Earnings Call
MSA Safety Inc (MSA)
Earnings Call Transcript - MSA Q3 2020
Operator, Operator
Good day, and welcome to the MSA Third Quarter 2020 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the conference over to Elyse Lorenzato. Please go ahead. Thank you, Drew. Good morning, everyone, and welcome to MSA’s Third Quarter Earnings Conference Call for 2020. Joining me today are Nish Vartanian, Chairman, President and CEO; and Ken Krause, Senior Vice President, CFO and Treasurer. Before we begin, I’d like to remind everyone 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-K filed in February of this year. MSA undertakes no duty to publicly update any forward-looking statements made on this call, except as required by law. We’ve included certain non-GAAP financial measures as part of the discussion this morning and the non-GAAP reconciliations as well as our Q3 press release are available on our Investor Relations website at investors.msasafety.com. With that, I’ll turn the call over to our Chairman, President and CEO, Nish Vartanian.
Nish Vartanian, Chairman, President and CEO
Thanks, Elyse, and good morning, everyone. This morning, I’ll provide an overview of how we’re executing in this environment and give more insight into the steps we’re taking to position MSA for continued value creation in both the near term and long term. Ken will then provide a quarterly financial review and give more texture on various demand trends we’re seeing across our portfolio. After that, we’ll start the Q&A session. The COVID-19 pandemic and ripple effects on employment and the economy continue to impact our business in the third quarter with revenue contraction of 13%. From an incoming order standpoint, we were disappointed with the overall order pace in the months of July and August, the greatest weakness coming from short-cycle products related to the oil and gas and commercial construction markets. We did see significant order pace improvement in September and October. In fact, we were pleased with the last eight weeks of incoming business, which was up versus 2019. While we’re hopeful the worst is behind us, it’s difficult to say that definitively with reports of rising COVID cases and concerns that our customers might experience future job site shutdowns or a slowing of reemployment. While it was a challenging quarter, we continue to see a number of benefits from investments we’re making. We also believe the steps we’re taking during this pandemic will create an even stronger MSA as we emerge from this environment. I want to highlight five key areas that give me a great deal of confidence in our future. First, the importance of safety has never been more evident than it is today. And MSA’s mission of protecting worker health and safety through innovative product solutions and services continues to grow in relevance and importance. Second, we remain very well positioned as the safety technology leader. We continue to invest in new product development to drive organic growth while providing our customers with innovative market-leading solutions to address their challenges of protecting their employees. We’ve often stated that one of MSA’s core competencies and differentiators is our global commitment to engineering excellence. With that in mind, we continue to invest heavily in product development across our core markets. From our G1 and M1 SCBAs to the X&S 5000 transmitters, ALTAIR io360 gas detector to new smart PPE technology and our groundbreaking LUNAR system for firefighter accountability, we’re forging ahead with an R&D portfolio that brings to market the most advanced safety solutions available today. To provide just one example of this, with the launch of our innovative line of fall protection harnesses under the V-Series umbrella, we’ve now turned our attention to reimagining our line of self-retracting lanyards and redefining the role technology can play in enhancing workers’ safety at heights. More specifically, we recently launched a patent-pending personal fall limiter with a smart hook connector that uses RFID technology to alert wearers when they’re not secured to an anchorage point. Unfortunately, falls remain the number one cause of death on construction sites. And many of those falls involved individuals who are wearing fall protection equipment but are not tied off to an anchor point. This technology helps customers to address this issue. And already, the V-TEC io1 Smart Hook PFL is being used by one large U.S. customer with significant upside potential. We foresee many applications for this type of smart compliance product all over the world. Today, our V-TEC io1 falls squarely in the center of two important and evolving global megatrends: protecting the safety of workers at heights and the growing use of connected data to provide insights that will make workers safer. Over time, we expect to expand the use of the V-TEC io1 across industries and applications. Third, our balance sheet remains very strong. With leverage less than 1x on a net basis, we’re well positioned to use it to drive inorganic growth, both in our existing product lines as well as expanding our addressable market in areas that align with our safety mission. Inorganic growth remains an important part of our strategy. So it’s great to see the M&A market opening back up. We’ve been very active in recent months with pipeline development and continue to engage with a number of attractive targets in our core markets. And as always, we’ll stay disciplined. Fourth, the MSA team is executing well and driving improved productivity. Despite the revenue contraction of 13%, we were able to maintain very healthy margins. Strong SG&A leverage continues to reflect these programs, and notably, our International segment margins continue to see nice expansion, up 230 basis points year-to-date despite the challenges we continue to see on the revenue line. As you know, our restructuring programs have been largely focused on the international segment, and we’ve accelerated our cost reduction roadmap in that segment as a result of COVID. Bob Leenen and the entire International team have made great progress against the European cost reduction roadmap that we laid out at our last Investor Day, which includes footprint rationalization, leveraging shared service centers, manufacturing optimization, and other areas of improvement. While we have additional programs that we will continue to execute in International, we’re now taking a global approach to drive structural cost reduction during this downturn. The restructuring investments in the third quarter are expected to drive improvements in our business model for the long-term across all of our reporting segments. And last, but certainly not least, we have a very strong team at MSA. We put a great deal of effort into employee engagement, talent development, and motivating our team to drive results. As many of you have seen on our website, MSA was recently named Western Pennsylvania’s top workplace among large companies by the Pittsburgh Post Gazette. The Post Gazette program assesses employee perceptions on engagement, leadership effectiveness, connection to an organization’s mission and values, and benefits program. This marks the seventh time MSA Safety has achieved a Post Gazette top workplace designation, but the first time we’ve risen to the number one spot. For us, what makes this recognition particularly meaningful is the fact that the results are based exclusively on feedback from employees. This kind of associate engagement is always important to us but it’s taken on an even greater level of significance this year given the challenges we’ve all faced during this pandemic. It’s a tribute to the culture at MSA. As an organization, we’re executing on a number of strategic programs to position MSA for continued success, and none of that happens without attracting, developing and retaining the brightest talent. With worker safety being more important than ever, we continue to invest in growth and productivity programs to enhance our market leadership positions, provide an exceptional customer experience, and expand our margin profile. To achieve those goals, we focused on the five areas I discussed today, which included leaning into the secular trend of safety, investing in R&D and organic growth, driving global productivity programs, and retaining and developing our talent. And I’m confident these programs will position MSA as an even stronger company as we navigate and emerge from the economic recession. With that, I’ll now turn the call over to Ken to take you through our financial results. Ken?
Ken Krause, Senior Vice President, CFO and Treasurer
Thank you, Nish, and good morning, everyone. Before I go into the quarterly financial results in detail, I’d like to share some general observations. The economic environment this quarter posed challenges, particularly where we experienced a resurgence of COVID-19. Despite the macro challenges that created several hurdles, our team performed effectively. Even with a 13% decline in revenue, we managed to maintain an operating margin that decreased by only about 20%. Our commitment to productivity and enhancing our business model has been stronger than ever during this downturn, and we are seeing promising results, particularly in our International segment where margins improved by 240 basis points in the third quarter and 230 basis points year-to-date. Although our constant currency revenue for the segment fell by 9%, profitability showed significant improvement. The most considerable impact from COVID was in the Americas, specifically the United States, where revenues declined by 15% in the Americas and even more significantly in the U.S., our most profitable segment. In September, revenues in the U.S. rose by 3%, but they finished the quarter lower compared to the same quarter last year following a challenging summer. As mentioned during our last earnings call and again in September on a public webcast, we need to closely monitor the resurgence of COVID and its effects in key markets, especially in oil and gas and commercial construction, as these sectors influenced our business over the summer. As Nish noted, we are executing global structural cost reduction initiatives that will help us emerge stronger from this downturn. I will go over the related restructuring investments and savings goals with you today. Let’s take a detailed look at the quarterly financial results. Revenue for the quarter decreased by 13% due to weakness across much of our product portfolio, although this was somewhat offset by growth in respirators and ballistic helmets. We observed a 15% drop in the Americas segment and a 9% decrease in our International segment. While currency had a neutral effect on overall consolidated revenue, it posed a 2% headwind in the Americas and a 4% tailwind in our International segment. As I indicated during a public webcast in mid-September, it was a particularly difficult summer, with significant challenges in July and August for our employment-based industrial PPE in the U.S., which includes products like fall protection, head protection, and portable gas detection. These items are utilized across various industries like oil and gas and commercial construction, both of which are experiencing the repercussions of slower growth due to the impact of COVID. The resurgence we observed during the summer brought about various challenges in the third quarter. However, we were encouraged by improvements in September, with a notable increase in both orders and sales in nearly every business area. The employment-based industrial PPE sector faced the most significant challenges, declining by 25%. Although forecasting demand for these products in upcoming months is difficult, the relief seen in September compared to the summer's weakness was welcome. In the fire service market, our business was softer in the third quarter due to delays in SCBA evaluations mentioned in the spring that were caused by social distancing guidelines. As AFG funds began to be distributed in August and September, we saw our SCBA backlog and inventories increase. We achieved some significant competitive conversions across the U.S. in September. Our pipeline and competitive edge remain strong, both domestically with the G1 and internationally with the M1 SCBA. The Globe business is still performing well in terms of demand, and we built up backward and inventory in this segment during the third quarter. Although we faced some production constraints at Globe due to COVID and social distancing, turnout gear remains a dependable part of the portfolio. Our APR line experienced a 24% growth year-over-year, though this growth is somewhat obscured in the press release by a decrease in shipments of thermal imaging cameras in the U.S. and declines in other non-core revenue in Latin America. Throughout the quarter, we noted a moderation in orders for respirators over the summer, leading us to anticipate a decline in the growth rate for the second half compared to the first half. While we have made progress in reducing lead times recently, we still maintain elevated backlog and inventory levels in this area, and we expect continuous improvements by year-end. Our overall backlog at the end of the quarter was similar to Q2 levels and significantly higher than the same time last year, driven by increased backlog in SCBA turnout gear and air purifying respirators. Gross profit dipped by 180 basis points from last year due to approximately $9 million in higher costs this quarter, primarily linked to inefficiencies related to lower factory throughput and, to a lesser extent, implementing COVID safety protocols. These factors considerably affected our Americas segment margins. I want to emphasize that price realization remains robust across the business, capturing the pricing intended when we set our price list about a year ago. We continue to heighten our focus on pricing across our operations and observe encouraging results, especially in our International segment. SG&A expenses totaled $65 million, down 22% from a year ago. We achieved $8 million to $10 million in savings from discretionary cost cuts and previously initiated restructuring programs in the quarter, in addition to reducing our variable compensation accruals by about $6 million based on Q3 trends. Favorable adjustments to other accruals, such as medical expenses, added another $3 million reduction to quarterly SG&A. As I noted before, we have aggressively pursued cost-saving measures to enhance our business model and keep MSA aligned with our long-term margin expansion goals shared in earlier discussions. We incurred just under $8 million in restructuring expenses this quarter to prepare for cost reduction programs across all reporting segments. We have so far invested or accrued $18 million in restructuring costs during the first nine months of 2020. We expect these initiatives to collectively yield $10 million to $15 million in savings on the income statement in 2021, with anticipated annual savings of $15 million to $20 million thereafter. These savings are expected to partially counteract the impacts of variable compensation resets and other discretionary costs that will return to the P&L in 2021. Our aim is to improve the business during this downturn, enabling us to emerge from these challenges as a stronger, more profitable firm. The quarterly adjusted operating margin fell by 40 basis points compared to the same quarter last year. Year-to-date, the adjusted operating margin stands at 18.4%, which is an increase of 30 basis points despite a 5% revenue contraction due to the pandemic and the accompanying recession. Year-to-date decremental margins have been about 15%. As we previously discussed this year, we anticipated our decremental margins to be superior to our incremental margins, which is reflected in this quarter's results. The quarterly adjusted EPS was $0.94, an 18% decline compared to the same quarter last year. The effective tax rate rose to 29.5%, up 240 basis points compared to the same quarter last year due to a less favorable profitability mix, nondeductible compensation, and statutory rate hikes internationally. Although adjusted operating margins were healthy, the combination of lower revenue and a higher tax rate affected quarterly EPS. Free cash flow conversion was impacted by elevated inventory levels. Additionally, we paid around $14 million in taxes during Q3 that would typically have been paid in the first half but were deferred to Q3 under the Cares Act. Let’s take a closer look at working capital. Inventory was the most significant cash usage in the quarter as we experienced increased order flow and backlog toward the quarter's end. While the increased backlog is partly responsible for this rise, we are also preparing to ensure we have enough inventory to meet customer demands as business conditions improve. We continue to seek the right balance between investing in inventory to capture market share when conditions rebound and managing cash flow. Our solid balance sheet offers us flexibility in this regard. However, based on our working capital planning and the latest forecasts, we anticipate improvement in our inventory levels moving forward. We continue to uphold best practices in managing receivables, which are showing positive results. Receivables were a source of cash, with improved collection timelines. Accounts payable and accrued expenses used cash in the quarter due to the tax payments I previously mentioned. In reviewing the first nine months of the year, we generated $78 million in free cash flow, compared to $65 million in the same period last year. This free cash was used to support our dividend and share buybacks while maintaining strong leverage ratios. Our balance sheet remains robust, and our capital allocation priorities are well-balanced. With a gross leverage ratio of 1.2x at quarter-end, or under 1x on a net basis, we are well-positioned to continue investing in our business. Alongside R&D, restructuring, and ongoing manufacturing optimization projects, we are pursuing M&A opportunities in our core markets. In conclusion, order activity improved in September and October relative to the weak results seen in July and August. While there are positive signs across the business, the ongoing economic challenges in a dynamic environment make it hard to predict the fourth quarter and 2021. However, we have observed significant improvements in September and October compared to July and August. We are planning for sequential improvement from Q4 to Q3, primarily driven by our fire service sector, which aligns with normal seasonal trends. Year-over-year, we will encounter tough comparisons due to the softness in the industrial PPE sector and the exceptional performance witnessed in FGFD in last year's Q4. Looking ahead, we are actively working on a range of margin expansion initiatives across all regions, with a strong emphasis on structural cost reductions to generate savings in 2021. I’ve often said that MSA’s success doesn't depend on any single product line, acquisition, or restructuring initiative, and this remains true. We see numerous opportunities for long-term growth and enhancements to our business model in the years ahead. Even as we navigate a challenging environment and recession in the near term, with the timing and shape of economic recovery still uncertain, our long-term growth and value creation prospects for the business remain unchanged. With that, I will hand the call back to Nish for some final remarks.
Nish Vartanian, Chairman, President and CEO
Thank you, Ken. Well, it’s certainly been a very challenging year. I have a tremendous amount of confidence in our strategy and the team we have executing it. As we have noted, both today and on webcast through the quarter, Q3 started very weak. And although we saw signs of improvement in September, it was not enough to offset the weaker July and August. Even with that, MSA’s business model is showing resilience, as evidenced by our strong margin profile despite the economic and revenue challenges in key markets. Our balance sheet positions us well to invest in acquisitions, and we’re very active on that front. And lastly, we’re pushing forward with structural cost takeout to support and improve upon a very strong incremental margin profile as we emerge from this pandemic. At this time, Ken and I will be glad to take any questions you may have. Please remember that MSA does not give guidance. Having said that, we’ll now open up the call for your questions.
Operator, Operator
The first question comes from Stanley Elliott of Stifel.
Stanley Elliott, Analyst
You talked a little bit about October trends improving. Is there any way you could kind of help us a little bit more about that? You mentioned some of the products, but I’d love to see kind of how the cadence has improved from September as we’re thinking about the back half of the year or back part of the year.
Nish Vartanian, Chairman, President and CEO
Sure. Yes, so we saw very strong improvement in September, and that was really led by the fire service products. So we talked about AFG grants being released in that business coming through. And that came through as we anticipated. It was very strong both, as Ken mentioned, with the Globe products, SCBA and across the board. So the fire service was very strong. What was a little surprising to us is how strong and how quickly the PPE industrial products snapped back in September. And that strength continued into October in both areas. So it’s encouraging to see... While we were disappointed with what we saw in July and August, we weren’t surprised by that. We talked about that during some calls earlier with job sites shutting down in the Southeast and down on the Gulf Coast. We had a feeling that we would see our PPE business contract along with that. We were a little surprised with how quickly things snapped back. And so we just don’t know what’s going to happen going into the future. I’m sure it’s your next question. With COVID cases popping up, there’s a lot of uncertainty out there. But what was very encouraging is how the business came back. Ken, I don’t know if you want to add some more color to that.
Ken Krause, Senior Vice President, CFO and Treasurer
The only thing I would add, Nish, is a couple of things. September was a good month for us. And it was the first time, quite frankly, that we saw core business growth since the early part of this pandemic. Our core business was actually up about 11% in September. So it was a really good month for us. And really nice to see the run rate of the business step up. It’s hard to compare our business today in October of 2021 to October of 2020 because so many things have changed. But what I can tell you is that the run rate of business has improved nicely from what we saw in July and August earlier in the year.
Stanley Elliott, Analyst
And could you update us on the Jacksonville facility? How is that coming along? And then as it relates to the APR demand? I mean I understand that it’s going to step down, but I’m curious to find out if you’re seeing any customer cancellations, kind of what the market sizing opportunity, if that’s changed in your view given kind of where we are, 6, 8 months after the start of the pandemic?
Nish Vartanian, Chairman, President and CEO
Sure, Stanley. Yes, we’re right on schedule with the ramp-up of our Jacksonville facility. The team has done a nice job in ramping up production with the CapEx expense there. And we’re near capacity where we anticipate it to be at this point. So good progress there. As you mentioned, the APR products and the pipeline for business, that’s moderated as we signaled in the past. But we do expect to see solid growth through the balance of the year based on the backlog we have and we’ll work at backlog down through the fourth quarter. We continue to work on opportunities within health care and first responders for APR products as the pandemic numbers rise, there could be some more opportunity for that. So we’re certainly prepared to respond to that. But the pipeline remains pretty good. And as we mentioned, we’ll shift that through the balance of this year.
Stanley Elliott, Analyst
Perfect. And then you mentioned a global restructuring opportunity here. Do we think that it’s more North American based? Is it more international? Just trying to get a flavor as we think about the margin opportunity side here.
Nish Vartanian, Chairman, President and CEO
Sure, we are continuing to implement our International restructuring programs, and I'm very proud of the team's achievements in International, particularly in Europe, where we've seen significant margin expansion throughout the year. We believe there is still more potential for growth. We previously discussed the 15% operating margin, and we see room for improvement as we move forward. We are also identifying opportunities in other regions, taking a global approach. Ken mentioned the cost reduction initiatives we are undertaking, and we expect to see benefits from these in 2021 and beyond. We have good opportunities to optimize our systems and business processes for greater efficiencies. I anticipate that our margins will continue to perform well in the future. It’s encouraging to see our margins remain around 18%, and we are currently above that mark year-to-date. We have opportunities ahead as we continue to focus on effective pricing and cost management.
Operator, Operator
The next question comes from Dan Moore of CJS Securities.
Brendan Popson, Analyst
This is Brendan standing in for Dan. I wanted to ask about your noncore products. There has been significant volatility this year with respirators and other items. How should we view this going into the next quarter and beyond? Do you expect levels to return to 2019, or do you think the baseline has increased, though not quite to the extent of 2020 for respirators?
Nish Vartanian, Chairman, President and CEO
Sure. That’s hard to put a finger on because there are some moving parts. Obviously, the fourth quarter, we expect to see some decent growth, year-over-year growth in 2020 fourth quarter for the APR products or the adjacent products. But as we go forward, there could be some opportunity with APR products with stockpile opportunities with elastomeric respirators, possibly powered air purifying products. So it’s really hard to put a finger on where that’s going to land and level out for us as we get into 2021. There’s certainly some opportunity, but we don’t have enough certainty around that to put a number on that.
Ken Krause, Senior Vice President, CFO and Treasurer
It’s a lumpy business, Brendan. The noncore business can be a bit lumpy from time to time. When we look at what’s in that business, not only are we talking about our respirator line, but we also have our ballistic helmet line that’s in Europe. And so, oftentimes, you’ll see large contracts come and go. And so it can be lumpy from time to time. But generally, we feel like the portfolio is fairly well optimized at this point, and the products that are left in that part of the portfolio are value-creating for our customers and our shareholders.
Brendan Popson, Analyst
Great. Looking at federal funding for fire safety, it's good to hear you’re starting to see some progress. Are there any updates on this? I know there's been discussion about possibly more funding, but is that mainly dependent on next week’s election or is everything currently uncertain? Any updates would be appreciated.
Nish Vartanian, Chairman, President and CEO
Our outlook for the fire service business is very positive. We are where we expected to be at this point in the year with the order pace in the business. We continue to perform well in the marketplace. The Globe business has been consistent and has not faced any issues with bookings. Our focus is on delivering products, managing production, and reducing the backlog. Looking ahead, our pipeline for breathing apparatus opportunities and the overall business remains strong. During the previous Republican administration, federal funding for the fire service was considerable, and we have had some successful years. There is speculation that if a different administration takes over, we might see increased funding for the fire service, which could provide additional opportunities. Therefore, the outlook for fire service remains solid as we head into 2021. If we consider the draft bills from earlier this year, both parties, Democrats and Republicans, showed strong support for the firefighter community. There was significant backing in those bills from both sides, so regardless of who is in office, we believe there will be substantial support for our firefighters.
Operator, Operator
The next question comes from Richard Eastman of Robert W. Baird.
Richard Eastman, Analyst
Nish, when discussing the expected sequential revenue improvement from the third to fourth quarter, you pointed out that the fire service was a key factor. Looking at the rest of the industrial business, some aspects are short term, but regarding the fixed gas and flame business for the fourth quarter, is the confidence in sequential growth on the industrial side primarily based on the healthy backlog and the visibility on shipping that backlog? Have there been any cancellations or delays beyond year-end that would affect that confidence?
Nish Vartanian, Chairman, President and CEO
Yes, that's accurate. When we examine our backlog at this time of year, we typically experience a regular shift towards fire service products, which is what we're observing. Regarding industrial products, those have a quick turnaround, making it difficult to predict their trajectory. Additionally, we experience normal seasonality with PPE products from November to February, which tends to be a weaker period because winter months see fewer construction activities, especially in the Northeast, resulting in reduced workdays. Traditionally, these months are less robust for us. However, we found it encouraging that PPE products performed strongly in September and October. It remains to be seen how business will progress as we move forward, and we are closely monitoring this on a daily basis.
Richard Eastman, Analyst
And just speaking of backlog, I mean Globe’s revenue, I think, is tracked down like 23%. So they must have a pretty substantial backlog of product. How quickly can that business ramp back up? And from a manufacturing standpoint, supply chain standpoint, how quickly can they turn and ship?
Nish Vartanian, Chairman, President and CEO
The backlog in the business is down about 6%. Quarter-over-quarter, that is correct, with a 6% decrease in the Americas for fire helmets and Globe turnout gear, which we combine in our reports. However, the decline is not significant. Year-over-year, our bookings are up; they have shown strong growth year-to-date, and we have the largest backlog ever with Globe. It is crucial for us to fulfill these orders. The business remains very steady. Ken, would you like to add anything further on this?
Ken Krause, Senior Vice President, CFO and Treasurer
Yes. I just want to clarify. So the numbers, firefighter helmets and protective apparel for the first nine months or so of the year are down about 10% globally, 7% in the Americas segment. And the Globe product is down much lower than that. It’s low single digits. And so we’re still seeing good performance there. Still seeing good demand there. Some of the things we talked about in our prepared commentary around the COVID virus and the social distancing aspect of the production facility are certainly hampering our efficiencies there, but we’re doing some things to adjust that. We feel good about that business.
Richard Eastman, Analyst
Okay. So Globe is down kind of high single digits. So this 23% in constant currency around fire helmets and protective apparel. Fire helmets are down much more.
Nish Vartanian, Chairman, President and CEO
When you look at the situation, Globe is experiencing a decline in the low single digits. The decline in firefighter helmets is more significant, especially in the International market. There were some large shipments last year that did not happen again, and this category is much smaller now. However, the Globe business is performing better than what the numbers suggest. If you review the press release and the tables, firefighter helmets and protective apparel sales are down about 10% globally, largely due to the issues with fire helmets.
Ken Krause, Senior Vice President, CFO and Treasurer
When you consider OpEx in 2021, I assume that the savings would offset some inflationary pressures in the remaining overhead of the business. Do you expect OpEx to still increase in 2021 by a few percentage points despite the contributions from restructuring? If you take a moment to reflect on the first nine months of the year, Rick, we have seen a decrease in performance-related compensation, as well as a reduction in discretionary costs. The performance-related compensation is functioning as intended; it decreases when the business contracts and increases when it grows. However, this will reset as we approach next year, which we anticipate will present challenges. We are actively managing discretionary costs as we prepare for next year, and you may notice a slight increase in SG&A next year due to these resets. Nonetheless, we are making significant progress on the restructuring front, not only in SG&A but also in operations. We believe there is a solid opportunity to enhance our cost structure, but it is reasonable to expect a small rise in SG&A due to these adjustments.
Operator, Operator
The next question comes from Larry De Maria of William Blair.
Larry De Maria, Analyst
Obviously, you guys talked about better markets in September and October. Just to clarify, did October grow sequentially from September? Or did that kind of flatten out? And how would you kind of emphasize well, curious if you could split it up between Americas and International, what kind of risk you think there is in International now that they’re moving towards more?
Nish Vartanian, Chairman, President and CEO
So, Larry, your question was a bit softer, but I think I got it. When we compare the business from September to October, looking year-over-year, October is slightly better than it was last year at this time. In October, we are seeing improvements over 2019 in terms of bookings, although not quite at the level we saw in September, which was a bit stronger in certain areas. Overall, the business has been robust in both the International and Americas segments, with a notable bounce back in both. The North American fire service market saw a stronger recovery, particularly due to the release of grants. Ken, can you provide more insights on that?
Ken Krause, Senior Vice President, CFO and Treasurer
I want to clarify that in September, we experienced strong year-over-year growth, though it was slightly less robust in October. However, the business's run rate remains healthy and comparable to its performance at the end of the third quarter in September, which is reassuring. The challenge we are facing includes some difficulties in European economies and a resurgence of COVID, which we are monitoring closely. Overall, the business performance in October is quite solid.
Larry De Maria, Analyst
It seems to go beyond just catching up. If July and August were soft, and there's some catch-up business in September, do you think it's more than just that? Is it more of a sustained improvement, with the understanding that COVID could change things?
Nish Vartanian, Chairman, President and CEO
Yes, Larry. Absolutely. We do monitor that closely, and you made a good observation. There may have been some catch-up business in September. As we discussed during the second quarter and early summer, it was challenging to meet with customers for evaluations and other work, so it stands to reason that September saw some catch-up. What is encouraging is how the business has remained resilient, particularly the day-to-day sales of PPE products through October. This likely reflects the reopening of job sites and the return of workers, who needed fall protection and head protection gear, which led to a quick rebound in sales. Notably, the strongest area in our PPE segment has been fall protection, with September and October proving to be particularly solid months for these products, indicating that people are indeed returning to job sites.
Larry De Maria, Analyst
You mentioned a sequential increase in sales for the fourth quarter. Typically, we focus on year-over-year increments and expect them to be high, around 35% to 40%. However, how should we interpret the sequential increments? Usually, the transition from the third quarter to the fourth quarter is not as strong as the year-over-year figures. Should we expect these increments to be in between those figures, or should we consider historical patterns? What is your perspective on the sequential increments, which may be more relevant?
Nish Vartanian, Chairman, President and CEO
It’s hard to put a fine point on it right now, Larry when we think about the outlook. And so I’m a little hesitant to give guidance around what our expectations are for the fourth quarter. Whether it be volume or incrementals because they’re so closely related. And so I would step back and if I look at the third quarter, we certainly had a number of things that came through the business, which we would hope would not repeat. But at the same time, we just don’t know where the markets are going in the fourth quarter, especially in light of some of the challenges you’re seeing in Europe with resurgence of COVID.
Larry De Maria, Analyst
Okay. But if mix or anything else, a big issue? A bit firefighter getting maybe better in the fourth quarter? Is there just a high mix discussion you can have?
Nish Vartanian, Chairman, President and CEO
No. The mix doesn’t have that big of an impact. We’ve done a nice job at improving the margins in the fire service products. And so the mix doesn’t have a significant impact, maybe a slight impact on the fire service, slightly lower profitability in some of the industrial products, but it certainly should move it in a significant manner one way or the other in the fourth quarter of this year.
Larry De Maria, Analyst
Okay. And then last question on the M&A outlook. I know you guys have been talking for a while to allocate capital in the downturn. Are bid spreads getting a little bit closer valuations a little more reasonable? Is there any stress out there that you guys can take advantage of? Just some overarching comments on the environment would be helpful.
Nish Vartanian, Chairman, President and CEO
So, Larry, we continue to be very active in this area. And there’s a number of opportunities we continue to work on and stay close with. I was hopeful that we would have something through the summer, but obviously, the M&A-type work really shut down for a period of time. And now it’s opened back up. And so we’re back at it with some opportunities. And hopefully, we’ll have something to report on here in the near future. I just — we’re very active in this area. It’s a key part of our strategy, but the key is staying disciplined. We’ve been very successful from an M&A standpoint, and bringing on the appropriate bolt-ons or expansions into some other product areas like Globe. We’ve been very successful with our returns on those acquisitions and the way we’ve integrated those. And so we’re going to make sure that we use our capital appropriately because the balance sheet is in great shape, doesn’t mean we’re going to run out and chase after some opportunities just to get a sugar high and get short-term rewards. We’re going to be disciplined in our approach and add value to this organization and continue to drive our mission through acquisition.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Elyse Lorenzato for any closing remarks. On behalf of our entire team here, I want to thank you again for joining us this morning. If you missed a portion of the conference call, an audio replay and transcript will be available on our Investor Relations website for the next 90 days. We look forward to talking with you again soon. Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.