Yahoo Finance ESAB Corporation (NYSE:ESAB) Q3 2023 Earnings Call Transcript
ESAB Corporation (NYSE:ESAB) Q3 2023 Earnings Call Transcript November 1, 2023
ESAB Corporation beats earnings expectations. Reported EPS is $1.08, expectations were $0.92.
Operator: Good morning and welcome to the ESAB 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 would 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 press star, one. Thank you. Mark Barbalato, Vice President of Investor Relations, you may begin your conference.
Mark Barbalato: Thanks Operator. Welcome to ESAB’s third quarter 2023 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 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, Shyam Kambeyanda.
Shyam Kambeyanda: Thank you Mark. Good morning everyone. Thank you all for joining us today. ESAB 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 continue 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 have made in both regions. Our teams continue to execute our EBX 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. Third, in September we had two of our biggest industry events, Essen and Fabtech, where we unveiled ESAB’s innovative equipment and automation solutions, generating tremendous interest amongst our end users and sparking excitement among our valued customers.
Since 2016 in Fabtech, we have systematically revitalized our equipment portfolio by bridging product gaps and fortifying our distribution networks while simultaneously creating a global presence in global gas control products and solutions. Fourth, we continued to ramp up the use of EBX business system. During the third quarter, we completed several kaizens, including our President’s Kaizen at our Denton facility as part of our product line simplification initiative. For this kaizen, our teams mapped out product families, created plans to eliminate low volume SKUs, and aligned customers with similar SKUs to enhance customer value while reducing complexity. We are already seeing the positive impact of this kaizen that has allowed us to increase on-time shipments, improve customer satisfaction, and expand margins.
Last, as a result of our record third quarter performance and the good start to Q4, we’re raising our guidance for the year. Turning to Slide 3, we delivered outstanding third quarter results. Total sales grew 12% with our 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 to 35% of sales. Profits also reflect a strong quarter with adjusted EBITDA margins expanding by 170 basis points. Our EBX initiative, including product line simplification, continued to enhance our operational efficiency and cash flow generation.
Moving to Slide 4, in the past I’ve discussed how we’re positioning ESAB for the future. ESAB has always had a leading consumables franchise. When I started in 2016, equipment represented only 26% of our sales. Our 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 offering and have successfully filled our product gaps. Last month, we showcased products like the Volt, the digitally-enabled Warrior Edge, and our newly digitally connected Cobot at Fabtech and Essen trade shows, 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 and automation sales seeing high single digit growth, Cobot 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 MediVital valves, further enhancing our position in the North American gas control market. All in all, strong progress as we continue to shape ESAB into a premier narrowly diversified industrial company. Moving to Slide 5, our 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 continue to outperform. EBITDA margins expanded by 170 basis points, reaching a record 18.3%.
Turning to Slide 6, the Americas region 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. EBX and our new product launches played a significant role in driving a 220 basis point margin expansion in the quarter. Turning to Slide 7, our EMEA and APAC segments 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 are showing notable strength. Our strong showing at Essen drove sales volumes higher by $4 million in September. EBITDA margins in the region expanded by 130 basis points. The team is effectively utilizing EBX and our pipeline simplification initiative to stimulate growth and expand margins. On that positive note, let me hand it over to Kevin for Slide 8.
Kevin Johnson: Thanks Shyam. 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 2.2 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 EBX business system. 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 and expect net leverage of below two turns as we exit the year. Turning to Slide 9, as Shyam mentioned earlier, we have again raised our full year 2023 guidance.
Sales guidance has been increased to $2.59 billion to $2.61 billion on organic growth of 5% to 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 $0.15 at the midpoint, reflecting a stronger adjusted EBITDA performance, improved outlook for tax, and an update to our interest expense guidance. Cash flow conversion remains on track for a strong year for ESAB.
With that, let me hand back to Shyam on Slide 10 to wrap up.
Shyam Kambeyanda: Thank you Kevin. To wrap up, our teams continued 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 addition, our focus on introducing new innovative product solutions to our customers is allowing us to grow and gain share. We’re taking EBX up a notch, and I’m proud of our teams’ 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’re building momentum going into 2024. Thank you again for joining us. Operator, please open the line for questions.
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