Q2 2022 ESAB Corp Earnings Call

Okay, and thank you for standing by. Welcome to the ESAB Corporation second quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. Should you require any assistance, please press star 0 on your telephone keypad and an operator will assist you. During today's call, there will be a question and answer session. If you would like to ask a question during this time, please press star 1 on your telephone keypad. I will now turn the conference over to Mark Barbolato. Please go ahead.

Thanks, operator. Welcome to ESOG's second quarter 2022 earnings call. This morning, I'm joined by our President and CEO , Shyam Kamayanda, and CFO , Kevin Johnson.

Please keep in mind that some of the statements we are making are forward-looking and are subject to risks, including those set forth in our SEC filings and today's earnings release.

Actual results might differ and we do not assume any obligation or intend to update these forward-looking statements except as required by law.

With respect to any non-GAAP financial measures mentioned during the call today,

The accompanying reconciliation information related to those measures can be found in our earnings press release and today's slide presentation.

With that, I'd like to turn the call over to our President and CEO , Shyam Kambayanda.

Thank you, Mark. Good morning, everyone, and thank you for joining us today.

We continue to make strong progress on our long-term goals. Our second quarter was another step forward in that direction.

Before talking about the results, let me take the time to recognize our teams across the globe and particularly our team in China who worked extraordinarily hard during the quarter to ensure we served our customers during the lockdowns.

We have the finest set of associates and I'm proud and appreciative of what they do every day to make ESOP successful.

Turning to slide 3.

We had another record quarter for ESA. We delivered record sales of $661 million, with organic growth of 9%, excluding Russia, organic growth was 13%. Our organic revenue growth reflected strong price utilization, as our teams continue to execute our EBX process on pricing to offset inflation.

EBITDA was a record $111 million in the quarter, up 6%, and we expanded EBITDA margins by 10 basis points to 16.7, a solid achievement despite geopolitical, currency, and inflation at once.

In addition, we remain on track to deliver our free cash flow guidance.

Lastly, we successfully extended our 600 million term loan and fixed it at competitive rates. Kevin and our Treasurer Mark Karush did a fantastic job. Kevin will share more details a little later.

Turning to slide four, I've discussed our digital strategy several times in the past. Let me take a bit of time to calibrate us. When I joined in 2016, ESAB was in the early innings of its digital journey. And what I discovered was we had a strong foundation, which included WeldCloud, Universal Connector, and CutCloud, all developed using an open architecture. At this time, we also discovered our customers were using their welding equipment less than 10%.

to strengthen our portfolio, we then acquired WellNote, which provides our customers with a library of well processes.

To pull it all together, we acquired Octopus, a leader in offline robotics software. All of these solutions created Indosuite, which we launched in the second quarter. I'm thrilled about our progress and even more excited about our future.

To accelerate the commercialization of our digital strategy, we have been looking for strategic partners, which brings me to our next slide.

Turning to slide 5.

Let me introduce our partnership with Hexagon. Hexagon is a global leader in manufacturing software solutions, based in Sweden, and is complementary and a great cultural fit with ESA.

This collaboration creates a premier software welding solution to help our customers increase efficiency and productivity of their weld operations.

This collaboration also opens a larger customer set for ESOP to serve.

We're excited about this partnership and will be sharing more in the future quarters.

Moving to slide 6 and EBX.

We are taking EBX up a notch and are laser focused on leveraging our EBS toolkit to streamline our supply chain processes across all regions.

We have kicked off our product line simplification initiative to drive growth and margin expansion. I know many of you like to see examples of EBX. On the right side of the slide, I provided a recent example of a distribution center at Kaizen in North America where we successfully streamlined our order pick process.

This sky's end, significantly eliminated waste and improved order pick efficiency.

The results were a reduction of order backlog by 72% and a reduction in time to pick by 53%.

During the quarter, we completed over 37 Kaizens, each improving our productivity, efficiency, and safety at ESAB.

And as I've said before, we are a continuous improvement organization and EBX is in our DNA.

Turning to slide seven.

and our performance in the quarter. As I mentioned earlier,

Sales rose to a record $661 million, a 5% year-over-year increase, 9% organically, and 13% excluding Russia. Our markets in North America, India, and the Middle East had strong end-market demand. Europe and South America were resilient as expected.

and we expect improving market conditions in China for the second half.

Price realization across all geographies remained strong. We delivered record EBITD8 dollars, expanded margins by 10 basis points, 80 basis points excluding Russia despite a strong US dollar.

Moving to slide 8 and our Americas business.

America's had a strong quarter, sales rose to $291 million, growing 15% organically, reflecting strong price realization. We continue to introduce exciting new products, many of them focused on our North American equipment market. EBITDA increased 28% and margins expanded by 170 basis points, reflecting strong execution by our teams. We include some back-to-back and back-to-back pumpkin milk.

Moving to slide 9, NRMEA and APAC Business.

Our EMEA and APAC segment performed well. China worked through restrictive COVID measures and demand in Europe was in line with what we expected.

Our second quarter sales climbed 4% organically on the back of strong price. Excluding Russia, organic sales increased 11% and margins improved 10 basis points year over year.

We expect margins to continue to expand as we execute our product simplification initiative. Lastly, I'm proud of our team as they continue to build momentum for our new products, and we've had some notable wins leveraging our Indosuite software solution.

With that, let me turn it over to Kevin for slide 10.

Thanks, Shyam. Good morning, everyone.

Since we separated, we have been working hard and finalizing our financing, and I'm pleased to say that we have now completed this work.

We successfully extended our $600 million term loan and fixed this loan at a blended rate of 4% using both interest and currency swaps.

Today, this means over half of our debt is now fixed.

and we have around $550 million of borrowing capacity, which provides us with ample financial flexibility for the next few years.

We finished the quarter with net leverage of approximately 2.6 turns and we will continue to focus on driving cash flow and paying down our debt during the rest of the year.

Turning to slide 11, we are reaffirming our 2022 guidance.

As in our prior guidance, we have only included Russia for Q1 and continue to exclude it from Q2 to Q4.

Total revenue guidance remains at 2 to 4 percent, but under the bonnet there were a few changes that we did make.

Organic growth increased the point as we went for more price due to inflation.

This was offset by a point of FX due to a stronger US dollar and had an approximately $4 million negative impact on our full year adjusted EBITDA.

Given this little backdrop, we have been working hard on cost reduction opportunities.

We are accelerating our manufacturing, consolidation, and transformation projects and expect to drive some additional savings in the first half of 2023.

We continue to target free cash flow of greater than $210 million.

a strong second half of the year, in line with what we expected in our guidance as we burn off inventory that we built up during the first half to offset supply chain pressures.

We also paid out our first dividend in July , a 5 cent per share quarterly dividend, and we expect to continue this in the future.

With that, let me hand back to Sharm on slide 12 to wrap up.

Thank you, Kevin.

To summarize, we delivered a strong first half and I'm very proud of our team as we continue to bring innovative new products to the global market and build momentum in our digital solutions through IndoSuite. Our financing is in place, we are using EBX to drive growth, and we are also working on a new solution for the future.

higher profit and cash flow. We're executing well on our strategy to create long-term shareholder value.

Thank you again for joining us. Operator, please open the line for questions.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. If you would like to remove yourself from the queue, you may press star one again.

One moment please for your first question.

Your first question comes from the line of Nathan Jones with CIFIL. Please go

Good morning, everyone.

I need

Just start with some of the numbers on Russia here. I know you've excluded it from 2Q onwards. Have you not exited the Russia business? Are you still intentionally doing business in Russia but just excluding it from your results or are you getting out of Russia? Can you just talk about what's going on with that?

Yeah, Nathan, what we've said, if you remember our announcement back in May, that we had stopped supporting the business. We are no longer exporting from Western Europe into that business, and we're working out a transition plan. It is a complex process, and we continue to work through it. So we have nothing more to add on that front. When we do, we'll make that announcement.

Okay, fair enough. Maybe you could talk a little bit about the rest of Europe . Obviously, you know, there's concerns over there with high energy prices, rising inflation, higher rates, all those kinds of things.

But I think ex the rush of business you still saw organic revenue growth.

Can you just talk about the trends that you're seeing there, what you're expecting out of Europe for the second half of the year?

Yeah, so out of Europe we are expecting flattish volume for the rest of the year. There could be some upside as we see sort of the semiconductor space unwind itself and supply chain issues resolve. We think the auto market could come back and give us a bit of upside. Where we do see a lot of momentum within our business is in India, the Middle East.

and also to some extent in the South Pacific, especially in Australia and the Southeast Asia region. So, all in all, what we define as our EMEA and our APAC region continue to have some green shoots with some fattish volumes out of Europe .

Your next question comes from the line of Chris Danker with Loop Cup.

Loop capital. My apologies. Please go ahead.

Hey, morning. Thanks for taking the question. The hexagon news is certainly exciting. So I'll come back to automation a little bit more broadly, I guess. Historically, automation and cutting sales combined have been near 12-ish percent of sales, if I remember correctly. Is that still the case today and how should we think about automation growth and kind of the cadence there going forward?

Yeah, you know, what we have defined within, if you remember, even during our investor day and then since then is that we are expecting that segment to grow by close to about $150 million through the next three to five years. And so if you look at some of the numbers that we have provided to you in the past and then add that number, you can sort of see it sort of creates a significant business within ESOP going forward. We are excited about it.

thrilled about the partnership that we've signed onto with Hexagon. But more importantly, there were several other things that we've also done. We've got some exciting things happening in our heavy industrial line. We've created specific products with our filler metal line that drives specifically towards that second wave of automation going forward and continue to innovate on the cutting process as well to continue to serve our customers well. And our intent on that particular front is to sort of be a process leader.

rather than provide a fully integrated solution going forward, which we believe allows for lower cyclicality, better margin profile over the long term through ESOP.

Got it. That's really helpful. And then not to get too grainy here, but what kind of gives you confidence in that back half outlook and maybe how growth is trending through July here? Are we expecting a pretty typical seasonal step down into the third quarter here?

That's right, and Kevin, maybe you want to sort of give them a view on that one?

Yeah.

Yeah, hi Chris. How are you doing? Yeah, so Chris, what we're expecting, we are sort of going back to normal seasonality, stepping down in Q3 and we've given a little bit more color in the appendix. We expect to step down sort of in that 23 to 40, 23 to 24% of full year sales and stepping up in Q4 to around 25 to 26%. And on that as you kind of walk your way through the year, we're expecting

sort of sequential decrementals and incrementals in that kind of mid 20s range as we're walking out for the rest of the year. I think as Sean mentioned.

growth assumptions in the second half to exclude Russia as I mentioned in my script. Under there we're expecting strong price, high single digits and flattish volume in the back half of the year.

Yeah, really helpful, Tola. Thank you both, gentlemen.

Thanks, Chris.

Once again, ladies and gentlemen, if you have a question or follow-up question, please press star 1.

If there are no further questions at this time, I will turn the call to Mark Barballato.

Thank you for joining us today and we look forward to speaking to you on our next earnings call. Thank you guys. Have a great night.

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