MSA Safety Incorporated

Good day, and welcome to the MSA Safety Second Quarter 2024 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 Larry DeMaria. Please go ahead.

Thank you. Good morning and welcome to MSA Safety's second quarter 2024 earnings conference call. This is Larry DeMaria, Executive Director of Investor Relations. I'm joined by Steve Blanco, President and CEO, Lee McChesney, Senior Vice President and CFO, and Stephanie Shulo, President of our America segment. During today's call, we will discuss MSA's second quarter financial results and provide an update on our full year of 2024 outlook. On slide two, 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. Turning to slide three, we've 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. I'd now like to turn the call over to Steve Blanco. Steve?

Thanks, Larry, and good morning, everyone. I'm on slide four. 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. 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 minutes. 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 second quarter 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. 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 our product categories and innovation, sales and fire service were up big single digits in the quarter with notable growth in turnout fear and fire helmets. The new Carnes 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 trounce of the U.S. Air Force order, which is about $28 million. Our sales and detection were up high single digits, with solid growth in both fixed and portable detection. The new FL-5000 multi-spectrum 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 of new geographies and new customers, both existing and for new applications. Industrial PPE sales overall were slightly negative on a year-over-year basis. Our head and fall protection products continue to grow and are offset by headwinds in other PPE products, such as ballistic helmets and 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 five, I would like to review some of the key points from our 2023 impact report, which I noted earlier. This was released this week. As the 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 metrics. This impact metric represents the average number of global workers that use our products and solutions each year. We estimate that MSA helps to protect more than 40 million people annually. Here are a few examples of what can be found in the report. 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 2030 emissions goals. As you would expect from MSA safety, we maintain world-class employee safety metrics within our facilities. 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 six, I also note to you the 2028 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 business system. 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. 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 second quarter. Lee? 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 four-year outlook. Let's get started on slide seven with the quarterly results. Sales were $462 million, up 4% on an organic constant currency basis, and 3% on a reported basis over the prior year, with a balanced contribution from volume and price. 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 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. 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 period, and is just below one 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. Operating margin on a GAAP basis was 21.6% in the quarter, up 40 basis points over the prior year. Slightly higher SG&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. Gap net income in the quarter was $72 million, or $1.83 per diluted shares. 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 America 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% of 60 basis points compared to the prior year. 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&A leverage, partially offset by modest FX headwinds. Now turning to slide 8. Free cash flow in the quarter was $39 million. representing a conversion rate of 49% of adjusted earnings. Second 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. Consistent with our strong capital allocation history and our investor day goals, Capital expenditures were $14 million in the second quarter, including investments to drive productivity and execute production transfers as part of our strategic manufacturing programs. We also repaid $8 million in debt, returned $20 million in dividends to shareholders, and repurchased $10 million in common stock. Net debt at the end of the quarter was $441 million, and our cash balance was $147 million. Our net leverage ratio at the quarter end further improved to 0.9 times. Adjusted EBITDA for the trailing 12 months ended June 30th at $466 million, or 25.7% of net sales. Now, I'd like to move to our full year outlook on slide nine. We entered 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. 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 ESG 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 the year. Our business is healthy. Our pipeline is strong, and we look forward to executing our second half plans and 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. With that, I'll now turn the call back over to Steve for concluding remarks. 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.