Q4 2022 ESAB Corp Earnings Call
Good morning, and welcome to the Aesop fourth quarter 2022 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one.
On your telephone keypad.
If you would like to withdraw your question again prestige star one.
Thank you Marc Bilodeau, Vice President of Investor Relations you May begin your conference.
Thanks, Operator, welcome to <unk> fourth quarter 2022 earnings call. This morning, I'm joined by our President and CEO , Sean come Yonder and CFO , Kevin Johnson.
Please keep in mind that some of the statements. We're making are forward looking and are 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 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 , Sean come beyond that.
Thank you Mark good morning, everyone and thank you all for joining us today.
2022 was the beginning of a new era and Aesop's, how did an 18 year rich history.
We had a strong finish to 2022 and are entering 2023 with positive momentum as we continue to shape aesop for the future.
Let me take a moment to highlight a few accomplishments.
We successfully launched as an independent company.
We are well positioned to compound value for our shareholders.
We again demonstrated our innovation leadership by introducing several exciting new products like renegade volt battery powered well there.
And our new heavy industrial product the warrior edge.
We took our business system E B X up a notch or a bx process helped drive price and working capital improvements and a challenging environment.
Our strengthened balance sheet and robust cash flow funded three acquisitions that moved our strategy forward.
We continue our progress on ESG initiatives and I'll share more on this later.
Before I highlight the fourth quarter, let me take a moment to acknowledge the hard work and commitment of our associates.
And body, our purpose and values and had been relentless in their focus on our customers and key stakeholders.
Moving to slide three and our performance in the fourth quarter as I said before we had a strong finish to 2022.
<unk> sales increased 11% adjusted EBITDA rose, 10% and margins expanded to 17, 4% as our <unk> initiatives drove margin and working capital improvement.
We made two acquisitions in the fourth quarter, that's but has strengthened our enterprise shaping aesop towards higher growth lower cyclicality higher margins and higher cash flow.
Moving to slide four we met all of our key financial metrics, reflecting strong execution, despite the challenging operating environment.
Full year organic revenue grew 13% all of our regions contributed to our growth, India and the middle East were standout performers.
We achieved 470 million of EBITDA, which was 7 million higher than the midpoint of our guidance and we delivered $4 in 'twenty, one cents of EPS, which was 16 cents higher than the midpoint of our guidance.
To appreciate the team's EBITDA performance I would like to highlight that we absorbed approximately $10 million of unfavorable currency pressure of roughly 12 cents.
Sure compared to our original guidance.
And on free cash flow, we generated $219 million of cash with a strong finish in the fourth quarter. The key takeaway on this slide as Aesop delivered on all of its commitments.
And we're on a clear continuous improvement path towards our long term strategic goals of 20% in EBITDA and 100% free cash flow conversion.
Moving to slide five over the last six years, we worked hard to reshape our company and with the recent acquisitions of Swift gotten therapy gas equipment, we continue our journey to compound value.
There'll be gas equipment strengthened our gas control business by broadening our product offering and extending our geographic reach.
Like our Ohio Medical acquisition therapy equipment is immediately accretive to our margins.
Swiss Scott is a leader in light industrial automated cutting and provides us with an opportunity to extend our process leadership as well as grow our aftermarket. Additionally, there is an opportunity to accelerate growth and expand margins by plugging in Swift got innovative products and solutions and to our global distribution network.
Turning to slide six let me share an example of E B X at work.
We use product line simplification AI forecasting enhanced standard work improved shop floor, gamba and glass boards to systematically optimize and improve our inventory levels.
As the chart indicates we were able to reduce inventory by $60 million over the course of the second half of 2022 and 2023 expect us to raise the bar and continue to reduce our inventory days.
Moving to our fourth quarter financials on slide seven as I mentioned before fourth quarter sales grew 11% organically our markets remained resilient with particular strength in our emerging markets acquisitions added two points of growth and are performing as expected.
Our integration and synergy plans are off to a good start.
I recently had the opportunity to visit with our team at Ohio Medical for a 100 day integration plan review. This includes implementation of our strategic vision as a global leader in gas control equipment as well as leveraging E. B X across the business to drive growth margins and cash flow.
It was evident that there was great energy in the room, Ohio Medical has fit right in and the team is excited about our future opportunities together.
Similarly, I'll be visiting both strip got and therapy equipment for their 100 day reviews in the second quarter.
Continuing with the impact of Evs, we're pushing price to offset inflation and our cadence of innovative new product introductions are driving excitement within our sales team and our customers I'm encouraged by the strength of our sales funnels and the activities that will drive both an increased share of wallet as well as bring new customers to <unk>.
Asaf.
Strong price and cost saving execution helped offset both inflation and currency headwinds in the quarter. As a result, EBITDA margins expanded 40 basis points year over year, and 80 basis points sequentially.
Moving to slide eight Americas had a solid quarter and performed as expected.
Sales rose, 5% organically as the team executed on price volume in the Americas reflected a tough year over year comparison, we made strong progress on penetrating new channels accelerating our product line rationalization and improving our operational efficiency.
Acquisitions added four points of growth.
As a result, adjusted EBITDA increased 9% margins expanded by 20 basis points and 100 basis points on a sequential basis.
Turning to slide nine and our EMEA and APAC segments, They had a strong quarter again.
Fourth quarter sales rose, 15% organically, reflecting eight points of price and seven points of volume acquisitions added another 100 basis points.
We saw particular strength in India, and the middle East in the quarter, both regions made significant progress on equipment digital solutions and automation sales adjust.
Adjusted EBITDA improved 10% margins expanded 60 basis points year over year, reflecting strong execution and despite being impacted by a strong U S.
With that let me turn it over to Kevin for Slide 10.
Thanks, Sean and good morning, everyone.
<unk> had another strong quarter for cats for free cash flow $35 million higher than the prior year on a cash conversion greater than 100%.
I'm proud of the work piece up team has completed during the year, particularly on inventory, which we reduced by a further $30 million in the fourth quarter.
We funded our new acquisitions with our strong free cash flow and ended the year with net leverage of two seven turns 0.1 turns better than we expected last time, we spoke.
As we look forward to 2023, new technology is being implemented that will further improve our cash generation. We are confident of delivering on our long term goal of cash conversion greater than 100% in the next few years.
Turning to slide 11, we provide our 2023 guidance.
Our guidance numbers exclude our Russian business for the full year 2022 and 2023.
Total sales growth is expected to be 2% to 4% with sales seasonality similar to 2022.
Organic growth of three 5% includes one to two points of volume.
And the rest from price, we expect two 5% from acquisitions and a 3.5% FX headwind due to a stronger U S. Dollar impacting the first half of 2023.
We expect a year on year incremental in the mid Twenty's with an adjusted EBITDA guidance of $420 million to $440 million. This.
This includes $15 million of investment, we are making to drive growth for our gas control equipment products.
As we discussed last year, we successfully fixed half of our debt at a 4% interest spread.
And we are assuming the fed will increase the cost to run 5% by the end of Q2.
Our interest expense is guided to $70 million to $72 million.
2023, adjusted tax rate is expected to be 24% to 25% from 50 basis point improvement at the midpoint versus 2022.
We expect to consistently lower our adjusted tax rate over the next few years.
Overall 2023, adjusted EPS guidance is $3 80 to $4.
Finally, our cash flow conversion guide, it's greater than 90% as we continue to generate strong free cash flow with a similar quarterly seasonality to 2022.
To assist with modeling we have included a more detailed guidance slide in the appendix.
Let me hand back to <unk> on slide 12 to discuss our ESG progress.
Thank you Kevin let me highlight some of the exciting things we've been doing with ESG.
At <unk>, we've established five work streams that are aligned to our purpose of shaping the world we imagine.
We have reduced our footprint by 30% as a result reduced our energy waste and water usage by the same proportion.
We have improved our safety performance and our performance is in the 98 percentile amongst industrials.
Every voice is valued at Aesop and diversity is a big part of it.
As part of our design process all of our new products meat Eco standard designs.
We use over 20% recycled steel in our consumables business and are making great progress on sustainable packaging for our products.
Lastly, the communities, where part of Aesop believes in participating in growing the communities. We live in as a result of our associates have volunteered and Aesop is funded several initiatives globally to ensure shared success.
We are using ESG to make <unk>, a better business for our customers our associates and our communities.
Turning to slide 13 to wrap up.
I'm very proud of our team Aesop delivered a strong year of performance in a challenging environment.
There is more to come from <unk>, as we drive growth expand margins and generate cash.
We have a healthy funnel of bolt on acquisitions as we continue our compound our journey.
We have made strong progress on our ESG initiatives and we'll be doing much more in this field.
He saw this had a solid start to the year and as I've said in the past our best is yet to come. Thank you again for joining US operator. Please open the line for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question comes from the line of Tami Zakaria from Jpmorgan. Your line is open.
Hi, good morning, Thanks, so much for taking my question.
First question is it seems like volume and demand.
Down in the quarter about 2%.
Could you expand on that a little bit what drove that and what are you seeing now quarter to date.
Good morning, Tommy.
Thank you for your question.
First aspect.
To answer your question is we actually performed as we expected and the Americas.
We found that we had really strong performance in the quarter from a margin perspective, we made great progress with some of the initiatives that I spoke about which was around creating new channels.
Driving better equipment sales continuing to win share of wallet with our existing customers going forward.
Year over year comparable issue. So if you remember from my call last year, the Americas business actually grew 31%.
In Q4 of last year, and we're also running the playbook around our product line rationalization, which is really the 80 20 strategy and so for us would be fine in North America, and South America that we're right, where we want to be we're positioning the business to be less cyclical better margin and a better profile for long term growth.
Really thrilled about the work the team is doing to set ourselves up to sell more equipment, a better process automation in the market.
And we're off to a good start in Q1.
And so looking forward to how the business performs under yet.
Got it. Thank you so much and one more from me.
Can you remind us which are key.
Key end market.
You still see sort of volumes below pre COVID-19 levels and enhance do you expect.
You know some sort of recovery and in the next.
A couple of years.
Yeah, we were really encouraged by how the emerging markets performed.
I have highlighted in my.
Commentary that we really.
We're thrilled with how the business in India, which as you know as a public company and is doing quite well.
Wrong with the Middle East business performed so we really saw some really emerging shoots with a broad based.
And that sort of activity above sort of COVID-19 pre COVID-19 levels in the <unk>.
Merging markets.
We're seeing the auto market recover.
Europe , giving us a bit of a tailwind as we finished out Q4, and we've started off nicely also.
In Q1 and in the North America market.
We have seen sort of a gel.
The industry continued to be strong.
Where we are seeing.
And we've been reading about the same as that the retail space is seeing a bit of.
A weakness on that particular front.
As I've mentioned before in some of my commentary that were new to that space. So that every dollar of sales that we get is actually accretive to us and so really excited about what that drives resolve in 2023.
Got it thank you so laurence.
Your next question comes from the line of Nathan Jones from Stifel. Your line is open.
Good morning, everyone.
Good morning.
I'd just like to pick up on part of your answer to one of those questions. There I mean, you talked about.
Dr rationalization through the 80 20.
Maybe you could give us a bit more color what's going on there.
80, 20 somewhat about a new initiative for each job.
What kind of impact that could have to the sales number and what kind of impact that could have to.
Two the margins over the next few years.
Yeah, So a couple of aspects.
Sort of.
And in my call by stating that we are exactly where we wanted to be.
Our position to invest in the things that we believe creates long term value.
For all of our stakeholders.
So 80 20 as an initiative as you know it takes a bit of time to grain traction not Nathan you've been around this a while but really thrilled about what the North America team was able to do is be finished out the year and the biggest portion on that exercise is that it's not just the pruning exercise. It's also a growth exercise as to where you want a CEO business grow where do you want to add.
Value to your customers and where you see yourselves, creating a significant amount of efficiency within your shop floor annual facilities.
So what I'd say to you is that we're in the early innings on that particular front I expect us to be in the mid innings as we go through 2023 and.
And really drive significant value as we get into 2020 for us. So as we sit here today I'm very concerned about the goals that we set of creating US 20, plus EBITDA percentage business at Aesop. We think 80 20 is a big part of it along with the mix change that we talked about the gas control and <unk>.
And as we go through the next couple of years.
We know exactly what we need to do we have been talking to a few people that have done this in the past.
We have a roadmap to get there.
So for US it's about reaching the task of 'twenty and then taking it up a notch from that.
Okay.
Great. Thanks for that my follow up question's going to be on price cost can you talk about where you ended the year on price cost from a dollar basis and I assume price cost is probably dilutive to margin. So if you could give us the impact of that.
And then the outlook for 'twenty, three where you expect to be on price cost as we go forward the effects.
So yes.
<unk> talked about before with Bill So I would say.
Strong processes Orion.
Management off price on a trend that we have got a visibility.
What's happening on the insulation side towards continue to play that play during 2020 today.
We exited the year 2022.
Our price cost neutral.
Stepped into 2023, we are continuing to see inflation.
Across the world.
There are certain pockets continuing to go after price to cover that inflation assumptions in the 2023 guidance are that we won't be price.
Price inflation neutral.
Okay.
Yes, I think I think Nathan on that front one of the things that we've proved to ourselves over the last three years as our execution skills on it whether it be related to inflation or FX.
And so I think that stays solid but then.
<unk> of our business are really strong AVX process and as you know.
As we look out into the horizon, we always expect to be price cost neutral.
We've got some activities that could end up being.
Showing a bit of favorability, but otherwise very confident in how we've set the business up.
And Kevin when you say cross cost neutral you're talking on a dollar basis correct.
That's correct yes.
Alright, thanks for taking my questions.
Thank you.
Your next question comes from the line of Meg debris from Baird. Your line is open.
Thank you good morning.
I wanted to follow up on this price discussion.
You know one of the things that we're thinking.
Many hearing.
Good Lord steel.
Costs are starting to impact them or many of our corporate company P&L.
I'm curious how you see that dynamic playing through to the consumable portion of your business. If there's any difference between first half and second half 'twenty three in the way you kind of frame your pricing outlook.
And if you are able to hold price positive.
What gives you that ability and an environment in which you know in steel prices that returns to growth.
Yeah, Good morning, Mike Great to have some Neil.
So let me start by saying so we.
Have seen steel prices abate a bit but for the most part very stable and in some regions. There is still some amount of volatility in inflation on steel prices. So it's not a broad based with treat.
On steel prices across the globe.
And to answer the second part of your question, which was Hey, you know in the past what we've had.
Ability to able to be able to hold onto price.
As commodities has abated and that is again our intention this year so far the market continues to be rational.
And obviously, our intention is to hold onto as much of that price on the way down as we possibly can.
On the point around.
Whether we see the second half, let me hand, it over to Kevin and he can sort of talk to you how we sort of planned our pricing at least in the guidance for the second half.
In terms of comps in the first quarter.
Half of the year, we'll expect a higher price.
Over the year, the second half of the year.
We are expecting the scope for some price, but there'll be less price in the second half of the year I think the thing that we've proven out over the last few years is no matter what happens on the inflation side, we will respond to that with price we have an extremely strong processes today within the business.
And regardless.
Do you see more inflation.
We'll go for more price, if we do see inflation I.
We will try to hold onto as much guidance, we can on the way down and then to answer a bigger piece of your question. When you talked about how is it specifically impacting our consumer business. What we find is that there's other inflation that's out there.
Some of it associated with energy some of it associated with the indirect pieces of it that allows us to continue to hold onto some of the price in spite of.
Some of the steel or raw material costs as you talked about going down we see we've always liked the neighborhood that we're in.
On that front bag and I know you and I have talked about that in the past.
And so we continue to see the opportunity to to be able to hold on and continue to push price into the market in case, there is inflation related activity out there.
Okay understood.
If I may follow up with a question on volume, where EMEA APAC segment.
7%.
Frankly, this was a lot better than what I was guessing.
Can we get a little more color here on you talked about middle East and India being strong maybe what those regions contributed to this number and maybe how Europe .
Hyper growth.
Yeah, and as I had mentioned earlier, our playbook on all of this is actually quite simple we have.
Really strong process around our sales growth plan.
Really strong territory plans, we create regional plans off of it and then growth bridges with that business and what we've seen over the last couple of years as our sales teams really inculcate that into the DNA and drive that as we move forward. So when you look at our.
EMEA APAC business, we did see a lot of strength in India. The same things that we've spoken about in the past we've seen.
Investment in infrastructure, we've seen investment in AG.
We've seen investment in renewables.
And then also investment in LNG and oil and gas and so what youre seeing is that India sort of benefiting in general.
Was it just general industry, rising, especially agonists infrastructure, the middle East on LNG oil and gas and investments and what I would call in the middle East more slightly so that gives us a lot of confidence.
Is the fact that it's a steady investment it has not been this sort of massive investment upfront has been a steady state of investment within the middle East region across all geographies, there that's driving for capacity improvement, especially as it relates to LNG and processing.
Crude oil so we really like those two spaces Europe I've mentioned it briefly in my commentary earlier, we're seeing the auto market rebound.
And then just market being resilient.
And that's the probably the best word that I could use for Europe . It continues to be resilient, but some auto business coming back strong focus into renewables.
The other piece that I'm really proud of our team on is that we had a chance to visit with a couple of customers. This past week and we're looking at building partnerships, where we're providing digital consumable and equipment solutions to our customers, creating a full workflow solution set that's gained traction giving us confidence about the mix change that we've talked about.
<unk> are creating with the Nissan where today, we're at about a 70 30 and we'd like to continue to improve that over the next three to five years to get closer to 60 40, and so we're really pleased about our initial onset how our sales teams have approached it and more importantly, how the customers are engaged with us.
And that sales process.
Yeah.
Okay, and if you allow me one final one maybe this one's for plumbing.
How are you thinking about working capital in 2023.
Single room key to work down inventory.
Sure.
Thinking about free cash flow.
How would you frame your leverage in the way you're kind of looking at deploying capital.
For 2022.
And so firstly.
I think John already mentioned that as part as part of <unk>.
<unk> presentation, we do still see opportunity you want inventory.
When we look at the DSI, we have certain parts of our business, where we believe we are.
But we have other parts of the business, where we believe we have opportunity to improve so.
Certainly as part of our plan for this year.
We have targeted to make further strides in.
Further reducing our inventory levels so.
Youll see more and more to come on that part in terms of.
In terms of capital deployment, we're going to.
Continue to be disciplined in our capital deployment, you've seen with the acquisitions that we did in 2020, we funded that out of the free cash flow that we generated will continue to manage our leverage.
Two to three times range and will be focused on bolt on M&A some smaller acquisitions.
Immediately be accretive.
Require a great thing.
Cash to fund.
And I think the way to think about that one Meg is that what we've done today is created an optimal.
Inventory stayed for each of the regions and more importantly for each of our facilities.
And through our <unk> process, and what I talked about a strong visual board strong daily management, just to manage our glass to achieve or create a glide path to achieve that optimal inventory level.
And so Kevin and I are something that Kevin has done incredibly well since he took over as our CFO was manage our cash and im very confident.
Between our AVX process MD and the processes that Kevin has put in place in terms of its weekly and daily management on cash.
We are in a strong position to continue to deliver on our commitments on that trial.
Okay. Thank you for the color.
And your next question comes from the line of Chris Dankert from Loop capital. Your line is open.
Hey, good morning, guys.
I guess looking at the 2023 organic sales guidance here can you give us any detail you know Americas versus international and maybe just kind of how you're looking about Europe .
Specifically in terms of growth in 'twenty three year.
Yeah, we haven't broken that out yet Chris.
Sort of give that a little bit more consideration and get out but in general.
It's still early in the year.
Best to probably think about both regions performing at similar levels as we as we get these get office.
Get out of the gate.
Very soon it will be the second quarter, and we will be able to give you a little more color on that particular front, but as of right now probably best to assume that both businesses performing at similar levels as we exit and as I've mentioned earlier, we're off to a good start to Q1 and so.
And just about eight weeks will be out talking to you about the first quarter. So we'll be able to give you more color.
Understood sounds good there.
And then forgive me if I missed it but you know kind of circling back to Swift and therapy gas here.
As the sales contribution similar for each of those businesses and then you know on an EBITDA margin basis, how do those kind of look versus company average here.
Yeah.
I think we sort of mentioned already we haven't given individuals' sales numbers, but I know it's in the back end.
And you can sort of pull those numbers out but $20 million is the total impact of those two businesses for the full year.
With therapy equipment being accretive immediately.
And I'm very confident that Scott has a really strong game plan, but the gross margins are accretive today, and we expect EBITDA to get accretive as we finish out the year.
Got it and if I could sneak in one more maybe this is more for Kevin as well.
And then given some of the more uneven macro headlines that you highlighted the two to three times debt leverage being a comfortable range I guess.
Heading into.
The cloud of your macro does that change your where you feel comfortable in that range or just any thoughts as we think about leveraging cash deployment going forward.
Yes, so the one thing <unk> SaaS proven.
<unk> strong.
These have generated strong free cash flow.
As we step back during Covid, we actually generated over 130%.
Cash conversion over that period.
More short cycle, we generally are cycled down our inventory pretty quick when things turn so that gives us a lot of confidence in terms of our abilities strength of our balance sheet too.
Any.
Type of step that up.
At this point, we don't see happening.
Yeah.
Yes.
Okay.
Yeah, maybe to highlight that I think the view for US is that we want to stay within that two five to three range and stay disciplined.
Great thing about the acquisition strategy that we have in the funnel that we have nothing sort of news out there that pushes us to.
To move those.
Those targets.
So we're very confident that we can create a compound or create a really strong global leader in gas control strengthen our fab tech business and stay well within that range of two five to three.
In the foreseeable future.
Great. Thanks for the color guys and best of luck in 'twenty three here.
Thank you.
And there are no further questions at this time, Mr. Marc Mayer, but why don't I turn the call back over to you for some final closing remarks.
Thank you for joining us today, and we look forward to speaking to you on our next call.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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Okay.
Okay.
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