ESAB Corporation (ESAB) Earnings Call Transcript & Summary

Okay, and thank you for standing by. Welcome to the ESAB Corporation Second Quarter 2022 Earnings Call. [Operator Instructions]. I will now turn the conference over to Mark Barbalato. Please go ahead.

Thanks, operator. Welcome to ESAB's Second Quarter 2022 Earnings Call. This morning, I'm joined by our President and CEO, Shyam Kambeyanda; and CFO, Kevin Johnson. 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. Actual results might 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, Shyam Kambeyanda.

Thank you, Mark. Good morning, everyone, and thank you for joining us today. We continue to make strong progress on our long-term goals. Our second quarter was another step forward in that direction. Before talking about the results, let me take the time to recognize our teams across the globe and particularly our team in China, who worked extraordinarily hard during the quarter to ensure we served our customers during the lockdowns. We have the finest set of associates, and I'm proud and appreciative of what they do every day to make ESAB successful. Turning to Slide 3. We had another record quarter for ESAB. We delivered record sales of $661 million with organic growth of 9%. Excluding Russia, organic growth was 13%. Our organic revenue growth reflected strong price realization as our teams continue to execute our EBX process on pricing to offset inflation. EBITDA was a record $111 million in the quarter, up 6%, and we expanded EBITDA margins by 10 basis points to 16.7, a solid achievement despite geopolitical currency and inflation headwinds. In addition, we remain on track to deliver our free cash flow guidance. Lastly, we successfully extended our $600 million term loan and fixed it at competitive rates. Kevin and our Treasurer, [ Mark Kurish ], did a fantastic job. Kevin will share more details a little later. Turning to Slide 4. I've discussed our digital strategy several times in the past. Let me take a bit of time to calibrate us. When I joined in 2016, ESAB was in the early innings of its digital journey. And what I discovered was we had a strong foundation, which included WeldCloud Universal Connector and CutCloud, all developed using an open architecture. At this time, we also discovered our customers who are using their welding equipment less than 10% of the time. They had a strong desire to automate and digitize, which we have defined as a second wave of robotics. To accelerate our digital solutions strategy, we added 4 fantastic acquisitions. Starting with TBi, which is a leader in robotic arm torches. We added to our analytical capabilities with HKS, which provides real-time weld analytics. To continue to strengthen our portfolio, we then acquired WeldNote, which provides our customers with a library of weld processes. To put it all together, we acquired OCTOPUZ, a leader in offline robotic software. All of these solutions create InduSuite, which we launched in the second quarter. I'm thrilled about our progress and even more excited about our future. To accelerate the commercialization of our digital strategy, we have been looking for strategic partners, which brings me to our next slide. Turning to Slide 5. Let me introduce our partnership with Hexagon. Hexagon is a global leader in manufacturing software solutions based in Sweden and is complementary and a great cultural fit with ESAB. This collaboration creates a premier software welding solution to help our customers increase efficiency and productivity of their weld operations. This collaboration also opens a larger customer set for ESAB to serve. We're excited about this partnership, and we'll be sharing more in the future quarters. Moving to Slide 6 and EBX. We're taking EBX up a notch and are laser-focused on leveraging our EBX toolkit to streamline our supply chain processes across all regions. We have kicked off our product line simplification initiative to drive growth and margin expansion. I know many of you like to see examples of EBX. On the right side of the slide, I've provided a recent example of a distribution center Kaizen in North America, where we successfully streamlined our order pick process. This Kaizen significantly eliminated waste and improved order pick efficiency. The results were a reduction of order backlog by 72% and a reduction in time to pick by 53%. During the quarter, we completed over 37 Kaizens, each improving our productivity, efficiency and safety at ESAB. And as I've said before, we are a continuous improvement organization, and EBX is in our DNA. Turning to Slide 7 and our performance in the quarter. As I mentioned earlier, sales rose to a record $661 million, a 5% year-over-year increase, 9% organically and 13% excluding Russia. Our markets in North America, India and the Middle East had strong end market demand. Europe and South America were resilient as expected. And we expect improving market conditions in China for the second half. Price realization across all geographies remained strong. We delivered record EBITDA dollars, expanded margins by 10 basis points, 80 basis points, excluding Russia, despite a strong U.S. dollar. Moving to Slide 8 and our Americas business. Americas had a strong quarter. Sales rose to $291 million, growing 15% organically, reflecting strong price utilization. We continue to introduce exciting new products, many of them focused on our North American equipment market. EBITDA Increased 28% and margins expanded by 170 basis points, reflecting strong execution by our teams. Moving to Slide 9 and our EMEA and APAC business. Our EMEA and APAC segment performed well. China worked through restrictive COVID measures, and demand in Europe was in line with what we expected. Our second quarter sales climbed 4% organically on the back of strong price. Excluding Russia, organic sales increased 11% and margins improved 10 basis points year-over-year. We expect margins to continue to expand as we execute our product simplification initiative. Lastly, I'm proud of our team as they continue to build momentum for our new products, and we've had some notable wins leveraging our InduSuite software solution. With that, let me turn it over to Kevin for Slide 10.

Thanks, Shyam. Good morning, everyone. Since we separated, we have been working hard on finalizing our financing, and I'm pleased to say that we have now completed this work. We successfully extended our $600 million term loan and fixed this loan at a blended rate of 4% using both interest and currency swaps. Today, this means over half of our debt is now fixed, and we have around $550 million of borrowing capacity, which provides us with ample financial flexibility for the next few years. We finished the quarter with net leverage of approximately 2.6x, and we will continue to focus on driving cash flow and paying down our debt during the rest of the year. Turning to Slide 11. We are reaffirming our 2022 guidance. As in our prior guidance, we've only included Russia for Q1 and continue to exclude it from Q2 to Q4. Total revenue guidance remains at 2% to 4%. But under the bonnet, there were a few changes that we did make. Organic growth increased the point as we went for more price due to inflation. This was offset by 1 point of FX due to a stronger U.S. dollar and had an approximately $4 million negative impact on our full year adjusted EBITDA. Given the global backdrop, we have been working hard on cost reduction opportunities. We are accelerating our manufacturing consolidation and transformation projects and expect to drive some additional savings in the first half of 2023. We continue to target free cash flow of greater than $210 million, a strong second half of the year in line with what we expected in our guidance as we burn off inventory that we built up during the first half to offset supply chain pressures. We also paid out our first dividend in July, a $0.05 per share quarterly dividend, and we expect to continue this in the future. With that, let me hand back to Shyam on Slide 12 to wrap up.

Thank you, Kevin. To summarize, we delivered a strong first half, and I'm very proud of our team as we continue to bring innovative new products to the global market and build momentum in our digital solutions through InduSuite. Our financing is in place. We're using EBX to drive growth, higher profit and cash flow. We're executing well on our strategy to create long-term shareholder value. Thank you again for joining us. Operator, please open the line for questions.

[Operator Instructions]. Your first question comes from the line of Nathan Jones with Stifel.

I'll just start with some of the numbers on Russia here, I know you've excluded it from 2Q onwards. Have you not exited the Russia business? Are you still intentionally doing business in Russia, but just excluding it from your results? Or are you getting out of Russia? Can you just talk about what's going on with that?

Yes, Nathan, what we've said, if you remember our announcement back in May that we had stopped supporting the business. We are no longer exporting from Western Europe into that business, and we're working out a transition plan. It is a complex process, and we continue to work through it. So we have nothing more to add on that front. When we do, we'll make that announcement.

Okay. Fair enough. Maybe you could talk a little bit about the rest of Europe? Obviously, there's concerns over there with high energy prices, rising inflation, [ titer ] rates, all those kinds of things. But I think ex the Russia business, you still saw organic revenue growth. Can you just talk about the trends that you're seeing there, what you're expecting out of Europe for the second half of the year?

Yes. So out of Europe, we are expecting flattish volume for the rest of the year. There could be some upside as we see sort of the semiconductor space unwind itself and supply chain issues resolve, we think the auto market could come back and give us a bit of upside. Where we do see a lot of momentum within our business is in India, the Middle East and also to some extent in the South Pacific, especially in Australia and the Southeast Asia region. So all in all, what we define as an EMEA and our APAC region continue to have some green shoots with some flattish volumes out of Europe.