Participants

Larry De Maria; Executive Director, Investor Relations; MSA Safety Inc

Steven Blanco; President, Chief Executive Officer; MSA Safety Inc

Lee Mcchesney; Senior Vice President, Chief Financial Officer; MSA Safety Inc

Rob Mason; Analyst; Baird

Ross Sparenblek; Analyst; William Blair

Presentation

Operator

Thanks, Good day. Welcome to the MSA Safety Third Quarter 2024 earnings conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question. You may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Larry De Maria, Executive Director of Investor Relations. Please go ahead.

Larry De Maria

Thank you. Good morning and welcome to M & A. Third Quarter 2024 earnings conference call. Larry De Maria Executive Director, Investor Relations. I'm joined by Steve Blanco pregnancy out out stamping. Sure love president of our market segment. In today's call, we'll discuss MFA's third quarter financial results and provide an update on our full year 2024 outlook. 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 not limited to 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. And safety undertakes no duty to publicly update any forward-looking statements made on this call, except as required by law. Turn to slide 3, we've included certain non-GAAP financial measures and Harvard discussion this morning and non-GAAP reconciliations are available in the appendix in today's presentation. Presentation and press release are available on our Investor Relations website at investors dot MSA Safety.com. I'd now like to turn the call over to Steve Blanco, state.

Steven Blanco

Thanks, Larry, and good morning, everyone. I'm on slide 4, thanks to our team's dedication and hard work. Our ability to serve our customers and advance our mission has never been stronger. We continue to be guided by the strategy we outlined earlier this year at our Investor Day to drive profitable growth while judiciously deploying our capital as we work towards our 2020 financial goals. We remain focused on bringing industry-leading safety solutions to our customers around the world. I'll touch on some of our mission driven innovation and accomplishments in a few minutes, but let's first look at some of the third quarter highlights. Overall, we once again demonstrated operational resilience with our quarterly results. For the third quarter, net sales decreased 3% year over year on both a reported and organic constant currency basis and adjusted earnings increased 3%. As we noted in our press release, the decline in sales was largely due to the previously mentioned delivery time in the fire service and some specific customer delays . With that said, we continue to see positive order momentum in our backlog grew sequentially during the quarter. Orders increased year over year by high single digits, excluding the impact of the U.S. Air Force order in each period. During our earnings call in July, we discuss some aspects of order and delivery economy that could impact the cadence of the second half, including the assistance to firefighter grants or AFG. funding. This was the release later this year than in 2023 and specifically around the U.S. Air Force SCBA order delivery timing in final form, the U.S. Air Force schedule has shifted towards the end of the year, but we still expect to deliver most of that order in 2024. While our top line sales number came in below what we planned. The team performed exceptionally well from an operational standpoint, as evidenced by our overall earnings growth and margin performance. The overall demand environment remains healthy, albeit with some choppiness, and we continue to see a strong business pipeline. Moving to our product categories. Sales in fire service were down high single digits in the quarter, primarily due to the U.S. Air Force shipping delay and also decline and breathing apparatus sales versus a strong prior year comp than included several large departments such as LA County. As you know, Fire Service SCBA order timing can be lumpy. While orders were up year over year, some customer orders have been delayed. At the same time, we retain a solid pipeline in North America, and we continue to have excellent international momentum with our M1 SCBA in the third quarter experienced continued momentum in fire helmets with growth of our new current 1836 and our affluent access as well as turnout gear. Sales in Detection were up mid single-digits. Fixed Gas and Flame Detection had a solid quarter moderately declining compared to last year's robust third quarter growth with good contribution from our SF. 5,000 flame detector. Portable detection sales continued to perform strongly in both traditional and connected devices. We also can continue to see solid margin improvement in our detection business. Industrial PPE sales were down mid-single digits year over year as international markets slowed. Head protection was up modestly, while fall protection declined mid-single digits. And we saw continued customer delays in ballistic helmets. Turning to slide 5, I'd like to share some innovation highlights from the third quarter. First, I'm proud to note that the Product Development and Management Association named MSA at 2020 for outstanding corporate innovator, making us one of only two companies to achieve this distinction twice in the 37 years. History of the award recognizes companies consistently generating long-term value through exceptional product and service innovation. We were honored in part for our transformation from a safety equipment manufacturer to the global leader in developing and manufacturing and advanced safety technologies and solutions. Second, I'd like to briefly highlight our portable detection business. We continue to grow across our diverse detection product category through innovation. Portable sales have grown by nearly 40% over the last two years. While we continue to see strong growth in traditional portable devices, our fastest growing category is connected portables now including a complete solution set sold through MSA. plus subscriptions. We're signing up new customers and and converting our existing installed base of customers to connected solutions with most customers selecting durable multi-year contracts. In addition, there are opportunities for service contract add-ons and back end contract renewals. We expect to see strong profitability from this business that will scale even more over time. Most of these contracts are incremental with many new customers. We'll discuss connected portables more in the future, but we wanted to highlight the success and strength we've had so far, we're in the early innings of this journey, led by our IO for device, which is the heart of our industrial technology strategy. Finally, MSA is proud of our products and solutions protecting more than 40 million workers annually, demonstrating our team's impact and safety. In the third quarter, we were made aware of to specific cases where MSAs end users were saved from significant injury or death. one case was related to our IO for gas detector and the other was related to our LUNAR device in the fire service fees. Remind us each and every day of our purpose and the importance of our mission that the entire team and MSA is committed to. I want to thank our team for working hard with these customers and our more than 5,000 associates around the world for their dedication to delivering innovative products and solutions that enable us to continue advancing the MSC mission of helping men and women working safety throughout the world. With that, I'll turn the call over to Lee, who will discuss our financial results for the third quarter of late.

Lee Mcchesney

Thank you, Steve, and good day, everyone. We appreciate you joining the call. Fish now review our third quarter performance and provide an update on our full year outlook. Let's get started on Slide 6 with the quarterly results. Sales were $433 million, down 3% year over year on an organic constant currency and reported basis with lower volumes offsetting positive price contributions. Currency translation was relatively neutral for the quarter across our product categories. Mid-single-digit growth in Detection was offset by contractions in Fire Service and Industrial PP. So growth was challenged by a strong year over year comparable period in the shipment timing change. Steve mentioned double digit sales growth on a two year stack reflects the health of our underlying business must have been high single digits over the past six months with growth at all of our markets. Our commercial pipeline remains encouraging across our property cat doors and in most of our regions, we have seen a nice continuation of activity so far in October. In the third quarter, our book-to-bill ratio was about 1.1 times and exceed the one times on a year-to-date basis. As a result, our backlog increased sequentially due to these favorable trends in the normal 3Q seasonality, but remains below the unusually elevated levels of the past couple of years. Heartlogic performance continues to be resilient. The team's commitment to the M&A business, system processes and behaviors are evident in our results. Gross profit margins were 47.9% in the quarter, 110 basis points below the strong levels of the prior year. Operating margin on a GAAP basis was 21.1% in the quarter, including the benefits of lower SG&A. Adjusted operating margin was 22.6%, down 10 basis points over the prior year. And decremental operating margin was 24% within our target range of 20% to 30%. Operating margin performance was largely driven by mix, productivity, cost, price management and lower SG&A levels. Gaap net income in the quarter was $67 million or $1.69 per diluted share. On an adjusted basis, diluted earnings per share were $1.83, up 3% over the prior year. The increase was a combination of positive mix productivity, lower SG&A, lower interest expense and a lower year over year adjusted tax rate. Now moving on to our segment performance. In our Americas segment, sales decreased 5% on a reported basis year over year with mid single-digit growth in detection, offset by a shipment impacted decline in the fire service and a slight contraction in industrial PPA. Currency was a 2% headwind in the quarter. The adjusted operating margin was 30.7%, up 80 basis points compared to the prior year. Margin expansion was driven by positive mix, productivity, cost price actions and a lower SG&A. In our international segment, sales increased 1% on a reported basis year over year. Healthy growth in the fire service and detection was mostly offset by decline in industrial PPA. On a geographic basis, growth in A-Pac was partially offset by decline in India. Currency translation was a 2% tailwind in the quarter. Adjusted operating margin was 13.6%, a decrease of 340 basis points year over year, and profitability was challenged by lower volumes as our bus comparison period and partially offset by productivity and price. Now turning to Slide 7. Free cash flow of the quarter was $70 million, representing a conversion rate of 97% of adjusted earnings. Third quarter cash flow reflected healthy earnings is solid. Working capital execution assisted with a capital allocation strategy outlined at our Investor Day capital deployment. The third quarter was about capital expenditures were $14 million, up modestly compared to the prior year. We returned $20 million in dividends to our shareholders, and we repurchased $10 million in common stock. Debt payments totaled $38 million. Our net debt at in the quarter was $400 million with a cash balance of $154 million. Our net leverage ratio at quarter-end was 0.9 times, consistent with the second quarter levels. Adjusted EBITDA for the trailing 12 months ended September 30th was $464 million or 25.7% of net sales. Now let's move on to our full-year outlook on Slide 8. So although the operating environment, the second half of the year has been incrementally more dynamic. Our broad diversification across products, geographic regions and markets as well as the attractive underlying market trends in the safety industry continued to position us to deliver resilient results. As we look ahead to the fourth quarter, we expect to finish the year favorably with mid single digit revenue growth in the quarter, implying low single-digit growth for the full year 2020. For the expected mid-single-digit growth in the fourth quarter is supported by our orders and backlog, including the U.S. Air Force business and compound on top of that 12% reported growth we delivered in the fourth quarter of last year. Now compared to our Joy sales outlook, we have adjusted our view in line with the order a ship, the dynamics that we're seeing with specific customers. Looking forward, we're also well positioned to deliver at or above the high end of our 30% to 40% incremental margin objectives. And we remain on track to deliver a healthy cash flow conversion. Finally, I want to extend my thanks to our associates worldwide, who are so focused on partially supported our customers each and every day is supporting emissions. Steve highlighted earlier. Now I'll turn the call back to Steve for concluding remarks.

Steven Blanco

Thank you, Lee. As we look forward, I want to reiterate the resiliency of our business driven by strong underlying industry fundamentals are proven innovation process in leading positions across our markets. I believe we have the best team in the industry. And with our mindset around continuous improvement and commitment to the MSC business system, we're well positioned to create value over the long term for our stakeholders. With that, I'll turn the call back to the operator for questions.

Question and Answer Session

Operator

You're right. We will now begin the question-and-answer session to ask a question. You may press star then one on your touch-tone phone. If you're using a speakerphone, please pickup your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And our first question today comes from Rob Mason with Baird. Please go ahead.

Rob Mason

Hi. When I just wanted to start. Good morning. I just wanted to start with Tom. You noted you were able to deliver the decremental within your guided range on and it looked like SG&A was a lever within that a dynamic. Can you just speak to we don't we saw a sequential decline there, perhaps some seasonality around that, but just how should we be thinking about SG&A as we go into the fourth quarter, um, and your ability to manage that number specifically?

Yes. Certainly, Rob, I'll give it to Lee to take that.

Sure, good morning, Rob, the decremental certainly in the range we've talked about in the past, it is certainly gross margin was a continued nice resilient level. It had to your point, SG&A is in a good place, certainly, Yum. Feel we are focused on prioritization and SG&A was certainly Flex, and we need to there's a benefit in the third quarter from just a bit lower volume that comes through as well. But as you as we go forward, I mean, versus from what you've seen the past, you're going to see continued momentum will be quite what it was a very quarter. We'll certainly go up dollar-wise just because of the higher volume, but you'll still see a pretty pretty healthy ratio there. So but again, we're focused on driving incrementals and decrementals. I had a good to see. I want to have. Yes, yes.

Rob Mason

Okay. The um, I wanted to see again that some of the customer time, there's not it's not a complete surprise there. But I am curious, as you're thinking about your fourth quarter levels on sounds like Air Force you are counting on shipping some of that. But just can you parse through some of the other specific customer delays, which are you expecting those to abate in the fourth quarter to those carry through year end? And where would we see does if it's a FG. related, Dom mentioned ballistic helmets, I thought also, but I'm just provide a little more color around where you're seeing those delays.

Yes, sure. Rob so if you think about the Air Force, first answer that question, we expect D&O pretty much, I'd say 90 plus percent centered at the ship in the fourth quarter. So that will ship. And again, that's based on customer timing and what they would do, what they want to accept in what time. So that's really how that push. So we are prepared and expecting to do that. So I'd say most of that ships in the fourth quarter. And then the other things you talked about ballistics, this happened in Q2 actually, but in Q three to fix the customer, this is a European government customer on push this back to 2025. So that obviously comes out of the 24 story from a revenue perspective. We've got that business. We have the the contract here, but it's a push from them on timing to take that order. So that's what we see. And we've seen a couple of others like that. We saw a for that are going to affect the fourth quarter. We got one in the Americas in Latin America, a large government order over the same thing.

Rob Mason

Again, we have the business where the where the incumbent and they've told us we have the business, they just pushed it back because of the election change they had with their government.

So everything's intact there. You know, in the fire service, it's not inconsistent, as you know, our story pretty well. So we've seen this lumpiness before. The pipelines really good business is resilient. The AFG. funding is now released, which is good, but the order timing can be lumpy as we've seen in past years. And that's what we've seen this time. They haven't gone to competitive accounts, but they're slower to close than we expected. So that's that's really where we're at on on why we called out some of these orders taken a little bit more time than we hoped. Sure.

Rob Mason

But it is just one last follow up. I just could you go through you called out portable, um, portable gas strength in the quarter, both on the traditional in the connected side, just to kind of the underlying market drivers there, or do you think this is some strength or do you think that is some some share gain mixed in India that just dumb? What kind of underpins the double-digit growth there?

I think it's both. I think you're correct on your thesis on share gain, we're certainly seeing that occur. We're also seeing expansion of the wallet share, right, as we're providing more value through these connected solutions to our customer base. And really we're expanding the customer base overall itself. So we have this if you think about the affordable portfolio, we really got options, a diverse set of options for the markets, right? So our customers can choose whether they want that traditional platform or they want to add this connected platform, which we go to market through MSA. plus. And it's a tremendous combination for that customers to choose from. So the growth was both. So we saw some mid to upper single digits depending on the market for the traditional. But rarely, by and large, the high acceleration of growth is the connected platforms we're seeing. So that's that's what we expect to kind of kind of continue to see it fits right, really well with what we talked about on earlier this year as we walk through the strategy at Investor Day. And that's that's playing out really nicely spigot lump. I'll turn it back to Nick.

Operator

But again, if you have a question, please press star then one. And our next question today comes from Ross sparing black with William Blair. Please go ahead.

Ross Sparenblek

Hey, good morning, guys. For us, maybe just starting with broader end market demand backlogs, physical contracts. And can you just give us a sense of the high single-digit growth in the quarter? Is that seasonal or is that the kind of steel maybe more just the push out of the orders in the third quarter and what expectations are in a broader demand? I mean, would it be like you guys are taking share Cosmos in science?

Thanks, Ross. The question. So, if we think demand, it was healthy to your point with orders up high single digits. And I'll turn it over to Lee to talk a little bit more about what it does on the backlog store in a bit on the book to bill. But when we look at the markets, why would I kind of think of it this way? We do feel like we're in a really good position from a share perspective. Detection. We just talked a little bit about his answer, Rob's question on portables. We've seen some nice performance in fixed as well. Last year was a tough comp because we had such great growth. But really solid performance. Industrial still mixed. We see some really good market performance in some categories. And some we don't there are a little softer, Europe's a little softer than most right now. But overall, it's been consistent throughout the year. Haven't seen an uptick as we've come into the second half of the year, but we haven't seen much degradation either, and we can expect it to remain fairly constant through the rest of the year. And in the fire service, as you know, we're really doing well with international growth in the fire service teams taking a ton of share, which we're really pleased with. They're performing well there. They're competing extremely well with customers across the international markets, which is a real strength for us. And then we expect to fire service in North America to as we said, we've got the pipeline. It's just a matter of getting some of those orders to close. But overall, yes, we feel like you have in in totality, our position in the markets are really strong, probably as strong as they've ever been, but mainly even 5%, a little bit about the backlog. Sure.

So good morning, Ross. As we noted on the call with me are Tom and I remind everyone I've never to overreact to one quarter, but certainly a nice quarter, um, over a one one, but we also gave you the full year year to date number as well, which is slightly above one. And the idea really speaks to were Steve is going. We're still seeing generally good good markets. It can be lumpy from quarter to quarter. We're talking about for orders in those high single-digit number here in the third quarter with a similar performance in the second quarter. So I think that does speak to service. He was walking through there. As you look for and as well, I'm just giving some insight to across the markets. We say Oil-Dri single digit was very, very consistent, frankly, across all three categories of our business. A good performance around the globe as well. There are spots in the world that are not as healthy, but overall, it's a good place and clarify. It was also that in the third quarter, the orders resolve did not include airports, revoke Air Force in the second quarter. So this just speaks that Order Dynamics. So no, that's very helpful.

Ross Sparenblek

Maybe just follow-up on Rob's question. I mean, can you maybe help us size that Q3 order pack PENTAX?good And I know I'm not trying to can you guys announced a 25, so it would begin selling to get a sense of 29 Airforce order and also the backlog conversion in the first half of the year.

So yes, prices really clarify, too, because we had airports in the first half of the year for the first trench. And obviously, that went through the business and feel good, good portion of Air Force also fell into 3Q, which is really what you're going to see here are normally in 4Q as we talked to earlier, Sinclair auto for them. So beyond that, I know you've had healthy growth in the categories I mentioned.

Yes I would. I would say, Ross, you're right. I mean, we're going to be comping two straight years of Air Force rate for 25 to two points, but we'll plan to talk more about 25 as we ramp 24. What I would suggest that you think about and just we stay centered on and we're very comfortable with is we're fully committed to our 28 targets we identified during Investor Day. And as we noted 25 years, you said 25 comp challenges in there with Air Force. But we're fully committed to what we what we laid out there for for the Investor Day. You know, the margin expansion, certainly the growth and the compounding on EPS.

Ross Sparenblek

Yes. Okay. And then maybe just snorting international fire. As you get the sense that competitors and become more price rational there, duration in the sense that that's fine, more volume order?

You know where that's a really interesting question. So, we have it's really different by markets in China and Asia Pacific are a bit different. So we've we introduced a a different product category for SCBAs in the Asian market this year. That's doing really well, but it's matching and the needs of the customer base in that area. So it's a little lower price point, but the one is competing really well. A lot of what we've seen. There's still some of this price-based customer needs. I guess I'd call it out there, and we're certainly we understand that. But a lot of the customers really looking to functionality set performance. And when they do an evaluation, it's really nice to see them way that a lot more than they do price. So they're looking at total value, which I think we compete very well with.

Ross Sparenblek

Perfect. And then just one more in here on portables, three Q and a seasonal low historically and double-digit growth, and that's obviously showing some signs of acceleration. Biomass, maybe there is 5,000,6000 incremental units that are kind of the expectation that we're kind of ramping to and maybe there's 20,000 unit run rate.

you mean on portable instruments. Is that what your question is?

Ross Sparenblek

Gas and portable gas detection.

Okay. So yes, so if you look at fixed fixed gas detection, I think the unit run rate continues to be pretty consistent. Portable gas detection. I think on orders, you may be closer on the order count, but on Union accountants, a magnitude higher than that we're seeing. What's really nice is we're seeing on this on this the traditional business, the customer continues to really look at our value prop. So we talk about accuracy of sensors, durability of the product, reliability across our portfolio and certainly our service. So we're winning there in converting business. It's probably a higher rate than we expected on the traditional. And then what's happening on the connected portable side is plain exactly playing out how we thought it would you think of the growth there more like you would think of a software platform and that's the kind of growth we're actually seeing there. So we do expect that to continue. Now it is on a low base. It's still under 110% of our overall port portables revenue. And I think that's important to note, which is why we keep these combined, and we'll continue to track that and keep you updated on progress.

Ross Sparenblek

and that's right thank you guys.

Thank you.

Operator

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

Larry De Maria

Okay. Thank you. We appreciate you joining the call this morning and for your continued interest in MSA Safety 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. The conference has now concluded. Thank you for attending today's presentation.