MSA Safety Incorporated (MSA) Earnings Call Transcript & Summary

All right. We can get started here. So welcome, everyone. Thanks for joining the 10:10 a.m. session with MSA. I'm James Ko covering many industrial names at Jefferies with Steve Volkman and I'm joined by Steve Blanco, CEO; and Julie Beck, CFO. We're going to host this in a hybrid format. Steve will start with a presentation, and then we'll move on to the fireside chat format. But we'll be happy to take any questions. So please feel free to raise hands. Thanks for joining us, Steve and Julie.

Thank you.

Yes, you can.

Well, good morning. Thanks, James, and thanks, Jefferies for hosting us. And we're delighted to be here and talk about MSA. I would remind everybody, we are webcasting this, as James referenced, and just to remind you of our safe harbor's forward-looking statements and obviously, non-GAAP financial statements. MSA is a company that is built on a purpose and that purpose is singular around our safety mission, and that mission helps guide us into the industrial safety technology space and has enabled us to create and produce safety products and solutions that meet the most challenging market conditions that we have across the globe. And that's helped us protect over 40 million workers annually, which is what we do today. If you think about the business on a pro forma basis, we're about $2.1 billion. And as you can see from some of these metrics with our investments in innovation, we're able to appreciate and achieve strong operating and gross margins, and we've got great cash flow. On a pro forma basis or post acquisition, I should say, we're 1.8x leverage. And I say post acquisition because we finished an Autronica acquisition in July, which we're pleased with. We go to market. We have 2 different business segments, one called the Americas, just what you would expect it to be. The other is international, which is everything else across the globe, and they're broken down about 63% and 37%, respectively. We have 3 product categories inside of these businesses. One is detection, the second is fire service and the third is industrial PPE. Again, when you think of detection, as we've made these acquisitions in Autronica being the last one, it's now become the highest piece of our business, the largest part of MSA. Previously, a few years ago, you might remember that it was the fire service. We continue to execute on our ACCELERATE strategy to drive the key pillars to our growth story into the future. We announced these at the 2024 Investor Day, and I would just reference a couple of things. First, we are on target to achieve these. We will likely come out with new targets mid-next year to identify what the next step in the company's growth plan is. And we're very pleased with how we've allocated capital throughout this cycle so far. And the growth we've had both organically that's starting to pick up steam and the inorganic growth we're starting to see. Speaking of inorganic, Autronica came on board in July. We're delighted to have this organization join the MSA family, you think of Autronica, it added about $3 billion of addressable market to the company. And it's in a space that's very, very technically competent and fits perfectly with the portfolio we have within fixed monitoring. Helps us get earlier in the process, and we expect this to provide further tailwinds not only as we grow this business, but also for the legacy MSA fixed monitoring business as well. As you think about the second quarter, if you did have a chance to see the earnings call or hear our earnings call, you note these metrics, we felt -- we had a strong growth quarter where we finished the quarter with really nice cash flow and growth and that still includes some of the headwinds we've seen with the Middle East. As I noted on the call, that's created about 1.5 points or more of headwinds on revenue through the first half of the year, because of the Middle East challenges we've had. Most of that is related to the detection business. We continue to maintain our outlook of low double-digit growth overall, and that includes mid-single-digit organic growth and a contribution of mid-single digit from acquisitions as well and also some tailwind from FX. So the story, I think, continues to be positive for MSA. We think the market dynamics are positive in the markets we serve, and we're expecting to have a strong year. So I'll just wrap it up and we can get into the Q&A by just reminding everybody, we are mission-driven. We've had the same mission statement for our entire existence. We're driving the ACCELERATE strategy. We're very pleased with the execution to date. And we are in very resilient, diverse markets that enable us to participate in growth throughout whatever economic cycle we may have. With that, we'll go to Q&A.

All right. Thank you, Steve. And before I start with my prepared questions, I wanted to open the floor to see if audiences have any questions to ask here. Okay. Then yes, I can start with my questions here. And if there are any questions that come up during the fireside chat, please raise your hand. So kind of starting at the high level, you closed Autronica and you returned a meaningful amount of capital to shareholders in first half, and you delivered pretty strong margin expansion. So while navigating like fire service headwind and Middle East pressure and everything. So as you kind of look across the portfolio today, like where are you most encouraged and where is still work to do?

So if we look at across the portfolio, I'll hit each of the 3 product categories because I think there's some really strong optimism across the board, and there are some challenges we're dealing with. But inside the industrial PPE markets, we've had really nice growth year-to-date. And I think there's a couple of things that help that catalyst occur. One is the market conditions have been really solid, specifically in industrial with capital investments we've seen. We think the infrastructure spend has been positive for our specific business. Data centers are a part of that, certainly. But broadly speaking, the industrial markets in North America have been supportive of the growth we've seen. The second thing, I think you're seeing some trends in the safety industry, specifically with how we look at head protection and how the end customer is looking at the head protection space. Traditionally for many years, Type 1 head protection, which is a -- our head protection hat that has a standard for vertical protection has really dominated the marketplace and most users, whether it be construction or any industrial space uses a Type 1, that started to transition to what's called a Type 2 and a Type 2 has vertical, but also lateral or horizontal head protection standard requirements. So many of our customers are now transitioning to Type 2, which is a price point of 3-plus X Type 1. So you're seeing some of that show up in our performance, and we expect that to continue. And at this stage, based on our customer feedback, we expect the economic situation to continue as well. So that market for the at least immediate term, looks very positive. We're seeing some other nice signs around our fall protection, which, as you know, is one of our core tenets of the ACCELERATE strategy. And then within the European business, the protective ballistic helmet business has been a positive as well as European countries have pivoted and spent more in the defense side, we're seeing some benefits of that in that side of the business. I don't see short-term many headwinds in that space. Obviously, it's a short side for business that can turn economically, but we feel pretty pleased and confident with what that space is going to do through the remainder of the year. I think detection, we referenced the Middle East. We were hopeful that, that conflict would finish or wrap itself up in the middle of the year. Certainly for the region, we're mindful and our thoughts and prayers go out to those that have to deal with it. And from an economic perspective, we think that, that now is something that I'd hate to try to put a guess on what that does. For us, from our performance, certainly, we want to see that behind us. But I would say customers are starting to try to understand how they get really recentered into the new normal that they're operating in. And I would anticipate that business starts to see an uptick regardless of the conflict in the coming months because they're not going to continue to not operate and they need to start fixing some of the things they have issues with some of the equipment damage that they've seen year-to-date. So that certainly is a headwind, although I think it mitigates a little bit the further out it goes. We're seeing strong growth in portables. We continue to see appreciable growth with our connected platform. We're very pleased with that. As we talked about on the call, that's now representing 4 portable business, 14% of that versus 10% last year. And then when we look at fire service, fire service dynamics last year, as you might recall, included a government shutdown, which was right after the AFG funding came out. So no customer could actually access the funding. But then you also had the promulgation of the new standard. So we had some dynamics going on that really slowed that market. This year, we have not seen the AFG funding come through quite yet. We do have an expectation that comes through from sources within the government in the coming week or 2, which you passed to by the end of September. The good news this year is there's government funding through mid-December. So whereas last year, as soon as they put the funding out and identified to the departments that they had received the funding, the departments couldn't go in and actually accept that funding. They couldn't say, yes, I'll take that funding. So it was in limbo until the government came back this year, that won't be an issue. So we anticipate that's going to be something that helps us in the fourth quarter year-over-year. And I think other than that, the market looks pretty solid. And I think in all of the categories we just talked about, we think there's some nice opportunities for growth going forward.

Great. Thanks for the comprehensive color there. And since we are on our webcast, I have to ask this. So I wonder if you have any updates on how 3Q has kind of progressed through July and August and maybe even into September.

I think it's consistent with what we expected it to be year-to-date. I think Q3 is similar to what we talked about at the end of the second quarter. The dynamics that we're dealing with in the Middle East are certainly a bit of a challenge more so than we would like, but the growth in the rest of the business has been -- we're pleased with the growth.

James, we have -- just to point out, we -- our overall, one thing that's a little bit different about Q3 is we just have a higher federal tax rate in the third quarter. The full year, we talk about our outlook in the full year. The full year is the same, but it's just a bit higher in the third quarter.

Got it. Thanks for that additional color there. And I mean, you talked about Middle East here a few times, and that obviously has been a growth headwind here. So how are you kind of thinking about the recovery time line? And is there a kind of a scenario where the rebuild phase actually accelerate your business in that region in the future?

I would say that we're already seeing orders for rebuilds, but I would not anticipate it being highly significant to 2026. I would expect you'll see more of that play out in 2027. Based on our customer feedback, they're starting to do some of that, again, we've gotten some orders, but we've got more activity and requests that lead us to believe it's going to be the latter part of '26 or into '27. Again, I think there's an expectation that, that region is trying to calibrate to a new normal, where they're recognizing this thing may not go away and they want to make sure that they figure out how to operate. It's probably early next year before you see a lot meaningful.

All right. And I guess, moving on to fire service here. I mean, you talked about AFG delay last year, and you've been kind of working through that delayed like orders for most of the year in 2026. How is the conversion kind of tracking today? And how much visibility do you have into the kind of remaining pipeline?

The pipeline continues to be very solid. I would say there's -- in our minds, we're in a good position for the remainder of this year and certainly as we get into the out years, the AFG funding might have an effect in the fourth quarter. But when you look at the comp compared to last year, we still feel good about where we're at relative to our performance. And part of it is we've continued to innovate in that space. We launched the XR addition prior to the NFPA standard change. We then had the NFPA standard change in obviously, the product changes that came along with that. And we're pleased to continue to innovate. As a matter of fact, later this month, we'll announce another new version of the G1 that we think will be very well received in the market. It's all based on the VOC we do with our customers and ensures that we stay ahead of any competition that we have in the market place. So those things put us in a position that we feel pretty good about where the fire service market is going.

Got it. And on that SCBA, I think you kind of talked about like 2027 and 2028 SCBA replacement tailwind kind of tied to that like 2014 G1 launch, and that has been kind of a consistent part of your long-term story. So what are you kind of seeing in the pipeline today and that gives you kind of conviction that inflection is actually going to happen in 2027 and 2028 and how kind of meaningful is that impact?

Well, the volumes, the unit volumes in 2015 through 2019 were significantly higher than the unit volumes now. So I think if you took a snapshot of where the market is, that gives us a really good level of confidence of what we will start to see most SCBA replacements occur in the 13- to 14-year time period, but they typically start 10, 11, 12 years, and our pipeline shows that. So when I say pipeline, what we have in our CRM system on customers that have identified, hey, I'm in the process of starting to evaluate or look at evaluating replacing my fleet. And so when we see that, then that gives us, based on how this pipeline and the maturity of the pipeline goes, you likely start to see some of that show up in '27, maybe the second half, some of that delivered. And if not -- and again, we believe you'll see some in '27, but then you'll start to see that accelerate in '28, '29. You've probably got about a 7 or 8-year period of extended growth. Again, you're talking unit volumes that are minimum 50-plus percent higher than what we've seen over the last 3 years. Starting -- I mean starting to tickle back into the marketplace.

Got it. Yes. That's a pretty impressive number. And I think you talked about new G1 that's coming out soon. Is there any kind of pricing implication there? Are you pricing that higher so that you're going to see a heavier mix shift and like the margin benefit?

Well, this product, again, it's based on customer feedback. We've had tremendous customer feedback that we've used and taken advantage of because of the customer intimacy we have, and that's enabled us to create a next version of that product that, again, will come out later this month. And it's a lighter weight. It's more comfortable. It has additional features on providing awareness opportunities and protection for firefighters to do search and rescue. So we're very excited by that. And all of those features are added value to the SCBA. So that certainly provides a price point opportunity.

Got it. That makes sense. And I guess I wanted to touch on this competitive dynamic. I mean Drager has a new kind of U.S. product at a price point kind of much closer to MSA compared to historically? And I think they have like new distribution relationship with MES. So how do you think about like competitive kind of positioning, particularly with like larger departments that actually run a more structural, like evaluation process rather than just relationship business.

Well, we look at it -- we have strong competitors in all of our spaces, and we respect those competitors and expect them to compete across a number of different categories. And I think when you look at the fire service, in our view, it starts and ends with the customer. We try to be proactive around the customer and lead with innovation that's customer base, which is what I was referencing with the new G1 that we'll be talking about in the coming weeks. But if we can stay centered on the customer and the needs the customer has, I think that puts us in a position that we can compete and be effective in the marketplace because we're providing those solutions that are based on what the customers identified as their top needs. And that's what this new version does in addition to what we've had. So great competitors. We expect them to compete and show up consistently in a number of different areas, but I think we're well positioned to counter that.

Got it. And moving on to kind of detection here, which is kind of one of the most exciting stories that you guys have and that has been a kind of consistent growth engine here. But as you look across like fixed and portables, where are you in the cycle like in terms of like each different end markets?

It is exciting. That's fun stuff. So I think when you think of detection, I would just remind people, you got fixed monitoring, which is about 2/3 of detection, and you got 1/3 of it, which is what we call portable detection, which is more of the wearable devices. I would say that the fixed monitoring typically has a 15% to 20% of that business' project. The rest of it is this just this recurring, if you will, business of assets that are already existing in fleets or maybe an expansion, but they're putting on same as type of units in those situations or replacing sensors. They got about a 12-year life cycle. That business because of the investment required in energy and some of the things on clean energy, we expect that, that cycle, we don't see any really decline in that cycle going forward. We see strength, our expectation is strength in Asia, strength in Latin America and North America. And excluding the conflict-related challenges, strength in the Middle East. All of those regions have indicated investment. There's a new study that just came out talking about the energy requirements going forward, not only new energy usage, but replacement that needs to come online to replace energy that's going to come offline. And I think 7 million barrels a day that comes offline along with the additional energy required. So we're well positioned in that space. Our expectation is that, that's going to be a nice growth algorithm that goes forward when you look at that. Also, I would add that having Autronica really positions us even better because now Autronica helps us get in earlier because of the fire detection side, along with our flame detection. You put those 2 together and you've got this full suite solution for our customer base, which we're uniquely positioned to really participate I think, very well in a way that we hope and expect our customers to want to spec some of that in early into the process. So I'm very excited. The team is very optimistic about what fixed monitoring will do for the future of the company and the growth we'll have. It's become a really big business. driver of growth. I mean the margins are fantastic in that business. And the last 2 acquisitions have been fixed monitoring. So it kind of gives you an idea of what we think of that business. If you pivot to portables, we've continued to see nice progress in the connected space. That's now 14% of portables versus 10% a year ago. We see long-term growth there. I would expect the connected side of that space to grow at a nice double-digit clip over the coming years on a continuous basis. Now when do you get to a point where that eclipses the legacy, the discrete product category of portables? I don't know. It's going to be customer based, and it depends on what our competitors do and how that plays out. But at this stage, the portable space is really strong. We had anticipated that we would see the connected space grow, but we would see some of the legacy discrete business kind of slow down a little bit. And that's not been the case. So our position in the market, what the customers look for, for speed of response and durability regardless of which solution they pick, we're seeing more and more customers come to MSA.

Got it. And touching on that MSA plus Connected Solutions, like I don't think you set any public penetration target there, like beyond 14% that you're at right now. So how do you think about where this business can be in like the next 5 years? And are there any kind of structural limits on adoption here?