Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- MSA Safety Inc (MSA, Financial) achieved net sales growth of 3%, organic constant currency sales growth of 4%, and adjusted earnings growth of 10% in the second quarter.
- The company successfully reduced its backlog to normalized levels, overcoming previous supply chain issues.
- Sales in the Fire Service category increased mid-single digits, with strong performance in turnout gear and fire helmets.
- The new FL5000 Multi Spectrum Flame Detector and io4 portable detection devices received positive market feedback, contributing to growth in the Detection segment.
- MSA Safety Inc (MSA) maintained a strong balance sheet with a net leverage ratio of 0.9 times and continued to return value to shareholders through dividends and stock repurchases.
Negative Points
- Industrial PPE sales were slightly negative year-over-year, with headwinds in ballistic helmets and respirators.
- Currency translation posed a 1% headwind to overall sales growth.
- The company faced slightly higher SG&A expenses due to volume, inflation, investments in professional services, and a one-time legal cost.
- The book-to-bill ratio was slightly below one times for the second quarter, indicating potential future sales challenges.
- There are concerns about the timing of orders and macroeconomic and geopolitical risks that could impact future performance.
Q & A Highlights
Q: Could you talk a little bit more about the full year? The mid-single-digit guide kind of implies a consistent run rate, maybe a slight acceleration in the second half. Where is the confidence coming in to be able to hit that second half run rate?
A: The diversity of the business helps us. Demand in end markets remains healthy, particularly in fire service, energy, and utilities. The fundamentals are good, and the pipeline is solid. Industrial PPE is more cyclical, but the diversity of our markets and geographies helps. If performance continues and we turn the pipeline into orders, we feel good about the second half.
Q: How quickly could you react if macro conditions change?
A: We can react pretty quickly. We have a list of levers to pull to protect our profitability and margin profile. Our incrementals are 30% to 40%, but we manage our decrementals at a lower level and would expect the same if we needed to pivot.
Q: What's driving the strong quarter in the Detection side of the business?
A: We were able to ship the elevated backlog to deliver to our customers. The longer cycle, fixed monitoring business has a strong installed base supported by energy needs. Portables are more cyclical but our approach of providing different options with traditional and connected platforms is working well. The io4 has a 50%-plus take rate from new customers.
Q: Is all of the work on reconfiguring your manufacturing footprint complete?
A: It's not complete yet, but we're more than halfway through. We're focusing on manufacturing in region for region to provide the best cost and delivery options. This will have a nice impact, especially in fall protection with moves to Mexico and plant transitions.
Q: Did you do anything different on price adjustments at mid-year?
A: We had a price increase at the beginning of the year, with one region doing an increase early in Q2. This year is more of a normalized pricing environment. We continue to track inflation and potential tariffs and will adjust if needed.
Q: Can you further delineate what some of the watch items are for the second half?
A: Timing of orders can be lumpy. The funding environment is good, but for example, the Assistance to Firefighter Grants (AFG) started releasing funds later this year. About $62 million of the $325 million available has been released, so we need to ensure those funds come through.
Q: Can you update us on the supply chain bottlenecks from the first quarter?
A: We are maintaining similar levels of growth for the back half. Margins will be maintained around the 48% level. The third quarter last year was very strong, so we won't repeat that, but we expect an improvement in the fourth quarter.
Q: What was the recurring revenue contribution in the quarter?
A: We are in the 15% zone for recurring revenue, with initiatives to drive that higher. We had some nice wins in the io4 and MSA+ spaces, which helped the growth rate in portables for the first half of the year.
Q: What was the impact of mix from International on gross margins?
A: Mix was pretty neutral. The second quarter had a record margin rate in the Americas, driven by productivity, price and cost management, and new product innovation. We expect a bit of a headwind in the back half due to strong Detection performance last year.
Q: Should Industrial have a seasonally higher step-up in the second half?
A: It's market-driven. We expect Industrial to be consistent with the first half unless the economy accelerates or changes materially. We have tough comps on the ballistic side for international, so it will likely be consistent.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
