MSA Safety Inc Q4 FY2025 Earnings Call

Good day, and welcome to the MSA Safety Fourth Quarter and Full Year 2025 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Larry De Maria. Please go ahead.

Thank you. Good morning, and welcome to MSA Safety's Fourth Quarter and Full Year 2025 Earnings Conference Call. This is Larry De Maria, Executive Director of Investor Relations. I'm joined by Steve Blanco, President and CEO; Julie Beck, Senior Vice President and CFO; and Stephanie Sciullo, President of our Americas segment. During today's call, we will discuss MSA's Fourth quarter and full year 2025 financial results and provide our full year 2026 outlook. Before we begin, 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. We have included certain non-GAAP financial measures as part of our discussion 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. Moving on to today's agenda. Steve will first provide an update on the business. Julie will then review the fourth quarter and full year 2025 financial performance and 2026 outlook. Steve will then provide his strategic priorities for 2026 before giving closing remarks. We will then open the call for your questions. With that, I'll turn the call over to Steve Blanco. Steve?

Thanks, Larry, and good morning, everyone. Thank you for your continued interest in MSA Safety. I'm on Slide 6. We executed well within a challenging environment for 2025. We had a solid finish to the year, guided by our Accelerate strategy, centered on serving MSA's mission for our customers and protecting over 40 million workers worldwide who trust the MSA brand. Just within the last month, I've learned about two separate customer save stories where our solutions helped save lives. First, a worker at a water treatment facility was alerted to a flammable gas alarm by his ALTAIR 5X portable gas detector, enabling evacuation before the fire occurred. It's why customers count on the MSA brand: fast response, reliability, and durability in the real world. We also heard directly from a firefighter wearing our Globe turnout gear when he was engulfed by a flashover as he entered a structure. As he told us afterwards, 'In a moment where everything went wrong, your gear did exactly what it was designed to do, and did it when it mattered most.' Save stories like these remind us all at MSA of the importance of fulfilling our mission. Now for our business update on the fourth quarter and full year. Our fourth quarter results reflected strong free cash flow, low single-digit reported sales growth, mid-single-digit adjusted earnings growth, and sequential improvement in operating margins. Quarterly consolidated reported sales growth was 2%, with a 3% organic decline, a 3% contribution from M&A, and a 2% favorable FX. Adjusted earnings per share were $2.38. Organic sales performance in the quarter was driven by continued strength in detection, which was offset by a decline in the fire service, while industrial PPE was up modestly. The M&C TechGroup acquisition contributed $15 million to the quarter. Looking at sales by product categories, detection's 17% organic growth was driven especially by strength in fixed, while portable instruments also continued their growth. This growth was primarily driven by excellent performance in the Americas as we completed the delivery of several large orders. Organic sales in fire service declined 21% year-over-year. The U.S. market dynamics surrounding AFG funding and the U.S. government shutdown impacted the timing of SCBA sales in the quarter as expected. We also faced the final tough year-over-year comparisons with U.S. Air Force deliveries. Organic sales of industrial PPE were up 1%. Fall protection moderated from the strong pace we saw in the previous quarters, though it retains a positive outlook. From a full year perspective, we effectively executed our strategy against a volatile operating environment. Net sales growth for the year was 4% on a reported basis, with 1% on an organic basis and a 2% contribution from M&A. We remain very pleased with M&C's performance and its integration into the MSA family. Order pace across our product categories was healthy, albeit mixed, in the low single digits year-over-year and reflected the timing dynamics in the fire service. Detection orders were about flat versus the strong FGFD comparison last year, and industrial PPE orders decreased by low single digits, with fire service orders increasing by low single digits. Order flow improved from the third quarter following the NFPA approval of our newest G1 SCBA, the release of AFG grants, and the reopening of the U.S. government in mid-November. Overall, backlog remains healthy and consistent with historical levels, and we have a solid commercial pipeline. Our overall book-to-bill was slightly below 1 and above the year-ago period. Turning to Slide 7, you know how dedicated we are to serving our mission for our customers and delivering innovative products and solutions. As you can imagine, we also have our own MSA culture of safety that we live every day. I'd like to share a couple of highlights. In 2025, we delivered world-class safety levels across our organization, finishing the year with 0 lost time incidents. In addition, our total recordable incident rate was 0.25, the best rate we've achieved ever. These metrics demonstrate that we live our mission every day at MSA at every facility around the world, and further emphasize how doing so enables us to strengthen our culture of safety. I'm extremely proud of the MSA team. A sincere thank you to the team for their dedication and commitment in our endless journey of improvement. Moving to Slide 8. We expected 2025 to be a dynamic year when we outlined our Accelerate strategy and long-term targets in 2024, and it proved to be just that and more. However, we maintained our diligent focus on strategic execution. I'd like to share a few of our 2025 achievements. First, as we committed to, we delivered above-market growth in our key strategic growth accelerators, with detection up organically low double digits and fall protection up high single digits. Detection is now our largest product category, representing 41% of sales. In addition to the exceptional fixed detection performance, we continue to see growth in both MSA+ connected and traditional portable solutions. Second, we continue to innovate and bring industry-leading products and solutions to market. This included launch announcements for the ALTAIR io 6 portable gas detector, which advances our MSA+ ecosystem; the new H2 Full Brim Type II hard hat; our newest Globe turnout gear, the G-XTREME Pro jacket; and our latest generation 2025 G1 SCBA, which received NFPA approval in November. Finally, from a financial perspective, we utilized our consistent free cash flow to deploy nearly $0.5 billion into growth investments and returns to our shareholders. We welcome M&C into the MSA family, increased our share repurchases, and raised our dividend for the 55th consecutive year. Moving to Slide 9, moving into 2026, we remain confident in our expectations for a number of key markets. That includes fire service for both our domestic and international segments. In North America, we're optimistic about the pipeline of opportunities and continued use of AFG grants in the U.S., which we expect customers to access throughout the first half of the year. Internationally, we continue to see opportunities to gain market share across our regions as our pipeline for our fire service solutions remains strong. In the energy sector, we anticipate strong underlying global demand in 2026 and beyond. We expect to leverage the various investments in this area as well as in the industrial markets. We are well positioned for opportunities across the entire detection portfolio as well as in fall and head protection. With that, I'd now like to turn the call over to Julie to walk through our fourth quarter and full year 2025 results in more detail and our '26 outlook. Julie?

Thank you, Steve, and good day, everyone. We appreciate you joining the call this morning. Starting on Slide 11 with the quarterly financial highlights. Fourth quarter sales were $511 million, an increase of 2% on a reported basis over the prior year. Sales were down 3% on an organic basis from the prior year, while M&C added 3% to overall growth and currency translation was a 2% tailwind. As expected, GAAP gross margins improved sequentially, rising to 46.9%, an increase of 40 basis points from the third quarter and remaining consistent with the previous year. Year-over-year gross margin reflects the mitigating effect of our pricing strategy on tariffs and inflation as well as positive mix and favorable transactional FX. As we have previously communicated, we remain focused on achieving price/cost neutrality in the first half of 2026. GAAP operating margin was 22.3%, with an adjusted operating margin of 23.9%, which was consistent from a year ago, as lower volume and gross margin pressures were largely offset by mitigating pricing actions, positive mix, and favorable transactional FX. Sequentially, adjusted operating margins were up 180 basis points from the third quarter. Entering 2026, we remain diligently focused on SG&A productivity, pricing, and tariff mitigation plans to counter headwinds and return to margin expansion. Quarterly GAAP net income totaled $87 million or $2.21 per diluted share. On an adjusted basis, diluted earnings per share were $2.38, up 6% from last year, which included a favorable adjusted effective tax rate of 23.2%, primarily due to a reduction in state income taxes. Now I'd like to review our segment performance. In our Americas segment, sales declined 1% year-over-year on a reported basis or 3% organic as mid-20s organic growth in detection was offset by a low 20s contraction in fire service. As Steve mentioned earlier, sales in the fire service were negatively affected by timing-related market conditions, while organic sales in our industrial PPE business were relatively consistent. M&C contributed to 1 point to total growth and currency translation added a 1% tailwind for the quarter. The adjusted operating margin was 31%, a 30 basis point increase compared to the previous year. The margin improvement was primarily due to pricing, favorable mix, and effective SG&A management, partially offset by lower volumes, inflation, and tariff pressures. In our International segment, sales increased by 8% year-over-year on a reported basis, with a 6% contribution from M&C and a 5% tailwind from FX. Organic sales declined 3% as mid-single-digit growth in detection and industrial PPE was offset by a double-digit contraction in fire service, which was primarily driven by orders being pushed into 2026. Adjusted operating margin was 16.8%, 80 basis points below last year. Margin contraction was mainly due to inflation, tariff pressures, and volume, partially offset by pricing and SG&A management. Now moving on to Slide 12, where I'll review our full year results. Total net sales were $1.9 billion, up 4% or 1% on an organic basis versus last year. M&C contributed 2 points to overall growth, and currency translation was a 1% tailwind. We saw double-digit growth in detection and low single-digit growth in industrial PPE. Growth in industrial PPE was primarily driven by strong performance in fall protection. Sales in fire service contracted due to the challenging market conditions we have talked about. Adjusted operating margin was 22.1%, down 80 basis points from last year on tariff, inflation, and transactional FX pressures, partially offset by strategic pricing actions, positive mix, and improved productivity. Adjusted diluted earnings per share were $7.93, up 3% over the prior year. M&C contributed $0.09 to adjusted earnings per share. We delivered a strong return on invested capital of 20%, which included the overall impact from our acquisition of M&C and far exceeds our cost of capital. Overall, MSA's financial performance was solid, given the challenging prior year comp and the dynamic operating environment that persisted throughout 2025. Now turning to Slide 13. We generated a strong free cash flow of $106 million in the fourth quarter, which is 122% of earnings, marking a 13% increase compared to a year ago. For the full year, free cash flow reached $295 million, up $53 million from last year, with a 106% conversion rate that surpassed our annual target range of 90% to 100%. In the quarter, we returned $61 million to shareholders via $21 million of dividends and $40 million of share repurchases, in line with the increase we communicated last quarter. Repurchases in the fourth quarter were equal to our total repurchases throughout the first three quarters of the year. In addition to returning cash to shareholders, we invested $16 million in capital expenditures. For the year, capital deployment, excluding R&D investments, totaled approximately $420 million and included $189 million spent on the M&C acquisition. $162 million returned to our shareholders via share repurchases and dividends, and $68 million in CapEx, which includes our Cranberry expansion that will further support our Accelerate strategy priorities for growth and footprint optimization. We continue to reinvest in R&D, which represented 4.3% of 2025 sales, reinforcing our commitment to being a leading safety technology provider. Net debt at the end of the year totaled $416 million, down $43 million sequentially. As of year-end, we have repaid approximately $100 million of the $140 million we borrowed for the acquisition of M&C, and we ended the quarter with net leverage of 0.9x. Our weighted average interest rate at quarter end was 3.9%. Our strong balance sheet and ample liquidity of $1.2 billion continue to provide optionality and position us well to support our Accelerate strategy and invest in our business, while we maintain an active M&A pipeline entering 2026. Let's turn to our 2026 outlook on Slide 14. We are projecting mid-single-digit full year organic growth. Overall, our business remains healthy, and the pipeline is solid. Although the fourth quarter was affected by timing issues in the fire service and the U.S. government shutdown, we expect those delays to favorably impact the year as we carry over about 1% of annual business that was delayed. We anticipate ongoing momentum in detection and fall protection as key growth drivers, while pricing actions taken throughout 2025 and 2026 will be realized alongside moderate volume growth. We expect normal seasonal patterns throughout the year, including M&C, with the first quarter typically being the lowest of the year, implying approximately high 40s to low 50s sales split between the first and second half. In addition to our mid-single-digit organic growth outlook, we expect M&C to contribute approximately 1 percentage point to full year revenue growth. Other items below the line included interest expense of $28 million to $31 million and a tax rate in the mid-20s percent. In conclusion, there is no question that further uncertainty and volatility exists into 2026. We remain confident in our resilient business, our pipeline, and our ability to navigate macro uncertainty and timing challenges as we execute our strategy and work towards our 2028 targets. With that, I'd like to pass it back to Steve.

Thank you, Julie. I'm on Slide 16. Overall, we executed well in a very dynamic 2025. As we move into 2026, our strategic priorities remain rooted in our mission and disciplined execution of our strategy. We retain our focus on driving profitable growth while extending our leadership in the markets we serve. We continue to apply the principles of the MSA business system to drive continuous improvement in all we do. Our strong financial profile and balance sheet enable effective capital allocation through organic and inorganic growth investments and returning capital to shareholders. We remain active and highly disciplined in our M&A approach as we continue to evaluate inorganic growth opportunities that meet our strategic and financial targets. Moving to Slide 17. I'm proud of our team's execution and thank all of our associates for their continued commitment to serving our singular mission of safety. While there are always new challenges, I'm optimistic that we will continue to grow both organically and through acquisitions, and that we have begun to exit some of the most difficult quarterly comparisons. With that, I'll turn the call back over to the operator for Q&A.

And the first question today will come from Rob Mason with Baird.

On detection, we had a really strong quarter and managed to fulfill some of the larger orders before year-end. Steve, I remember we anticipated that business would grow in the high single digits for '25, but it actually increased by 12% on a local currency basis. Is that difference due to the large orders, or did we see some other factors contribute in the fourth quarter?

Yes. Thanks for the question, Rob. I would say it was explained by the large orders. We had a couple of really nice orders come in. We had a customer in late Q3 that asked us to execute on an order that would have been this year. So we had an additional large order that came in. So if you took that out, it probably would have been a 10-ish number for the year instead of the 12. Obviously, very strong. We said high single digits, I think, pretty early in the year, and I think the team executed very well in that. But the underlying demand continues to be super strong across most of our regions, and we're expecting the investment category for some of the end markets to continue. I mean we're not going to have that same kind of year this year, certainly, but a really solid year.

Yes. And in addressing the well-known challenges in the fire service during the fourth quarter, how do you envision the progress in fire service throughout the year? These issues likely won't resolve immediately on January 1, but how do you think things will evolve from the first quarter to midyear?

Yes, thank you. It will be interesting to see how this unfolds. When considering the delay, fire services typically have a time frame aligned with the fiscal year-end after receiving funding. They recognize the opportunity to make purchases before manufacturers inevitably increase prices in the first quarter. However, that didn’t happen this time due to a lack of funding, which impacted their ability to place orders. We are currently addressing this situation with our customers, which leads us to believe that most of the affected orders will likely be fulfilled in the first half of the year. The rest of the year is expected to follow a more normal pattern for fire services, with demand likely peaking in the second half. Overall, apart from the AFG delay, we anticipate seeing some positive movement in the first half, but we expect the majority of the year to resemble standard operations.

I see.

Just to add on to that, I would say that we would expect pretty consistent growth throughout the year in terms of the revenue growth for fire service.

The next question will come from Mike Shlisky with D.A. Davidson.

I'll follow up on your impressive detection numbers from the quarter. It seems to be a consistent trend. Could you provide insight into the expected growth for detection in 2026? Will there be a point where you face challenging comparisons, or is there enough new product being launched to support strong growth this year?

Yes. Thanks for the question, Mike. Last year, especially in the latter half, particularly the fourth quarter, will have tough comparisons. As I mentioned with Rob's question, there are a couple of factors that likely would have contributed to this year. We expect this to be a strong year for detection. Although it's early, we anticipate mid-single-digit revenue growth for the year, despite last year's comparisons. At this point in February, that's our outlook for the year. We believe growth is achievable, supported by the macro environment. Our solutions in both fixed and portable detection categories reinforce that with our customer base.

Great. And I also wanted to turn to the margin outlook. When I think back, you've got that longer-term 30 to 50 basis points a year margin goal to gain every year through '28. Now that goal was released prior to the tariffs and things coming out more recently. But you did end up down a bit in 2025. Is there a catch-up that happens here in 2026 and then you add on top of that the 30 to 50 basis points of margin just as pricing catches up? Just some thoughts as to whether you could be seeing 100 basis points plus of margin in 2026, especially the run rate to exit the year.

It was certainly a dynamic 2025. The tariff situation had an impact, as we discussed last year. Our ongoing strategy focuses on a mix of efficiency and pricing. The business system has been beneficial. As mentioned before, we've put in place some price increases, and our main focus has been on the long term, executing in a way that allows us to manage price costs in the first half of this year. We are currently where we expected to be, and you should see continued improvement. This was evident in the fourth quarter, and we anticipate that trend will continue as we move forward.

Yes. I would expect that our margins will improve over time. We should achieve price and cost neutrality by the end of the second half, and we anticipate returning to our 30% incremental margin targets this year.

The next question will come from Ross Sparenblek with William Blair.

Looking at Slide 9 on the end market assumptions. First off, thanks for providing that. I was curious to see that the infrastructure bucket is expected to be neutral this year. Energy and chemicals are up. Can you maybe just provide a little more color on the project activity you're seeing in the funnel? And anything else you can speak to that kind of underwrite those assumptions for the year?

Yes, thank you for the question, Ross. When we consider 2026, we observed that 2025 was somewhat inconsistent in the industrial sector. However, investments in chemicals and energy have remained steady, and our outlook appears positive across most global regions. We expect 2026 to be similar, with some regions likely experiencing growth in the second half of the year due to some announced investments. For instance, Europe has not seen as much investment recently, but we anticipate progress in the latter half of the year, and improvements in China in this regard. The Middle East performed strongly throughout the year, and we expect that trend to continue. The Americas also have a comparable situation. These factors give us some advantages. From a market perspective, there is a global demand for energy, and our customers are preparing accordingly. Overall, when we assess our Accelerate strategy alongside the expected market conditions, we feel optimistic about our position for 2026.

Okay. Regarding the portables, it seems there was slightly slower growth this quarter. Is there anything notable as we consider potentially tougher comparisons? Or could the transition to io 6 be causing a slowdown? I'd appreciate any updates on portable gas.

The portable business continued to grow in both 4 gas categories. Portables include both single dual gas and the 5 gas, with the io 6 set to replace our 5X or serve as an option for the 5XR. The 4 gas segment has performed exceptionally well, marking our best year ever for units. Interestingly, the revenue for the year from the io 4 and MSA+ segment accounts for just over 10% of portables, while unit sales are nearly double that, indicating a positive future due to ongoing subscriptions. It experienced significant growth and is expected to perform similarly in 2026.

The next question will come from Tomo Sano with JPMorgan Chase.

This is Ethan asking how we should understand the mid-single-digit growth outlook on pricing and volume, given that about one point of it is attributed to the fire services delay?

I think we're going to get contribution from both. So I would say you're going to see both probably lean more towards the price side, right, Julie? But you'll get contribution from both. A little bit more on the pricing side.

And would we expect this to be more of a first half weighted on a volume standpoint versus price? Or can we see like pricing due to tariffs flow through kind of in the first half?

Yes. So we'll have some more pricing early on because we have a carryover from last year and pricing actions that we took that are going to start to flow through at the beginning of the year here in the first six months, as we talked about. So we'll see it in the first half.

The next question will come from Jeff Van Sinderen with B. Riley FBR.

Most of my questions were answered. But I guess, when you look at the competitive landscape, how are you seeing that evolve in detection? What do you think the key factors are that are driving new business wins for you in detection? In other words, why do you believe your customers are choosing you versus competitors in latest wins? And then anything more you can say about product innovation that could drive upgrades or new business wins in detection?

Yes. Thank you for the questions. Starting with the competitive landscape, there are some strong competitors in this space. We have focused on staying close to our customers and understanding their needs to create solutions that address their challenges. Our portfolio, particularly in detection, has expanded through strategic acquisitions and aligning with customer needs. We have a strong traditional gas detection offering, and last year we launched a new flame detector that has been very successful. The field server and controller business from an acquisition a few years ago is now integrated into our platform, providing a comprehensive solution for customer communication at their sites. We are also seeing growth in our refrigeration businesses from Bacharach, along with the addition of M&C from the processing side last year. On the fixed side, we have built out our business, expanding our market opportunities and creating more comprehensive solutions for our customers. This gives them a convenient option to meet their needs, which is appreciated. In the portable segment, customers usually prefer to buy discrete products, which we expect to continue. However, our connected products, like the MSA+ on the io 4, present a unique offering. While there are some competitors in the connected space, we believe our solutions fulfill customer desires for ease of use, durability, reliability, and accuracy. We may not be the lowest cost provider, but from our customers' perspective, we often deliver the best long-term cost of ownership. Looking ahead, we plan to keep this focus, which ties into the innovation aspect of your question. As I mentioned earlier, we have a number of new product launches informed by customer feedback, and we will continue this into 2026. Our capital allocation begins with organic growth, and most of our investments this year—over two-thirds—are directed towards growth initiatives.

That's correct, yes.

So hopefully, that provides you with a bit of insight on that.

The next question will come from Brian Brophy with Stifel.

So just a modeling question. SG&A, how should we be thinking about that this year?

Yes. So SG&A, I would say, in the first quarter, kind of consistent with the fourth quarter. And I would say SG&A as a percentage of sales is relatively consistent for 2025 to 2026. We're going to have some nice growth projects that we're going to fund in SG&A this year, and so we're excited about that.

Okay. That's helpful. And then just wanted to get an update on what you're seeing from some of your shorter-cycle businesses. Obviously, we've seen PMI flip back above 50, but then there's some more mixed signals from an employment standpoint. So just kind of curious what you're seeing there near term?

Thank you for the question. The fourth quarter resembled 2025 overall, with some fluctuations. We experienced a solid month followed by some inconsistencies, then a slight slowdown. Looking into 2026, we are cautiously optimistic about the industrial sector in the short term. We have noticed an improvement in demand so far, which is encouraging, and we hope it continues. We're pleased with the recent PMI data you mentioned, and the signals from our channels suggest a growing optimism about moving beyond the fluctuations we've experienced for over 18 months. Early indicators appear to support this hopeful outlook.

Okay. And then one last one, more of a big picture question. You touched on this a little bit, but obviously, you've had a lot of success with portables on the connectivity side. Curious how you're thinking about expanding connectivity across additional product lines and how we should be thinking about any progress on that front this year?

Thank you for the question. We approach it by considering how best to engage with customers based on their preferences. Our focus is on addressing the challenges I've mentioned earlier, starting with the customer in mind. Currently, every one of our G1 SCBAs is connected and accessible for customers. Our goal is to expand that ecosystem in a way that creates value for them. I believe this will be the next area of growth, though it's more of a long-term strategy. Specifically, we are concentrating on portable detection, and we are actively involving customers through workshops and gathering their feedback on their long-term needs. We are preparing adequately for that.

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

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. Thank you.

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