Q2 2023 ESAB Corp Earnings Call

Speaker 1: Good morning and welcome to the ESOBS second quarter 2023 earnings release and 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 1 on

Speaker 1: If you would like to withdraw your question, again press the star 1. Thank you. Mark Barbolotto, Vice President of Investor Relations. You may begin your conference.

Speaker 2: Thanks, operator. Welcome to ESOP's second quarter 2023 earnings call. This morning I'm joined by our president and CEO , Sean Combianda, and CFO , Kevin Johnson. Please keep in mind that some of the statements we are making are forward-looking and are subject to risks.

Speaker 2: 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.

Speaker 2: today's slide presentation. With that I'd like to turn the call over to our president and CEO Shyam Kambianda.

Speaker 3: Thank you, Mark. Good morning, everyone, and thank you all for joining us today. I'm very proud of the ESOP team. Our first half results are a testament of our team's focus on executing our strategic vision. These efforts have yielded expected results and strengthened our conviction in our strategy.

Speaker 3: We're creating a narrowly diversified premier industrial that is less cyclical, focused on growth, expanding margins, and delivering impressive cash flow.

Speaker 3: One of the key drivers of our success has been harnessing the transformative power of EBX.

Speaker 3: which has propelled ESOP to new heights of efficiency and effectiveness.

Speaker 3: Our commitment to streamlining our product line has not only fueled growth, but also boosted profitability.

Speaker 3: In addition, our kaizen activities at manufacturing sites continue to improve our productivity and create opportunities to consolidate our footprint.

Speaker 3: But that's not all. We're making significant progress on our ESG journey.

Speaker 3: Workplace safety is a top priority and our team's efforts have yielded excellent results.

Speaker 3: We are equally dedicated to making a positive impact in our communities.

Speaker 3: Lastly, we have entered into partnerships to accelerate our commitment to green energy and the possibilities ahead are truly exciting.

Speaker 3: Moving to slide 3 to talk about the second quarter in particular. ISAB achieved record sales and margins reflecting the dedication and hard work of our global teams.

Speaker 3: Total sales grew 8% and organic sales in the second quarter rose an impressive 600 basis points, driven by robust demand and solid execution by both regions.

Speaker 3: I was happy to see our automation business grow above 20%, an indication of our innovative solutions. Adjusted EBITDA margins expanded 200 basis points to 18.6%.

Speaker 3: Our EBX initiatives have improved our operational efficiency and cash flow generation.

Speaker 3: As a result of our positive momentum and strong performance, we are raising our full year 2023 guidance. We are now returning to slide 4.

Speaker 3: Let me share a bit more on how we're shaping ESAB into a narrowly diversified premier industrial company. We have strategically built our gas control business into a global leader, complementing our fabtech business.

Speaker 3: With the recent acquisitions of Ohio and Therapy Equipment, our gas control business is now around $450 million in revenue with gross margins greater than 40%. We are in our early innings. We see plenty of potential to grow this business and expand margins over the coming years.

Speaker 3: Second, we've been shaping our automation business into a less cyclical, faster growing, process focused and higher margin product line.

Speaker 3: As I mentioned before, automation today is approximately 10% of ESAB's revenue.

Speaker 3: In the second quarter, we saw 23% growth in our automation business.

Speaker 3: Automation, along with our digital solutions and our cobalt solutions, have been met with great enthusiasm at our customers.

Speaker 3: As a result, we anticipate double-digit growth in our automation business over the next few years as customers reshore and address the ongoing shortage of skilled welders.

Speaker 3: Today, gas control and automation contribute 26% of ESAB's total sales. This percentage will continue to increase in the years ahead.

Speaker 3: Moving to slide 5 and sharing a bit more on our automation strategy.

Speaker 3: We have focused on creating a differentiated automation business. Over the last few years, we've been on a journey collaborating with integrators, acquiring companies that give us an edge in programming and data management. As a result, allowing ESOP to provide our customers with a complete workflow process solution.

Speaker 3: Today, I'm pleased that these initiatives and acquisitions have started to yield dividends reflected in our strong growth we experienced in the second quarter.

Speaker 3: Talking specifically about our cobot solution, our customers love the fact that our solution is easy to use, reduces programming time. In fact, with our solution, one can use their smartphone or smart tablet to program the robotic arm.

Speaker 3: Additionally, ESAB has the capability to provide real-time analytics, providing customers with a unique value proposition.

Speaker 3: Our offering has been a game changer for customers looking to simplify programming and boost their shop floor productivity.

Speaker 3: Our cobalt product line saw triple-digit percentage sales growth in the second quarter. There's more to come in the years ahead.

Speaker 3: saw triple-digit percentage sales growth in the second quarter. There's more to come in the years ahead. Turning to slide six.

Speaker 3: In the second quarter, I had a chance to visit our Czech manufacturing sites. It is clear our teams in Bamberg and Schorabor have taken lean activities up a notch.

The teams have done a fantastic job of connecting capital investment and lean activities to deliver a step function improvement in efficiency and productivity.

What was more impressive was a list of ideas of additional improvements at our sites.

Talking specifically about our kaizens in the second quarter, we saw 51 kaizens completed globally.

The example on the right of the slide is our healthcare valve line and shorter ball.

We automated our ClickWash production line using a cobot. This guysend delivered 30% improvement in throughput, a 40% reduction in lubricant usage, also an important ESG initiative for us, and most importantly, created a reliable, repeatable process ensuring quality to our customers, while also enhancing safety of our associates.

Moving to slide 7 and briefly updating you on our ESG efforts.

I'm particularly proud of our health and safety efforts.

The second quarter's total recordable incident rate was a remarkable 0.33, surpassing industry benchmarks.

Our commitment to giving back to our communities is steadfast. Recently, we collaborated with our customer, Northern Tools, to donate ISAB equipment to a trade school training the next generation of welders.

And on my visit to our Hanover, Pennsylvania plant, I was able to drive by the local Little League baseball fields where the scoreboard is now sponsored by ESAB. These are small contributions, but they are creating a great sense of pride and belonging for our teams and the communities we live in.

Lastly, our partnership with GRI Renewable Industries. This highlights our focus on green energy projects and deepens our commitment to shaping a better world together.

Turning to slide 8 and our financial performance.

Sales for the quarter was $680 million, up 8% in total. And sales grew 600 basis points.

Our end markets continue to perform as expected and remain resilient. Acquisitions added 300 basis points of growth and are performing better than expected.

Adjusted EBITDA margins expanded 200 basis points and reached a record 18.6%. I would like to point out that we modestly benefited from $2 million of growth investment being pushed into the third quarter. All in all, a fantastic quarter for ESOP in which we delivered record sales and profit.

Moving to slide 9, another solid quarter for our Americas region. They continue to perform in line with our expectations. Total sales grew 7% and organic sales was up 400 basis points. Acquisitions added, another 500 basis points of growth.

The region continues to drive our product line simplification strategy, excluding our PLS-related activities, volume grew low single digits.

We continue our progress on changing the mix of our business. At the core of our success is our commitment to innovation.

The team's relentless efforts have brought new products and solutions, like the battery-powered WOLC and the Warrior Edge Heavy Industrial product for automation and robotics, creating additional growth opportunities.

Turning to slide 10, another impressive quarter for our EMEA and APAC regions.

with total sales growing 9%, organic sales up 700 basis points, and acquisitions adding 200 basis points of growth.

We continue to see a resilient end market buoyed by investment in renewable energy, agriculture, infrastructure and oil and gas.

liquefied natural gas in particular. I'm very proud of our team in Europe , Middle East Africa and Asia.

They are using EBX and our Product Line Simplification Initiative.

to drive growth and expand margins. Our team in Europe has enhanced our product line simplification process and have identified a unique way to stratify target growth customers. Adjusted EBITDA in the region expanded 180 basis points to a record 18.4.

On that high note, let me hand it over to Kevin to talk about slide 11.

Thanks, Siam. We delivered another strong quarter of free cash flow, which was up 61% versus 2022 and allowed us to pay down debt and further reduce our net leverage to 2.4 turns. Don't miss thepmwiki

Excluding recent acquisitions, which were funded with our free cash flow, our leverage is closer to two terms. We are continuing to leverage our EVX business system and work with AI partners to identify opportunities for working capital improvement. This work is delivering strong results with our working capital terms.

improving by 0.3 turns. In the third quarter, we also increased our dividend payment by 20% to $0.06.

You can expect us to continue to increase this in future years.

We are on track to drive even higher cash flow in the second half of this year.

Turning to slide 12, as Sean mentioned earlier, with a strong first half and increased confidence in our second half performance, we have significantly raised our full year 2023 guidance.

Our business continues to benefit from resilient end markets and improved FX outlook and recent acquisitions performing ahead of plan.

As a result, we are increasing our full year sales guidance to 2.56 to 2.61 billion dollars for a total growth of 6 to 7.5% and an organic growth of 4 to 5.5%.

Our guidance for the remainder of the year continues to assume low single-digit volume and price growth and FX turning to a tailwind.

Adjusted EBITDA guidance increased to $450 to $465 million, which includes $5 million from improved FX, and continued progress on margins from further manufacturing consolidation, product line simplification initiatives, and more.

automation in our factories and back office. We are continuing to invest in our business and our second half guidance assumes four million dollars of added investment on initiatives to fuel long-term growth. Two million dollars of this deferred from the second quarter.

Interest expense guidance has been increased to $74 to $76 million which accounts for one additional bed rate hike.

Tax rate guidance is unchanged and adjusted EPS guidance has been raised by 25 cents. Our cash flow conversion remains on track.

I am pleased to let you know that we are scheduling our investor day for the 5th of December in New York City, and we'll be issuing details shortly.

We have had a strong first half and expect to continue our momentum into the second half of this year. With that, let me hand back to Shyam on slide 13 to wrap up.

Thank you, Kevin. In summary, we're focused on driving our strategy forward.

Product Line Simplification is taking root, delivering both growth and margin expansion.

Our acquisitions are performing above expectations, and we're seeing great progress on our automation strategy.

We continue to drive EBX within our enterprise and I am pleased with our team's energy and commitment towards continuous improvement.

As a result of our first half performance and confidence in our team's ability to execute, we have significantly raised our foliar guidance.

We are on track to deliver another year of significant progress towards our strategic goals.

As a team, we're focused on creating significant value for our associates and shareholders. 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. We ask that you please limit yourself to one question and one follow-up. Your first question comes from a line of Tammy Zakaria from JP Morgan. Your line is open. Hi good morning. Thank you so much for taking my questions.

up low single digit in the back half so both pricing and volume up.

Hi, good morning, Tammy. Yes, that's accurate. Obviously, we've had a strong first half. We started off the third quarter well as well, and so our current estimates are that the second half of the year will have low single digit price and volume.

Does that mean pricing will be positive in both markets because I saw I think EMEA and APAC pricing was flat in the second quarter so do you expect that to reaccelerate in the back half?

No, I think the view is that we see pricing in the rest of the world to kind of stay where it's at and then the North America pricing to start to lap and then sort of that's the estimate that we have or the assumption that we have into the second half.

Got it. If I can ask one more question, the 3% negative volume in the Americas, could you give us a sense how much of that is attributable to the PLS initiative and when you expect that to dissipate? Hmm.

Yeah, you know, I think first it's important to sort of reiterate that we had a really strong quarter overall at ESUB and you saw our global volumes sort of be very strong. We also saw our American volumes be good and positive in the low single digits when you took out our PLS activities.

With that being said, I think I've mentioned several times before that we have a complex business that we continue to work on in North America and execute our PLS strategy. Our view is that it takes the rest of this year to get through that. It may happen earlier, but we're committed to the process.

We're committed to driving our margins to a good spot, making sure that we have a business that's sustainable. But we're very happy with the results when you exclude PLS and you saw a slight volume growth in the Americas.

Got it. Thank you so much.

And your next question comes from a line of Nathan Jones from Stiefel. Your line is open.

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Bye, Nathan.

I'll just follow up on Tammy's question there. There's obviously an impact from PLS on the volume numbers, but I assume that there's also an impact from PLS on the margin profile of the business. So any commentary you can give us on kind of the improvement that you're seeing in the margin profile directly from these PLS actions.

Well, the first piece is that I think I was very proud of the team and the way we executed in the second quarter. Multiple things went right from our team's perspective. We delivered well on price. We grew the accounts that we wanted to grow. We improved the mix in the business.

and then obviously PLS and EBX. And so, one could sort of take a look at this and say EBX and PLS delivering half of it and the rest of it coming from execution on the growth accounts along with price. I guess to follow up to that, Dan, I mean, the comment there was, a lot of things went right in the second quarter. Do you think you can maintain those kinds of margins in the back half? I mean, 4Q is probably gonna be a strong volume quarter. Yeah.

which should result in good margins. So just any commentary on whether there's some good guys in the second quarter that maybe don't repeat in the back half? Yeah, I think the intention of this leadership team and the entire enterprise for us is obviously to hit a watermark and then continue to go from that particular point.

Understood. You already got asked the margin question a couple of times, but I'll try it as well. When I look at incremental margins in a quarter, they were considerably better than what I was expecting. I'm sort of curious, if there's anything that's unique about Q2 that potentially you might not have going forward, and if not, then how do you frame the margin opportunity because we're not that far from that 20% goal that you've outlined before, and I'm curious to do kind of how you see the path going forward.

Yeah, you know, obviously we were very thrilled with the execution from our teams. In the second quarter, we felt that both the regions performed very well and executed through the opportunities that we had to drive the business forward. Apart from the amount that I spoke about, which was the two million that sort of got pushed out to the third quarter, we didn't see any one-time benefits in the quarter, but that being said, there is a seasonality to our business and I think the way that we forecasted the rest of the year placed to that, Kevin, do you want to add something?

I think a big our expectation is sequential incrementals, that fermentals in that sort of 30% range as we progress through the rest of this year. I'm sorry, just to clarify here, when you talk about sequential incrementals, I mean, I guess the way I think about it is on a year-old and year-of-a-year basis.

to Europe , Europe , Europe , difficult seasonality. Yeah, Europe , Europe will be in the, you know, mid to high 20s as we go through the rest of the year. Yeah, I remember, Meg, we are planning to invest a bit into our business. We talked about that earlier with the launch of some of the new products that are coming in the third quarter and the

dollars of out of investment we put in make as well as the half of the 10 million dollars of the already communicated that we were going to spend additional for this year.

Last question from me, maybe a comment on your M&A pipeline and sort of how you are

How aggressive you think you want to be over the next call it 18 to 24 months? Maybe that's a question for the investor day later in the year I don't know.

Yeah, no, we're obviously happy to take questions on that front. One, I would say that our funnel is very strong. I think our team has done a really nice job identifying what we call bolt-on and tuck-in acquisitions that continue to move our strategy forward meaningfully. I'm thrilled about the three acquisitions that we've made thus far, and all of them are performing above expectation, and we're thrilled about that.

So as you stay very similar to that, you saw on the slide that Kevin presented. Our leverage now is down to close to 2.4 and if we had done none of the acquisitions, we would have been down to 2.0 or 2.1. We expect to stay within that two range as we do our acquisitions.

We're obviously generating, as we had mentioned to all of you in the past, we're a great generator of cash. We expect the second half to continue that trend. We expect to generate cash and acquire companies keeping our debt rates to where they are today or in that two range.

All right, thank you. And again, if you would like to ask a question, it's star 1 in your telephone keypad. And your next question comes from a line of Chris Dankert from Loop Capital. Your line is open.

Hey, morning. Thanks for taking my questions. Really appreciate all the color you've given us around the margin moving parts here and there, not particularly around the private line simplification here. I'm just curious, and forgive if I missed it, but on the price cost side, you can just kind of give us.

sense for how big of a benefit that was in the quarter and kind of what we can expect in the back half on from a price cost perspective? Yeah so we've always said that on a price cost side we expect to be neutral you know and so our view on price cost that is our strategy. Now we've got other activities underway whether it be value pricing.

whether it be price related to product line simplification, that we think will continue to add tailwind to our sales. But that being said, our intention with pricing is always threefold, and we've talked about this before. One is related to inflation, and we expect if we do see inflation will...

Obviously, we don't see as much inflation now towards the second half of the year. We did see some inflation in North America. As a result, you see that pricing number be a bit higher, but otherwise we continue to expect to play those second and the third play around value pricing and PLS as we move into the second half of the year and into 2024.

Understood that that's really helpful and then I guess to zoom out a little bit here Obviously make me talk about you know gas control and some of the opportunities there. I'm seeing nice growth in the quarter But when you're looking at gas control more specifically What gets you the most excited whether we're talking is it is at the core industrial applications or is it more?

like the diverse markets in terms of medical and that type of thing. Yeah, you know, the great part about that business as we sort of began to focus on it back in 2017 and 2018, we saw that the industrial side of that business actually has better characteristics than the broader industrial business that ESAB had. So we like the characteristics of the industrial side of the business. And then when you map it over...

possibilities obviously to acquire and stack up businesses in that category. So we're actually happy about the entire breadth of that product line. We like the performance of the industrial side of that business and we've talked about it being accretive to the gross margins of ESOP. And then you pick the spec gas and the medical side of that business and that continues that journey further north for us.

Thanks so much for the call there. And there are no further questions at this time. Mr. Mark Barbolano, 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.