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spk05: Good day, and welcome to the MSA Safety Second Quarter 2023 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 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 Chris Hepler.
spk01: Thank you. Good morning, and welcome to MSA Safety's second quarter 2023 earnings conference call. This is Chris Hepler, Executive Director of Corporate Development and Investor Relations. With me today are Nish Vartanian, Chairman and CEO, Lee McChesney, Senior Vice President and CFO, and Steve Blanco, President and COO. Before we begin, I'd like to remind everyone that 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. We have included certain non-GAAP financial measures as part of our discussion 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. Moving on to today's agenda. First, Nish will discuss the key highlights of the quarter. He will then turn the call over to Steve to make a few remarks. Lee will then review our financial performance and outlook. To conclude, Nish will provide closing comments, at which time we will open up the call for your questions. With that, I'll turn the call over to Nish.
spk04: Thanks, Chris. Good morning, everyone. And thank you for your interest in the work we do. I'll start on slide four. MSA is a purpose-led company with the single mission of safety. We protect people, assets, and the planet. In June, we celebrated our 109th year anniversary, and the entrepreneurial spirit of our founders continues today. MSA has established itself as a global leader in the safety industry with strong market positions across our portfolio and around the world. Our success is based on our innovation and passion for solving our customer safety challenges. We've made great progress over the years in delivering on our mission and living our purpose. As we look ahead, I believe our future is bright. Moving on to slide five, we delivered another quarter of strong results with double digit growth, healthy margin expansion, and robust cash flow generation. I want to thank our team for their outstanding execution. which drove balanced growth across our business and regions. I want to provide an update on what we're seeing in our end markets. Our largest business, firefighter safety, has proven to be resilient over many years. Funding in this market is stable and largely comes from federal, state, and local governments. The pipeline for business across our head-to-toe firefighter solutions remains strong, and the outlook is healthy. Recently, we spoke about self-contained breathing apparatus wins in both London and Los Angeles, and I'm pleased to see additional large orders in these geographies with fire departments in the UK, including West Midlands, and in California, where we recently won Fresno. We've also made meaningful progress, reducing lead times in our globe firefighter protective apparel business as a result of improved labor and material availability, as well as operational execution. Our team's commitment to continuous improvement and the application of the MSA business system has resulted in sustainable improvements in our execution and positive outcomes for our customers. To summarize, our firefighter safety business is performing well and positioned for future growth. In the second quarter, growth was nearly 20% year over year, driven by 36% growth in firefighter helmets and protective clothing, and 10% growth in breathing apparatus. Now moving on to our gas detection business. In the quarter, we saw double-digit growth in both fixed gas and flame detection and portable gas detection, helped in part by an improving supply chain. Fixed gas and flame detection was up 32% year over year, and portable gas detection grew by 17%. Our end markets continue to be stable across our gas detection business, and our pipeline is solid. Finally, in our industrial PPE business, which includes head protection, fall protection, and related safety products, we saw healthy growth in sales and orders in a quarter. Fall protection sales increased 27% year over year, and head protection grew by 8%. While we're pleased with our growth in industrial PPE, we're seeing macroeconomic variance across the broad range of end markets we serve. Demand in process industries and utilities remain stable, while non-residential construction and general industrial have been mixed. A common theme we hear from our customers is that labor continues to be a challenge. Given that our industrial PPE products and solutions are closely tied to industrial employment and general economic activity, we continue to be measured in our near-term outlook. I'll next provide an update on BACARAC. Last month marked the second anniversary of our acquisition of the company, and we're in the final stages of integration activities. Baccarat is performing well, and the margins in the business are accretive. Baccarat is a leader in gas and leak detection technologies for heating, ventilation, air conditioning, and refrigeration markets. With Baccarat, we've been able to add scale to our HVAC and refrigeration product lines, further diversifying our gas detection business. I've also been impressed with the talent on the Baccarat team. The team is inspired by our values and mission, and several associates have taken on new and expanded roles at MSA. Baccarat participates in a broad range of end markets, and the evolving regulatory landscape for greenhouse gas emissions and customers' need to preserve refrigerants has been supportive to growth, which we expect to continue. We've had positive momentum with blue chip customers in the food retail and quick service restaurant sectors. And recently, we signed a $25 million multi-year contract with the US Navy. I'm very pleased with the value this acquisition has brought to our customers and organization. Turning to slide six, I want to say a few words about our recent leadership changes. Steve Blanco, who many of you on this call have met, was named our President and Chief Operating Officer. Succeeding him as president of our America segment is Stephanie Shulo. Finally, Rick Rhoda has assumed the position of chief legal officer. MSA continues to evolve as a company, and these senior leadership changes reflect our deep bench of talent and our commitment to grow our leaders. Steve, Stephanie, and Rick have made a tremendous impact on MSA, and I'm confident in their ability to deliver results for our stakeholders going forward. These leaders are supported in their new roles by highly experienced and talented teams around the world. Before moving to the financial review, I'll ask Steve to say a few words regarding his new role and near-term priorities.
spk06: Thank you, Nish, and good morning. I want to start by saying thank you to our board of directors and to Nish for entrusting me in this new capacity. I'm excited by the opportunity to take on this global operating leadership role as we continue our journey to drive long-term profitable growth at MSA. I'm focused on further leveraging the progress made in our America's business over the past several years and the MSA business system to drive continued momentum across the business. As I get started in this role, I'm guided by three principles, listen, learn, and lead. Over the past several weeks, I've had the pleasure to meet with many of our talented associates around the world. My goal has been to understand their opportunities and challenges and to determine how we can best deliver on our commitments to our customers while continuously improving as a company. The deep level of talent we have across the organization and the commitment to our mission of safety is evident. I'm inspired by our mission each and every day and look forward to the many opportunities ahead. With that, I'll pass the call to Lee to discuss our second quarter financial results and outlook. Lee?
spk07: Thank you, Steve, and a big congratulations to you. And good morning, everyone. We appreciate you joining the call today. Let's get started on slide seven with the quarterly financial highlights. Overall, we had a robust performance in the second quarter. Sales are $447 million, an increase of 20% over the prior year, with positive contributions from each of our businesses and regions. Growth was again well-balanced between unit volume and price. As Nis just noted, market conditions remained quite favorable for MSA. For the first half of the year, our book-to-bill was one times. Our commercial pipeline remained solid across all of our businesses. We were encouraged that we were able to reduce our backlog sequentially due to sustained progress with our supply chain. we will continue to focus on making further progress in the coming quarters. And of more recent note, our orders in July are trending up high single digits year over year across the majority of our businesses. Now moving on to margins. Gross profit margin for the second quarter is 47.8%, up 360 basis points over the prior year and 230 basis points sequentially. Adjusted operating margin of 23.2% was up 560 basis points over the prior year, and incremental operating margin was more than 50% in the quarter. Our strong margin performance was driven by higher volume and the benefits of the MSA business system, as price realization and operational productivity helped mitigate inflation. We continue to be encouraged by the progress we are making on margins. Adjusted diluted net earnings per share were $1.83, a 42% increase over the prior year. The increase was largely due to higher operating profit, which was partially offset by higher interest expense in the quarter. Now I'd like to review our segment performance. In our America segment, growth was 22% year-over-year and was balanced across our regions and businesses, particularly firefighter helmets and protective apparel, fixed gas and flame detection, and fall protection. Adjusted operating margin was 30.7%. Healthy year-over-year margin expansion was driven by higher volume, price realization, and disciplined cost management. We also had strong results in our international segment. Growth was 16% year-over-year and balanced across our regions and businesses, particularly within fixed gas and flame detection, fall protection, and breathing apparatus. Adjusted operating margin was 15.7%, representing 140 basis points of expansion compared to the prior period, and driven by strategic pricing initiatives and improved operational productivity. Now turning to slide 8 on cash flow and leverage. Free cash flow in the quarter was $85 million, representing a conversion rate of 118%. Free cash flow improved due to higher earnings and solid execution with working capital. During the quarter, we invested $10 million in CapEx, repaid $59 million in debt, and returned $18 million in dividends to our shareholders. We continue to strengthen our balance sheet position as we progress through the year. Net leverage at the end of the second quarter is 1.7 times. Since the beginning of the year, when we announced the legacy liability divestiture, We reduced leverage by a half turn as a result of robust cash flow generation, profitable growth, and disciplined investment strategies. Net debt at the end of the second quarter was $667 million, a sequential reduction of $64 million. Adjusted EBITDA for the trailing 12-month period into June 30, 2023, was $401 million, or 24% of net sales. In light of the rising interest rate environment, in late June, we issued $50 million of 5.25% fixed rate senior notes and used the proceeds to redeem borrowings on our revolver. This helped lower our blended interest rate and reduced our percentage of floating rate debt while extending the maturity date into 2028. We believe the strength of our balance sheet is a strategic asset. It provides us with the optionality to make investments in our business through economic cycles. Our ongoing investments in MSA safety products and solutions, as well as strategic acquisitions, have enhanced our positioning with customers and increased our capacity to serve our mission. Now I'd like to move to our outlook for the remainder of the year on page nine. We enter the second half with responsible optimism. Our end markets are healthy, demand trends are positive, and our backlog remains elevated. However, a dynamic macro and economic backdrop could result in a more challenging operating environment. Given the potential for increased uncertainty, we're remaining agile, disciplined on costs, and focused on executing our strategy to deliver profitable growth and generate strong cash flow. We enter the back half of the year with solid momentum. We continue to expect mid-single-digit growth in the back half of the year, with higher growth weighted to the third quarter. Combined with our strong first half performance, we are increasing our growth outlook to low double digits for the full year. Our outlook balances the many opportunities and risks we've seen throughout the year. So to wrap up, we're pleased with our strong performance in the second quarter and the first half of the year. Our results reflect our team's consistent execution and the durability of our businesses, the strength of our market positions, and the resiliency of our end markets. With that, I'll turn the call back to Nish.
spk04: Thanks, Lee. I'm on slide 10. We had great results this quarter and for the first half of the year. Our performance demonstrates the strength of our portfolio and our team's commitment to delivering solutions that enable our customers to operate safely. Over the past several years, through new product introductions and strategic acquisitions, we've evolved our business to be more resilient and better positioned to deliver sustainable growth. At MSA, we're driven by our mission and passion for safety. MSA has proven resilient over our 109-year history. Our innovative safety equipment and solutions serve our customers' most critical safety needs. We've built a diversified portfolio with market-leading positions in firefighter safety, gas detection, and industrial PPE. And we're positioned to deliver durable growth The combination of our talented and driven team, differentiated portfolio, resilient end markets, and strong balance sheet positions us well to continue delivering shareholder value into the future. With that, I'll turn the call back over to the operator for a Q&A. And I also want to mention that Stephanie Shula, President of the Americas, and Bob Lenin, President of International, will be joining us for the Q&A session.
spk05: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster. And our first question comes from Larry DiMaria from William Blair. Please go ahead.
spk00: Thank you. Good morning, everybody. Good morning, Larry. Good morning. First, I want to talk about margins, if we can. Incremental margins, obviously, exceptionally strong in the first half. How do we think about second-half incrementals? You know, maybe they come back down to earth, and then have a follow-up on margins.
spk04: Sure. So, Lee, why don't you take that?
spk07: Yeah. So, Larry, good morning. So, as you know, we like to target 30% to 40% incremental, so we're certainly delighted with the first half being on the higher end there. You know, What's behind that is, frankly, the momentum we've had for the last couple of years with the business system. You didn't see all that before because you had things like broker buys and COVID to navigate. So you're seeing all those efforts come through. I think as you now then think about the second half of the year, we see similar opportunities. So, again, the range is 30% to 40%, but we think we'll be on the higher end. That will come through. Like primarily, you know, different than probably how you looked at it is higher gross margin. So, you know, wouldn't be surprised to use kind of 47% to 48% gross margin in the back half. And you'd see that translate into, you know, an operating margin in the 21 range. And again, so if you do that math, that's just about 40% incrementals.
spk00: Perfect. That's helpful. And then I was going to ask about the gross margins. Obviously, remarkable at 47.8%, I think. Have we reached a new range? I know a lot of things are working out well, and some of the friction of the last couple of years is easing. But is 47 or 46, is there a new range to underwrite going forward, assuming supply chains are okay? I'm thinking about obviously beyond this year.
spk07: Yeah. I mean, As we look forward, as we've talked about, we still have the confidence that whether it's the 30 to 40% incrementals, the mid-single-digit growth, that's our mindset looking forward. So yeah, I think there's always a volume component to it, right? So that's certainly helping. But the fundamentals of driving productivity, driving mix, innovation, balancing cost and inflation, to help course margin, also to leverage that into SG&A. That's our mindset, Larry. So that's what I would use as a foundation going forward.
spk00: Okay. And if I could shift gears towards top line. It sounds like orders trended better through the quarter. I think they were up high single digits, you said, but we're looking at mid-single digits in the second half. How do we rectify the two, or is it just, you know, obviously – watching the macro and some uncertainty out there. But if you have some backlog and orders are trending higher, you know, what's the real risk? Or perhaps maybe short cycle orders you could talk to? Maybe there's some concern there. So can you just help us understand that?
spk04: Yeah, Larry, you know, that really gets back to being responsibly optimistic. You know, we have some optimism with our business and we think a lot of good things can happen through the back half of the year. But, you know, we're also being responsible and You know, looking at the macroeconomic conditions and, you know, we saw some, you know, mixed results in some of the end markets for our industrial PPE products. And that started to moderate a bit for certain products and certain geographies around the world. So we're just watching that closely and, you know, certainly looking at that as we get into the second half. We have a lot of confidence around our fire service business. That's on a different funding cycle. That's where we have some strong resiliency built into our business model and represents 40% of our business. So we believe the fire service business, regardless of the macroeconomic conditions, will continue to do well. And then that fixed gas and flame detection business, which is a late cycle product line, that's resilient and downturned. So we believe that that business will continue to do well. along with portable gas detection, you know, as oil and gas is pretty strong. So, you know, we think overall the business should be resilient through any type of downturn that may occur during the back half of the year. Okay, thanks. I'll pass it on.
spk05: Our next question comes from Stanley Elliott from Stiefel. Please go ahead.
spk02: Hey, good morning, everyone. Thank you for the question, and congratulations, and welcome, Steve and Stephanie. Thank you. Can you guys talk a little bit about what's going on with the free cash flow profile? I mean, massive improvement, you know, kind of year over year. Is it working capital focus? Is it the pricing flowing through? Just anything to help us with, and how should we think about the sustainability of the conversion going forward?
spk04: Yeah, thanks, Stanley. You know, I'm really pleased with the team's work and results around working capital. They've been leveraging the MSA business system for improvement. You know, Lee's done a really nice job in driving and leading what we call the cash council at MSA. He's put a team together to stay after that. And I think he's done a real nice job in leading that. So why don't I have Lee add a little color as to where we are and where we're headed?
spk07: Yeah. So, hey, we've talked. We had an opportunity to be more efficient. And certainly, you know, with no fault, you know, COVID has changed the supply chain. We had to respond to that. And the opportunity we had this year was to continue the growth potential we had, but also to do it with a little bit more efficiency. So really, it's been a nice rally across the entire organization. I can give props to everyone. Certainly, I give the ops team a lot of credit as well. But really, everyone's participated in this. And we were encouraged by the progress. Think about growing 20% and then keeping things like inventory actually flatter even now in the downward trajectory, we've really worked on improving the mix there. And there's a whole series of projects in really all elements of working capital that we're focused on. So we've talked about an improvement consistently throughout the year. I would say we're a little bit ahead of schedule, which is encouraging. So we certainly see in the back half some of the same opportunity you would typically see from us. In terms of changing things, you know, we're not going to get back to where we were four or five years ago, per se, with the supply chain we have now, but we definitely have some further opportunities. So we're working to get our working capital to the lower 30s this year, and then we work to get into the 20s next year would be the mindset, Stanley.
spk02: Perfect. And congratulations to the BACREC. you know, announcement, especially to win a sizable contract like that for a newer business for you all. Can you talk about the integration? Talk about how you're able to share those technologies or to what extent you're able to share the technologies with some of the existing kind of gas detection systems that you have in place?
spk04: Yeah, you know, Stanley, we had some business in that HVAC refrigeration market. It was a small piece of our business, and that was an area – We made a determination that we wanted to invest in and grow that piece. And so, obviously, Baccarat being a leader in that space, and we feel that that's a space that has regulatory tailwinds to it, as I mentioned in my prepared comments, there's a nice opportunity to grow that business, number one. And number two, from a profitability standpoint, we thought we could show some improvement there. So we continue to work through our channel partners and the Baccarat channel partners to offer both lines, the MSA and the Baccarat products. And we're able to bring the Baccarat products through the MSA channels to enhance some of their revenue. So we're really excited about the future prospects there. And I'm really enthusiastic about the workforce. The workforce has been fantastic. They're really pleased to be part of the MSA mission and what we do, and we've seen a number of those employees take on added responsibility with MSA to contribute to our overall success.
spk02: Great. And then lastly, can you talk about the M&A landscape? You guys are deleveraging probably faster than what we would have guessed. You know, I get it that the market's kind of seized up a little bit with COVID, but how are you all thinking about M&A tracking right now? And kind of where would some of the focuses be?
spk04: Right. And I agree. We have delevered faster than our internal plan, which I'm excited about. And hopefully we can continue that in the third quarter and get ourselves in a strong position. We continue to have a good pipeline of acquisitions as we go forward. Obviously, we've added a lot of value to the organization through past acquisitions and the pipelines. Pretty full force, and I'll flip things over to Lee to add a little more color about where we are and where we're headed with that.
spk07: Yeah. So, I mean, I think Nish described it well. We've been very disciplined. The last five years, we've done four deals that we're delighted with. It's something you can always say when you do M&A. I think part of that is that discipline. So, as Nish said, we continue to participate in what's going on in the marketplace. Certainly, another bolt-on acquisition would be interesting. But it's going to have to hit the thresholds we're looking for. And I think those bars are even higher, just given the cost of debt and things like that, Stanley. But we are active. Chris is active. Stephanie, Bob, and Steve are active in the pursuit. And we'll see how it plays out. Certainly having the leverage down to 1.7 is encouraging. If we continue progress here in the third quarter, we'd be at the lowest leverage point in two years. So that certainly puts us in a good place. But again, it's got to check all the boxes for us to move forward. We don't have to do something. We would do something if it makes sense.
spk02: Perfect. Thanks, everybody, and best of luck.
spk05: Thank you, Stanley. Again, if you have a question, please press star, then 1. The next question comes from Rob Mason from Baird. Go ahead.
spk03: Yes, good morning. There was, I guess, the comment, Booked a bill for the first half of the year was around one. So you did highlight that elevated backlog remains an opportunity. And it was good to see maybe some of the supply chain cooperating in the second quarter worked that lower. But I'm curious what your outlook for the second half of the year embeds with respect to being able to work backlog for.
spk04: You know, that is an opportunity for us with backlogging. But we don't have a lot of backlog opportunities. work down in the back half of the year. You know, that remains an opportunity for us when you look at the back half of the year, if we could reduce that backlog. You know, one way to look at the backlog is over the past four quarters, our book-to-bill was one, and we grew 16%. And as Lee mentioned, over the first half of the year, the book-to-bill was one, and we grew 20%. So, you know, we've done a nice job of increasing our put-through and operations and working with the supply chains. You know, hopefully we can continue to do that and work that backlog down a bit in the second half. But we don't have a lot built into the model at this point. So that remains to be an opportunity. Lee, anything you want to add to that?
spk07: Yeah, I think, Rob, just when you think about the back half, we talked about mid-single-digit growth and higher in the third quarter. it's the same baseline we've used all year, right? So we aren't counting on the backlog of the supply chain improving. It could become an opportunity in case we ran into some headwinds. We're taking a conservative view on what happens with the industrial PPE market. You know, if it turned out to be better than that conservative view, it could be an opportunity. We benefited from that in the first half of the year. So, again, we talk about being responsible here. If things... were to turn into a bit of a headwind. I think we're cushioned, and if they're not, we have an opportunity to do even a little bit better. But right now, that's our call point, and we'll update 90 days from now on how it plays out.
spk03: I see. How are you thinking about the pricing environment at this point? Again, as you look into the back half of the year, where you stand relative to inflation, price cost, is that an opportunity, or is there anything planned on that side? Steve, why don't you take that?
spk06: Yeah. Hey, Rob, how you doing? So when you think about, when we think price, we look at, we think our price value is really well aligned right now with the market. We think we've been very, very effective offsetting inflation with price. And we'll continue to do so as necessary. I mean, we're watching the cost inputs very closely. Right now, we're pretty comfortable with where we're at, but we'll certainly react as we need to.
spk03: Very good. Just last question. There was a mention, you know, some mixed trends in July, perhaps by geography. I was just wanting to see if you could walk globally just through some of the regions, and in particular what you're seeing perhaps in Europe, which is printing, you know, lower macroeconomic statistics, you know, versus the Americas. Lee, why don't you take that?
spk07: Yeah, I'll start there. Interesting. We talked about, obviously, the incoming orders through July are in the upper single digits so far. Rob, it's very consistent across the globe, across the product lines, similar to what we've experienced in the first half of the year. It's interesting. The European business obviously has the macro environments participating in, but I think the team's done a nice job there. We enter the back half with a strong backlog. Certainly the fire business is as strong as it's ever been. So despite that environment, it's why we continue to be optimistic as we look forward here.
spk03: Very good. Thank you. Thank you. All right. Excellent.
spk05: This concludes our question and answer session. I would like to turn the conference back over to Chris Hepler for any closing remarks.
spk01: Thank you. 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 appreciate you joining us this morning, and we look forward to speaking with you again soon. Thank you.
spk05: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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