ESAB Corporation (ESAB) Earnings Call Transcript & Summary

Good morning. This is Tom Hayes with CL King. I'm pleased to have Shyam with us from ESAB. The plan this morning is he's going to run through a few slides. I have some prepared questions, and then hopefully, we'll open up to the group for some questions. So Shyam, I appreciate you participating today. I'll turn it over to you.

Thank you, Tom. Good morning, everyone. I'm thrilled to be here and share what we've been up to at ESAB. I've got a few slides that I want to run through just to make sure that all of us have the same vantage point of what we've been doing at ESAB and why we're so thrilled about our future. So let me get into my first slide. You've sort of seen the safe harbor statements. I'm not going to go into it, but it's in there just for all of you to know. So as all of you are aware, ESAB has actually had a rich 119-year legacy. I've been with the business since 2016, and this leadership team has been together for the last 7 years and done a tremendous amount of work to continue to build a high-performing industrial enterprise within ESAB. A couple of things that I want to highlight to you. We're headquartered here in Bethesda, Maryland. We have a phenomenal global team. One of the things that I highlighted when I joined in 2016 was that we had great global talent and our talent was local. We knew our markets well. And we've made -- we've shown with our results that we're capable of taking this business up a notch. You can see in 2016, when I joined, we were about a $1.7 billion enterprise, delivering 12.7% of EBITDA. And this year, we're on track to deliver $2.6 billion at 17.7% EBITDA, which I think is a phenomenal run for the business. And what I can tell you, we're in our middle innings and are very confident about continuing to raise the bar with an ESAB. There are a few other things that are working in our favor. We call them secular trends within our business. The first piece is obviously automation and robotics, and I'll share a bit more about that and how we're approaching the automation and robotics side of the business. The second is connected devices. We have been leading the space through our InduSuite line of product lines where we are connecting and creating workflow solutions for our customers, and we believe we have the best-in-class connected devices for our industry. The third piece is just some global trends that have been working in our favor. The first piece is really global infrastructure. We see countries like India, whether it be countries in South America, the Middle East and Africa, along with the U.S. and Europe spending a bit on infrastructure that's benefiting ESAB. The second one is agriculture. We've seen agriculture kick in quite nicely globally, again, and ESAB plays well in that space. And we've seen that tailwind, and we expect that to continue over the next coming years. The next one is renewable energy and all of you are familiar with everything that's happening in the energy space, we see renewable energy spring a big role in filling the power needs of multiple markets of ours, especially in Europe and in North America. We've actually developed a new solution set that we call Adaptive Welding. We've been showcasing that. We've actually won a few customers based off of that technology. We showcased it at the Essent show, which was at the same time as FABTECH last week, which received great reviews and a lot of interest. We've actually got a prime customer that will be using this product line both in Europe and in North America. So really thrilled about what the team has done on that front. And then last but not least, we've also seen some increase in defense spending, and we have a lot of alloys on that particular front, and we see ourselves benefiting from the defense spending rising both in North America and in Europe. The next one is around sustainability and green products. We continue our journey on that in that direction. The Volt is exactly a product like that, replacing sort of a need for a gen set as you get out and do our work in farms, et cetera. And not to mention the fact that we've gone to more green packaging and are creating more recyclable parts in our power equipment as we go forward. Going to my next slide. The other thing that I'm most proud about is our innovation engine. When I joined in 2016, we were launching barely about 24 new products today. Last year, we launched close to about 100-plus products. And we're planning to be right around that range this year again. And the big piece there for us has been we've refreshed our entire equipment product line. One of the things that we've often talked about is that we want to continue to move our mix towards more equipment sales along with consumables. And we're thrilled about the progress that we're making our lineup has been extraordinary. We now believe we have a full light industrial lineup. I've spoken about this in the past in North America. For example, we have been able to go into channels that were not available to us 5 years ago, like Northern tools, like Tractor Supply. And so very thrilled about the progress that we're making as a result of the innovation that we've developed. We've also done a tremendous amount of work on our heavy industrial line that gets us to participate more meaningfully in automation and robotics. That product line launched at FABTECH and at Essent, thrilled about what that brings to us and allows us to participate in close to about 80% of that heavy industrial market, and we'll build out that product line between the rest of this year and into next year. On the bottom, you sort of look through some of the new products that we've launched. We've got a cobot product line that we believe is best-in-class and the piece that we love about it is the ease of use of that product. We actually had some people walk through our booth on that particular front. And you're talking minutes in which you can program that robot to do the work that's needed. A great example that we had recently was a customer that took a sample of ours, but didn't let us take it back until we delivered 2 new cobots for them. They improved their productivity by hundreds of percent. The payback seems to be less than 3 to 4 months on these particular product line. So thrilled about the progress that we're making there. The other one that's truly in our DNA, as some of you may know, we're sort of our roots belong with Danaher, and we've got a business system that's based off of the Danaher businesses that we call EBX. We've been running that playbook since I've been here in 2016. We've taken it up a notch, focused on the industrial business that we are. And you can actually see we've done a great job with pricing. We call it dynamic pricing, value-based pricing. And now we've got some product line simplification activities happening that's driving pricing forward. The other piece that we've done is reduced our manufacturing footprint. We actually took 45 plants down to about 25%. And then since then, we've acquired a few companies, as you know, adding to the list a bit. But we expect that number to continue to go down, giving us additional fuel to be able to improve our gross margins over the coming years. The next piece for us is capital allocation. One of the things that we have done extraordinarily well is invest in our business. We've taken our debt down in the time frame that we have been a public company. We've paid out a small dividend, and we've picked up businesses that have been accretive. The thing that we're focused on creating at ESAB is a less cyclical, higher margin and great cash-generating business, and we're well on our way in doing exactly that. We today, I believe, are a diversified industrial, having -- our intention is to have a best-in-class FABTECH business, a differentiated automation business. And today, we're a leader in gas control products playing in the industrial space, specialty gas space and in med gas. We've done 3 acquisitions since we went public. The first one, Ohio Medical was accretive both on the EBITDA line and the gross margin line and performing extraordinarily well within our portfolio. The second business that we acquired was therapy in the U.K., adding to our portfolio in medical gas and creating -- strengthening our position in Europe. And we believe that both these products have legs where we can sell them in different geographies and continue the growth journey forward. The next business was Swift cut, which was a smaller, less cyclical automation cutting business that we acquired out of the U.K., a great business, again, margin accretive for us and EBITDA credit for us. So thrilled about what that acquisition is doing for us. So what you can see here is that the 3 characteristics that we look at in the acquisitions, these were actually bull's eyes on that particular front. Our funnel continues to be very rich. We expect to go ahead and continue deals of this size that we call bolt-on and tuck-ins allowing us to move our strategic intent forward of creating a narrowly diversified industrial company. So all of this gives us the confidence in the goal that we've set for ourselves. The first piece is to create a $3 billion to $3.5 billion company within the next couple of years. We talk about our margin expansion story and something that I've said openly a couple of times, we are very confident of getting our margins north of 20% because we've got actions that we are planning to do, which relates to pricing, product line simplification, footprint reduction. So we believe that the margin story is well within our control. On the top line, yes, we're expecting markets to stay where they are. So we could get there faster if the markets stay where they are, and we do a few acquisitions. But we're very confident regardless of where the top line is, our margin journey continues to stay strong. The next is cash flow. We have always been a great cash flow generator. One of the things that I think was underappreciated at ESAB, while we were part of Colfax is our ability to generate cash through the cycle. In fact, when we went through the COVID period, because we're a short-cycle business, we actually generated cash over 100% of net income through that period during COVID because we were able to control our working capital. Our customers are obviously very good payers for us, and we have control over our supply base. So a very strong cash gene to begin with. We expect to move our journey forward and get to 100% free cash flow conversion within our business. And you can see the working capital turn improvement that we've made within the business, 4.2%in 2016, 5.2% last year, we're again going to make a journey forward this year. And then we've got 6 plus as our goal in the future. So really thrilled about what we have. We've got a simple playbook. It's all about execution, and I told you that I'm very confident about our team's ability to execute. We've got great talent. We've got great product. We have the complete ability to shift the mix to be more favorable at ESAB. EBX is in our DNA. We've executed against it multiple times. And then we continue to acquire great businesses that enrich our portfolio and move the ball forward in terms of less cyclical, higher margin and better cash flow businesses. So with that, Tom will open it up for questions.

Great. I guess I'll kick it off with a few. And then kind of before we get into some of the business specific ones I have. You and I had an opportunity to meet at FABTECH, the largest U.S.-based manufacturing trade show. Just wondering what maybe your top couple takeaways from the show was for?

First, I thought the energy level at the show was extraordinary. We were really thrilled to showcase a few things at SABIC. One, our capability on the automation side and creating a data analytical capability, which I thought came across extraordinarily well. The second product line that we wanted to really talk about was cobots. We believe that, that has a unique position of playing in automation in a space that will be less cyclical, less capital intensive, but great in terms of productivity. I thought our product was extraordinary. The capability that we demonstrated along with our well cloud and data analytical capability was spot on. The other piece, I think, is something that you and I have talked about a couple of times that we've got this battery-powered welder that we introduced called the Renegade volt. There was a big hit. So a couple of things that we always like about our booth is that, one, you can actually come in and actually do work. You can well, you can actually try out our product line, which I think, again, we did well. There were a couple of things that I was very interested in seeing and you saw it across the board, a big play around automation, everybody is sort of doing a piece on that particular front. And I thought our team did a really nice job differentiating our product and our booth from what was out there.

Maybe just building on that a little bit. I thought the battery power welder was regarding grey attention. I was just wondering briefly kind of what was the genesis behind that? And where do you see that going over the next couple of years as far as being able to really kind of take its place in the marketplace.

I sort of think about this as need and necessity is the mother of all innovation. And we -- as part of EBX, a big piece when I joined was to go to [ Gemba ], to visit customers, interact with them and kind of find out what was really happening in our marketplace and what unique solutions could we provide to begin to drive more interest in our equipment in the North American market first, but also globally. And the one unique piece that we found out is we sort of did Gemba and visited with customers was that there was these engine-driven welders that obviously are gas-powered create a bit of pollution, but still were not very easy to move around or mobile. So it was a conversation that I had with our Chairman around some thoughts. It so happened that I had a chance to interact with the VOLT at one of the conferences. And we kicked off a project where we love their battery. We thought that if we partnered with somebody that already had batteries out there in the field that people could then use their power tools, along with the welder with the same battery, we would create a differentiated solution in the marketplace. And so off we went with 2, 3 years of development with them, and we now have a Renegade VOLT. And I'll tell you, for those of you that follow Black & Decker or DeWalt very rarely do they showcase another product on their website with a different brand. And I can tell you the Renegade VOLT is on their website, they're talking about it, they're selling it. You've seen that even at FABTECH, some of our customers had the Renegade VOLT and their boot and then not to mention the amount of people that came through, somebody was actually telling me, we monitored the uptime of our equipment and the Renegade will single handle on in terms of the amount of people that came in and welded and use that piece of equipment at FABTECH. So really thrilled about what that does. In terms of the marketplace, you now look at somebody that can just pick up the welder, charge the batteries overnight get out, do work, not have to worry about taking a generator filling gas. This piece of equipment, as you saw, Tom, is very compact, clearly, mobile, easy to carry. And so now you've got people that can take this product line to tough places, client stars with it, go do the work. It's got enough battery power to do 25 of electrodes, which really is most work than any farm or anybody that's kind of doing sort of a small construction work and take care of. And then you can charge the battery yourself of an AC outlet, which is another extraordinary feature. We expect to continue to use sort of this battery-powered concept to build out that line, but slowly, but surely. But this clearly has scrubbed the interest of a lot of our customers, our big distributors. And so very excited about the launch, and it's going to be a global launch, and we've already received a significant amount of interest.

Just for a clarification of the products available to ship now or it's coming soon?

Yes. It's actually shipping this week, Tom, so it's ready.

Maybe staying on that line of thinking as far as products at FABTECH because I think the stop on the tour that you provided on your cobot station, as I was fabulous, a lot of good Q&A. And I also had a chance to kind of walk the show and then see some of the other cobot demonstrations. And I think one of the key takeaways for me is this is -- the addition of cobot is additive to the overall growth in automation. It's not pushing out more robust automation solutions, is actually it will probably increase the size of the market opportunity for automation. I just wanted to get your thoughts on that.

You're spot on. When we first looked at this space, we talked about it as the second wave of robotics. You've got this highly intensive, high volume, low mix stuff that has already been automated, and we call it industrial robotic automation that takes some amount of capital investment. The second wave was going to be for high-mix, low-volume products that's sort of dealing with a different set of issues in the marketplace. And I'll give you the -- a bigger piece of this example. We were actually with a customer in Canada, where they had seen a video of our cobot, they called and they said, could they see a sample. Our team went out with the sample of our product line. He was building material racks for a large box retailer. He was behind schedule. I was unable to get the wells out. We took our cobot out there. They went from, I think, 1,000 wells a week to 4,000 wells a week. He didn't let the sample product go out, bought 2 of our cobots and actually has more in line to get there. So you could see the amount of productivity gains that you can get, not to mention the integrity of the well and the simplicity in running these robots today and the ability to program them. And so I think that what's happening is that the space is much larger than we thought. We think it's extremely attractive because of the productivity gains and the payback that these products provide. And what we love about it is that it's margin accretive, it's less cyclical in our view, and it's not as chunky as those other larger automation projects that we were part of before.

No. I think that's fantastic. And one of the things that I picked up at one of the other cobot boots was over the last year or so, the focus had been on using the cobots for welding, now it's moved into plasma cutting as well. So just kind of speaks to the huge opportunity there. So I think that's going to be an exciting area for the next couple of years.

That's right. And I think the view for us here, especially on the cobot side and the analytical side is just getting started, and we talked about it in Q2. We saw triple-digit growth in that product line and the interest continues to rise. We continue to build our relationships on that front to create a unique solution set. One of the things that -- about us that I think our customers like is the ease of use. And then you can actually program the cobot through your smart device, whether it be your iPhone or iPad or any other smart device that you have, you don't need a pendant that is unique and proprietary just to the cobot. So that's the extraordinary piece about our solution.

Maybe shifting gears a little bit to more looking internally at ESAB. I think one of the things that you and I have talked about before is -- and you touched on it a little bit this morning in your prepared remarks, is streamlining your product line. Not only has that fueled growth but obviously improved profitability. Maybe just kind of take a moment and assess where you are in the process? I know continuous improvement by nature is continuous kind of where you think you are on the journey.

I actually had a chance as we sort of spun out to become a public company to spend some time with some CEOs and understand some of the things that they had done and what they had seen. And I've always been interested in 80/20, always been interested in that concept. But one of the things I want to make sure that we got right was doing 80/20 with a growth focus. And so I spent some time with Andy Silvernail from IDEX. We talked through a couple of pieces, talk to several other people in the marketplace on that particular front. And off we went on a journey that began to make sense. So we've actually got regions that are -- several regions that are doing this product line simplification today. And what I can tell you is we're seeing growth and margin expansion in those categories. In North America, we're in the middle innings on that particular front. We should be through the bulk of it by first quarter of next year. But the entire idea was to simplify and sell the product lines that make the most sense and add the most value and then focus on the customers that have the best growth potential for us, not just for the short term, but also for the long term and provide them the service and what they need in a unique way that kind of creates a moat around that business. And so I'm thrilled with what our teams have been doing. Very happy with the results that we're seeing in terms of our margins. We still think there's a little bit more work to be done in terms of growth, but the momentum and the excitement on that particular front is profitable within our team is palpable within our teams. And I think truly that we're setting ourselves up well for the next years.