Good day, ladies and gentlemen and welcome to the MSA Third Quarter Earnings Call. At this time, all lines are in listen-only mode and the floor will be open for questions following the presentation. [Operator Instructions]. It is now my pleasure to introduce your host, Director of Corporate Communications, Mark Deasy. Please begin.

Thank you, Anne, and good morning, everybody. I too would like to welcome you to our third quarter earnings conference call for 2016. With us this morning are Bill Lambert, Chairman, President and Chief Executive Officer; Ken Krause, Vice President, Chief Financial Officer and Treasurer; and Ron Herring, Senior Vice President and President MSA International. Our third quarter press release was issued last night and it is available on our website at www.msasafety.com. Before we begin, I need to remind everybody 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. 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 our most recent Form 10-Q, which was filed on August 9 of this year. You are strongly urged to review all such filings for a more detailed discussion of such risks. Our SEC filings can be obtained at no charge at www.sec.gov or on our own website in the Investor Relations section. MSA undertakes no duty to publicly update any forward-looking statements made on this call, except as required by law. In addition, I need to note that we have included certain non-GAAP financial measures as part of our discussion today. These non-GAAP financial measures should not be considered replacements for GAAP results. Reconciliations to most directly comparable GAAP measures are likewise available in the Investor Relations section of the MSA website. You can find this information in the Quarterly Results section, which is located under the Financial Information header. That concludes our forward-looking statements. So at this point, it's my pleasure to turn the call over to Bill Lambert. Bill?

Thank you, Mark, and good morning, everyone. As always, I want to begin by saying thank you for joining us this morning and for your continued interest in MSA. As you saw in our press release that was issued last night, we drove double digit earnings expansion despite moderate and top line growth as we continued to navigate a slow growth environment and faced a difficult quarterly comparison for our self contained Breathing Apparatus business in the Americas. While it’s true the challenging underlying conditions still persist in certain key end markets and geographies. We did see some bright spots for the quarter. This included strong shipments in fixed gas and flame detection systems or FGFD growth and portable gas detection products and continued momentum in fall protection driven by Latchways which we acquired in late 2015. Overall the investments we have made in new product development in strategic acquisitions which I will talk about in more detail momentarily are fuelling our growth and positioning us well for the future. Today, I’ll start by giving everyone an overall performance review followed by an update on our Latchways integration efforts and then I will talk about strategic investments we’ve made in the FGFD area of our business. I will then wrap up with an update on our G1 SCBA business including some details about our recent competitive conversion with one of the largest fire departments in the U.S. After that I’ll turn the call over to Ken for his financial review. As you saw in our press release, reported sales were up 2% in the quarter in total. In constant currency and excluding Latchways, sales were down 3% while we saw an uptick in FGFD shipments in the quarter and solid growth in portable instruments and fall protection, a decline in…

Thanks, Bill, and good morning everyone. I'd like to take some time to walk you through our third quarter financial results and to provide more insight into the drivers of our performance. Additional information will be available, when we file our Form 10-Q with the Securities and Exchange Commission. Let’s start with a few highlights and then we’ll take a closer look at the quarterly performance drivers. Net income from continuing operations was $25 million in the quarter or $0.67 per diluted share increasing 63% year-over-year. Adjusted earnings were $27 million or $0.72 per diluted share up 22% in the quarter. On a year-to-date basis net income and adjusted earnings were up 38% and 18% respectively. Reported SG&A expense is relatively flat in the quarter and down $1 million on a constant organic basis. Year-to-date reported SG&A expense is down $4 million in constant currency organic SG&A is down $9 million. This improvement is a key driver of the year-to-date adjusted earnings growth and this is an area we continue to focus on and I’ll talk more about that in a bit. The Latchways acquisition provided earnings of $0.03 per diluted share in the quarter bringing year-to-date earnings accretion to $0.08. We have met our full year target range of $0.05 to $0.10 per share and excluding integration costs and amortization associated with purchase accounting earnings accretion is $0.17 per diluted share for the first nine months of 2016. We are certainly seeing solid returns on the acquisition we made a year ago. During the quarter, free cash flow was $13 million or 53% of net income. We expect improvements in cash flow in the fourth quarter as we reached a confidential negotiated settlement with two of our insurance carriers related to a significant portion of our insurance receivable. We…

Thank very much, Ken. Looking at our earnings growth, it's clear that the investments we've made along with our cost containment activities are driving strong profitability in the face of challenging economic conditions in certain markets and geographies. As Ken said, we expect the slower growth environment to extend into 2017 and as you mentioned that will require us to maintain a focus on cost control and improve efficiency of our operations. However be assure, we will continue to invest in programs and growth initiatives that expand profitability and position MSA to provide enhanced shareholder value for many years to come. I want to thank you for your attention this morning and at this time, Ron Herring has joined Ken and me, and we will be happy to take any questions that you may have. Please remember that MSA does not give guidance and that precludes most discussion related to our expectation for future sales and earnings. Having said that, we will now open up the call for your questions.

[Operator Instructions] We'll take our first question coming from Richard Eastman of Robert W. Baird.

All right. Good morning, and, Bill, nice quarter, and Ken and Ron. Just a couple of questions. One is, when I look at the fixed gas and flame business, and I look at the sales both internationally as well as in the Americas in the third quarter, could you maybe just speak to what the backlog looks in FGNF? Was the book-to-bill one or just how does that backlog look going forward?

I'll comment on the overall business. Ken maybe you have book-to-bill ratio. I don't have that; it’s top of my head. But Rick, the backlog of business as we look into the fourth quarter looks pretty healthy actually. FGFD has withstood this downturn in the oil and gas sector over the last two years fairly well. We're not seeing the drop off there that most other companies perhaps experience in that oil and gas sector. I think that's attributable to a number of things, number one, did the replacement cycle for some of our sensors and points of gas detection in the market is quite robust, so that base business so to speak just has not been affected. What has been affected is maybe 20% of that FGFD business which is related to large projects and Greenfield sites. We have seen that slowing and extending out in its buying decision especially here in North America. But in the Middle East we have not seen that effect and so we've been able to offset some of that downturn in North American market by nice increases in the Middle East and in Asia. Ken, I'll ask you to provide any further color on that.

Yes. Sure. Rich, we did see a little bit of a reduction in backlog in the quarter which indicates the book-to-bill is a little lower than one, but it’s not significantly below one. We still maintain a pretty healthy backlog quite honestly as we look at that business and we compare it to levels we've had in past quarters, in past years. So still hanging in there actually, pretty business and as Bill indicated continue to see good growth in the quarter in the Middle East outside of the U.S.

So not to conclude for you, but I mean, do we have a backlog and visibility that maybe suggest at least fixed gas and flame could run out at a mid single-digit kind of growth rate, I mean just for the foreseeable horizon here maybe 12 months horizon. Is that out-of-the-box thinking here?

I think mid single-digit growth rates might be a little bit on your optimistic side, Rick, if you're looking at a full year looking out in to 2017, that might be a little bit on the optimistic side. I mean, through nine months our sales in FGFD are down 1% relatively flat if we can see some moderated improvement there I'd be quite pleased.

Yes, okay. And then, just, I wanted to flip over for a second to the SCBA business. Just a couple of thoughts here, I mean, maybe our math suggests that maybe this supply chain hiccup in the quarter maybe cost you $10 million to $15 million of sales in the SCBA product line? And my question maybe is around, Ken, you made a comment that the gross margin on SCBA and, in particular, the G1, was actually up 500 bps, 520 basis points? And how did we manage to do that with the supply chain hiccup? And then also is my math about right on the SCBA side?

I think your math is pretty close, Rick.

Okay, okay.

Good math skills there. Right, Ken, I think mentioned, we were up 520 basis points in the Americas segment of SCBA margins and that was driven by reduce costs from our value engineering activities. I think we spoke about that last year. We talked about the additional costs that we were experiencing last year as we ramped up our production to the full rates. And additionally what we saw in the quarter were nice shipments of accessories to those SCBA. So the accessories were a little bit slower and getting their NIOSH approvals, but once those approvals were received we were able to ship a backlog of accessories and they have nicely higher gross margins. So, while the G1 SCBA margins are still a little bit below the corporate average. I'm pleased with the improvements that we're seeing and we think we've got some additional runway to improve those even further especially as we look out into 2017 and the new integrated GIC becomes approved and available for shipment.

I see, okay.

The other thing I'd add that Bill is the second quarter; this is the second quarter in which we've seen some good performance in the gross profit line with the SCBA area. Then in the second quarter we saw about 460 basis points as we talked about in our last call, about a 460 basis point improvement in margin in this area. So, good work by the team on the cost side but then on the accessories as well.

I got you, okay. And then just a last question and I'll turn it over, promise, here. When I look at the international adjusted operating margin, kind of at 9.3, I'm curious, is that the number we're primarily going to attack with this newer restructuring effort here for 2017? Because that still seems reasonably sluggish progress to date on the international out [ph] margin -- adjusted out margin?

Well, I think Rick that the areas we can talk about in the way of restructuring are across MSA, so the voluntary retirement incentive program that Ken mentioned is primarily in North American initiative. So North America is involved in that and we would expect to see our cost structure here in North America come down a bit as well. But you're absolutely right. We're not entirely pleased with or satisfied with the operating margins that we're seeing in international. And so part of as Ken mentioned this reduction enforce that we have, this restructuring and realignment of activities internationally a piece of that investment and restructuring that Ken mentioned is really targeted at improving international operating margins.

Okay. All right. Thank you.

Your next question is from Rudy Hokanson from Barrington Research.

Thank you. I had a follow-up on the question on the international and the adjusted operating margin. When you were reporting on a net income basis by the various regions, that's when there was a considerable amount of discussion about what you were doing in Europe in terms of consolidation of manufacturing and warehousing et cetera and the plans that were going on there. But those results were always going to be measured in terms of how you'd be reporting the net income. So now that you are on the operating income line, for what we can monitor and trace. I was wondering if you could maybe give us an update on the international side in the perspective or in the context of your program that I think it was call Europe 2.0 or I forgot the name for it, but if could let us know how that's progress and how that's measure expectations and rather than the issue of current cost reduction programs just how that has filled out or how that has come to fruition? Hopefully that's clear.

Yes. Number of questions there Rudy, but I'll take the first question. Then I'll ask Ron to add a little bit of texture and color to the European story. What I would say is we're making – we've made and we continue to make very solid progress in Europe, but not only in Europe, but around the world as well. When we look at our operating margins in the quarter in the international sector and the segment, we saw margins go from 6.7% to 9.3% in the quarter, I'm sorry, 1.5% to 9.3% on the quarter, considerable improvements each and every region in the international segment showed considerable improvement, and Europe being one that show the most significant improvement. And what we're seeing there as we're seeing improvements on the gross profit line. We're seeing improvement on the SG&A line. So we're seeing improvements throughout the entire P&L quite honestly. And so making good progress but we're meeting with the team, and as part of these ongoing restructuring programs that we talked about Europe is a major part of that, so we're continuing to focusing on that geography to make a additional progress.

Yes. I would just add, I mean, at the end of the third quarter we went live with our last schedule facility which our Galway locations. So, now Europe 2.0 is complete as we'd original design it and we continuing to find additional efficiencies there. We’re finding them not only in the SG&A line, we find them in the other costs of sales and the team there is continuing to drive improvement, So, I think that investment will continue to provide productivity for us, your efficiency, for us here going forward.

And then you had another part of your question, Rudy, if you can just clarify the second part of your question?

What has to be ask I'm trying to remember, let me ask it and maybe another way, looking at the 9.3 and with what you're doing throughout the company how should we look at the product mix on international because some of your highest margin business in the FGFD area is being sold in the Middle East which is under that international certainly. And so, is there anything in the product mix that would be suppressing the operating margin right now that we could see that if the product mix improves given your hopes for what you'll be able to do now that you have Latchways which is also very profitable that you're looking for some crossover selling that we could see the margin improvement from product mix.

Sure. So to talk about product, let's focus on FGFD first, we actually sell FGFD or Fixed Gas and Flame Detection products in all four of the international regions. The important product group in China and Pacific Asia region, Middle East obviously, and actually we're making some inroads into India and Europe is an important product group too. So it’s no just a Middle East play for us, it really is a product group that we're selling in all four regions and have a lot of focus on that. And regards to the product mix, one of the core strategies here is to continue to focus on the core product area and that is and that’s a strategy we have across international where we're moving away from peripherals or adjacent products and really focusing on driving core products and that should have, will have a favourable impact on the product mix.

Okay. So that -- as we look at the operating profit margin on international there should be a number of forces at work to improve that, not just cost savings, but also product mix?

Absolutely.

And that's reflective of what happened in the quarter quite honestly. If we look at the improvement from 1.5% to 9.3% gross profit was we saw margin improvement of about 390 basis points. We saw SG&A leverage of about 370 basis points. Latchways added about 30 basis points, so we had a whole host of things that drove that margin up significantly and actually that tend is followed out throughout the first nine months as well. So good progress in all fronts across the P&L.

Okay. Thank you. That answers my questions for now.

Okay. Thanks Rudy.

We'll take our next question from Stanley Elliott at Stifel

Hey, guys, good morning and congratulations on the nice quarter. Quick question for you when thinking about, kind of the additional $12 million to $15 million of costs out from the new restructuring plan. One, do we have any legacy spill over caused from the actions this year? How quickly does this $12 million to $15 million impact next year? And then the last part of that is with the settlement, I believe you guys have been spending close to 1% of sales to keep this active in the court system. Does that go away or does it become less of an impact? And how should we think about that -- all of those kind of mixing together for next year?

So, I'll take that question. On the insurance front, on the litigation front, we're not finished with that effort. And so we're going to continue to spend unfortunately on that, in that area for the foreseeable future as we go through the process. So we're working through it very successful quarter making good progress and strides, but still more work left to go on that side. On the restructuring program we're expecting to incur between $12 million and $15 million. Our savings target is about $10 million at this point; just it was last year on our program. We expect to see cost start to come out of the business more aggressively in the first quarter of next year, the effectives date on the voluntary retirement program is February 1 of next year, so we expect to see cost start to come out more considerably in the latter half of the first half. So we're making progress on that. But we think that we certainly think and we have a pretty high degree of confidence that we're going to be able to continue to take an additional $10 million out as we head into the 2017.

Perfect and thanks for clarifying that. And then on the FGFD on the new products, how quickly can you start shipping those products with the better, I don't know, if its better sensor technology or the better kind of cost advantage position, how do we want frame it, but how quickly I guess can you start shipping that product when we think about next year?

This is Bill, I'll take that question. The new sensors that I talked about in FGFD, what we call the S5000 under the General Monitors brand and the X5000 under the MSA brand. Those we expect to have approved and ready for shipment in the month of November, so we are immanent there in our ability to ship that product. And before we get too excited about that ability we do have to keep in mind that on the FGFD side it is a longer buying cycle. So the amount of type when you bring new technologies to market that the get into the field that they get evaluated by customers, we're probably looking at our relatively slow ramp up at least that's our anticipation at this point in time as we look into 2017 on that front. But having said that, the approach that our engineers took to that product and its design, the lower cost of ownership, the direct drop in replacement to our existing product line which then allows us to go after the 100,000 plus install detection sites that we have in the field that does get us excited. And so we might see a ramp up here, that's a bit faster. On the Senscient acquisition, that product is available today and is shipping today and we think there's immediate application for us to then take that product through our channels of distribution and through our sales organization and begin to see an impact.

Perfect. And then lastly you in the past you talked about and kind of back to Rudy's question about that -- Europe 2.0 is a 15% out margin in Europe. Is it fair to say what these numbers that were are on that trajectory right now? And then I guess the second point is, second part rather would be when do we start to see kind of the 200 to 300 basis points of tax benefit which you had been targeting as part of that plan? Thank you.

So, I'll talk to the tax benefit side. On that side we've talk to couple of quarters here around that and especially in the second quarter you saw the impact of a higher degree of profitability coming out of the U.S. and as we know the U.S has a highest rate in the world. And so as that continues that has an impact. What we saw in the third quarter though was we actually saw good performance and profitability coming out of our international segments and especially in Europe. And so what you saw in the third quarter was a tax rate that came down to just about 30% down from about 35% in the second quarter. So you saw a really nice performance. So a lot of it is going to be driven by the level of profitability that we see come out of these various regions and level of ongoing profitability. So that has an impact then you saw it come through. But as we continue to take cost out, as we continue to grow our business in these regions we certainly expect that tax benefit to come to fruition.

Ron, can you provide the commentary on trajectory that you see in operating margin improvement and the 9.3% that we saw this quarter, how do you envision that going forward towards those goals that you have for Europe?

Sure, Bill. In regard to Europe, I mean it’s a program that we implemented few years ago you all been following it for a while here. We are now fully implemented and we continue to find efficiencies with the ECC 6.0 system, being able to have everybody under one IT platform. We have reduced everything down to one warehouse, so we're down to the one year from 10 warehouses down to one. And so we continue to find those efficiencies. And so that trajectory is going to continue, the improvement on the operating margin, our expectation and that will continue. And we have targets set out there with specific actions for us to be able to achieve those.

Great guys. Thank you. And best of luck.

We will take our last question coming from Ed Marshall at Sidoti. You'll have your question.

Hey, guys. Good morning. Sidoti and Company. So I just want to ask, listen I just to ask by the way good award with Boston Fire Department.

Thanks.

I'm curious, if there are other large cities that you're working on throughout the country from I'm sure you are, but I'm curious if there's any kind of details as you can provide around that. And secondly, when you land one of these deals and I respect the technology that's in the new product, but are the discounts awarded as well to kind of helping that business, just help me think about it from a margin perspective?

Well, certainly, we're working in all major fire departments across the country with the G1, its getting attention from quite a few of the largest fire departments in the U.S and I think it would be inappropriate for me to run down that list but I can assure you that their interest, their awareness is pulling us into those competitive accounts which is terrific. So, we are having success and as I think maybe I'd mentioned in previous calls and we haven't talked about before, we're still seeing that roughly one half of all the incoming orders we're booking on that G1 SCBA are competitive conversions. So, the market share gains that we continue to see on the G1 is terrific, nothing short of that. On those large accounts, you're asking do we have to discount. Then the answer is, certainly we do. And that competitive environment is getting even tougher for a couple of reasons. Number one, there are now five other competitors, there are five competitor to the G1 SCBA in the market. A year ago there were only two. So other producers of SCBA have in fact over the last year now we see their NFPA performance certifications and so the competition is little bit harder right now. And because of our competitive win rate the pricing pressures are very evident. So in some cases we are having to discount, but as you see in the margin improvement that Ken talked about and if we focus in on the America segment, we're still able to see margin expansion. We're able to maintain some of our premium pricing strategy and the technology and everything we put into that product is still allowing us to gain share and win in these competitive account. So, I still feel pretty good about that, but it is getting more difficult not less difficult and we've got more competitors not less than we did a year ago in this area.

I'm curious too, what are the -- I mean, what's the biggest deciding factor from – I mean is it the family of products that is combined with the technology that is clearly a winner or is this now really come down to price as we can kind of extend on that last question?

Yes. The competitive evaluations that we see by U.S. Fire Department is quite sophisticated. So generally an evaluation committee is formed and all of the competitors are invited to show their latest wares and talk about the technology that they offer. Talk about the cost of ownership, talk about the ability to upgrade that product in the future and add new technologies in the future. So it's pretty sophisticated and its extended and it include an evaluation period on the fire ground where the fire fighter get to choose. Purchasing and pricing is always an element of that, but I would not say that that's the major element and the deciding factor here, at the end of the day the fire fighters choose the SCBA that they think will best protect them and provide them with the greatest ability to do their job in the safest manner possible and I'm really please to say that MSA is winning that evaluation in most cases.

Good. When I look at and I know we have – lot of things can change between now and year end especially with interest rates. But when I look at kind of discount curve you know it changed 80 basis points since the end of the year. If the year was to close today what will be the impact to the pension expense or income and I forget what you have right now to the P&L?

Yes. I'll take that. So you're exactly right, that interest rate certainly will have an impact on our over funded pension plan and our non-cash expense that we've record, associated with that. If we look at where we are right now in the yield curve and do something similar to that, you'd probably see $2 million to $4 million reduction in pension income between what we have now and what we would have for next year. That's about the magnitude or the range of the magnitude. But again as you indicated who knows what happens, what will happen with interest rates between now and year end.

Right. And what's the pension income for the years for 2016?

Yes. I have to go back and check that, Ed to confirm that number, but it’s in the low single-digit million range something between $3 million and $5 million, it’s not overly significant. And it hasn't really over the last year or two it hasn't been a big driver like it was going back in time when we – at one point seven, eight years ago when interest rates were much we had a much more significant impact on that.

Last question on repurchases, you've been generating a lot of cash. Historically MSA has not been a big acquirer of, maybe such to offset options. I'm curious what the capital deployment obviously made some acquisitions here and that's important. But our share purchases in the future, I mean is that some that you will do especially we happen to hit a rough spot in the market, would step back and support the shares? Thanks.

Yes. Just as we've said a number of times we really deploy a balanced approach to capital allocation with the dividend that we've been paying for as long as we been paying it and increasing it for as long as we been increasing it the acquisitions that we've made and then the share repurchase. So we'll continue to look at the share repurchase program and take action when we think it's appropriate. But at this point it's not a major part of the capital allocation program, merely just to be use to be offset the dilution that we would say from stock compensation.

Got it. Thanks guys very much, Appreciate it.

Okay, Ed. Thank you.