MSA Safety Incorporated

Good day and welcome to the MSA second quarter 2020 earnings conference call. All participants will be in 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 touchtone 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 Elyse Lorenzado. Please go ahead.

ELYSE LORENZADO Thanks, Drew. Good morning, everyone, and welcome to MSA's second quarter earnings conference call for 2020. Joining me on the call today are Nish Vartanian, Chairman, President, and CEO, and Ken Krause, Senior Vice President, CFO, and Treasurer. and I will note that we are all remote this morning joining the call from our respective home offices. We don't anticipate any technical issues, but please bear with us if any should happen. And before we begin, I'd like to remind everyone that the matters discussed on this call, excluding historical information, are 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. All of these forward-looking statements involve risks, uncertainties, and other factors that may cause our actual results to differ materially from those discussed here. These risks, uncertainties, and other factors are detailed in our filings with the SEC, including in our most recent Form 10-K filed in February of this year. MSA undertakes no duty to publicly update any forward-looking statements made on this call, except as required by law. We've included certain non-GAAP financial measures as part of our discussion this morning. and the applicable non-GAAP reconciliations as well as our Q2 press release are available on our investor relations website at investors.msasafety.com. And now I will turn the call over to our Chairman, President and CEO, Mish Vartanian.

Thanks, Elyse, and good morning, everyone. This morning I'll provide an overview of the various demand trends we're seeing across our portfolio and how we're executing in this environment. Then I'll hand it over to Ken for a financial review and we'll start the Q&A session. While the COVID-19 pandemic continues to impact our families, our communities, our workplaces, and our economy, the team at MSA continues to execute very well. Despite the many challenges we've all faced in the first half of 2020, our associates' dedication to MSA's mission of protecting lives as well as our high performance culture was clearly evident in our quarterly financial results. We remain focused on providing our employees with a safe work environment while advancing our mission in providing our customers with products and services they need each and every day, investing in growth opportunities and driving improvements in productivity. We had a number of accomplishments in the quarter. Despite having a challenging macroeconomic environment, We reported a strong quarterly adjusted operating margin of 18.7%. I'd be pleased with that result in any quarter, but I thought it was particularly noteworthy here because we achieved that performance despite an 8% decline in revenue. The operating leverage was driven by strong results in strategic pricing, discretionary cost controls, reductions to variable compensation, and returns from our international segment restructuring programs that we've actioned over the past 12 to 18 months. We did a great job of controlling the controllables and our results reflected diversification and resiliency of the MSA business model. As expected, and as we have indicated on a number of webcasts in June, the industrial PPE area of our business, notably fall protection, head protection and portable gas detection, is where we saw the greatest challenges in the quarter. These products protect the individual worker, so they're largely tied to employment levels in the energy, construction, utilities, and general industrial markets. These areas were collectively down 25% as work sites shut down and the economy came to a screeching halt. In the fire service market, our SCBA business was a source of growth. Revenue is up 3% on momentum in China and Europe and solid execution in the US as we work through several strategic orders. Our order pace was strong to start the quarter, but we did see some delays beginning in May as evaluations and decision processes were pushed back due to social distancing measures. Nonetheless, our pipeline is as strong as it's ever been, both in the US with G1 and internationally with the M1SCVA. As always with the fire service, the outlook for the second half will be somewhat dictated by the timing of AFG funding in the third quarter. Our nation's first responders have been instrumental on the front lines of the COVID-19 pandemic. For this reason, it's encouraging to see recent government stimulus packages such as the CARES Act provide firefighter funding at the federal level. As fire departments resume their evaluations, and decision-making processes, we expect they will secure the funds required to purchase mission-critical equipment. Continuing through the portfolio, our air purifying respirator line was clearly the standout in the quarter. These products reflect 10% of Q2 sales and increased more than 60% from a year ago. Year to date, air purifying respirators, or APRs as we often refer to them, have provided $23 million of incremental revenue for MSA. While the surge order pace that we saw on the outset of the pandemic moderated through the quarter, we continue to post double digit order growth through June. We discussed that working down the backlog in this area would take time and that continues to be the case. Our APR backlog remains elevated and we expect to make further progress in reducing lead times in the second half. While the increase in APR demand is primarily from existing customers and markets, there are a few new growth opportunities we continue to target. First, we made inroads with several healthcare systems by providing elastomeric respirators for use in hospital settings. There was an interesting article in the New York Times published in May on the many benefits of reusable elastomeric respirators in healthcare as a complement to N95 masks. As you may have seen on our website, MSA has invested in a number of marketing initiatives and campaigns to educate potential customers on the advantages of reusable respirators for emergency preparedness applications. Because we manufacture respiratory protection in the United States, Germany, and Brazil, we're able to localize manufacturing for each of those markets. The CapEx investments we're making in our APR manufacturing operations will prepare us to respond well to future demand and our payback period on those investments remains very attractive based on our results to date and existing backlog. Most importantly, we're proud to fulfill our mission of protecting lives and health at a time when the world needs it most. Another area where we're seeing attractive returns on strategic programs is in the international segment of our business. As many of you know, we've been heavily focused on improving commercial excellence and executing cost reduction roadmap, mostly in our European region. It's encouraging to see international margin expansion of 240 basis points year to date. We have discussed the focus on pricing as part of our international margin improvement plans at our 2019 Investor Day. We are indeed seeing improved price realization across international, and SG&A is declining at a much faster pace than revenue as a result of previous restructuring programs. Bob Lienen and the entire international team have done a great job executing. And we see continued opportunity ahead. And we'll give you more insight into the additional restructuring investments we're making to drive further improvements on our cost structure. While MSA's long-term growth algorithm remains intact, The near-term outlook is more unclear. Much depends on the timing and shape of an economic recovery. Beyond that, a number of other factors could impact how the second half of the year unfolds. These factors include the extent of a virus resurgence in the U.S. and other parts of the world, conditions in the energy market, and employment levels in construction and manufacturing, the timing and extent of AFG funding, as well as the passage of additional government stimulus programs. and how the demand patterns evolve for our respiratory protection business as we continue to target new opportunities. What we do know is that MSA has a diversified portfolio and a very strong balance sheet that position us well for these challenges. We're also accelerating certain strategic programs to drive further productivity improvements across our business. With that, I'll now turn the call over to Ken to take you through our financial results. Ken?