Q3 2023 ESAB Corp Earnings Call
Good morning, and welcome to the East saw third 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'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 Presti Starwood. Thank you Mark Barbara <unk>, Vice President of Investor Relations you May begin your conference.
Thanks, Operator, welcome to <unk> third quarter 2023 earnings call. This morning, I'm joined by our President and CEO, John Combi, 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 <unk>.
Thank you Mark good morning, everyone. Thank you all for joining us today.
<unk> achieved record results for the third quarter, our team delivered strong year over year organic growth margin expansion and free cash flow.
Before getting into the slides, let me make a few comments.
First let me appreciate and thank our dedicated associates for their commitment and hard work their efforts are driving us closer to our long term goals.
Second our markets continued to be resilient benefiting from favorable macro trends.
The third quarter also underscored the strength of our global franchise.
Our European team in particular excelled in the quarter identifying opportunities to sell our new products and gain market share.
During this period I also had the privilege to travel and meet with our teams in the Asia Pacific and Middle East regions.
It's always inspiring to be with our regional teams and I was reassured by the remarkable progress we've made in both regions.
Our teams continue to execute our E. B X playbook, which has resulted in organic growth margin expansion and cash flow improvements.
Both regions added new customers to our equipment and automation portfolio. It is a testament to our exceptional ground game that is difficult to replicate and their hard work and excellence are evident in our results.
In September we had two of our biggest industry events, Essent and fab Tech, where we unveiled aesop's innovative equipment and automation solutions generating tremendous interest amongst our end users and sparking excitement among our valued customers.
Since 2016, and fab Tech, we have systematically revitalized our equipment portfolio by bridging product gaps and fortifying our distribution networks, while simultaneously, creating a global presence and global vast control products and solutions.
Fourth we continue to ramp up the use of V. Bx business system. During the third quarter, we completed several kaizen, including our presence guys aren't at our Denton facility as part of our product line simplification initiatives.
This guy is that our teams mapped out product families created plans to eliminate low volume skus and aligned customers with similar rescue use to enhance customer value, while reducing complexity.
We're already seeing the positive impact of this guy that that has allowed us to increase on time shipments improved customer satisfaction and expand margins.
Lost as a result of our record third quarter performance and a good start to Q4, we're raising our guidance for the year.
Turning to slide three.
We delivered outstanding third quarter results total sales grew 12% with organic sales growing an impressive 700 basis points.
We continued to experience resilient end markets in both geographies with EMEA and APAC, leading the way.
Our innovative new products continue to experience robust demand and we're on track to achieve our goal of increasing our equipment mix the 35% of sales.
Profits also reflect a strong quarter with adjusted EBITDA margins, expanding by 170 basis points or a bx initiatives, including product line simplification continued to enhance our operational efficiency and cash flow generation.
Moving to slide four in the past I've discussed how we're positioning aesop for the future.
<unk> has always had a leading consumables franchise when I started in 2016 equipment represented only 26% of our sales.
Strategy was to refresh our equipment portfolio fill product gaps and extend our leadership in gas control equipment, while protecting our consumables franchise I'm proud to say, we have made great progress on our equipment offerings and have successfully filled a product gaps last month, we showed.
Based products like the volt, the digitally enabled wire edge and our newly digitally connected cobalt at fab Tech and Essent tradeshows generating significant interest and excitement.
We are making substantial investments in marketing advertising and sales training to leverage our new product offering. These innovations are beginning to bear fruit with equipment automation sales seeing high single digit growth cobalt sales, increasing by triple digits compared to last year and Additionally, our Ohio.
Acquisition has been successful in selling our GCE gas control products like many vitale valves further enhancing our position in the North American gas control market. All in all strong progress as we continue to shape aesop into a premier narrowly diversified industrial company.
Moving to slide five.
Financial performance sales for the quarter reached a record $644 million, representing 12% total growth our end markets continue to perform better than expected displaying resilience our acquisitions continued to outperform each.
EBITDA margins expanded by 170 basis points, reaching a record $18 three.
Turning to slide six.
The Americas regions performed as expected during the quarter total sales increased by 9% organic sales increased by 400 basis points year over year and acquisitions added an additional 500 basis points of growth.
Excluding our product line simplification initiative volumes grew low single digits.
Our new products and solutions for the distribution channel automation and robotics are expanding our growth opportunities.
Our gas control business also continued to perform well <unk> and our new product launches played a significant role in driving a 220 basis points margin expansion in the quarter.
Turning to slide seven.
Our EMEA and APAC segment posted an outstanding quarter with total sales growing by 14% organic sales increased by 900 basis points year over year and acquisitions added 200 basis points of growth Europe continues to demonstrate resilience and the middle East and India markets.
Showing notable strength.
Our strong showing at Essent drove sales volumes higher by $4 million in September EBITDA margins in the region expanded by 130 basis points. The team is effectively utilizing E bx and client simplification initiative to stimulate growth and expand margins on that.
Positive note, let me hand, it over to Kevin for Slide eight.
Thanks, Sean we delivered another strong quarter of free cash flow up 30% versus last year to a record $100 million and we ended the third quarter with net leverage of less than two two turns as we continued to repay debt.
Key to our performance was a half a turn improvement in working capital.
As we ramp up the deployment of our <unk> business system we.
We have a deep funnel of opportunities for the future and we continue to embrace the latest developments in AI to accelerate improvement.
Our cash flow momentum has continued into the fourth quarter and we are on track to deliver a year of record free cash flow unexpected net leverage of below two turns as we exit the year.
Turning to slide nine.
John mentioned earlier, we have again raised our full year 2023 guidance.
<unk> guidance has been increased to five nine to six $1 billion and organic growth was five 6%.
This reflects continued resilience in our end markets.
A strong performance from acquisitions offset by negative FX that is expected to impact our Q4 top line by approximately $12 million.
Adjusted EBITDA guidance increased to $465 million to $475 million, which includes continued progress on margins from manufacturing consolidation product line simplification and automation in our back office offset by around $2 million of FX impact.
Adjusted EPS guidance has been raised by 15 cents at the midpoint, reflecting a stronger adjusted EBITDA performance improves I think for tax and an update to our interest expense guidance cash flow conversion remains on track for a strong year freeze up with.
Let me hand back to <unk> on slide 10 to wrap up.
Kevin to wrap up our teams continue to execute our strategy and we're well on our way to becoming a premier narrowly diversified industrial.
Our markets continue to show strength and resilience on the back of favorable macro trends in.
In addition, our focus on introducing new innovative product solutions to our customers is allowing us to grow and gain share. We're taking AVX up a notch and I am proud of our team's energy and commitment towards continuous improvement.
As a team we remain focused on creating value for our customers associates and shareholders.
We're poised for a strong finish to 2023 and we are building momentum going into 2024. 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.
And your first question today comes from the line of Tami Zakaria from Jpmorgan. Your line is open.
Hi, good morning. Thank you so much for taking my question. So.
Pricing turned negative in Europe can you help us understand what drove that and what's the outlook going forward.
Hi, Good morning, Tammy Yeah. Thanks for the question a couple of things.
We still anticipate pricing to be sort of in the low single digits as we finish out the air.
We just saw some items, especially steel sort of abate in the region, but the real story for us.
In the EMEA.
APAC region was the market's continuing to stay resilient our teams actually got significant volume and our AVX initiatives drove a significant beat in margin.
Versus where we expected so all in all really strong execution by the team pricing was just one part of the story based on some inflation that sort of began to abate, but the real story for US was really strong markets, great execution and margin expansion year over year.
Got it. Thank you so much and just a follow up.
As you think about raw materials prices coming down how should we think about pricing in the Americas as they look to the next few quarters.
Yeah.
We've talked about this before we really have three strategies on pricing the first one being inflation based and you know.
We play in.
And varied markets and not every market is seeing steel prices.
Debate. So so so there's sort of a mixed bag out there, but there's two other pieces that we're working hard on one is value pricing and the second one as you know our product line simplification based pricing so from that perspective, we're evaluating all of our options and looking at next year in that context.
We're confident on on holding price regardless of where.
Where the markets grow.
So our intent as we go forward as to sort of talk more about it during our investor day call, but as of right now nothing changes in our strategy.
Got it thank you great quarter.
Thanks, Tim.
Your next question comes from the line of Nathan Jones from Stifel. Your line is open.
Good morning, everyone.
Hi, Nathan.
I was hoping to dig in a little bit more on on Payless and its impact on the business. It's been going on for a few quarters that obviously has some.
Some headwind on the revenue line some tailwind on the margin line.
He talked about it having some positive impact on the pricing line, maybe you could unpack some of the impacts.
As far as just in terms of the revenue drag margin benefits.
And anything else you can give us some color on.
Yes.
The best way to think about Pls is that one we've been very happy with the engagement.
And what you can see is we talk about pls a certain way in the Americas market and then we're also doing pls in Europe, and the middle East and to some extent also in India, and where you can actually see the power of the Pls initiative as it focus is also on growth fortifying and understanding how you sell to your customers. So what I'd say.
As the Pls story is not just about.
Refinement and elimination of Skus, but it's also about growth and so the best way to think about Pls is look at Aesop's performance, we've talked about the North America business being more complex than some of our other regions are selling.
Selling a significant larger amount of skus and a lot of third party sales, where we were not adding much value in terms of sales content and so one of the things that we adopt about is that it would take us this year to get through that aspect of pls and begin to focus on growth I was very happy with the progress of the North American team made as the quarter.
<unk> rolled on.
We saw improvement.
Starting.
In July all the way to September in terms of volume and to ask you a question as to the volume impact. We've said this if you exclude the pls volume impact we had low single digit growth.
In the region and all in all in our view really strong initiatives something that we believe is going to be a core tool kit.
All of ours with a with a big focus on growth as well and we're demonstrating that in the middle east and demonstrating that in Europe.
Thanks for that.
Is it your opinion, then that the impact of Pls I know pls will be an ongoing initiative the major impacts that workday at least to the topline in Americas.
About probably five points of volume or something like that.
That you're dragging on on revenue in 2023 that we should see the end of the major impacts of that and be into a more normal cadence, where we can more easily identify the impact to growth of these tools in 2020.
That's right our intent is to sort of exit this year and be in a spot where the comparable.
Or sort of more equal and excluding sort of the big Pls impacts that we've made this year in the in the North America, and then Americas market that's correct.
Thanks Nathan.
Your next question comes from the line of Meg Dobra from Baird. Your line is open.
Hey, good morning, guys. Thank you. Thank you for the question.
If I may I would like to see if you can unpack your growth a little bit more so.
On slide three here.
Slide four you mentioned that equipment and automation volumes were up low double digits.
Just running basic math it looks like your consumables were flat and your growth in volume was really kind of all driven by equipment and automation. So correct me if I'm wrong there.
What I'd like to understand from you is sort of how you see these two sides of your business progressing into the fourth quarter or maybe if you're willing to comment beyond that how sustainable is this growth in equipment and automation and what do you think is happening with volumes.
Thank you.
Yeah. So thanks Mega always good to hear from you.
So a couple of aspects. The first piece is something that I spoke about in my in my prepared comments was that in 2016, we really did not have an equipment line.
One of the best stories that came out of fast fatback in Essen was the excitement our sales teams solve with the fact that we now have a full toolkit in our lineup to go sell on equipment and the progress that we've made in creating automation solutions with our new wire edge product line. So fundamentally think of it as Aesop was playing back in 2006.
<unk>, primarily as a consumables franchise to today, we've now got a full product line on the fab Tech sites to go out.
And get behind in our sales teams and our customers to rally behind so we're seeing a lot of excitement on that particular front, we're seeing a lot of engagement and so we fundamentally believe that over the next couple of years, we will be able to sell more equipment vis vis consumables that being said you know the assumption that youre, making prime.
Merrily as.
Has the right assumption, which is equipment and automation is growing faster than consumables, but.
Probably the incorrect part of it is that the underlying we did see consumables growth as well just not as much.
And so so we feel that this journey continues for us our position of strength in the geographies that we spoke about is significant our ground game as is bar, none and unparalleled we genuinely feel that our teams are now executing our aesop growth playbook and AVX playbook quite well.
So we believe that we continue to have an opportunity to gain share and drive volumes to be positive over the coming is the other aspect make that I'd say to you is we've been very positively.
Surprised by how resilient the markets have been.
And in reality, what would be find I was in the middle East and I can tell you never before have I seen the kind of infrastructure and investment projects underway.
In India and I can tell you from the time that I came to college and had been going back I've never seen the kind of development that's happening in that particular region and we all know about the opportunity that's going to happen in the U S, Canada and Mexico over the next decade.
Whether you call it.
Reindustrialization or an industrial Renaissance are reassuring there truly is significant opportunity for companies like us and Aesop in particular to be able to drive volume growth.
We're also looking forward to sharing a lot more detail on all of these topics during our Investor day in December.
Sure.
And thank you for that color, but maybe just to put a final point here.
When we're looking at what your peers reported for instance.
What we have seen there.
<unk>.
For lack of a better term is just deceleration in activity.
That's not really apparent in your when you reported today.
Which which which is why I'm asking the question is is that the penetration of new products in the whole year initiatives are leading to the kind of.
Outgrowth in a market that you deemed to be sustainable even as maybe broader demand conditions potentially shift going forward. Thank you.
Yes, so two fold. The first one is just a simple answer yes, we believe that we've got good good processes in place that allow us to continue to do what we're doing and get better from there, but the other piece that I would also say that the markets actually are showing reasonable resilience.
As we see it and where we are playing we talked about this before we're seeing add continued to show some strength, we're seeing renewable energy show some strength and we continue to.
Gained customers in that particular place, we see downstream oil and gas and investment in the middle East and infrastructure doing well and the emerging markets exposure that we have.
Really we've always talked about it having sort of a <unk> impact on <unk> growth.
We're seeing that play out.
Okay. Thank you.
And your next question comes from the line of Chris Dankert from Loop capital. Your line is open.
Hey, good morning, everyone.
I might be a question more for for December here, but I'll give it a shot anyhow, Kevin I think you touched on manufacturing consolidation, maybe just any kind of update on what the actions work in the quarter and kind of what needs to happen on that front.
Yes, so we've been working hard on the manufacturing consolidation, we have a couple of large projects. This year with a focus on our European business. This year in terms of some work that we're doing.
There is an impact in the fourth quarter, a few million dollars as a result of those actions, it's benefiting our margins when we have.
Got a funnel of opportunities that we're excited about for the future.
Yes, Chris I think we've talked about this before where.
We think we're in the middle innings in terms of where we think our footprint efficiency can go but we've done a lot of heavy lifting in the past so but.
But the points delays that plenty to do.
A footprint rationalization in terms of the things that Kevin spoke about also related to AI.
And data mining that sort of fundamentally drives are opex to a different position so.
So we're looking forward to executing those as we go into the budget cycle, Kevin and I actually looked at a several of those initiatives.
For us and we're putting plans in place depend.
Depending on what.
The end markets do for us to either accelerate or run them through the course.
Perfect. Thanks for the color there both of you.
And then just kind of following up on price cost or any kind of color you can give us on what the impact of price cost was too to EBITDA in the quarter and kind of what we're expecting to finish out the year here.
Yes, so I think as Sean mentioned earlier.
We're constantly watched inflation reacting to inflation with price and we would say at this point, we're a little bit ahead of where we are with price over inflation.
We'll look to continue.
We have a really strong system as we've talked about Chris in the past, where we look at net impact of price within our business.
Kevin did a really nice job few years back and creating what I'd call a standard work for us to monitor how our business is doing against that particular metrics and so we feel confident that we've got.
Enough sensors out and then our space to ensure we're doing the right things associated with price and then I spoke about the two other ones that we're going hard on which is value pricing and pls based pricing in the marketplace.
I guess, if I could just put a fine point on that last topic there of pls with the price dynamic is that should we think about that as like an 80 20 price approach as we move kind of beyond this year or how do we think about that component of pricing after kind of the lines are kind of reset into 'twenty four.
You know.
The.
We believe that it's an ongoing initiative you continually look at where you add value.
Where you are delivering significant amount of value to your customer.
And work that piece, but the short answer would be yes. There is some sort of low hanging fruit that come at you early and then it becomes a stable process, but it is a powerful process of how you think about your business. How you think about your customers and how you think about your product line and Skus.
So we're excited about it the one thing that we've always talked about pls for us is not an exercise in cutting it's an exercise in growth and efficiency.
And that's what we're focused on.
Got it thanks, so much.
Your next question comes from the line of Sherif El <unk> from Bank of America. Your line is open.
Hi, good morning.
Hi, Jerry.
Follow up a bit on some of the strong equipment sales you've seen on the CAGR for Fab Tech side are you seeing the uptick in equipment sales, mostly from existing customers that are buying sort of the new refresh product lines or is it also growing market share among sort of the non traditional <unk> customer.
Yeah really both the first pieces that sort of talked about this in the context of us having a really strong consumable franchise and not being able to sell to the customers that were already buying from us.
Full portfolio answer today that has changed and then the second piece that comes along with it with these exciting new products like the volt.
Like the warrior edge and the fundamental transformation of our portfolio of new customers are engaging with us and customers that did not have.
The opportunity to allow for a full aesop workflow solution are now engaging with us and so we're actually winning on both sides and something that I've talked about a dollar sales for us in equipment is not only a dollar sales and growth, but a dollar and share gain.
So it's a really nice dynamic for us very proud of our engineering team and the efforts that were put in in terms of open innovation to get US there. Our intent now is to continue to refresh this line keep it.
On the forefront keep it in the best in class category.
And continue to build on this.
Understood.
You mentioned just on some of the end markets, you're seeing strength in renewables.
<unk> seen some upheaval in clean energy projects, particularly on the wind side can you remind us of your exposure in renewables and sort of where your areas of strength.
Yes so.
Do you have the number mark.
It's low single digits.
But what we are seeing is a significant amount of investment that is going in and activity. As a result of it I mean, yes, there may be I mean, I'm not sure of the upheaval that just speaking of what we do see is a significant amount of offshore investment that's going on in Europe, that's going to continue probably for the next decade.
We're seeing sort of renewable energy.
<unk>.
Opportunity also in the Middle East.
Where we're seeing obviously the U S also engage hard on that but the glass back along with South America. So our opportunity list and something that we've talked about at our industrial shows called adaptive welding.
For that particular category is actually gaining a ton of traction we're seeing some excitement around that field, where we're displacing a few incumbents and so so we like we like the space. We like the efforts our team has put in in terms of the technology that we have.
And so it's a growth driver for Aesop.
Got it thanks, so much.
Your next question comes from the line of David Raso from Evercore ISI. Your line is open.
David Your line is open.
And you expect James.
Yes, we will move onto our next question is from the line of Rob Jamieson from UBS. Your line is open.
Good morning, guys congrats on the good quarter.
Yes, just real quick on the end markets.
I think your exposure to auto is pretty small like probably low single digits here in the U S. Just is there anything baked in for.
Full year.
W strikes.
It's related to your consumables business in the Americas.
No, we actually have very little auto exposure.
And in the Americas, and so as a result, we really saw no impact.
Of the strike.
But that being said, we do expect to continue to sort of work that aspect of the channel.
And continuing to have growth opportunities there.
Gotcha, Okay perfect. Thanks, and then just a couple on free cash flow I mean look at another strong quarter here and Kevin I know you mentioned the use of AI and.
And what that's doing for working capital just curious if there is opportunities to use similar technologies across the rest of the organization and maybe become more efficient on.
Sales initiatives or leads as youre trying to grow your equipment business.
And then I guess another question on like net leverage being sub two turns by the end of the year just an update on the acquisition pipeline and prioritization there you're still looking to expand the gas control business any other areas of the portfolio that youre looking to Phil. Thanks.
Yeah, Rob I think we've spoken a few times that we are piloting some projects in AI that are supporting the cash side of the business but.
We'll probably talk a little bit more in detail about some of the activities. We're doing another investor day in December but AI is something that we're looking at across the entire business in the areas that you mentioned are areas, where we are definitely focused.
See significant opportunity in this evolving AI world to get even more benefits in the future. So.
Definitely at the forefront of our mind and definitely something that we're working on across the wider business in terms of the M&A and the funnel maybe hand over to Sean Yes, we actually have a very strong M&A funnel.
Balanced we've got a lot of opportunities on the gas side as well as some opportunities to create more strength, but then our fab tech business.
And so yes, we are actively working at the funnel has never been stronger.
It just comes down to is executing.
Based on timing on a few of them.
And so we'll see when those happen but.
We continue to expect to be a compound or in our category.
Our intent is to create a less cyclical higher margin better cash flow business.
And began to shift.
<unk> diversified premier industrial I think we're well on our way on that particular front end youll see that our acquisition strategy will fuel that direction.
Great. Thanks for taking my questions.
Thank you.
And there are no further questions at this time, Mr. Marc for all but a lot of 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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Yes.