Q1 2023 ESAB Corp Earnings Call
Speaker 2: Good morning and welcome to the ESOG first quarter 2023 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 would like to ask a question during this time simply press star followed by the number one on your telephone keypad.
Speaker 2: If you would like to withdraw your question, again press the star 1. Thank you. Mark Barbolotto, Vice President of Investor Relations at ESOB. You may begin your conference.
Speaker 3: Thanks, operator. Welcome to ESOP's first quarter 2023 earnings call. This morning, I'm joined by our president and CEO , Shyam Kambianda, and CFO , Kevin Johnson.
Speaker 3: 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.
Speaker 3: 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.
Speaker 3: With that, I'd like to turn the call over to our President and CEO , Shyam Kambianda.
Speaker 4: Thank you, Mark. Good morning, everyone. Thank you all for joining us today. The ESOP team has been busy. More importantly, we have been impactful and have made meaningful progress towards accomplishing our strategic goals. I'm very proud of our team's effort and focus on the development of our team.
Speaker 4: and higher cash flow. I've actually been out visiting several of our sites and recently had a chance to visit Gothenburg, Sweden and Chennai, India to meet with our engineering teams. I was delighted to see our truly global innovation process at work and the new products we expect to launch in the coming quarters.
Speaker 4: In Q1, we published our first sustainability report where we highlighted our activities and governance practices. I am pleased with our design efforts to make our products more sustainable and the continued positive community involvement of our associates globally. I am looking forward to sharing more about our ESG initiatives.
Speaker 4: during our investor day.
Speaker 4: Moving to slide 3 to talk specifically about the first quarter. We had another quarter of strong performance that exceeded expectations. Organic sales in the first quarter rose 7% driven by robust demand in our APAC, Middle East and Europe regions and solid performance from the Americas.
Speaker 4: Adjusted EVA DA was up 12% and margins expanded 80 basis points to 17.4 as our EBX initiatives pushed margins up and improved working capital.
Speaker 4: continue to make great strides in integrating and finding synergies for growth and margin expansion.
Speaker 4: In a few weeks, I'll visit our newest acquisitions, therapy and swift cut for their 100-day EBX review. At this meeting, we do a deep dive into the business to review progress on synergies and resolve any roadblocks.
Speaker 4: We are off to a good start this year and I am pleased that the positive momentum in our end markets has continued into the second quarter. As a result, we have raised our Poulier guidance. Kevin will share more on this later. Turning to slide 4.
Speaker 4: We've been on a journey to reshape ESOP into a less cyclical, faster-growing, better margin enterprise. And this slide shows our progress towards a higher mix of equipment sales that accelerates achieving this objective. Let me share how we have advanced this strategy. First, through open innovation.
Speaker 4: We have developed a complete line of light and industrial equipment like Rogue, Rebo, Renegade, and I've begun to introduce our new heavy duty line of products.
Speaker 4: like the warrior edge, fabricator, and robust feed. And as you know, we've always protected our R&D span. Second, acquisitions into robotic torches, automated welding and cutting, and our digital solutions portfolio, which we call IndoSuite.
Speaker 4: And last, we have strengthened our gas equipment portfolio with the 2018 acquisition of GCE. Victor Products and GCE established leadership gas equipment positions for ESAP in North America and Europe .
Speaker 4: In the last 12 months, we've expanded this business into more profitable end markets with the additions of Ohio and therapy equipment. We're confident that this strategy is shifting ESAB into a higher profit mix, allowing us to sustainably expand our EBITDA margins to greater than 20%.
Speaker 4: expanded this business into more profitable end markets with the additions of Ohio and therapy equipment. We're confident that this strategy is shifting ESAP into a higher profit mix, allowing us to sustainably expand our EBITDA margins to greater than 20%. Moving to slide 5.
Speaker 4: Our industry is facing a well-to-shortage, increased safety requirements, and the need to reduce total cost of ownership. At ESAP, we have a robust EBS stage gate process for product development that includes significant time spent gathering the voice of our customers to understand their unmet needs.
Speaker 4: To solve these broader industry issues, ESAP designed our Cobot solution with three important characteristics. One, open architecture, two, digital workflow solution that we call industry, and three, the ease of use, where one can be trained on our Cobot in a matter of hours. I'm encouraged by the funnel our teams have generated this.
Speaker 4: is just the start and I look forward to sharing more in the coming quarters.
Speaker 4: Turning to slide six, we continue to drive EBX and lean initiatives throughout our facilities. Our continuous improvement initiatives free up manufacturing's floor space, which helps with future rooftop reductions and solves any issues we face within our business. In this specific example, we solved a past due problem and freed up manufacturing space.
Speaker 4: with lean principles. In fact, we now have a lean cup competition underway, which is recognizing hard work of our teams and delivering results to the business.
Speaker 4: Turning to slide seven and our financials.
Speaker 4: First quarter sales grew 7% organically. Our markets continue to perform as expected and remain resilient. APEC, Middle East and Europe continue to show strength, while the Americas have performed in line with expectations.
Speaker 4: Acquisitions added at another 300 basis points of growth. Strong price coupled with cost savings helped offset inflation and currency headwinds in the quarter.
Speaker 4: Epidide expanded 80 basis points year of year to 17.4.
Speaker 4: basis points year over year to 17.4. Moving to slide eight.
Speaker 4: America's had a solid quarter and continues to perform in line with our expectations.
Speaker 4: Sales rose 5% organically as the team executes on price and acquisitions added 500 basis points of growth. We've accelerated our product line rationalization initiative to drive margins and operational efficiency. As a result, adjusted EBITDA increased 12% and margins expanded 80 basis points to 17%.
Speaker 4: and we continue to experience strong demand in two regions, APEC and the Middle East, with both regions continuing to benefit from strong investment in infrastructure, renewable energy and oil and gas.
Speaker 4: As mentioned before, the European market continues to be resilient. Adjust the EBITDA, improved by 13% and margins expanded 80 basis points year over year to 17.8, reflecting strong execution by the team. With that, let me turn it over to Kevin for slide 10.
Speaker 5: Thanks, Sam. Good morning.
Speaker 5: We had a strong start of the year, a record Q1 free cash flow for ESOW, as we continued to use EBX to improve our performance. Our strong free cash flow allowed us to further reduce our net leverage as well as fund the therapy acquisition that closed in the first quarter.
Speaker 5: ESAP continues to work with AI partners to identify opportunities for working capital improvement. We have projects lined up that give us confidence in delivering our 2023 guidance and long-term goal of creating the 100% cash conversion.
Speaker 5: Turning to slide 11, as Sean mentioned earlier, we are raising our full year 2023 guidance. The old sales growth has increased to points now guided to between 4% to 6%. We have raised our organic growth guidance half a point.
Speaker 5: to 3.5% to 5.5% based on our strong first quarter performance.
Speaker 5: R&M markets continue to be resilient and volume and price assumptions for the rest of the year remain on cheese at low single digit volume with the rest coming from price.
Speaker 5: FX has improved one and a half points on a weaker US dollar.
Speaker 5: We expect a low single digit at Vex headwind in the second quarter on for it to turn to a tailwind in the second half of the year.
Speaker 5: Adjusted EBITDA guidance increased by $10 million, half coming from improved organic growth in the first quarter, and the other half from improved FX through the year.
Speaker 5: Interest guidance has been increased $3 million to $73 to $75 million, as we now expect the Fed to increase the cost rate of further 25 Bips to around 5.25% by the end of the second quarter.
Speaker 5: Finally, our cash flow conversion guidance remains on track at greater than 90%. As in prior quarters, we have included a more detailed guidance slide in the appendix. Before I hop back to Sham, I am pleased to let you know that our 2023 investor day has been confirmed for October 4th at the New York Stock Exchange. We will provide more details on this closer to the time.
Speaker 4: With that, let me hand back to Sharm on slide 12 to wrap up. Thank you, Kevin. In summary, we're making great strides towards our long-term goals. We have positive momentum in the business with more opportunities to accelerate our journey. Our bold-on acquisition funnel is healthy and we're pleased with the performance.
Speaker 4: We have raised our guidance for the year and our laser focused on delivering for our shareholders. Thank you again for joining us, Operator, please open the line for questions.
Speaker 2: 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.
Speaker 6: Your first question comes from a line of Tammy Zakaria from JP Morgan. Your line is open. Hi, good morning. Thanks so much for taking my questions. So my first question is on the America's volume. It seems like it was down about 3% in the quarter. Is it because of the product line simplification you're doing in the region or was there any end market weakness there? Any?
Speaker 4: America's region. And you're absolutely spot on that product simplification has accelerated. We continue to focus on product lines that we believe have longer secular tailwind and we're driving that through. In terms of end markets, we continue to see great strength, especially in our ag segment, renewable energy, along with automotive.
Speaker 4: where we see the retail segments being slightly down. So we believe that our North America business is performing as expected. We expect to continue to see margins improve as we go into the year and into next year. So nothing really to talk about in terms of specific actions except for what I've mentioned, which was the part of the line.
Speaker 6: any talks on when product line simplification would be largely done and when the headwind would largely abate.
Speaker 4: Yeah, we expect to go through, you know, most of this year with that particular exercise. And so I'll probably share more as we get into the next quarter, Stanley, but we think that we're in the middle innings on that particular initiative and expect to be, you know, the late innings into 2024. And your next question comes from a line of Nathan Jones from Steeple. Your line.
Speaker 7: color on the, you know, a quantifiable impact of PLS, whether or not you think there's any market share losses there, I know, so obviously PLS is going to be some deliberate market share losses. But just hoping you can give us some more color around the disparity.
Speaker 4: of that versus your competitor and what the actual impact of PLS is here. Yeah, thanks for that question, Nathan. So, you know, the view that we have on that particular front is, you know, we do a deep dive across all of our product lines. We look at how we're shaped with particular end segments, particular product lines. And what I can tell you is that when we looked at the data,
Speaker 4: our performance on the product lines that we want to grow on the customers we want to grow with was actually very comparable and strong along with anybody that sort of presented out there. So that's that's base number one. The second piece that we've always talked about is how we are approached towards.
Speaker 4: capital goods, in this particular case automation, where we're really focused on process-driven value add.
Speaker 4: And what you will find, in fact, even in the presentation that I made today around co-bots, our focus is around workflow solution and process solutions, which is better margins and less cyclical businesses over the long term. So in the short term, there may be some noise, but over the long term, we believe we're setting ESABAB for steady growth, higher margin profile, and less cyclicality. And in addition to that, I think it's important to stay as we go through this part of the project, to start working with this adjustment model. There are two categories from who
Speaker 4: focused on our numbers, you know, we're very pleasing to say the least.
Speaker 7: Yeah, I think you have to be important because PIRL has obviously created some noise as it's going along. Maybe just on price cost, are your prices where they need to be in order to cover inflation? Do you need to go back after the market with any further price increases or just where you think you've positioned on that?
Speaker 4: So Nathan, we've talked about this a couple of times where we have three processes around price, the first obviously being inflation-related price. We've seen some commodities, whether it be nickel or copper sort of move, and we've immediately reacted to those and gone out for pricing. Then the second and third piece is where I think there's continued opportunity for to reach out the second one being value-
Speaker 4: that the right value proposition and then obviously PLS, Friday's, and additional price. But that being said, we've also seen some volume growth within our business, especially in the areas that we're focused on. So really pleased with how both of those are playing out as we've started the year.
Speaker 2: And again, if you would like to ask a question or any follow-up questions, please press star one on your telephone keypad. Your next question comes from the line of MIG-Dober from Baird. Your line is open. Yeah, thank you. Good morning. You know, go back to the ESOP.
Speaker 2: And you know, as a potential to the volume discussion in the America, I guess I'm curious if maybe some of the variance between you and your competitor has to do with the various exposures that you might have in automation versus what they're doing. So yeah, maybe we can start with that.
Speaker 4: Yeah, thanks for that, Megan, and always good to hear from you. So a couple of things, I think, you know, we've had a couple of questions on the America, that I think it's also important to state that our AMIA and APEC business really had a phenomenal quarter. And we've always talked about our global enterprise and the value our franchise brings to the table. And so it's important to also state that...
Speaker 4: What you can see is what is possible with our franchise when it gets focused and what we can drive across the enterprise. Specifically to your question around co-bots, we do have some proprietary stuff. We do have some...
Speaker 4: some disclosures that are awaiting, so I can't share a lot of it. But I think the bottom line are the three things that I spoke to you about, where we differentiate ourselves from some of the stuff that's out there. And happy to share some of that with all of you at Investor Day, or if some of you want to visit one of our facilities, happy to sort of showcase that particular technology.
Speaker 4: you know, advertisements on social media. We've had a couple of influencers talk about it and we had a customer call as more recently where they were actually having some significant past dues on a requirement to a large retailer. They called us, they asked us to send us a sample, we sent the sample out to them.
Speaker 4: That afternoon a team member of ours went out along with one other technician By the afternoon of that Monday they were trained by Tuesday They were often running and they refused to send back the sample that we had sent them They actually said they were gonna hold on to it until they got their order
Speaker 4: They went from a wealth of about 8,000 wells a week to about 25,000 wells a week ran through their past you thrilled about it. I think we're gonna be working with them to get some more press releases out. But bottom line is that we've got a really strong funnel on this particular place. Yes, we do have some stuff.
Speaker 4: specific relationships with some software manufacturers on that particular front, along with the ease of use, when I talk about it in terms of the pendant that people use to control the robot, where we think that we have a differentiated solution, we have the best solution in the marketplace. So, really excited about that particular piece because it's focused on exactly where we want to be.
Speaker 4: which is the less cyclical side, the less chunky side of automation, and it really brings to four welding process expertise, along with our industry digital solution set, creating a compact solution for our customers that allows the shift of this high mix, low volume products, also into the automation space, creating some significant, what I'd call, five to 10 year tailwind for ESAP.
Speaker 2: Understood. Maybe my follow-up is on slide number four, talking about your shifting the mix over time towards equipment. So as we're looking at this 2026, 2027 goal.
Speaker 2: I'm curious as to how you get there. Is it a function of, again, capitalizing on automation the way you sort of describe here? Or is it really primarily introducing new products and trying to take share on the equipment side? And then...
Speaker 2: Also, as you think about the margin goal that you have outlined, how much of that 20 plus percent of the margin target is really driven by this mixed shift towards equipment. Maybe you can comment on that as well. Thank you.
Speaker 4: Yeah, so Chris, one of the things that we've mentioned several times with this particular community has been is that we have great confidence.
Speaker 4: Regardless of where our top line heads up, you know, whether on the top end of the range or the bottom of the range that we are confident that we have the tools necessary to get past and north of 20% as an enterprise. So there's a tremendous amount of confidence and with that comes our activity associated with price, our activities associated with EBX, we're taking cost out rooftop reductions along with...
Speaker 4: significant amount of work that we're doing on op-x transformation and focusing our sales team. So there's a significant amount of confidence that regardless of what we do on the top line, this team has line-as-side to get us north of 20%. What we're talking about here are things that accelerate that journey and help us get beyond that particular percentage.
Speaker 4: And so on the mix you're spot on. There's a couple of things that we've done. You know, we have a full lineup of light industrial equipment with the Renegade Bolt launching this year, a lot of excitement and a lot of pre-work being done by the teams in Q1 to drive the activity on that particular front. Later this year we'll be launching the Warrior Edge. And I think I mentioned this to you in the past.
Speaker 4: really recently in Europe for a very large customer that does wind. We actually had them come in, look at our warrior edge combination with our ice, which is the integrated coal electrode technology that we talked about. We've re-up the game in terms of ease of use and what we control, along with some AI within that particular activity that allows the customer to do things that they've never been able to do before.
Speaker 4: And so we're seeing a significant amount of pull-through of ESAP equipment like we've never seen before. And a lot of excitement out there about finally our equipment line, driving the kind of excitement and the entitlement that ESAP deserves globally. And so it's early stages, but clearly a lot of excitement. We've done a lot of...
Speaker 4: But I don't want you to look at just those three things as what drives a margin past 20. We've got plenty in the kit to kind of get there on our own.
Speaker 8: Your next question comes from a line of Chris Danker from Loop Capital. Your line is open.
Speaker 9: Hey, and more on thanks for taking the other question here. I guess you decided you know some strength and A-pack in the Middle East. Maybe can we dig in just a little bit and if you could just give us some update on the dynamics between China, India, Europe , or any detail you can provide? Yeah, you know, I spoke about it briefly, obviously.
Speaker 4: We don't share specific details by the region, but what I can tell you is that the APAC region in its entirety did extraordinarily well with India being the clear outlier. And a lot of us have read in the press around what's happening in India. There's a lot of manufacturing moving in. There's clearly government investment happening.
Speaker 4: And so, things that we often talk about, right? The investment around infrastructure, the investment into agriculture, the investment into oil and gas, refining capability, renewable energy are all doing extraordinarily well in India. Then you looked at China's coming out of the COVID-19, peace we've seen the government invest in infrastructure, invest in renewable energy.
Speaker 4: globally. The Middle East, in my opinion, has never seen this kind of sustained energy. You're seeing investments in infrastructure. You're obviously seeing the oil and gas steady investment come in, LNG being a big piece within that particular front. And so there's a fundamental shift.
Speaker 4: At least in the time that I've interacted with that region where we're seeing a sustained amount of investment, a sustained amount of activity both from an infrastructure, economic diversification perspective, and Esad, as you know in this particular location, are phenomenally well placed. And I think I've mentioned this to you before, we're four exercise of anybody in India. We have a great ground game both in India.
Speaker 4: in the Southeast Asia region, Australia region, and in India. And in the Middle East, our team, again, continues to perform extraordinarily well, find new ways of growing the business. Some of the examples that I talk to you about on automation, driving some of our equipment sales and digital sales, they've actually been the leader. And it's interesting to see that region adapt quicker than some of the other regions. Now, the good part about that adaptation has been the fact.
Speaker 4: that most of the customers are either European and US based. So the stories are filtering back. This is obviously a cycle of sales that we've got to go through. So I'm not sitting here saying that we've sort of climbed the hill yet, but we're making significant progress and are excited about our journey as we transform and we shape these stuff. That's really great color. Thank you. Thank you for that.
Speaker 9: And then on that slide four, I mean, we talked about it a little bit here, but equipment, you put out some targets in terms of kind of where we want to go from 22 to 2026 and beyond here.
Speaker 9: Can you just kind of remind us what's automation at the percent of sales today and kind of what's contemplated in that more kind of five-year outlook? And as we look at the outlook, is it a combination of organic and M&A? It can just maybe break down how we should think about automation growth kind of from Descent to the five years from now.
Speaker 4: Yeah, well we've set out a few targets out there. I haven't given out a specific number, but it's probably reasonable to assume that about 10% of our business today is in the automation space. And we expect now to remember on that particular space our focus now is getting more refined and more laser.
Speaker 4: around just working on process automation, using integrators, using partners to drive our business forward, creating a less cyclical, higher margin profile, but also being reliable partners for our customers out there. And so the view that we have with this particular space, it's a high quality portion of our business.
Speaker 4: where margins will be a creative, and we feel that that is the right way to focus on it. And yes, the short answer to you is that yes, it does have a growth number for automation that's significant. We'll look at sort of sharing a little bit more on that during our investor day, but you're spot on that yes, it does have.
Speaker 4: growth within it. Now does it have M&A in it? The short answer is no, but we do see ourselves continuing to build out any gaps that we may have to M&A, but nothing that's imminent or in the numbers today.
Speaker 8: And as a last reminder, if you would like to ask a question, please press star one on your telephone now. And we have a follow-up question from the line of Chris Dancert from Loop Capital. Your line is open.
Speaker 9: Sorry, just one little housekeeping item. Just curious, has there been any update on the disposal of the Russia business? Anything to the right home about there?
Speaker 4: Now, we have nothing more to add on that particular front than what we have spoken of, so nothing more to update on that front.
Speaker 9: Fair enough. Thanks so much, guys.
Speaker 8: And there are no further questions at this time. Mr. Mark Barberlotto, I turn the call back over to you for some final closing remarks.
Speaker 3: Thank you for joining us today and look forward to speaking to you on our next call.
Speaker 8: This concludes today's conference call. Thank you for your participation. You may now disconnect.