Q3 2022 ESAB Corp Earnings Call
Good day and welcome to the <unk> Corporation third quarter 2022 earnings call.
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I'd now like to welcome Marc Bob allows her to begin the conference Mark over to you.
Thanks, operator.
Welcome to <unk> third quarter 2022 earnings call. This morning, I'm joined by our President and CEO , John Carman, Yonder and CFO , Kevin Johnson.
Keep in mind that some of the statements we're making are forward looking.
Subject to risks, including those set forth in our SEC filings and today's earnings release.
Actual results may differ and we do not assume any obligation or intend to update these forward looking statements.
As required by law.
With respect to any non-GAAP financial measures mentioned during the call today. The company 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 , Sean <unk> AGA.
Thank you Mark good morning, everyone and thank you all for joining us today.
I'm on slide three.
Aesop delivered another solid quarter of revenue growth margin expansion and cash flow.
This quarter, we made great progress towards shaping aesop into a faster growing higher margin and less cyclical business.
Organic sales increased 10% adjusted EBITDA margin expanded 40 basis points to 16, 6% as E. B X initiatives continued to gain traction.
We continue to reshape our enterprise towards our long term strategic goals by introducing exciting new products, making bolt on accretive acquisitions and using E. B X to expand margins and improve cash flow I'm proud of our team's effort and execution against these three goals.
Moving to slide four and focusing on organic growth.
Italic index continues to be robust at 27% on the left of the slide I've highlighted some of our exciting new products. You will note on the slide that we're focused on developing industry leading products.
Our eco friendly efficient and digitally connected.
These new welding equipment and gas control products will shape, he's afterwards faster organic growth and higher gross margins, let me start with our guests into our products on the slide.
The new <unk> product has enhanced safety features and is digitally enabled we also launched an upgraded GCE medical gas system.
Which is the most innovative medical central gas system on the market with the highest flow rates and the best precision control.
These products increase safety reduce maintenance and most importantly for our customers reduce gasoline gauge and waste, resulting in significant cost savings for our customers.
Moving to <unk>, Let me first talk about the warrior edge.
This new product offers best in class pulse wave technology with enhanced digital connectivity.
And provides a market leading power source for robotics and automation next is our new renegade Es, which further builds out our life industrial offering providing our customers a product with lower energy consumption and have best in class user interface.
Both the wire and the renegade provide aesop, a scalable platform for our equipment growth globally.
Moving now to slide five and continuing the conversation about our evolving equipment portfolio.
Let me introduce our category defining new product or battery powered well that the renegade volt.
This product was developed using our <unk> process of open innovation and in partnership with our friends at Stanley Black <unk> Decker.
This product will create a whole new category in the welding segment.
The renegade bolt Leverages devolves industry, leading flexible battery technology, which is interchangeable with other the vault products.
The batteries rechargeable recyclable and noise free making this product the most environmentally friendly weld out in the market.
The new battery powered world improves.
Improve strat portability, allowing users to bring a welding machine remote and hard to access areas.
The board also opens exciting opportunities for Aesop to continue to reach new customers and channels.
Renegade bolt is a fantastic addition to our equipment, Brad and alongside the warrior and renegade allows us to shape, our business to a higher equipment mix and as a result expand our margins.
Moving to slide six.
Spoken to many of you about our gas control business, let me take a moment to calibrate all of US gas is an integral part of welding and cutting and gas control is critical to a successful well.
Making it a natural adjacency to our core business.
We acquired Victor in 2014, which included a leading mission critical industrial gas control business.
Then in 2018, we acquired <unk>, a leader in industrial and medical gas control in Europe . These acquisitions provided aesop with access to a faster growing higher margin and less cyclical end markets.
The gas platform today is about $350 million with gross margins greater than 40%.
This platform also generated an annual growth rate above our base business with accretive gross margins.
As we move forward, we'll continue to focus on strengthening our gas control business and that brings me to slide seven and our exciting acquisition of Ohio Medical.
I'm thrilled to welcome the Ohio medical team into the <unk> family.
The acquisition strengthens our position as a leader in gas control technology and continues to shape aesop into higher growth less cyclical mission critical and higher margin businesses.
With Ohio Medical we now have a 400 million global gas control platform with gross margins north of 40%.
Ohio medical as a leader in oxygen regulators and flow meters, providing our gas control business with a strong presence in the attractive North American market.
When combined with our existing basketball backbone there are significant opportunities to cross sell given our complementary geographic footprints.
In addition, we will use <unk> to accelerate innovation improve efficiency and drive productivity savings.
There'll be more to come on this front and I will look forward to sharing more updates with you as we continue on this exciting journey.
Moving to slide eight.
As an enterprise we're focused on growing organically through introduction of new innovative equipment like the renegade bolt and the warrior edge supported by our industry and robotics workforce solutions, improving our mix and margins going forward.
Bolt on acquisitions, like Ohio, medical and <unk> driving margin expansion and improving cash flow.
We are confident in our ability to achieve our long term strategic goals of greater than $3 billion of revenue 20, plus 20% plus EBITDA margins and a 100% plus cash conversion.
Turning to financials on the quarter on slide nine.
Sales grew organically at 10% Europe continues to show Resiliency, North America performed as expected and our businesses in India and the Middle East outperformed.
New products continue to generate excitement with our customers. We continue to cover inflation with price using our AVX process. The teams are executing well expanding EBITDA margins by 40 basis points year over year.
Moving to slide 10.
Americas had a solid quarter sales rose, 10% organically and we continue to run our playbook, which is aimed at lowering our cyclicality and rationalizing our product lines as I mentioned earlier, our North America business performed in line with expectations.
South America continues to strengthen and is performing well sequentially.
It was faced with a difficult year over year comp as a result of post COVID-19 buying patterns.
EBITDA increased 9% and margins expanded 10 basis points in line with what we expected.
Moving to slide 11.
EMEA and APAC business had a strong quarter.
Our third quarter sales rose, 9% organically. This segment was negatively impacted by a strong U S dollar and despite the FX headwind EBITDA margins improved 50 basis points year over year, reflecting strong execution of our AVX process to reduce cost and improve efficiency.
And productivity.
That let me turn it over to Kevin for Slide 12.
Thanks, John Good morning, everyone.
So quite a strong quarter for cash flow free cash flow was up 26% versus the prior year and cash conversion was greater than 100%.
<unk> continued to improve in the quarter, allowing us to flex inventory and drive improved cash flow.
As John already discussed, we announced the Ohio Medical acquisition, and we have been able to fund this acquisition with our year to date cash flow.
In the fourth quarter, we expect another strong quarter of cash flow generation and expect the end of the year with net leverage of 2.8 turns or less well within our two to three times targeted leverage range.
As I spoke earlier in the year at our Investor Day, we still have significant opportunities to further drive higher cash flow.
We are embracing new technology and our team continues to focus on improving our processes using PBX and delivering our long term goal of consistent annual cash conversion of greater than 100%.
For 2022, we remain on track to deliver greater than $210 million of free cash flow.
Turning to slide 13, we provide an overview of our updated 2022 guidance.
Our guidance numbers exclude Russia from the second quarter of 2022 2021.
Total sales guidance has been reduced which reflects approximately $30 million of additional FX.
Organic growth remains unchanged with market conditions remaining in line with what was expected last time, we spoke.
With one quarter to go we narrowed our adjusted EBITDA guidance, which includes an approximately $4 million impact from FX adjusted.
Adjusted EPS guidance has been raised to $4 to $4.10, reflecting improvements in our operating performance as we continue to use <unk> to expand margins.
From lower interest expense due to the favorable financing we secured last quarter.
We expect another strong quarter in Q4 and look forward to exiting 2022 with positive momentum.
With that let me hand back to Sean I'm on slide 14 to wrap up.
Thank you Kevin to summarize we delivered another solid quarter as we shape our business towards higher growth less cyclicality and higher margins. We are introducing game changing innovative new products to the market and these products will increase our mix towards equipment.
Have positively shaping our portfolio with accretive acquisitions like Ohio medical.
To drive <unk> across the business to reduce our operating costs and deliver strong free cash flow.
We're off to a good start in Q4, and we're well on our way to shaping our business to deliver long term shareholder value.
You again for joining US operator, please open the line for questions.
Thank you well speakers for the presentation.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad and we will pause for a moment just to compile the Q&A roster.
Yeah.
Your first question comes from the line of 10 minutes I correct from J P. Morgan Your line is open.
Hi, Good morning, everyone. Thanks for taking my question.
So my first question is.
Hi, So my first question is it seems like our pricing in North America was up 9%.
And it's lapping them, almost 20% plus pricing from last yet.
So as as compares get.
Get tougher on pricing how are you thinking about price realization maybe in 2023.
Yeah. Thanks for that question, so a couple of things for us.
What I've mentioned this before we have three different processes for pricing.
And Aesop as part of our <unk> process.
First one was associated with inflation and you've seen us do a really strong job.
So price based inflation now would expect as we see the markets develop over the next 12 to 15 months, we will see what inflation does but pricing on that will continue to be very disciplined but there's two other processes that we have in place that I think will play a larger role as we go into 2023. The first one is value based price.
Based on the new products that we're coming out with.
We've done a really strong.
Work with our teams around our stage gate process as we develop products and we feel that these products.
Value price in the market rates continue to drive margins to a better spot and then the last piece is the piece around product sounds like product line simplification and rationalization, but we think theres again opportunity for us to go out to the market with some targeted pricing going forward. So I expect pricing to continue to be positive.
Kevin and I continue to work on.
2023, we'll have probably more detail as we finish out the year and give you some guidance sometime in Q1 next year.
Thank you so much that's actually very helpful color and then if I can ask a follow up so we've been hearing about.
A lot of noise in your.
Moderation in different end markets.
From your perspective.
Any comments on what you're seeing.
The order trends and the EMEA region.
Yes, thanks for that question.
We have a very strong European business, we've talked about the strength in our European business our team our ground game in Europe .
And as I mentioned earlier in my call Europe continues to be resilient, we've started Q4.
Oh well.
And in the continent.
Our.
We read the news.
Understand what's in the press, but there are a few factors in my view that could be in our favor as we as we go through the next 12 to 15 months, we think.
Recall, just spending in Europe is going to continue to be strong we think renewable energy, which includes wind power as possibly nuclear will continue to be a strong set of.
Investment opportunity.
The opportunity in Europe .
We also believe that oil and gas investments of some sort we will continue to sort of make their way in Europe , with maybe possibly LNG port investments et cetera that will drive multi product needs.
<unk> is well equipped on all of those three fronts. When you look at our ice technology for the wind space. The certified products that we have for the nuclear space.
And then also as I talk about oil and gas we have some phenomenal products that last piece is defense.
Think that defense will continue to sort of make its way forward as the European economy spend a little bit more of their GDP on that particular line.
<unk> is well positioned to take advantage of that so we think that there are some negatives, but there are also some positives that could moderate the impact on aesop as well.
We go into the next couple of years.
Great. Thank you so much.
Your next.
<unk> comes from the line of Mcdole break from Baird. Your line is open.
Thank you and good morning, everyone.
Good morning.
Yeah.
Hi.
Want to follow up on the discussion here with Tami.
Maybe since we're kind of talking about the.
Growth outlook.
Volumes clearly slowed.
In our business relative to where we were earlier in the year.
So from your perspective.
What is going on in terms of end market demand is this a function of comparisons and sort of like channel dynamics like you highlighted in Latin America or is this more about just the tone and momentum of the business.
Should investors at this point sort of expect.
A decline in volumes, especially as we're contemplating 2023.
How do you think about managing your business within that context.
We've just started our process for 2023, so we'll sort of talk about that sometime in Q1, but what I can say to all of you today is that we started Q4 well.
I don't see anything that sort of makes me what made me want to say to you that we're seeing any downward trend in volume.
That sort of has us concerned.
There is continued to be at a strong rate we continue to work our growth bridges. Our team continue to be excited about the possibility of driving share gain but the one thing that we're really thrilled about is the new products that we're launching in the marketplace. We think that that's going to drive new customers to drive new channels and opportunities.
For us in all geographies.
And I think thats the exciting part about what we're doing and the other piece of that is also the acquisition that we made of Ohio Medical we think that the geographic opportunities for us to cross sell our products, whether it be GC products in North America, Although Ohio products globally, we think that there's a real opportunity there for some volume growth.
Build out and strengthen our gas control portfolio that again drives higher growth better margins lower cyclicality better cash flow for the business. So all in all this is the team at Aesop since year end, we finished out Q3 and go into Q4.
Efficient amount of optimism, but just like anything else, we're strong and seasoned leaders.
We're making plans for everything that could come at us, but as we sit right now markets are resilient markets are performing as expected.
As much opportunity for growth.
And there is sort of in the newsprint on things that could go.
The other way, but we're very excited about the products. We're very excited about the acquisitions that we've made.
Feeling really good about where the business is positioned for the long term.
Okay fair enough.
In your discussion from a moment ago on pricing there.
The way I was sort of interpreting your commentary is to really.
It was really pertaining to your to the equipment side of the business more so than consumables things like value pricing.
So on.
I am wondering though as you as we're kind of looking at raw material costs pulling back do you think it's reasonable for.
Consumable pricing to remain flat or better in 2023 or is.
Is that going to start manifesting as a potential headwind.
Yes.
Make the way that I.
I would ask you to look at this as in the past what has happened is that we have seen commodity prices drop and we've held on.
Some of the price on the way down.
Like as we go out but price into the marketplace and we sort of a very deliberate on the way down. So I think thats an expectation that we continue to have within the business going.
Going forward the second piece that I would say to us that there's other inflation out there that continues to sort of justify.
Pricing to be where it's at or possibly move north.
As we go into 2023, so the team as you know we have a very disciplined process of understanding all inflation.
As a team we review net price on a monthly basis within the business and in every region and with all of our sales teams. So as a result, we know exactly where we're at at any moment in time, basically where our cost position is no matter, if it's a commodity based inflation or other inflation that the business sees.
Within the month of the quarter, so I'm very comfortable with the process that we have and the process is geared to sort of focus on net price and the impact on the business.
Driving margins forward.
And that's really where we're focused at the leadership team.
Alright, thank you.
As a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad and your next question comes from the line of Chris Dankert from Loop capital. Your line is open.
Hey, good morning, Thanks for taking the questions.
I guess.
And forgive me, if I missed it but thinking about <unk> in the quarter.
Any update just kind of on the product line rationalization, what's going on on that front.
Thanks, Thanks for that Chris.
We continue to make progress on that particular front.
The view that we have is that we're just early innings.
That particular piece we expect.
That initiative of ours to sort of move on.
Different geographies as we go through 2023.
And so as a result, what I'd say to you is <unk> continues to drive that base is another at least right behind it thats footprint rationalization that we're continuing to kind of drive forward and then opex reduction within the business and so we're sort of looking at three different pieces of product line rationalization.
Continued sort of improvement in our footprint and then opex transformation within the business and so were working all three are early innings on the product rationalization piece are seeing some good.
Good progress actually.
And.
Encouraged by what's what's sort of ahead of us in 2023.
Got it well then that touches on something else I kind of wanted to ask you about something on the footprint rationalization is it fair to assume we're in the planning and evaluation stages here, that's probably like a 2020 for benefit for the most part.
You know I don't think we've given out a specific number on benefit but expect to hear from us sometime in Q1 is too.
What what the restructuring or footprint benefits would be as we go into it.
It's something that we continually do within the business as we as we ratchet up outperformance and ratchet up the expectations within our team.
So the view for us would be that there's going to be something that we're just not ready to talk about it kevin or not going through our budget processing for next year and so we expect to hear more about that in Q1.
Understood. Thanks, so much for the color.
Your next question comes from the line of Nathan Jones from Stifel. Your line is open.
Hey, Good morning, this is Adam Farley on for Nathan.
Hi, Adam.
Have you had have you had any difficulties from a supply chain launching new equipment.
And then maybe are there any technology product gaps that you thought might go after inorganically.
Yeah.
So thank you for that so really appreciate the question on innovation, because we're really excited about what we've done over the last couple of weeks.
Here's what these are but you know we started off with Twentyfold products today, we're at 110.
The bigger piece for US is that we've made those innovations what we've done and something that I talked about also on the call. This create scalable platforms.
And the view for US is when you look at the renegade the warrior.
What you see are our platforms that are now scalable.
And so what you see is a designer.
Design integrity integrity Youll see design sort of that are now part of the foundation and so as a result, what we have is a better supply chain better production efficiency as a result of it going forward.
Not to mention the renegade book, which was absolutely game changing it's something that we're really excited about you'll see us talk about it.
At Fab Tech, we're going to be launching it in a big way here next week. This was the first time that we've talked about it publicly.
It's a it's a.
Device today that performs as well as.
As in it you know any other product that's out there for the applications that are needed for remote welding.
And it has interchangeable battery so if somebody has a power tool.
That belongs to the wallet they can use that exact same battery to run.
The welding equipment, so really excited about that piece and to your question on will be keep up the pace. The short answer is yes. The number of innovations made sort of a slowdown a bit only because we're focused on some specific platform specific foundation.
Talked about equipment, but we continue to also innovate on the filler metal side of our business also on the tour side of our business. So all in all what we're doing is rationalizing the number of product lines rationalizing the number of skus, creating truly innovative products that start in a foundation and a platform that can then be built upon both consistency and simplicity of our subs.
Jay really exciting stuff that in my view will continue to pay dividends in terms of margins and customer satisfaction over the next five years.
Okay.
That's really really helpful.
I did want to ask another question on the forward outlook for growth.
We've heard from some other companies in our coverage.
Divergence between industrial and consumer markets. So I'm wondering if maybe youre seeing that in your end markets.
There's industrial holding its charterer then there may be more retail oriented markets.
So our story is a bit different on that particular front.
Because we're new to the retail market and you'll see us sort of talk about this.
But another announcement that should come out in the next couple of days or move into retail and so were new to that space. So as we move into that space, especially in North America, It's really all growth for Aesop. So we're actually seeing positive momentum both on the retail side because of some share activity and the industrial side for us has actually held up.
It's been resilient is the best way to sort of is the best word to use on that particular front both in the Americas and also in Europe , and then I sort of mentioned to you India. The middle East have sort of been the outperformers.
We looked at Q3 end and we are off to a good start in Q4 as well.
Thanks for taking my questions.
This is the final call for any questions and if you do have a follow up question. Please press star one now and we will pause for any final questions.
Yeah.
There are no further questions at this time I would like to turn the call back over to Mark for fire and in closing statements.
Thank you for joining us today, and we look forward to speaking to you on our next call and good day.
This concludes today's conference call you may now disconnect.
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