heritage as well. We have the iconic V-Gard for head protection. We have fall protection to our categories, and it tends to be a bit more short cycle. But about $2 billion in sales, over 5,000 employees. And we spent over 4% every year in R&D. We've never cut that even during the COVID times when things are a bit more challenged. The company has really always been -- because of that mission, the way we meet that mission through innovation, and we're always investing in the company, both R&D and obviously, capital, CapEx and things like that. The balance sheet is very strong. As of 1Q, we're 0.9x levered. It's going to go up a little bit to 2x, which is within our 1.5 to 2.5x target net leverage range post close of Autronica. But maybe I'll leave it there. We consider ourselves a very high-quality, strong compounding industrial company. And the 3 product categories really balance each other out. And over time, if you look back in history, we've been a mid-single-digit organic grower with 30% to 40% profit pull-through. And if you look forward, we expect to be a mid-single-digit organic company with that strong incremental margin profile. So leave it there, and thanks for having us.

Yes. Thank you, Larry. For the audience, any questions, you can raise your hand or it's also a [email protected]. Larry, maybe we could just start off by talking a little bit about the current state of the business. First quarter core growth was 3%. You're guiding to mid-single-digit growth for the full year, implies a little bit of acceleration from here. Can you talk about across detection, fire service, industrial PPE, how you think that mid-single-digit growth will come together this year?

Yes. Thanks. We delivered a 3% organic in 1Q. And at the time, we said that 2Q should look a little bit similar to that, which does imply a little bit better of a second half to hit that mid-single-digit organic number. But overall, when we think about the 3 product categories, not too much of a diversion, relatively similar growth levels and a little bit skewed towards the second half, but that's driven in part by the strength we've seen in detection, which last year, organically, we grew detection 12%, and we expect to grow that again this year, even on top of that tough number given the strength of that business. Fire service is healthy. There's been some noise around some of the timing and things like that, a little bit more noise than normal last year into this year with the DHS shutdown and things like that. But overall, that business is very healthy. There's some really great targets that are out there. And I think we're encouraged by the industrial PP&E business as well. We're seeing some strength in our short-cycle businesses, which should portend well for the industrial complex broadly, but we're seeing it. It's coming in, especially in North America. So yes, it does imply a little bit of growth in the second half, but that's not abnormal either.

Okay. Can you double-click a little bit on within Detection, the International Detection business, understandably weak in the first quarter with some of what's going on in the Middle East and Europe. What are some of the indicators you track to inform your view that the International segment should see some sequential improvement from here? And secondarily, I mentioned the Middle East, have there been any discussions with customers at this stage about potential rebuilding opportunities that you could benefit from?

Yes. International has clearly been challenged, driven in large part by the Middle East, right? When the war started, it became very difficult even to just simply deliver things, right? So that slowed down, and then there was deleverage on top of that when the business slowed. And that reverberated a little bit even beyond the Middle East because some companies are buying things in other regions to -- that are ultimately going to the Middle East. And Europe, in general, has been kind of slower growth, less consistent on the macro front than the Americas and some other regions. So I think there's still some choppiness out there. I think some of the things we're looking at, though, are backlog cancellation rates. Frankly, we haven't seen cancellations, right? It's just more around logistical challenges and backlog has grown. So we're encouraged in the Middle East, especially, but you need some resolution, right? So things are happening, but not at the same rate that would have happened, obviously, a year ago. And Gustavo, please add a few.

No, I think the other thing is just to think about it is we are in close contact with all those end users and customers there. So as certainly this conflict really either comes to an end or we get a little bit of resolution in there, we'll be able to see some rebuilding activities. It will take a little bit of time, but we're doing our best to stay close to the customers and help them through this difficult time.

Gustavo, Larry mentioned in his opening remarks that detection now post Autronica is going to be 45% of the business. Clearly, that portion has been moving up. And the last 3 deals you have done have all been in the fixed gas arena. Can you expand a little bit from your seat leading product strategy, how you've evolved the product road map and commercial go-to-market to be able to better address the fixed asset opportunities, maybe where the channel synergies reside and where you're making some incremental investment?

Sure. That's a great question. So Electronica, which is a company out of Norway that was founded in 1957, really a leader in the space. And their product portfolio is they're very, very strong in the fire detection business, where we're very strong in the gas detection business. So those 2 components do kind of work hand-in-hand with one another. Their portfolio really plays earlier in the design process. So it's going to give us the opportunity to participate a little bit more on the FEED stage or the front-end engineering and design phase of those projects. just because of the basket of goods and the capabilities that we offer from a solution selling provider aspect of it. So when you look at that, combined with our gas detection expertise, we feel like there's going to be some nice opportunities in there to bundle the solutions together because, again, they do work hand-in-hand. Fire detection is a market that, quite frankly, we don't really participate in. So that is where the $3 billion total addressable market expansion that we commented on during the acquisition comes into play. And the other thing that's pretty interesting is that geographically, there's not a lot of overlap. They're very, very strong in the Nordics where, quite frankly, we're not. We're very strong here in the Americas, and their presence really is limited. So there's going to be a nice opportunity for us to leverage our channels, our structure and our breadth, our brand equity along with theirs to kind of have some nice growth opportunities in this particular area.

Staying with detection, you've also rolled out this year the ALTAIR io 6 portable gas detector. You talked about using voice of customer to develop your products. So can you give us a feel for what pain points that this product solves for the customer? And can this be a significant driver for you?

Yes. So I mean the io 6 really builds on the connectivity and the connected worker strategy that we've had for the last couple of years or 3 to 5 years that we started with MSA+ and the io 4. So if you think of our voice of customer efforts with the IO 6, it's a product that's really used for sampling in confined spaces, sampling for fugitive emissions, whether it's in a refinery or any type of industrial facility. So it's really the perfect complement to the io 4, which is a wearable device, so which is the device that most workers were aware and then just needed as they're doing their day-to-day activity, where the io 6 really becomes more of a tool. So that product really wasn't connected before. So now it's going to have the same level of connectivity, all on the grid platform, allowing customers to not only understand what's happening to the worker when they're just performing the day-to-day activity, but what's happening as they're measuring those different assets and points of fugitive emissions or confined space entry work that's going to happen within facilities. So we're pretty excited because it does complement the whole MSA+ ecosystem, and we're getting some really nice interest from our customers in all sorts of industries.

Where would you grade MSA plus that effort today? How do you view the competitive landscape and your value proposition in connected portables compared to some of your other competitors that are out there?

Yes. So first of all, we have great competitors. We have really good competitors that we respect and they've really helped kind of raise the bar with our customers, which is, again, good for everybody because we provide better solutions for our customers. I think when you look at our strategy versus our competitors, we really took what's in our DNA, and we didn't really change that as we made this transition into the connected side of things. So a lot of the things that made us great is the tool itself, the durability, the sensor performance, all those things. We didn't give any of those things up as we made this transition into a much more connected ecosystem. And it's an area that we protect through IP and also through our design, and it's why we're known in the brand marketplace. Whereas our competitors really are coming at it from slightly different angles, trying to push their strengths. But altogether, it's kind of raising the bar in the market, making it for a safer environment for everybody. And really, when you look at the top competitors in this space, we can all offer unique solutions in a particular part of the market that's growing quite fast as people are expecting more out of their gas detection equipment.

Switching gears to the fire services side of the business. Can you speak to a little bit about how the G1 XR addition is differentiated in the marketplace. I was at FDIC this year, and you were showing it off there, but for maybe investors that haven't had a chance to see that, just discuss some of the key features and why you feel that, that is differentiated.

Sure. So the G1 really is a platform that we've built over time. We're pretty excited about what it's going to do in the marketplace. So it really is a platform for the future. So it's one platform that not only did we launch it last year, we're going to continue to add to it because it's a platform that you can add more technology to it. So there's IP around power management systems. So it is got central power, which is unique and something that we have control with IP. So if you think of a fire department, if you think of the self-contained breathing apparatus to get a lot of the electronics, in a lot of cases, they have the power distributed around the SCBA. We have a central power all within the control module. So it's one battery that you replace and you can charge and keep it on charge. That's a big deal for fire departments. I think some of the other things that may be a little bit more on the wearable side is we added some nice lumber support in terms of how the SCBAs mounted onto the firefighter itself, which helps with the weight distribution. And that's just what we did here. The other thing that I'd be remiss to say, but because it is a platform for the future and one of the reasons we get very excited about it is we have some follow-up additional accessories and things that we're going to continue to add to the platform over the next couple of years that we believe are going to get us some nice uptick in the market as well.

Maybe this would be a good point to talk about just where we are in the replacement cycle for SCBAs in the U.S. I think you've described it as being at a lower level. Is there any way to frame up from a unit standpoint, how far we are below peak shipments for MSA or the industry? And any reason the next peak wouldn't mirror the prior peak?

Maybe I'll start. Yes. So the SCBAs in the fire business broadly is not an overly cyclical business from a macro standpoint, right? It's not very economically sensitive. There is some cyclicality to replacement cycles, of course. And if you go back in time, post 9/11, there's AFG funding grants, which sort of accelerated an upgrade cycle. And then we've sort of been dealing with those fluctuations since then. But the average SCBA gets replaced every 12 to 14 years. So if you go back in time, 2010 to 2014 were relatively low years from a replacement standpoint. Right now, we're kind of replacing those years. The business is still healthy. There's plenty of business, big opportunities, but it's a lower replacement from the prior period, but still very healthy. If you go to 2014 and '15, 2014, we started taking orders for the G1 and 2015, we started delivering them commercially. In that period of time, that was a post NFPA standards change. So there's some folks waiting and the cycle really picked up, number one. Number two, with our G1 product, we picked up a lot of market share, right? Even one of the premier competitors actually left the business. So we invested heavily in that G1. Now you fast forward in that 12- to 14-year replacement cycle, you start to think about the second half of this decade, right? So -- it went higher in '15 pretty substantially and stayed high for a number of years. If you think about that 12-year time period, maybe you start to see some in '27. I wouldn't overpromise that '27 is a big up year, but it should accelerate in the latter part of this decade. So we do anticipate a nice volume cycle going forward in the industry. As Gustavo just talked about, we have a lot more technology and bringing a lot more value. So the price point is higher on the units than it was back then as well. So the industry will increase. We're going to obviously focus on replacing our like-for-like [AirGreen] and then going out to win some more. I don't know that you'll see the level of the increase that we saw in 2015 was very, very high. We wouldn't promise that's going to happen. It might be a little bit more orderly. So -- but we do expect a nice uptick.

Maybe we could talk a little bit about FireGrid. Could you just give an overview of your capabilities there? And then what do you think the key is driving a greater rate of adoption for FireGrid? I think you said it's a little bit more early in the game in terms of adoption and the recurring revenue piece there. So what do you think is key to driving that higher?

Yes. So it's a little bit earlier in the game. Just the dynamics of a fire department is maybe a little bit -- so FireGrid is our cloud platform that really has different modules, one on live monitoring and another one really on asset management itself. So we're seeing a decent amount of usage on both, but it is very early in the game from a pure recurring revenue perspective. Right now, one of the main use cases where our fire departments really are using it is if you think of the incident command experience. So when a fire is happening and a fire truck comes in, rolls in and you have to obviously fight the fire, you need to understand where the groups of firefighters are, the level of air that they have and help the incident commander make better decisions, something that we offer through FireGrid right now. It enables a lot of the hardware sales of the SCBA because you now are connected to the standard operating procedure. So as we continue to add more connectivity, as we continue to add more integration into other software that are really being used in the fire scene, we expect that it's going to be a nice accretive solution for us. But it's going to make us that much more valuable within the fire department and in turn, also allow us to increase our wallet share with those fire departments, adding more value and more solutions to them.

Okay. And the monetization of that, can you describe how that would work?

Yes. So the way that it works today, it's probably going to look a little different than it does on traditional gas detection where you're bundling the device and the software together. We do charge the software license, and we work on an asset-based perspective. So we're still kind of working through that. It's a little bit more challenging to provide a full-blown solution just based on how budgets are really structured from a municipality perspective and how funding really is deployed on the self-contained breathing apparatus per se.

Okay. And industrial PPE, another product segment where you're making some significant investments to drive growth, I think specifically around fall protection. Can you start off just give us an overview of your differentiation in the fall protection space?

Yes. So fall protection, it's a unique space. It's an interesting one for us because it is the fastest-growing market in the PPE space. The #1 OSHA recordables is still adherence to fall protection or fall from heights. So it is something that we are pretty focused on because we're also really a #3 player. So the one area that we believe we can pick up some market share. So we're excited about that. I think when you look at our differentiation, we have a lot of differentiation in our mechanicals and a lot of the design there through an acquisition we made in 2016 in Latchways in the U.K. We've taken a lot of those designs and adding them to it. Comfort is a big deal for us as well, how you sell the devices, how we have IP on that. And we're also making a little bit of inroads into connected fall protection as well. So ensuring that how do you know that people are tied off. Admittedly, that's a little bit earlier in the process, and it's going to take some time to develop, but we're going to -- we're really taking all of the technologies that we have to try to solve a real customer need in this particular case, how do you know that somebody is actually tied off while working at heights, which is a really big challenge for safety managers to keep an eye on. So as we look at that, we believe there's opportunities for us to provide more value in those type of solutions.

There any ambitions that investors should be thinking about in terms of growth or market share for that business?

Yes. I mean I think in fall protection, it's really one of the -- like I said, fastest-growing market, is a mid- to high single-digit grower in general for the market, ebbs and flows a little bit. I think that's an area that I would continue to think that we can grow faster than the market because, again, we are a #3 market player right now, and we believe there's ample room for us to grow there.

Okay. How about from an end market perspective aside from just industrial PPE, I think you've called out diversifying end markets as a piece of the growth strategy, including areas like food and beverage. Are there any specific product initiatives underway that can help you better penetrate into some of those higher-growth markets? And what specific -- what markets would you be targeting?

So food and beverage is a good one. That one was one that -- while we made the acquisition in 2021 of Bacharach, which is HVAC refrigeration -- leak refrigerant provider that was actually based out of Pittsburgh, so right in our backyard. That diversified us. It gave us a little bit more of an inroad into that market. And over that time, we've also been kind of looking at balancing the entire portfolio because Bacharach really gave us additional channels into that space. We just launched a new product called the X30, X50, taking that Bacharach brand and adding some of the products that MSA has into it. So that's something that we're very excited about. And there's also a little bit of a play for the data center build-out that's happening as well. Those data centers require chillers, require all those things, require refrigerant leak detection solutions that we're now able to offer. And it plays really well with some of the other acquisitions that we've done in 2019 as well with Sierra Monitor, so some industrial IoT gateways that are also used in some of those capabilities. So one of the beauties about the MSA story is that our product categories really are used in a variety of different applications across different segments and diversifying is a really important piece of the strategy for us.

I guess I have to try and ask this, how big is data center?

How big is data centers. We were talking about it earlier, right? So I mean it's an interesting topic. It's we participate in it. For us, it's good to participate in it, but we're not -- in the value chain of things, we're not one of the bigger suppliers to it. So we participate in the build phase. In the build phase, they're going to use some of our fixed gas detection and some of that equipment. But bear in mind that once the data center is built, for the most part, it is unmanned. So it doesn't have people working in there. So there's not a ton of need for some of the other products. But we're excited about the halo effect. So the data centers then creates additional needs around the energy sector and so forth. And we participate in all of those value chains. So that's where we see a lot of opportunities to kind of grow the MSA portfolio and the MSA sales.

Sure. How about as we think about what the product road map might look like for the next 12 to 24 months, what new product cycles should investors really be watching for?

So R&D is something that we spend a lot of time, money and effort on, right? So we want to get into a continuous iterative approach of launching new products. We just launched the G1 XR. I was just in Germany this week at INTERSCHUTZ, one of the biggest fire trade shows in the International segment, and we launched our F1 Gallet helmet -- fire helmet. So we are getting into a rhythm. We had a lot of launches in the first quarter. And you're going to see that continue to develop for us, right? We are, as a whole, wanting to always change the mark. The only area that is maybe a little bit more programmatic based on regulations is the self-contained breathing apparatus or the SCBA for the North American market or the NFPA market since that tends to be in a 5- to 6-year standard cycle. So every 5 to 6 years, because of that, we are certainly introducing something to meet the new standard. But as a whole, you're going to see a lot of launches, rolling launches in all the categories that we have.

Okay. Probably should spend a few minutes talking about margins. Larry, gross margin was a real standout for you in the first quarter, 170 basis points of year-over-year expansion with price/cost favorability in the quarter. Can you just unpack for us some of the key factors that enabled that expansion despite what we talked about earlier with some headwinds in Europe and the Middle East?

Yes. I mean, when we laid out our ACCELERATE strategy back in 2024, we noted that we would target 30 to 50 basis points of operating margin expansion through 2028, and that comes at the gross and the SG&A line. Last year, gross margin took a little bit of a step back during the -- with the tariffs and the inflation. And we did put some pricing in, but what we didn't do was put in surcharges because we don't like to put in surcharges because customers don't like it, distribution doesn't like it, and we like to put in our annual price increases and then put in other ad hoc price increases when they're necessary, but more permanent. So you fast forward to 1Q, we got on the right side of that and it came through in the gross margins up to 48.6%. So now we're executing which is much more normal for MSA. A number of factors in there. Obviously, getting on the right side of price cost was a big one.

Sure. How about on the input cost side? What are some of the key raw materials that you're monitoring? And just what are you seeing on that front?

So I mean, I think a couple of things. One, obviously, electronics is something that we always look at. I think that affects really the detection portfolio and some of the self-contained breathing apparatus. So we work very close with our suppliers on that. And we've also have a task force internally that is looking at VAV opportunities wherever we can and trying to be proactive about that. We learned a lot from that during the supply chain crisis. I think the other one that we're keeping a close eye on is just how resins and things like that are an inflation and how some of those costs in there, and that really would affect some of our head protection and some of our maybe more industrial PPE type of products. But again, we feel pretty good in terms of the line of sight that we have, and we're very proactive with our pricing as well if we see something get completely out of whack.

Okay. About on the capital allocation front, I think pro forma leverage post Autronica is about 2x, so still well within your range. But obviously, a larger deal for you to integrate. So should we -- I mean, should we think about capital allocation shifting more towards share buyback and organic investment? Or could acquisitions still remain on the priority list.

Yes. So we have a very disciplined and balanced capital allocation strategy. That hasn't changed with the deal or not. First priority is always growth and organic growth, be it that R&D, I talked about earlier, capital investments where we need to for capacity and things like that. So organic growth, number one, followed by M&A because we are an industrial company that's focused on growth. And M&A has been very important for us going back for decades, but the detection business really accelerated with general monitors more than 15 years ago. But beyond the M&A, you've seen that for the 56th year in a row, we raised our dividend. Obviously, that's not something people want to change going forward. And then we return excess cash to shareholders via share repurchases. We did accelerate the repurchases last year. We did about $80 million, $40 million in fourth quarter and then $50 million in Q1. Going forward, post Autronica close sometime potentially in the third quarter, the first priority, of course, is going to be to delever, which we can do fairly rapidly, and it's obviously accretive. But we can also do both, a little of both, right? So I don't -- you would not expect to see the levels of share repurchases you saw in the first quarter, but it's going to become much more -- it seems to become much more right, and consistent with the excess cash. Now the overall leverage target range is 1.5 to 2.5x. As you said, that gets us to 2x. So -- and the faster we delever, the more opportunity we have to deploy towards more accretive M&A. And maybe Gustavo can welcome to talk to the pipeline, but we maintain a very active pipeline, and we're committed to be much more programmatic on the M&A front and being disciplined stewards of our capital.

What would be some of the priorities if you do reengage on the M&A front? Is it mostly in detection or different geographies filling in the map a little bit more?

I think in general, right, we look at strategic fit, what does the portfolio do for us? Is it going to expand our market? Is there a cultural fit of the organization? Is it going to work? Those are kind of the levers. And is there a competitive advantage that the organization is going to give us, right? So we look at all of those together when we really look at the various targets out there.

Great. Well, I think we're out of time. So please join me in thanking the team for being here.