MSA Safety Q2 2024 Earnings Call Transcript

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Provided by Quartr
July 25, 2024

There are 7 speakers on the call.

Operator

Good day, and welcome to the MSA Safety Second Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. Please note, this event is being recorded. I would now like to turn the conference over to Larry De Maria. Please go ahead.

Speaker 1

Thank you. Good morning, and welcome to MSA Safety's Q2 2024 Earnings Conference Call. This is Larry De Maria, Executive Director of Investor Relations. I'm joined by Steve Blanco, President and CEO Lee Machiasny, Senior Vice President and CFO and Stephanie Sciullo, President of our Americas segment. During today's call, we will discuss MSA's Q2 financial results and provide an update on our full year 2024 outlook.

Speaker 1

On Slide 2, I'd like to remind everyone that the matters discussed during this call may include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements include, but are not limited to, all projections and anticipated levels of future performance. Forward looking statements involve a number of risks, uncertainties and other factors that may cause our actual results to differ materially from those discussed today. These risks, uncertainties and other factors are detailed in our SEC filings. MSA Safety undertakes no duty to publicly update any forward looking statements made on this call, except as required by law.

Speaker 1

Turning to Slide 3. We included certain non GAAP financial measures as part of our discussions this morning. The non GAAP reconciliations are available in the appendix of today's presentation. The presentation and press release are available on our Investor Relations website at investors. Msasafety.com.

Speaker 1

I'd now like to turn the call over to Steve Blanco. Steve?

Speaker 2

Thanks, Larry, and good morning, everyone. I'm on Slide 4. In June, we celebrated our 110th year as a purpose driven company. Over that time, we've remained steadfast in our mission that men and women may work in safety and they, their families and their communities may live in health throughout the world. And I'd like to thank our more than 5,000 associates around the world who are inspired by the singular purpose of safety for our customers each and every day.

Speaker 2

This was an exciting quarter. Driven by our mission, we delivered solid commercial and operational results in the business through excellent execution and utilization of the MSA business system. I'm pleased with the continued work on our product launches and operational accomplishments. In May, we held our Investor Day where we discussed our strategy for profitable growth and capital deployment going forward as well as identifying our long term targets for 2028. Also, earlier this week, we released our 2023 impact report, which I will highlight in a couple of minutes.

Speaker 2

First, let's review some highlights from the quarter. During our earnings call in April, we discussed supply chain issues that resulted in an elevated backlog for detection and industrial PPE. I'm pleased to report that the team overcame these challenges during the Q2 and reduced our backlog to normalized levels. Previously, we discussed our efforts to optimize our manufacturing footprint as part of our operational excellence initiatives. This quarter, we made significant progress in production transfers at some of our factories in the UK, Morocco and Mexico.

Speaker 2

These changes better position us for growth by enabling a more efficient and productive structure to deliver and serve our customers across the globe. All of these efforts resulted in our ability to maintain our positive momentum through the first half of the year. This is building on strong performance from recent years. The team executed well and delivered net sales growth of 3%, organic constant currency sales growth of 4% and adjusted earnings growth of 10%. Moving to product categories and innovation, sales in fire service were up mid single digits in the quarter with notable growth in turnout gear and fire helmets.

Speaker 2

The new Karnes 1836 is being very well received by the market and performance at Globe and Bristol continue to strengthen. We continue to see excellent momentum in international markets with our M1 SCBA and have a solid global commercial pipeline going into the second half of the year. The fire service market remains resilient and the environment for funding around the world is healthy. I'm pleased to note that this month we were awarded the second tranche of the U. S.

Speaker 2

Air Force order, which is about $28,000,000 Our sales and detection were up high single digits with solid growth in both fixed and portable detection. The new FL5000 multispectrum flame detector launch continues to go well with positive customer feedback leading to a strong start in orders. Portable detection continues to grow both in traditional and connected devices. The IO4 continues to gain traction with the expansion in new geographies and new customers, both existing and for new applications. Industrial PPE sales overall were slightly negative on a year over year basis.

Speaker 2

Our head and fall protection products continue to grow and are offset by headwinds in other PPE products such as ballistic helmets in international as well as respirators. I'm excited by our opportunity to grow our fall protection business, where we continue to see healthy demand. The footprint changes I mentioned earlier will help us better serve our customers in this specific growing category. In May, we continued our leadership in head protection with the launch of the new V Guard H2 Safety Helmet, which provides superior comfort and versatility, while incorporating the latest technology to help protect against lateral impacts and features the optional MIPS technology. Turning to Slide 5, I would like to review some of the key points from our 2023 impact report, which I noted earlier.

Speaker 2

This was released this week. As a safety company, our commitment to operating as a sustainable business is evidenced by our initiatives across the MSA safety pillars of products and solutions, people and planet and is captured in the MSA impact metric. This impact metric represents the average number of global workers that use our products and solutions each year. We estimate that MFA helps to protect more than 40,000,000 people annually. Here are a few examples of what can be found in the report.

Speaker 2

The products and solutions we develop are at the core of our approach to creating positive impact. Our solutions use technology and connect and detect for safety and sustainability, helping to make work safer and easier as well as more productive. For example, our SCBA simplifies maintenance and reduces waste and baccarat refrigeration detection solutions help food and beverage customers reduce their carbon footprint and operating costs. We're also on track to meet our commitments towards our 2,030 emissions goals. As you would expect from MSA safety, we maintain world class employee safety metrics within our facilities.

Speaker 2

Additionally, we collectively shared that MSA Safety was recognized as one of Newsweek's most responsible companies, USA TODAY America's Climate Leaders and Forbes Best Employers for Diversity. There are many more highlights in this report, so please visit our Corporate Responsibility section on our website to learn more. On Slide 6, I also note to you the 20 28 financial targets we launched in May at our Investor Day, underpinned by our strategy to drive profitable growth and create value for our customers and shareholders. We highlighted a set of actions that we believe will enable us to continue to grow the top and bottom line over the near and long term by leveraging such key enablers as the MSA Businesses. These include capitalizing on secular trends, targeting growth accelerators, developing additional solutions with recurring revenue streams and utilizing our strong balance sheet for strategic capital deployment.

Speaker 2

We look forward to sharing our progress against these targets over the coming years. With that, I will turn the call over to Lee, who will discuss our financial results for the Q2. Lee?

Speaker 3

Thank you, Steve, and good morning, everyone. We appreciate you joining the call today. I will now review our performance in the second quarter and provide an update on our full year outlook. Let's get started on Slide 7 with the quarterly results. Sales were $462,000,000 up 4% on an organic constant currency basis and 3 percent on a reported basis over the prior year, with a balanced contribution from volume and price.

Speaker 3

Currency translation was a 1% headwind. Across our product categories, detection and fire services contributed healthy growth, up 8% and 4%, respectively, partially offset by a 2% contraction in industrial PPE. Globally, it was also encouraging to see these sales trends fueling our Americas and international results. Overall, orders were healthy in the quarter across our business, though there were some trend changes within the months. As I've noted in the past, this is not unusual for our business and orders can vary from quarter to quarter.

Speaker 3

Our commercial pipeline is encouraging across our product categories and in most of our regions and we have a nice continuation of activity we're seeing so far in July. In the second quarter, our book to bill was slightly below one times but above the prior year period and is just below 1 times for the first half of the year. As we had hoped, our backlog was reduced in the quarter to more normalized levels, principally due to good progress in fire services and detection. Our margin performance continues to be very resilient and our team's commitment to the MSA business system is evident from our results. Gross profit margin in the quarter was 48.2%, up 40 basis points over the prior year.

Speaker 3

Operating margin on a GAAP basis was 21.6% in the quarter, up 40 basis points over the prior year. Slightly higher SG and A reflects volume, inflation, investments in professional services and a one time cost related to a legal matter. Adjusted operating margin was 23.4%, up 20 basis points over the prior year and incremental operating margin was 29%. Margin expansion was largely driven by volume leverage, productivity and cost price management. GAAP net income in the quarter was $72,000,000 or $1.83 per diluted share.

Speaker 3

On an adjusted basis, diluted earnings per share were $2.01 up 10% over the prior year. The increase is primarily due to operating profit and lower non operating expenses. Now moving on to our segment performance. In our Americas segment, sales increased 2% year over year with high single digit growth in detection and mid single digit growth in our industrial PPE, partially offset by a modest decline in fire services. The adjusted operating margin was 31.3%, up 60 basis points compared to the prior year.

Speaker 3

Margin expansion was driven largely by volume leverage, productivity and cost price dynamics. In our international segment, sales increased 6% year over year. Strong double digit growth in fire services and detection was partially offset by declines in industrial PPE. Currency translation was a 1% headwind in the quarter. Adjusted operating margin was 16.4%, a strong increase of 70 basis points year over year driven by volume and SG and A leverage, partially offset by modest FX headwinds.

Speaker 3

Now turning to Slide 8. Free cash flow in the quarter was $39,000,000 representing a conversion rate of 49 percent of adjusted earnings. 2nd quarter cash flow reflected inventory investments and increased capital expenditures. And we remain on track to deliver our full year cash flow objectives of 90% to 100%. As a reminder, we typically generate more cash flow in the second half of each year.

Speaker 3

Consistent with our strong capital allocation history and our Investor Day goals, capital expenditures were $14,000,000 in the 2nd quarter, including investments to drive productivity and execute production transfers as part of our strategic manufacturing programs. We also repaid $8,000,000 in debt, returned $20,000,000 in dividends to shareholders and repurchased $10,000,000 in common stock. Net debt at the end of the quarter was $441,000,000 and our cash balance was $147,000,000 Our net leverage ratio at the quarter end further improved to 0.9 times. Adjusted EBITDA for the trailing 12 months ended June 30 at $466,000,000 or 25.7 percent of net sales. Now I'd like to move to our full year outlook on Slide 9.

Speaker 2

We entered

Speaker 3

the second half with good momentum, but are mindful of the dynamics of order timing and macro and geopolitical risks. Our end markets are generally healthy, demand trends lean positive, and we've executed initiatives to bring our backlog down to more normalized levels. Our business has broad diversification across products, geographic regions and markets, and there remains attractive underlying market trends in the safety industry, leading to the resilience we have delivered over time. We remain close to our customers, disciplined on costs and focused on executing our strategy to deliver profitable growth and generate strong cash flow. Should macro conditions change, we will adapt as needed.

Speaker 3

As we look forward to full year 2024, we are maintaining our sales outlook of mid single digit growth, which compounds on top of the 17% growth we delivered in 2023. We believe our second half growth rates will likely be similar to the first half. We do have to be cognizant of the timing of orders, primarily related to the SG funding cycle and customer delivery timing as we work through details of large orders like the U. S. Air Force order, which implies growth may be skewed towards the latter part of

Speaker 2

the year.

Speaker 3

Our business is healthy. Our pipeline is strong and we look forward to executing our second half plans in the long term profitable growth strategy outlined at our Investor Day. With that said, I also want to reiterate my thanks to our associates across the globe who are focused on supporting our customers passionately each and every day. Your continued focus on driving improvement is yielding significant impacts for all of our stakeholders. Well done.

Speaker 3

With that, I'll now turn the call back over to Steve for concluding remarks.

Speaker 2

Thank you, Lee. I want to reiterate the resiliency of our business, which continues to benefit from the broad diversity of our products, geographies and markets. With attractive industry fundamentals, our proven innovation process and leading positions in our markets, I'm excited by our future. I believe we have the best team in the industry and with our mindset around continuous improvement and the commitment to the MSA business system, we're well positioned to create value over the long term for all of our stakeholders. With that, I'll now turn the call back over to the operator for questions.

Operator

We will now begin the question and answer The first question comes from Stanley Elliott with Stifel. Please go ahead.

Speaker 4

Hey, good morning everybody. Thank you for taking the question. Could you guys talk a little bit more about kind of the full year? The mid single digit guide kind of implies you mentioned kind of a consistent run rate, maybe a slight acceleration in the second half. I know seasonally the business picks up in 4Q, but it does it sounds like not necessarily for you all, but other data points, we've been watching them.

Speaker 4

The overall economy might be slowing a little bit and your order book is not a little more normalized. Where's the confidence kind of coming in to be able to hit that second half sort of run rate?

Speaker 2

Yes. Thanks for the question, Stanley. And maybe I'll start here and Lee, you can jump in if you have some commentary, Ken. I think it's the diversity of the business that really helps us. We're a little different than maybe most industrials, as you know.

Speaker 2

But when we look at our business, I would say that the demand in the end markets remains healthy. Certainly, fire service, energy and utilities are healthy and stable. And we see a really solid pipeline in fire service and detection. Timing can be lumpy as we've seen before, but the fundamentals are good and the pipeline is solid. From a macro, we think these markets are resilient.

Speaker 2

We've seen that in the past. They've been resilient. We've been comfortable with that. Industrial PPE is certainly a bit more cyclical as we saw in the first half and that's likely to continue. But it's really where the diversity of our markets and geographies help.

Speaker 2

So if the performance continues, if we're able to turn that pipeline into orders, we feel really good about the second half continuing to be a growth category. Lee, you got anything you want to add?

Speaker 3

Yes. I think it's a good summary. And Stanley, as I said in my comments there, we think the back half will be similar to the first half. I think if we were going back to beginning of the year, maybe we're hopeful it will be even better than that, but that's just the reality, I think, some of the things you just mentioned, but we're still in a good place. I do think you'll see what we just experienced in the first half where you have some segments be really strong in 1 quarter, maybe be a bit weaker in the other quarter.

Speaker 3

So we'll just we can manage that. We'll probably lean a little bit towards the 4th quarter being stronger VPY than the Q3. And it's just as Steve said, there's we're in a good place with nice diverse mix. But we also every I said this all year, when we deliver 3% growth, 4% growth, we're doing it on top of the 17% growth last year. So I just think that puts it in perspective.

Speaker 3

Everything we're doing this year is compensating for that. So it actually says we're even doing better on the orders front than we are on the sales front.

Speaker 4

Yes, no doubt it kind of speaks to the breadth of the portfolio. You did mention one thing interesting, that the macro conditions change, you guys could adapt as needed. How quickly could you react if we were to see something? I mean, I think now with the market kind of looking more towards some rate cuts in the back part of this year into next year, I'm not sure that necessarily we would see that, but just give us kind of like the playbook in of how you would react?

Speaker 2

Yes. It's a good question, Stanley. I mean, we've done that in the past. I would say it'd be pretty quick. Certainly, we're going to protect our profitability and margin profile.

Speaker 2

And we have a list of levers that we could pull if we needed to pull to make sure we protected ourselves. And I think we've talked before about our incrementals are 30% to 40%, but we manage our decrementals at a lower level and we would expect that to be the same if we needed to pivot.

Speaker 4

And the very strong quarter in the detection side of the business, what's driving these gains? Is that more just kind of the product availability and the backlogs getting worked down? And then you all said some interesting comments around some of the new revenue models and traditional versus connected devices. Really interested to see how this connected device platform is starting to shape up?

Speaker 2

Well, we have thanks for that question as well. So we have we did see a little bit of back certainly we were pleased that we were able to ship that elevated backlog to deliver to our customers. You know that business when you think of detection and I talked a little bit about it earlier when you asked about our confidence in the second half. But you break it down that longer cycle fixed monitoring, our position is really good. Strong installed base supported by the energy needs, including as we've discussed the future clean energy needs we have.

Speaker 2

And the pipeline of business is really solid there. For portables, a little more cyclical because it's tied to employment levels, but we feel like our approach of providing the market different options with the traditional platforms through our 4XR and our 5X added by the connected IO4, just a tremendous combination for choose from. And that's what we're seeing. We're seeing this IO4, I think the take rate right now is we're still seeing 50 plus percent of the take rate from customers that are new to us,

Speaker 1

which has really been

Speaker 2

a nice add. But you put those 2 together and that's why we have confidence in Detection.

Speaker 4

Great guys. Nice to hear. Congrats and best of luck in the second half.

Speaker 2

Thank you, Stanley.

Operator

The next question is from Rob Mason with Baird. Please go ahead.

Speaker 5

Hey, yes. Good morning. Thanks for taking

Speaker 3

the question. Steve, you kind of

Speaker 5

mentioned of your incrementals at this 30% to 40% range. Is that just given the growth profile that you're expecting in the second half, I'm just curious how your confidence level is either around the upper or lower bounds of that range?

Speaker 2

Is that the expectation? Lee, do you want to hit that?

Speaker 3

Yes, Rob. So good morning. Yes, I think like we said throughout the first half this year, you do have some interesting comps. So just give you some reminder there, right, we had this incremental 70% in the Q1, 29% in the second quarter. You're going to see that same type of volatility in the back half.

Speaker 3

I mean, the 3rd quarter was a very strong quarter, certainly very good revenue quarter, but our absolute highest margin. There was some backlog and mix help that went into that last year that you won't see this year. So you'll see a lower incremental in 3Q and then you'll see a nice rebound in 4Q. I mean overall, I keep coming back to the 30% to 40% goal And we're certainly on track to being in that range. And based on where we are so far in the year, maybe slightly higher, but we'll see how it plays out.

Speaker 5

Sure. Maybe relatedly, the you made mention of the progress that you've made getting some of your manufacturing footprint reconfigured. Is all of the work that's in motion, is that complete? And I'm just curious how you feel about this current scaling of those operations and potential opportunity to see more leverage from those specific moves?

Speaker 2

Rob, maybe I'll take a stab at that. So it's not complete yet. We're more than halfway through that activity, but there's still a lot of work to be done on that in the second half. What we're doing is really trying to make sure that we continue on our strategy of manufacturing in region, full region and providing the opportunity for us to have kind of a best cost and best delivery option available for the customer base through our manufacturing footprint and operational performance. So this is really a big part of what we're doing with this.

Speaker 2

And it's really going to have a nice impact, especially in things like fall protection with the moves to Mexico and the plant transitions or shutdowns that we've had. So it's better than halfway, but we're not quite done yet. We've got more work to do through the second half.

Speaker 3

I see. And

Speaker 5

just last question. The you mentioned your price volume was roughly equal in the quarter. I'm curious as you got to mid year, did you do anything different on price, midyear price adjustments or how you're viewing the inflationary impacts right now?

Speaker 2

We had our price increase at the beginning of the year. One region did a price increase early in Q2, but typically that's consistent where we're at. This year is more of a normalized pricing. We're following the inflationary environment, the potential of any tariffs. Certainly, we're going to continue to track.

Speaker 2

And as we've done in the past, if we need to pivot and adjust, we will. That's I would add that's part of the for us, part of the reason we continue to lean in on the business system and continuous improvement and these operational footprint changes bear that in mind is to make sure that if we need to offset, we'll offset internally and get what we need to in price to make sure we protect our margins, which I think we've done a nice job of in the past.

Speaker 3

Excellent. Well, thanks for taking the questions. Thank you. Thanks, Rob.

Operator

The next question is from Ross Sperinblick with William Blair. Please go ahead.

Speaker 2

Hey, good morning guys.

Speaker 6

Good morning, Ross. Hey, coming back to the second half revenue guidance, we're seeing positive read throughs on order rates for the Detection and Fire business. I mean, it's implying a reacceleration in the second half and you guys are clearly taking share. So can we maybe just further delineate what some of these watch items are and what is maybe tempering your expectations for the second half?

Speaker 2

Yes. Thanks for the question, Ross. So we do feel good about where we're at in the market in both of those spaces. And we think the pipeline is solid. It's part of it is just timing.

Speaker 2

The timing of the order timing can be lumpy as we've seen in past years. So we think that there's good opportunity if we get some of that order, the pipeline to flush through in the orders. But part of it is the funding environment or do they have the funds, the environment is good. But for example, AFG, the assistant for firefighter grants, last year they started releasing funds much earlier than this year. This year they just did the first couple of tranches last week.

Speaker 2

So about $62,000,000 of the $325,000,000 available has been released. So obviously, for those that are expecting to use that funding vehicle, they have to have that available to them. So that's the thing that we just want to make sure those things come through. I would look at that. Lee?

Speaker 3

Yes. Ross, I'd just add a couple of things. So again, you have a dynamic in the back half for last year. We had some really nice wins. If you remember things like we were shipping LA last year in Q3 on the SBA side.

Speaker 3

In Bacharach, we had nice large wins that had some big chunky orders to it. This year, it looks like some of those things will be more in the Q4 than Q3. So it's just a subtlety to some of the the outlook being a little bit more back half of the second half, just to counter it as you kind of look at your model.

Speaker 6

Okay. I mean, can you maybe just update us on the supply chain bottleneck to the Q1? I believe that there's maybe 100 basis points slipping in the second half. And then maybe just on that 4th quarter comment maybe we could dig into the margins there, because it almost seems implied with the guidance that we could see a nice little step down in the Q3 in gross margins.

Speaker 3

Yes. I mean, obviously, lots of moving pieces. I think as you talked about the back half in terms of maintaining the kind of similar levels of growth, that includes all of that in there. I think in terms of margins, you have a nice continuation. We've talked about this 48 type of level kind of being in the plus or minus of that for the year.

Speaker 3

Our outlook for the back half is we will maintain that. Last year you had a very strong Q3, that won't repeat itself. But if you look at where we are in the second quarter in the mid-forty eight percent s, you'll have a step down because you have things like Europe holidays and things like that that factor in and then you'll have an improvement again in the Q4. So we're in a good place. I think to the question earlier on the incrementals, obviously we're at the halfway point slightly higher than our range on incrementals and it will still be in a good place in the back half.

Speaker 3

But the back half comp on margin is harder than the

Speaker 6

first half. So just one of the factors. Okay. That's helpful. And then maybe can you just give us a sense of where the recurring revenue shook out as contribution in the quarter and maybe help parse out also what those growth rates look like?

Speaker 6

It sounds like it's pretty meaningful.

Speaker 3

No, I appreciate the question. Well, I would tell you this, we've shared that we sit today in the 15% zone. Zone. We obviously have things a lot of initiatives to drive that into a better place. We talked about Investor Day eventually getting into the 20% zone.

Speaker 3

I would say there wasn't a material change in the Q3 towards that. But we had some nice wins in the IO4 space, in the MSA Plus space and just globally. So we continue to make progress and keep building out that book of business. And it was it certainly helped the growth rate in portables for the first half of the year and certainly is one of those factors that again goes into why we're optimistic. Well, we booked for the last year and a half, it's good about a 3 4 year contracts on the IO-four.

Speaker 6

Okay. I mean maybe then just on the mix, if we

Speaker 2

can get a sense of

Speaker 6

what the impact was from international. It does sound like the recurring might have offset a bit of that on the gross margin side?

Speaker 3

Yes, I would say mix is a pretty neutral story. I mean, it's interesting. Think about the margins in the second quarter. They are a record, certainly margin rate, record in Americas ever in any quarter. So that's really coming from the business system, the focus on productivity, continued management of price and costs and then certainly the new product innovation being a nice lift as well.

Speaker 3

So it's those elements mix again pretty neutral for us. It will be I think it's going to be a bit of a headwind in the back half again because we had a really strong lean into detection last year as we cleared that backlog.

Speaker 2

I do think you're Ross, you're pointing to something on international as you think of what we've been doing at the lease point on the innovation front and we're seeing the fire service do what we expected. Fire service and detection in international has been really nice growth categories that we expect in the coming years will kind of shift that mix. While we'll grow in Industrial, we expect those to really play a nice role in International's growth.

Speaker 6

Got it. So Industrial should probably have a seasonally higher step up in the second half despite the holistic helmets in the second quarter?

Speaker 2

I wouldn't say I wouldn't expect it to have I mean, it's going to be market driven. I wouldn't necessarily expect the industrial space to have a higher lift in the second half. We're expecting it. It's probably going to be somewhat similar to the first half unless the economy accelerates or changes materially, I would expect it to be fairly or very consistent with the first half. We had some tough comps on the ballistic side for international, the ballistic helmet business there.

Speaker 2

So I would say it's probably going to be fairly consistent.

Speaker 6

Got it. All right. Well, congrats on the quarter, guys. Thank you.

Speaker 2

Thanks, Ross.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Larry DeMaria for any closing remarks.

Speaker 1

Thank you. We appreciate you joined the call this morning and for your continued interest in MSA Safety. If you missed a portion of today's call, an audio replay will be made available later today on our Investor Relations website and will be available for the next 90 days. We look forward to updating you on our continued progress again next quarter.

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