ESAB Corporation (ESAB) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the ESAB Corporation Second Quarter 2020 earnings release and conference call. [Operator Instructions] I will now hand the conference over to Mark Barbalato, Vice President of Investor Relations. Marc, please go ahead.

Thanks, operator. Welcome to ESAB's Second Quarter 2026 Earnings Call. This morning, I'm joined by our President and CEO, Sam Cammianda; and CFO, Brent Jones. Please keep in mind that some of the statements we are making today are forward-looking and are subject to risks including those set forth in today's SEC filings and 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 can be found in our earnings press release and today's slide presentation, which is available on our website. . With that, I'd like to turn the call over to our President and CEO, Sean Cambianda.

Thank you, Mark, and good morning, everyone. Thank you for joining us today. Let me start by welcoming our DFI teammates to ESAB. I was in Quebec for day 1, and the positive energy was palpable. The teams are working extremely well together, building plans for growth and innovation, DFI adds talented leaders to our organization. To add, Brent has been with us now for 90 days and he has done a great job jumping right in and raising the bar for ESAB. In addition, we've scored a real win, bringing RJ to ESOP as an Executive Vice President. RJ brings over 30 years of experience with Danaher, Varaldo and GE Healthcare. At each of those companies, she built process-driven organizations at scale and delivered outstanding results. She's also an expert practitioner of our business system. I believe the combination of Brent, RJ, EBX AI and our current leadership team is exactly what ESAB needs to drive organic growth margin expansion and strong cash flow generation. We've been busy in the first half. Our teams have kept their heads down focused on executing their plans and controlling the controllable and it shows. Turning to Slide 3 to discuss our second quarter highlights in particular. ESAB delivered a strong second quarter, headlined by record total core sales and adjusted EBITDA and a return to organic growth in both segments. Demand in North America and Asia remain robust. Europe continues to be resilient and the Middle East performed in line with expectations in a tough environment. These results reflect the strength of our team and the power of our global enterprise showcasing the value of our unrivaled workflow solution that addresses our customers' most complex issues. Total sales for the quarter were $766 million, up 13% year-over-year, with core organic growth of 2.5%. Driven by double-digit growth in automation and equipment. Adjusted EBITDA grew 8% to $150 million. Margins reflected transitory price cost neutrality driven by increased logistic costs and commodity costs, which we expect to correct over the next few quarters with price and cost-out activities. Our teams did a fantastic job thoughtfully navigating this transitionary inflation, all while protecting our investments in equipment growth initiatives. We closed the acquisition of DFI ahead of schedule, a defining step that positions ESAB for faster organic growth and higher margins. Brent will walk you through the financial details and our updated outlook, which now incorporates FI. The ESAB you see today is a transformed enterprise with equipment now representing over 50% of our revenue and powering our ability to accelerate organic growth. Before we move on, I want to thank our teammates around the world for their passion and commitment to our shared vision. Together, we're raising the bar of performance at ESAB. Moving to Slide 4. Showcasing define. I want to take a moment to remind everyone why this asset is so important. EdF powers the next phase of ESAB's workflow and is a global leader in inspection and monitoring technologies for mission-critical applications with clear leadership in electromagnetic testing, ultrasonic testing and automated inspection. It serves attractive end markets with strong secular tailwinds across aerospace and defense, nuclear, infrastructure and oil and gas. These tailwinds are driven by aging infrastructure, rising inspection requirements growing power generation demand and industry-wide skilled labor shortage. Let me bring this to life for all of you. In early July, we hosted several customers at Edify, where we showcased the power of our combined workflow solution across various end markets. This was the first time our teams from DFI EWM, GCE and ESAB worked together to demonstrate the full power of our enterprise. The event showcased our unrivaled workflow solutions, and our customers walked away with a clear understanding of the connection between ESAB and Edi and the value it creates for their operations. That excitement is already converting into an active funnel of commercial opportunities, and our teams are energized to capture them. Just this week, I visited DFI site in State College, Pennsylvania, and got a first-hand view of this talented team, their ability to partner with large aerospace customers to quickly build prototypes to solve the toughest problems, it reinforced what I believed all along. We've picked up a team that is maniacally focused on the customer, capable of innovating at the speed of our customers' problems and carries an entrepreneurial spirit that will serve ESAB well over the long term. For our shareholders, this translates directly into a stronger ESAB, faster organic growth, higher margins reduced cyclicality, a more predictable and resilient earnings profile that compounds value over time. Financially, DFI is a premier asset. The business delivered high single-digit growth gross margins of approximately 65% and EBITDA margins of roughly 30%. RFI also brings meaningful North American exposure that pairs naturally with ESAB's global footprint creating immediate geographic expansion opportunities for big companies. Turning to Slide 5. By combining ESAB and EDF, we have created an unrivaled end-to-end workflow solution that supports our customers from initial preparation and joining all the way through real-time asset management. Data-driven insights and full traceability. Our teams are focused, and our growth funnels have never been stronger, and we're very optimistic about the opportunities that lie ahead. Together, we're uniquely positioned to accelerate the industry shift towards connected and digital workflow solutions. Moving to Slide 6. This is ESAB's transformation in 1 picture. Over the past decade, we have deliberately shifted our mix towards faster-growing, higher-margin portfolio of equipment and gas control products, which has become the foundation of our complete end-to-end workflow solution. From our leadership in gas control to our advanced equipment portfolio, every step we have taken, including our recent acquisitions has been accretive to our growth and gross margin profile and has significantly strengthened our offering and geographic reach. The execution of our strategy has moved our equipment mix from 38% to 50% plus on a 2026 pro forma basis. At that same period, we have improved our gross margins by approximately 500 basis points. Turning to Slide 7. This slide is the proof point of our capital allocation strategy. Over the last 18 months, we've deliberately deployed capital into high-quality assets that have fundamentally reshaped ESOP. Every 1 of these acquisitions is delivering. We have already discussed the merits of DFI. Active and Delta P strengthened our gas control leadership with unique products in fast-growing geographies. EWM establishes ESAB as the technology leader in equipment, bringing coal metal transfer technology, which we call ReACT along with additive manufacturing capabilities. And Bavaria extends our proprietary filler metal product line while deepening our presence in Germany. Each asset improves our growth profile, enhances our margin and extends our workflow solution exactly what we set out to do. The results validate our playbook and the runway ahead is long. We have reinvigorated eBx AI, sharpening our focus and driving out cost. ESAB is on a new trajectory. On that positive note, let me hand it over to Brent to walk you through the financial details.

Thank you, Sean, and good morning, everyone. It is a pleasure to be on the call today. I have been spending my first few months diving into the business and getting to know the team. Based upon everything I've seen, I believe we have a strong foundation in place to drive long-term shareholder value. . Let's turn to Slide 8 to review our financial summary. As Sam noted, we delivered $766 million in total sales, a 13% increase over the second quarter of 2025. We delivered 2.5% organic sales growth, reflecting double-digit growth in automation and equipment as well as an 8% contribution from acquisitions. Adjusted EBITDA was $150 million, up 8% year-over-year at 19.5% adjusted EBITDA margin. We experienced a 90 basis point year-over-year margin decline because of transitory price cost neutrality and deliberate targeted commercial investments to accelerate growth in our equipment product line. We view these investments as essential to driving future growth and margin expansion as equipment becomes a larger slice of the pie. Moving to Slide 9. Excluding the impact of 1 month of edify and the related financing transactions, core adjusted EPS was $1.41. Given the number of moving pieces related to this transaction, we have provided a simple walk. As you may recall, we prefunded a large portion of the debt financing with an exceptionally well-timed bond offering in March where we raised $1 billion in a very attractive cost of capital. This financing is even more attractive in retrospect, given current market volatility and interest rate trends. The total debt financing impacted EPS by $0.13 in the quarter, of which $0.03 was attributable to the prefunding. Our committed equity financing consisting of common shares and mandatorily convertible preferred stock, which helped fortify our balance sheet led to a $0.03 headwind. We are extremely excited to have DFI as part of the ESAB team. The teams are already working together exceptionally well, and we are making targeted commercial investments to accelerate our long-term growth and margin expansion. Turning to our Americas segment on Slide 10. The Americas delivered a strong Q2. Total sales grew 12% to $316 million with 5% organic growth. North America had double-digit organic growth on the back of particularly strong performance in equipment, 1 of our key growth priorities. Gas equipment and automation rose double digits Finally, Mexico continues to stabilize, and we are working to mitigate expected headwinds in South America. Moving to Slide 11. Our EMEA and APAC segment sales grew 14% to $450 million, representing 1% organic growth. We were able to drive organic growth despite the meaningful geopolitical headwinds in the Middle East, which impacted volumes. Margins in the segment were pressured by these disruptions as well as continued equipment growth investments. However, better-than-expected performance in Europe helped partially offset these headwinds. We continue to be excited about what EWM is doing for our business both in Europe and globally, and the EWM integration and associated margin expansion plans remain solidly on track. Turning to Slide 12. Regarding cash generation, our first half adjusted free cash flow was in line with the first half of 2025 despite the meaningful increase in interest expense. Our cash flow was impacted by costs associated with restructuring and acquisition integration activities that are enabling future growth and margin expansion and a strategic decision to carry higher equipment inventory levels to serve our customers. We are focused on leveraging eBx AI structurally to improve our working capital turns and we expect strong second half cash generation. In terms of capital allocation, we continue to focus on investing in organic growth, debt reduction and accretive tuck-in and bolt-on acquisitions. Moving to Slide 13 to update our full year 2026 outlook. With EdF now closed, we are raising our full year 2026 outlook. We expect total core sales of approximately $3 billion to $3.1 billion. This assumes organic growth of 2% to 4%. Acquisitions are now expected to contribute approximately 9 points of growth and foreign currency remains unchanged. We have increased adjusted EBITDA to $615 million to $625 million, which includes 7 months of Atif. We have assumed about $15 million of drag from transitory price cost neutrality driven by logistics costs and commodity inflation while protecting investment in equipment growth initiatives. The adjusted EPS range of $5.40 to $5.50 reflects these changes as well as the contribution and funding of the Enfa acquisition. Our free cash flow conversion should be approximately 90%. We have the right strategy and are executing it with discipline and focus and are on track to deliver another year of strong results. Thank you for your time, and I will now turn it back to Sean.

Thank you, Brent. To summarize, we delivered a record second quarter with positive organic growth in both segments, and we closed defy ahead of schedule. We're building momentum in our business. We transformed ESAB. We're continuing to reduce rooftop and optimize our manufacturing footprint. We are simplifying eBx AI so that every team member is fully engaged with our tools. Our teams are driving 4 powerful funnels of funnels of new customers, a funnel for synergy sales, a funnel for cost out and a funnel for Kaizen. We have renewed focus on Gemba, starting with me. Our priorities are clear: driving organic growth, margin expansion and deleveraging the balance sheet. We have reshaped ESAB into a faster-growing, higher-margin enterprise. True to our values, we will keep helping each other win, valuing every voice as we deliver long-term shareholder value. With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from Bryan Blair with Openheimer.

I was hoping you could offer a little more color on how orders progressed through Q2 and into Q3 and how your team is thinking about organic growth in the back half, both in terms of Q3, Q4 cadence and segment contribution?

Yes. Thanks for that question, Brian. Obviously, we were very happy with how things progress for us from Q1 to Q2. We've seen that trend continue into Q3. as you've always known, we felt at the back half of the year, we had a lot of initiatives in play. We felt that sequentially our growth profile and our performance improves and you've seen that from Q1 to Q2, our performance improved both from a margin perspective and a performance perspective on sales. We expect to continue that core growth trend into Q3 and Q4. The other piece that I would add there, Brent, is that we have, as I mentioned before, there were a couple of things that we were very comfortable with. One was EWM and the initiatives that we're working on for equipment in the second half of the year. And then we also had some really nice automation, standard automation orders that ship in the second half of the year, giving us confidence about the organic growth guide that we've given.

Okay. Understood. And you mentioned that the Middle East performed in line with expectations given the well-known circumstances at hand. The level set what was the Q2 revenue and profit headwinds for Middle East operations, how are you thinking about the back half? And then looking forward, is there any way that you can quantify or dimensionalize the prospective catalysts from rebuild efforts and incremental investment in energy infrastructure?

Yes. A couple of things there, Brian. First, obviously, -- very proud of our team in the Middle East. I think I may have mentioned it to you before, our teams are actually in the office and working our sales teams are out there, finding new accounts, continuing to deliver protecting our customer, protecting our share and, in some cases, gaining share in the region. As we mentioned before, the region is about 7% to 8% of SAP's business and it was down double digits. So really in that 10%, 11% range. The margins are good for us in the region. So we haven't given out any guidance on that particular piece, but you can make an assumption there. But we did see logistics costs sort of triple in the region as a result of the conflict, which we think are transitory, depending on what happens today and tomorrow, things could sort of really shift very favorably in our direction. From a rebuild perspective, we've said this before. Most of the assets that will need rework and rebuild, have ESAB product specked in. And so when those rebuild activities come in, we expect to get a larger share of it. We -- as you are aware, prior to the conflict that region was growing high double digits for us, closer to 20%, we would expect that for a period of time as they rebuild and reconstruct that the numbers would be equivalent to that or maybe slightly better.

Your next question comes from Tami Zakaria with JPMorgan.

Question on your organic growth outlook. I think it remains unchanged. You spoke about some price cost neutrality impacts that you expect to cover in the next few quarters. Has your pricing outlook changed versus the last time we spoke? And in lieu of that, does that mean your volume outlook is now weaker? And so on the net, your organic growth expectation remains the same?

Yes. I think the way to think about it is there's just a little bit of uncertainty out there, Tammy. So the view for us is sequentially, our pricing does get slightly better. And then things have to sort of improve for us globally, Middle East being 1 of them. And I think the view for us is that we feel confident about where we are and where we have guided. The view for us is that pricing gets slightly better. We're sort of flat to slightly better on organic volume as we go through the second half of the year.

Understood. And then the second question, would you be able to parse out the components of the $0.35 EPS guidance reduction at the midpoint how much of that is Edifisales, EBITDA, higher interest expense, how much from price cost impacts. If you could bucket those, that would be helpful?

Yes, certainly. It's Brent. Good to speak with you. So when you look at that at the midpoint, most of the dilution associated with Adif we absorbed in Q2. Now Edifias the year progresses, we'll be will improve sequentially each quarter and then it will be kind of just modestly dilutive in Q4, but you'll see most of that. So that's kind of 40% or more of the impact. So that's both the contribution of the business, net of the interest expense and the share and preferred stock issuance, then the balance of it is the comment on the trimming the EBITDA there, and that's probably about 60% of it. .

Well, it's really the investments in growth that we're doing and then the price cost neutrality. Yes. So the way to think about that also, Tammy, is that we think that will be slightly dilutive to neutral in Q4 and then confidently positive as we get into '27 with Edify.

Your next question comes from Nathan Jones with Stifel.

Good morning, everyone. I need I'm going to start with a couple of high-level questions on Edify. Obviously, 65% gross margins and 30% EBITDA margins are very good, but that does imply 35% SG&A. So I wanted to talk about that a little bit. Is that something that's a result of a different commercial model that requires more SG&A to support it? -- built for a higher revenue base? Or is it something that you think you can outright shrink or grow into? And what's kind of a normalized optimized level of SG&A that EDF should run at?

A couple of things that we're beginning to observe. One, it's an extremely innovative culture. The way that the business grows is that they're able to developed solutions in a short period of time. I just mentioned the comment about State College, Pennsylvania, where a customer comes in, discusses an issue and within a week -- the team has developed the probes needed and provide the solution for the customer. And these are for some large aerospace customers. So there's fundamentally a way that this business works that requires a level of engagement, especially from the R&D and the development team that creates both growth and innovative products. Now the level of what is the optimal level, we're working through our plans. We're just getting past our 60-day plan. We -- as you know, Brent, we have a EBX process of a 100-day plan that we'll be sitting with the team. But we do expect, as the business grows, we don't need to increase OpEx as much. So there will be some natural leverage there. And then there's obviously things that we do, whether it be the shared service center or other things where -- and supply chain where the team can leverage the base ESAB business continuing to improve that category. So -- when we went in, as you remember, we had talked about a $20 million synergy between us and them. We feel that, that is real and there may be more in it. But we're going to gradually do it. Our focus will be to capture growth rather than focus on the cost outside initially. But rest assured, we'll be doing both.

That leads to my second question, which was going to be the opportunities for revenue synergies and growth from EDF and ESAB together. Maybe you can talk a little bit more about where you see those opportunities and what kind of revenue synergies you might target in 2027, 2028? I know those take a little bit longer to materialize. .

Yes. Well, first is we talked about the session that we had with the combined teams at Edify. And I have to tell you I talked about it about day 1, but even that session that we had in the parking lot of defy in Quebec City was amazing. It was phenomenal to see our teams gas control, our traditional FabTech team sit with the EDF team and work out the workflow solutions. And we looked at segments when it came to nuclear, oil and gas, wind pipelines and fundamentally, the team sat in and looked at synergies across all of those customers. And what I can tell you is that the funnel at edify is close to about $450 million. Now we got to convert on that funnel. The view for us on that particular front is that it's going to take a bit of time. We've introduced the concept to our customers. We're seeing great feedback. We're seeing the Department of Defense engaged very differently with us as a result of both the additive manufacturing technology that we picked up with EWM and now if -- so the opportunities exist. We expect to get a few orders and those then become the base case for us to continue to drive organic growth across several other segments for both ESAB and Edi.

Your next question comes from Mick Dover with Baird.

I just kind of want to follow up on this discussion with Nathan here. Just conceptually, if I'm a customer and I'm buying products, testing products from FI, what would be the benefit to me from buying ESAB equipment or ESAB consumables in conjunction with the testing equipment that I'm giving from EdF. How do you go to market and you package these things together? .