Good day, and welcome to the MSA Safety Third Quarter 2024 Earnings Conference Call. All participants will be in a listen only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Larry De Maria, Executive Director of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to MSA Safety's Third Quarter 2024 Earnings Conference Call. This is Larry De Maria, Executive Director of Investor Relations. I'm joined by Steve Blanco, President and CEO; Lee McChesney, Senior Vice President and CFO; and Stephanie Sciullo, President of our Americas segment. During today's call, we will discuss MSA's third quarter financial results and provide an update on our full year 2024 outlook. On Slide 2, I would 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 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 3, we've included certain non-GAAP financial measures as part of our discussion this morning. The non-GAAP reconciliations are available in the Appendix in today's presentation. 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 4. Thanks to our team's dedication and hard work, our ability to serve our customers and advance our mission has never been stronger. We continue to be guided by the strategy we outlined earlier this year at our Investor Day to drive profitable growth while judiciously deploying our capital, as we work towards our 2028 financial goals. We remain focused on bringing industry-leading safety solutions to our customers around the world. I will touch on some of our mission-driven innovation accomplishments in a few minutes, but let us first look at some of the third quarter highlights. Overall, we once again demonstrated operational resilience with our quarterly results. For the third quarter, net sales decreased 3% year-over-year on both a reported and organic constant currency basis, and adjusted earnings increased 3%. As we noted in our press release, the decline in sales was largely due to the previously mentioned delivery timing with Fire Services and some specific customer delays. With that said, we continue to see positive order momentum, and our backlog grew sequentially during the quarter. Orders increased year-over-year by high single digits, excluding the impact of the US Air Force order in each period. During our earnings call in July, we discussed some aspects of order and delivery timing that could impact the cadence of the second half, including the assistance for firefighter grants or AFG funding. This was released later this year than in 2023 and specifically around the US Air Force SCBA order delivery timing. In final form, the US Air Force' schedule has shifted towards the end of the year. but we still expect to deliver most of that order in 2024. While our top-line sales number came in below what we planned, the team performed…

Thank you, Steve, and good day, everyone. We appreciate you joining the call. Let's now review our third quarter performance and provide an update on our full year outlook. Let us get started on Slide 6 with the quarterly results. Sales are $433 million down 3% year-over-year on an organic constant currency and a reported basis, with lower volumes offsetting positive price contributions. Currency translation was relatively neutral in the quarter. Across our product categories, mid-single-digit growth in detection was offset by contractions in Fire Services and industrial PPE. Though growth was challenged by a strong year-over-year comparable period and the shipment timing change Steve mentioned, double-digit sales growth on a 2-year stack reflects the health of our underlying business. Overall, orders in the quarter were robust and have been high single digits over the past six months with growth in all of our markets. Our commercial pipeline remains encouraging across our product categories and in most of our regions. And we have seen a nice continuation of activity so far in October. In the third quarter, our book-to-bill ratio was about 1.1 times and exceeds the 1 times on a year-to-date basis. As a result, our backlog increased sequentially due to these favorable trends and the normal 3Q seasonality, but remains below the unusually elevated levels of the past couple of years. Our margin performance continues to be resilient, and the team's commitment to the MSA business system processes and behaviors are evident in our results. Gross profit margins were 47.9% in the quarter, 110 basis points below the strong levels of the prior year. Operating margin on a GAAP basis was 21.1% in the quarter, including the benefits of lower SG&A. Adjusted operating margin was 22.6%, down 10 basis points over the prior year, and decremental operating margin…

Thank you, Lee. As we look forward, I want to reiterate the resiliency of our business, driven by strong underlying industry fundamentals, our proven innovation process and leading positions across our markets. I believe we have the best team in the industry. And with our mindset around continuous improvement and commitment to the MSA business system, we are well-positioned to create value over the long term for our stakeholders. With that, I'll turn the call back to the operator for questions.

We will now begin the question-and-answer session. [Operator Instructions] And our first question today comes from Rob Mason with Baird. Please go ahead.

Yes, good morning. I just wanted to start with you noted that you were able to deliver the decrementals within your guided range. And it looked like SG&A was a lever within that dynamic. Can you just speak to -- we saw a sequential decline and perhaps some seasonality around that, but just how should we be thinking about SG&A as we go into the fourth quarter and your ability to manage that number specifically?

Yes, certainly, Bob. I'll give it to Lee to take that one.

Sure. Good morning Rob. So as you know, a big decremental certainly in the range we've talked about in the past. It certainly -- gross margin was a continued nice resilience level. And then to your point, SG&A is in a good place. Certainly, we are focused on prioritization in SG&A. We certainly flex when we need to, and there is a benefit in the third quarter from just a bit lower volumes that comes through as well. But as you go forward, I think versus what you've seen in the past, you're going to see continued momentum. It won't be quite what it was in the third quarter, will certainly go up dollar-wise just because of the higher volume, but you'll still see a pretty healthy ratio there. So -- but again, we are focused on driving incrementals not decrementals, but good to see that when happen.

Yes, yes. Okay. The -- I wanted to see, again that some of the customer timing, shipment timing, not a complete surprise there. But I'm curious as you're thinking about your fourth quarter levels. It sounds like Air Force you are counting on shipping some of that. But just could you parse through some of the other specific customer delays? Are you expecting those to abate in the fourth quarter? Or do those carry through year-end? And where would we see those if it's AFG related? You mentioned ballistic helmets I thought also, but I'm just provide a little more color around where you are seeing those delays?

Yes, sure, Rob. So if you think about the Air Force first to answer that question, we expect pretty much, I'd say 90-plus percent of that to ship in the fourth quarter. So that will ship, and again, that's based on customer timing and what they want to accept at what time. So that's really how that push. So we're prepared and expecting to do that. So I'd say most of that ships in the fourth quarter. And then the other thing, you talked about ballistics. This happened in Q2 actually. But in Q3, the customer, this is a European government customer, pushed this back to 2025. So that obviously comes out of the '24 story from a revenue perspective. We've got that business. We have the contract here, but it is a push from them on timing to take that order. So that's what we see, and we've seen a couple of others like that. We saw a -- that are going to affect the fourth quarter. We've got one in the Americas, in Latin America, a large government order, the same thing. Again, we have the business, we are the incumbent, and they've told us we have the business, they just pushed it back because of the election change that they had with their government. So everything is intact there. On the Fire Service, it is not inconsistent as you know our story pretty well. So we've seen this lumpiness before. The pipeline is really good, business is resilient. The AFG funding is now released, which is good. But the order timing can be lumpy as we've seen in past years, and that's what we've seen this time. They haven't gone to competitive accounts, but they are slower to close than we expected. So that's really where we're at on why we called out some of these orders taking a little bit more time than we had hoped.

Sure. Just one last follow-up. Just could you go through -- you called out portable gas strength in the quarter, both on the traditional and the connected side. Just kind of the underlying market drivers there, or do you think this is the strength? Or do you think that is some share gain mixed into that? Just what kind of underpins the double-digit growth here?

I think it's both. I think you're correct on your thesis on share gain. We're certainly seeing that occur. We're also seeing expansion of your wallet share, right, as we're providing more value through these connected solutions to our customer base. And really, we're expanding the customer base overall itself. So we have this -- if you think about the portable portfolio, we really got options, a diverse set of options for the markets, right? So our customers can choose whether they want that traditional platform or they want to have this connected platform, which we go to market through MSA+. And it is a tremendous combination for the customers to choose from. So the growth was both. So we saw some mid-to-upper single digits depending on the market for the traditional, but really, by and large, the high acceleration of growth is the connected platforms we're seeing. So that's what we expect to kind of continue to see. It fits really well with what we talked about earlier this year as we walked through the strategy at Investor Day, and that's playing out really nicely.

Very good. I will turn it back, thank you.

[Operator Instructions] And our next question today comes from Ross Sparenblek with William Blair. Please go ahead.

Hi, good morning guys.

Good morning Ross.

Maybe just starting with broader end-market demand. Backlog is difficult to track. So can you just give us a sense of the high single-digit growth in the quarter, is that seasonal? Is that kind of maybe more just the push out of the orders in the third quarter? And what expectations are just broader demand? I mean it would appear like you guys are taking share across most of the segments.

Thanks, Ross. Thanks for the question. So if we think of demand, it was healthy to your point, with orders up high-single digits. And I'll turn it over to Lee to talk a little bit more about what it does on the backlog story and a bit on the book-to-bill. But when we look at the markets, I would kind of think of it this way. We do feel like we're in a really good position from a share perspective. Detection we just talked a little bit about, as I answered Rob's question on portables. We're seeing some nice performance in fixed as well. Last year was a tough comp because we had such great growth, but really solid performance. Industrial is still mixed. We see some really good market performance in some categories, in some we dumped that are a little softer. Europe is a little softer than most right now. But overall, it is been consistent throughout the year. I haven't seen an uptick as we've come into the second half of the year, but we haven't seen much degradation either, and we kind of expect it to remain fairly constant through the rest of the year. And in the Fire Service, we are really doing well with international growth in the Fire Service. The team is taking a ton of share, which we are really pleased with. They are performing well, they're competing extremely well with customers across the international markets, which is a real strength for us. And then we expect the Fire Service in North America too, as we said. We've got the pipeline. It is just a matter of getting some of those orders to close. But overall, yes, we feel like in totality, our position in the markets are really strong, probably as strong as they've ever been. But maybe, Lee you can parse out a little bit about the backlog.

Sure, sure. Hey, good morning Ross. As we noted on the call here, and I remind everyone never to overreact to one quarter. But certainly, a nice quarter over 1.1 times, but we also gave you the full year year-to-date number as well, which is slightly above 1 times. And I think it really speaks to where Steve is going. We are still seeing generally good markets. It can be lumpy from quarter-to-quarter. We're talking about for orders, a nice high single-digit number here in the third quarter with a similar performance in the second quarter. So I think that does speak to everything, Steve was walking through as you look forward as well. Just giving some insight to across the markets where we say in order to drive a single digit. It was very consistent, frankly, across all three categories of our business and good performance around the globe as well. There are spots in the world that are not as healthy, but overall, it is a good place. And I'd clarify also that, in the third quarter, the orders we saw did not include Air Force. We booked Air Force in the second quarter. So it just speaks to that order dynamic so --.

No, that's very helpful. Maybe just follow up on Rob's question. I mean, could you maybe help us size that third quarter order impact? And I know I'm not trying to think you guys [indiscernible] '25, -- but we sound to get a sense of kind of the comp impact we should expect as you think about the $23 million Air Force order and also the backlog conversion in the first half of the year.

Ross, let me clarify, too. Because we had Air Force in the first half of the year for the first tranche. And obviously, that went through the business. And then a good portion of Air Force also fell into 3Q, which is really what you're going to see here [predominantly] (ph) in 4Q, as you talked about earlier, just me clarify that for you. So beyond that, still had healthy growth in the categories I mentioned.

Yes. I would say, Ross, you're right. I mean, we're going to be comping two straight years of Air Force, right, for '25 to your point. But we'll plan to talk more about '25 as we ramp '24. What I would suggest that you think about and just we stay centered on and we're very comfortable with is we're fully committed to our '28 targets we identified during Investor Day. And as we noted, '25 -- and as you said, the '25 comp challenges are there with Air Force, but we're fully committed to what we laid out there for the Investor Day. The margin expansion, certainly the growth and the compounding on EPS.

Got it. Okay. And then maybe just for international fire. Do you get the sense that competitors become more price rational there? Or should we say that there is probably more volume in the quarter?

We're -- that's a really interesting question. So we have -- it's really different by market. So China and Asia Pacific are a bit different. So we've introduced a different product category for SCBA in the Asian market this year that's doing really well, but it's matching the needs of the customer base in that area. So it's a little lower price point. But the M1 is competing really well. A lot of what we're seeing, there's still some of this price-based customer needs, I guess, I'd call it out there. And we are certainly -- we understand that. But a lot of the customers really looking to functionality fit performance. And when they do an evaluation, it's really nice to see them weigh that a lot more than they do price. So they are looking at total value, which I think we compete very well with.

That's perfect. And maybe just one more in here on portable. 3Q is seasonally low historically and double-digit growth, and that's obviously showing some signs of acceleration. Buyer math, maybe there's 5,000, 6,000 incremental units. So it was kind of the expectation that we're kind of ramping to maybe the 20,000 unit run rate?

You mean on portable instruments. Is that what your question is?

Yes, portable gas detection.

Okay. So yes, so if you look at fixed, fixed gas detection, I think the unit run rate continues to be pretty consistent. Portable gas detection, I think on orders, you may be closer on the order count. But on unit count, it is a magnitude higher than that. We're seeing -- what's really nice is we're seeing on this traditional business, the customer continues to really look at our value prop. So we talk about accuracy of sensors, durability of the product, reliability across our portfolio and certainly our service. So we're winning there in converting business in probably a higher rate than we expected on the traditional. And then what's happening on the connected portable side is playing exactly -- playing out how we thought it would. You think of the growth there more like you would think of a software platform, and that's the kind of growth we're actually seeing there. So we do expect that to continue. Now it is on a low base. It's still under 10% of our overall portables revenue. And I think that's important to note, which is why we keep these combined, and we'll continue to track that and keep you updated on the progress.

Thank you guys.

This concludes our question-and-answer session. I would like to turn the conference back over to Larry De Maria for any closing remarks.

Okay. Thank you. We appreciate you joining the call this morning and for your continued interest in MSA Safety. 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 look forward to updating you on our continued progress again next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.