Good morning. We're going to go ahead and get started. Thanks for coming out for the MSA Safety session. I'm Rob Mason, the Senior Analyst at Baird that covers Advanced Industrial Technology. Many of you may know MSA Safety as a pure-play provider of sophisticated safety equipment globally and a market leader across most of the portions it competes in. Very glad to have Steve Blanco, the CEO, with us here today, as well as Julie Beck, CFO. Steve's going to open with a few remarks, and then we'll go to Q&A. Hand it off to you.
Thanks, Rob. Thanks for having us, and thanks for everybody's interest in MSA. Appreciate it. I'll just go through a couple of things to help everybody understand the company a little bit, if we can get this technology to work. MSA is a pure-play, purpose-driven safety company. What you think about with that is we've had the same mission for 111 years. That mission is that men and women may work in safety. They, their families, and communities may live in health throughout the world. We got them. Start with the safe harbor stuff. You know that?
Yeah.
Given that mission, I think what I'd start with, and some of you have heard this story, but we're really proud of this, and the entire family of associates at MSA is grounded in this. When we were founded 111 years ago, it was by two mining engineers who continued to see and have to go to a number of mining disasters where there are explosions. Those explosions were caused by flames, right? Everybody at the time had flames on their caps because that's how they were able to see. That, obviously, when you had high levels of methane or coal dust, you create an explosion. The canary wouldn't necessarily save them. These two gentlemen worked with a guy you may have heard of named Thomas Edison and convinced him that they needed to design an electric cap lamp.
That electric cap lamp, once it was implemented over the next 10 years, mining deaths went down over 75%. MSA has been innovating ever since. It is all focused on that mission of how we protect people across the world. What that has turned into is an industrial safety technology company. We innovate to lead across our different product categories. As you can see in the center, we have two segments we report to. One is the Americas, which is a little over two-thirds, and then international, which is everything outside of the Americas. Our product categories of detection, fire service, and industrial PPE are really how we go to market. We have a very resilient business. Detection includes instrumentation that people would wear, so we would call it wearable detection or portable, and then instrumentation that is fixed that protects assets, refrigeration, monitoring, and the like.
Fire service is just what you would expect. It is head-to-toe protective apparel for the firefighters, as well as the breathing apparatus, and certainly the helmets. Industrial PPE is a number of different product categories. The ones that we center on strategically are head protection and fall protection. We have a couple of other categories where we have some nice margin and cash generation. Doing that helps us protect over 40 million people annually across the globe. We are really proud of that. If you look at our strategy, we have four key pillars that we will probably talk a little bit about here.
I will not go through the details except that this is how we believe we can set ourselves up for continual growth into the future and leverage the technology that we have and our voice of customer to really take advantage of the market position we have and where we see the macroeconomic and market dynamics taking us into the future. We will continue to allocate capital as we have very effectively. We have leaned into this with this strategy that we announced in mid-2024 to really focus more on M&A as well as the organic growth we had been focused on. Certainly, we will continue to return back to the shareholders through our dividend and obviously share buybacks, which we are in the middle of right now as well. We are active on the market in that category.
Lastly, if you look at this year, I would just reference what we said a couple of weeks ago in the earnings call. We have about 2% organic growth year to date. We have about a 1% for the year headwind with the government shutdown because of the fire service, which we continue to expect to be around that zip code. Fortunately, we did receive NFPA approval, which we announced, which was a really nice milestone that the team's excited about. We are now capable of taking orders from our customers. With that.
Perfect.
We'll go to Q&A.
Again, if you have any questions, send those up, and we'll mark those in the discussion. Steve, maybe just we'll start where you kind of left off there in the fourth quarter. Typically, you do see some seasonal lift, and the business fire service is usually a component of that. Maybe just setting that aside, given some timing dynamics, how about the rest of the business in terms of what you're seeing as you go into the fourth quarter? What looks normal, abnormal, anything you'd call out?
I think if we look at the rest of the business, that'd start with detection. As we've talked, detection has been a really good business for us. I would reference the accelerate strategy. We talked then that we thought that 2025 would be a challenging year on the fire service. As we leaned into some of the activities we have going on in detection, we thought we'd accelerate growth there. We've intentionally focused on what the customer needs are. Again, this is that solution base I talk about. When we've done that and how we've done that has enabled us to have really nice growth in detection, matching up with that strategy. I think that's going to continue. If we look at the market dynamics in detection, we're outgrowing the markets at this stage.
We're really pleased with the growth we've seen across the globe. The portable detection, MSA Plus, has been a fantastic grower. Small base. Certainly, it's about 10% of the portables, which is about a third of the overall detection space. It has been a really nice catalyst in so much as it's also helped the rest of the portable business continue to grow. The customer base, even when they choose the existing platform, they've got the choice from us. They look at us as that trusted advisor and say, "Hey, you guys have all of the solutions we need." We're getting growth on the core traditional platform as well, which we, frankly, thought we might cannibalize more than we have. The market dynamics are pretty good. I mean, they're choppy. I would say the industrial PPE, we're continuing to see somewhat choppy market dynamics.
The growth there, which we expect to continue in the fourth quarter, has been really centered on our fall protection strategy and how we've really put a laser focus on what we believe is a nice set of solutions for the customer. I think we think that's going to continue. We're seeing that thus far.
Okay. And just maybe speak to we're still discussing it, just as we're playing still maybe a little bit of catch-up around tariffs and price contribution. How do you see that rolling in both the second half of this year, first part of next year? It's often when you take a normal price increase and bring us up to date on price cost, effectively.
Yeah. That's a good question. When we looked at the year and we talked early in the year, we indicated and have seen that there's acceleration in that cost impact to our P&L in the second half of the year. We saw that in the third quarter. We'll see that in the fourth quarter. We have instituted some targeted price increases throughout the year in both segments. Off-cycle is what we would call them because we typically do them in the first quarter. Those price increases haven't been the same in each region. What we've tried to do, we really take the long view on this. When we do a price increase, our intent is that stays. We've tried to make sure we see some normalization of what that tariff rate might be so that when we go to the market, it stays in there.
The second piece of that is, when do you think you kind of get this right-sized and get rid of the noise we've had in 2025? We think the first half of 2026, you should see that. We expect and we'll continue to see that improve early in 2026. We believe we're in a good position where that's going to right-size itself, and we'll be in the right space.
Okay. You made mention earlier just around the government shutdown dynamics. Any noise in other parts of your business besides fire service?
A little, but I mean, not as significant as fire service. I mean, we have a couple of orders that we know have been pushed, but minor.
Okay. And then on fire service, you made mention NFPA approvals are out. I would assume that's the case across all of the vendors in the industry.
We know ours are out. We know one other's is out. We would assume the other one will announce their approval at some point. We are focused on ours and how we compete effectively.
Now you can move forward with the NFPA-compliant product.
Correct.
How does that kind of impact the order dynamics here in the fourth quarter? Should there have been some customers holding back?
There certainly are customers that were waiting for the new approval, the new standard approval. As we've expected sometime late this year, early next, we were really pleased with when it did come out because it allows us, we've got certainly customers that have already indicated and have ordered the current version. We think that this is going to help customers really think about, "Okay, now I can get this new version. There's no more noise for them to worry about." Now, the timing with, again, the government shutdown and the AFG funding has kind of held a little bit, probably not much of an impact in the fourth quarter. It's still going to be what we expect for next year.
Okay. Just the mechanics, I mean, if we do have line of sight on a reopening maybe in the next week or two, the mechanics of what needs to happen around AFG is you would expect those, the awards have been made. You would expect then what, the submissions for those awards into AFG, and then they reimburse and start the dollars.
Right. So the process is if you're a fire department, you receive notification that you have an award. That happened at the end of September, last few days. The government shut down. You can't get on the website and go and basically.
Yes, claim your award.
Accept this award. Then to receive the funding, you have to have a purchase order to give back to basically, "Here's my PO," and then you'll get the funding based on that PO. Fire departments first can't go in there to check and sign off and say, "Yes, I received my award," or, "I'm accepting it." That, obviously, once the government comes back, they'll be able to do that. The next piece is the timeline of them then issuing the PO. Some of them will go through an evaluation and plan to do that. Some of them have already determined the manufacturer that they're going to choose, and they'll just move through that process. We're still in the same zip code with what we expected a couple of weeks ago. I don't think that changes with what we've seen on the timeline.
I would say that next year, you're probably going to see as that kind of rolls back in, right? It's because it's all about timing. That point is probably a first half. It's probably not all going to drop in the first quarter, again, based on those dynamics I just talked about. It's important to realize that the funding, the award notifications were the end of September, which is the latest historically we've ever seen. They did it in a very short window. Typically, you see that occur through August and September. September is lighter. Usually, you get the big tranche in August, or even typically, it starts in July. The big tranche is usually early, mid-August. All that timing I'm talking about is going through the process of them going through the process is happening in late August, September, and October.
That's going to be delayed certainly into the future.
Okay. Just on your last call, as you were framing out the maybe setting the timing dynamics aside, just the pace of demand in that environment or that market, at least domestically anyway, kind of steady underneath that, kind of steady through 2026, but you seem to have some optimism beyond 2026.
I do. I think we're in a place where we're having kind of a solid state, kind of consistent market size currently. We expect similar dynamics next year with a little bit of movement based on this funding thing, perhaps. As you look forward, the cycle and the quantity of SCBA that the market had, the market size of SCBAs shipped in 2015, 2016, 2017, 2018 was really large. Now we're really at that, I'd say, a little bit of a normalized lower point. There's kind of like the, we call it that replacement cycle, which you're very familiar with. You've talked to us a lot about it. We didn't see it drop off precipitously like maybe in the past. Part of that is because of the value of the SCBA has helped with that, right?
Because the value of our SCBA is much different than it was 10-plus years ago. As you think about the timeline of a fire department, they replace them every 12 to 15 years. You get into 2028, 2029, 2030, then you have these large volumes coming back. Yeah, we are prepared for that. We are planning for that. It is certainly something, yeah, I think bodes well for the future of the fire service.
Going back to the detection, again, you've been pleased with the performance there. That has been a market that you've targeted market outgrowth in as well. You talked a little bit about why that is. Just again, those markets can be diverse. I think externally, from our standpoint, our seat is sometimes hard to understand exactly what's driving that market. Any a couple of items that you would call out from a market standpoint and then where you think you've been particularly successful?
Sure. Energy has continued to be a really strong market for us. Traditionally, the oil and gas industry, we've done well in that industry. That industry has not gone away. It has continued to be solid for us. Not as big of a contributor because a lot of this outgrowth is us expanding our market coverage to other places, other markets, quite frankly. Energy has expanded, first and foremost, as we've talked about clean energy. Some of this carbon capture has been very beneficial in some of the activity. There are areas, for example, in Europe, they really are in the early stages of some of the activity they're doing on carbon capture, but are needing to do that. They're recognizing the need to do that. That total energy package, if you will, of business has been really strong.
We think will continue to be strong even with the oil prices hovering around the $60-ish spot. I would expect from what we've seen and what we're hearing that there's going to be continued investment, especially in the Middle East and North America. Latin America's not far behind. They're investing heavily too. Those markets are investing. Europe is really more of a maintain at best from an investment perspective. There's a little more investment expected next year. Those big markets, really, we're looking at those as a growing category into the future. Probably when you add all those things up, you probably have oil and gas traditionally growing at 2%-3%. Then you have the clean energy on top of that. You're looking at a market growth that's high, mid-single digit, or upper high single-digit growth in the next five to seven years.
That is just becoming more of an issue because of what we are seeing with the data centers, right, with AI. We play in that too. It is a nice space for our backer business. We have had some nice wins on a couple of data centers that we are leaning into. We expect that to be a nice tailwind as well. It has been really cross-functional. We have some activity that we recently won in the pharmaceutical side on the fixed gas business. These are things that we identified to really open up the aperture of opportunities when we went through the strategy. We are really good at this stuff. We have solution sets that can hit these other markets. We have to be intentional about these markets and show the customer our solutions to do that. That is paying off.
Yeah. The M&C TechGroup acquisition that you did as well. I mean, we think about your M&A history here. Maybe not the typical personal safety acquisition that you would have done. It gets you somewhat into the process stream. Just maybe talk about what that brings. Again, you kind of open the aperture around a market that it plays in. What does it present in terms of expansion, adjacencies, bolt-on type opportunities?
When we think of M&A, we're still going to stay true to that mission that I talked about earlier. That mission really grounds us in everything we do. If you remember what I said, it's men and women may work in safety, and they, their families and communities live in health throughout the world. That for us provides a nice foundation of how we look at M&A and opportunities to expand the addressable markets we participate in. M&C is an extension of that similar to what Bacharach was. Bacharach is an example where we understood the technologies very well. They're very well aligned with MSA's technologies and solution set. It was a market we participated in in a very small way. We've expanded that. This is the refrigeration market and HVAC are markets that we're now in with Bacharach.
M&C is a similar example to that. Now, we had not done much on the processing side and now the processing analysis side. We saw M&C as a really, really good opportunity because it's managing and measuring processes in ways to ensure that you have the right controls in place. This is again around instrumentation in the fixed monitoring space that we felt was we know the technology really well. We know some of the customer base pretty well, but it's in a different space that we do not participate in. It has been a really nice add. The M&C family is doing a great job with the integration. Our team's doing a great job. We're really pleased with where it's at halfway through one year. It is doing really nice.
Foundationally, it allows us now to really launch off that platform because there's a lot of space in this processing model. There's a lot of opportunistic areas we think we can go after and expand that.
Yeah. Okay. We'll just maybe touch quickly on the industrial PPE side. You said it's been choppy, but you've leaned into the fall protection. Just talk about kind of what's enabled some what looks like market share gains, market outgrowth anyway there. It's been somewhat my sense on the innovation side, but also just kind of execution, supply chain, and the like.
You're right. It's around how we've innovated the suite of products and solutions we have in fall protection. We've turned over and really done a nice job putting our innovation engine to work on fall protection. Commercially, the way we go to market with our customer support has been a big play in this and the brand equity we have. Third is how we have improved our ability to deliver to the customer. This is one where we've had nice double-digit growth for, I think, seven years minus one in North America. We're really trying to do that globally as well, in which we have, you saw that in the third quarter. The interesting thing for fall protection is it's really, as we look at it, the customer needs it right now. They don't typically plan ahead in many cases for fall protection.
When they want it, they expect it right away. It is a shorter cycle requirement for the customer. If you do not have the appropriate inventory on hand, you are not going to get that order, even if you have the best solution. We have really leaned into making sure we have the availability for those products for the customer. What is interesting, though, is we have stumbled on that a couple of times, right? Certainly, part of it was as we came back with the supply chain challenges post-COVID. We stumbled there. We had this great growth. We stepped back and the customer went elsewhere, right? Last year, we had the same thing. We closed the factory intentionally as we moved production to a different facility and rationalized our footprint. The same thing happened. The customer came back.
It's a real testament to the brand and the capability of how we have that connection to the customer. I've never seen a category where they come back multiple times. You usually can lose them once. If you can't build that trust, coming back that second or third time is very difficult. What we've done now has been very intentional to say, "We're going to put this in play. We're going to make sure we have all of the required inventory to ensure we keep it." Now we've built that credibility because they've seen it stay. It's just building momentum on that entire business front.
Yep. What about some of the other areas within industrial PPE, the head protection, ballistics is kind of a non-core business, but it does cycle up and down and actually, I think has been a little healthier for you.
Ballistics, we expect to continue to be healthier. Ballistics is an area. It's protective ballistic helmets. It's a European business that a lot of the European countries and governments have really leaned in to try to increase their defense spending. That's an area, certainly, we're on the protective side of that. We expect that business to continue to do well. It's doing well now. We think it will continue to do well into the foreseeable future with a little bit of lift to this funding transition that the governments have made in that area. Our traditional head protection has been a solid business. We just launched the Type II hard hat, the H2 full brim in the United States. We expect that market to continue to be a nice contributor.
The thing about the Type II helmet is the price point is like three and a half X of the Type I. If the market continues to shift as we're starting to see to a Type II solution, that could be a really nice tailwind on the revenue growth in industrial PPE.
What would drive kind of that shift?
There's a belief by the customers that while both of them meet the standard and are protective for that individual, there's some applications where customers want that side impact protection, which is a Type II versus the top impact protection. There's some organizations that are moving to, "Hey, I don't want to have two different helmets on site. I really want to make sure I streamline. If I'm going to streamline, I have to go to the one solution that is able to take care of every situation I'm in.
Okay. Just want to shift to your profitability, your margin profile, and basically kind of the margin algorithm that you've set out, kind of 30-40% type incrementals, what we're striving for. It'll help to get on the positive side of the tariff equation, FX as well.
That's true.
Exactly.
Maybe that's just a matter of timing as long as currency stays stable. Maybe, Julie, comment on where you think margin pathway looks as we exit the year.
Yeah. We improved margins from the third quarter, from the second quarter. We expect the margins to improve in the fourth quarter as well as some of these pricing actions take place. We expect that we will be in that 47% gross margin range, which is a nice margin. In 2026, we expect improvement going forward as well.
Okay. We get this question a lot around AI. Any early implementations of AI internally that you've been able to execute on?
We've been doing the teams, well, we love innovation. We've done some really cool things on both how we interact with the customer and how we drive efficiency internally. I believe we're on the early stages like most people. The things we've done around our SIOP process and how we evaluate inventory using AI tools is fantastic. As a matter of fact, our supply chain team was awarded an innovation, something use of technology award. Jose Sanchez and his team just did a phenomenal job with implementing that and taking technology to make us more effective. Their fall protection is a great example of that.
With our MSA Plus, we just went out with our first pilot of a large language model for our customers to use to help them on how they are able to take a fleet of io 4s and utilize those effectively and communicate with MSA on any questions they have and things that they want to learn more about. We have launched what we call Edison internally, which is something that enables our teams to look at innovation and use AI to help streamline any workflow that they have going on. We see it as an opportunity. I mean, AI, we're still learning. As I'm sure everybody knows, AI is really that understanding and utilization of data. It is becoming much, much more effective and more streamlined. We wanted to make sure we take advantage of that.
Absolutely. Real quickly, as maybe speed round here, you've already made mention, eyes on, at least with respect to M&A detection, a focus area. Any other areas of the portfolio that you're evaluating for inorganic?
All of them.
If they're core.
Even fire service.
Even fire service, I would say the fire service in the spaces we're in, it would have to be very, it's very difficult because we have leading positions. We'd have to expand that. We know the markets very well. I wouldn't say no. We're looking for categories that we believe can minimum meet our growth expectations for the future or add to those growth expectations. Again, it's either going to be technologies that we understand and/or markets we feel very, very comfortable with. If it's both, great. That's what we look at.
All right. Fantastic. We're at time. We'll stop there. There is a breakout session upstairs in the Chestnut Room. So if you have any questions, meet us up there. Thank you.
Thank you.