ESAB Corp (ESAB) 2025 Q1 法說會逐字稿

Thank you for standing by. And welcome to the ESAB first quarter 2025 Earnings Release and Conference Call.

(Operator Instructions)

I'd now like to turn the call over to Marc Barbalato, Vice President of Investor Relations. You may begin.

Thanks, operator. And welcome to ESAB first quarter 2025 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.

Thank you, Mark. And good morning, everyone. Thank you all for joining us today.

We had a strong start to the year. Results reflect our ability to perform in a challenging market and underscores the performance-driven, accountable culture we have built at ESAB.

Let me step back and share how we're creating a comparative advantage and why we're confident about our future. We deliberately shape ESAB to be locally responsive while leveraging our unmatched global scale.

This dual advantage allows us to serve customers more effectively and maintain secure, resilient supply chains in a dynamic market. Additionally, we have deployed our capital well, invested in innovation, resulting in a fully-refreshed equipment product line and acquired 15 outstanding businesses, enabling us to expand our serviceable market and strengthen our global presence.

Our focus is on building a long-term winner, one that drives regardless of economic backdrop. Today, we're driving sales excellence, shifting our portfolio towards equipment and gas control. Looking ahead, we are intensifying our investment in innovation, dealing partnerships with universities and harnessing the power of AI, and continuing a steady cadence of high impact acquisitions.

Over the past four weeks, I've had the opportunity to make three trips to Europe and one to India. There's a noticeable sense of optimism and excitement about the future in both regions.

The stimulus and investment plans announced by the EU, Germany in particular, especially encouraging and signals significant upside potential when stimulus and investment spending begins.

I would also encouraged by our team's ability to execute effectively. We're seeing strong traction with our new equipment offering and our gas control business is gaining momentum, both organically and through promising acquisition opportunities.

I wanted to take this moment to recognize the extraordinary efforts of our associates for their tireless work, dedication to our customers, and commitment to EBX, gives me confidence that we're well positioned to navigate the current environment and continue winning. At ESAB, we're shaping the world we imagine without limits.

Let me turn to slide 3 to review our first quarter financial performance. We delivered 100 basis points of margin expansion on slightly positive organic growth, resulting in a record first quarter adjusted EBITDA margin of 19.8%.

The strong performance underscores our disciplined execution of the ABX framework, complemented by accelerated strategic growth investments that are expected to generate returns in the long term.

As I mentioned last quarter, ESAB's unmatched global footprint is a key competitive advantage with 80% of our manufacturing located in region for region, we're uniquely positioned to manage today's global dynamics with agility and scale.

Our commercial excellence initiative, coupled with a steady stream of innovative product launches, continues to drive momentum. In Q1, both our global welding equipment and gas control equipment businesses grew by mid-single digits, reflecting strong channel acceptance of our new offerings.

We are also leveraging EBX to enhance supply chain performance, drive process improvements, and expand margins. On the acquisition front, I'm thrilled to share that we have received all regulatory approvals and officially completed the Bavaria acquisition yesterday. It strengthens our proprietary consumables portfolio and positions us to gain share in faster growing end segments.

As a result of our strong execution driven by a BX initiative, new product launches, and recent acquisitions, I'm confident in our outlook for 2025. It is important to note that our full-year guidance also reflects the expected impact of tariffs, which Kevin will detail shortly.

Turning to Slide 4. Over the past few quarters, I have highlighted the passion our associates have for both our business and their communities. This quarter, I want to spotlight another initiative on how we're making a difference by investing in the next generation of fabricators.

Three weeks ago, I visited Denton, Texas, where we hosted students from the agricultural welding class at MacArthur High School in Irving, Texas. The student steward facility engages in hands-on training at our customer innovation center and receive the ESAB equipment, PPE, and consumables for their lab.

We also awarded a scholarship to the students in memory of our beloved ESAB associate, Charlie. It was an inspiring day for both our team and the students. Similarly, in India, we've partnered with the two organizations for establish a state-of-the-art welding training institute in rural Tamil Nadu.

This initiative supports grassroots development of talent and provides local news with a sustainable career path in welding and automation. These are just a few examples of how our associates are shaping a better world, one community at a time.

Moving to Slide 5. Over the last eight years, our strategy has been clear to improve operational performance with EBX, invest in innovation, delight our customers to local agility, and deploy our capital effectively by optimizing our footprint, executing our product line simplification strategy, and streamlining our supply chains.

We have built the capability to manufacture all our major products within each of our three regions, the Americas, EMEA and APAC, a key factor in mitigating care. Our footprint, combined with our EBX net pricing tool positions ESAB to outperform even in volatile markets. Long term, we're building a higher margin, less cyclical and higher cash flow enterprise.

Moving to slide 6, to talk about our journey to Premier. Through open innovation and our EBX stage-gate process, we revitalized our equipment line. At the same time, we've exited unattractive capital-intensive automation projects and focus on high-growth swim lanes, most notably the gas control.

Our gas control business has grown from 10% to 18% of total revenue and is on track to reach 25% of revenue by 2028. With gross margins in the mid-40s, this segment has opened new adjacencies in medical and specialty gas market. This shift in mix towards gas control and welding equipment supports our 2020 target of 22% EBITDA.

At the bottom of the slide, you can see the progress we've made in adjusted EBITDA since 2016. We've steadily move towards a more profitable mix and achieved approximately 700 basis points of margin expansion, all while generating strong cash flow to fund a compounder strategy.

Turning to slide 7 and sharing more on our compounded journey. Our disciplined capital allocation has been the cornerstone of our success. One of our primary objectives has been to grow our gas control portfolio, strength in digital, and standard automation capabilities, fortify our core FABTECH business and expand our addressable market.

We've executed this plan with discipline adding 15 high-quality businesses, including Bavaria as of yesterday. Last week, I visited Bavaria team in Munich and was deeply impressed by their manufacturing capabilities for proprietary flux they've developed and the innovative culture there foster.

This acquisition significantly strengthened our portfolio of proprietary consumables and strategically positions us to benefit from the EU and German stimulus programs targeting key sectors.

For context, flux is the secret sauce in submerged arc welding by combining both buyers flux and our sub-acquire for unlocking growth opportunities across key sectors like oil and gas, wind, nuclear, transportation, infrastructure, and defense by Bavaria products are already specified.

While the acquisition is expected to be EPS neutral in year one, we see significant margin expansion upside to ESAB global distribution and scale efficiencies. Our balance sheet is the strongest it's ever been, and our acquisition pipeline is robust.

In fact, we may close to more tuck-in gas control deals before the end of Q2. We can do to prove ourselves as a premier industrial compounder.

Let me hand over to Kevin for Slide 8 and discuss our financial performance.

Thanks, Shyam. Good morning. Despite a challenging market environment, our quarterly sales met our expectations. High-growth markets in India, Asia Pacific, and the Middle East performed strongly and offset softness in the Americas as we had expected.

Our well-being and gas control equipment product lines showed a strong growth, supported by the investments, new products we've made over the last several years.

Our recent acquisitions in Bangladesh and SUMIG in Brazil are performing well and out at 200 basis points of growth in the quarter. Adjusted EBITDA increased by 100 basis points due to strong price discipline, product mix improvements, and the ABX initiatives offset by continued growth investments, our global teams need a strong start to 2025. I thank them for this performance.

Turning to slide number 9. In the Americas, organic sales declined by 200 basis points as expected, with lower volumes being offset by a strong price performance. The SUMIG acquisition continues to perform well and added 300 basis points of growth, offsetting some of the FX headwind due to the stronger US dollar.

Investing in long-term growth remains a priority frees up as reflected in the mid-single digit growth in welding and gas control equipment this quarter.

As Shyam mentioned earlier, our global operation positions us well to handle part of fluctuations. And in the quarter, our adjusted EBITDA improved by 110 basis points, reaching 19.4%, showcasing our team's resilience.

Moving to slide number 10, our teams in Europe, Middle East, and Asia delivered strong results this quarter. Total sales rose 200 basis points with adjusted EBITDA margins at 20%. Volume increased by 400 basis points, driven by high-growth markets.

And we saw some positive signs out of Europe with Germany's recent stimulus decisions might be to create some opportunities for ESAB in 2025 and beyond. Equipment sales grew mid-single digits year over year with positive customer feedback on new product launches.

The ESAB Bangladesh acquisition added 100 basis points of growth and is performing well. Our teams delivered another quarter of strong performance. And we are confident that this positive momentum will continue throughout the remainder of 2025.

Moving now to slide number 11, to discuss our cash flow. This quarter, we generated $30 million in free cash flow, including approximately $10 million inventory pre-purchase ahead of tariffs. We expect a stronger cash flow in the second half of 2025 as we invest to protect our supply chains in the first half.

Our consistent strong cash flow has enabled ESAB to complete several acquisitions since our spin off, whilst at the same time, reducing our net debt to 1.5 turns. We have significant financial flexibility and are well-positioned to execute our compound or strategy.

Moving now to slide number 12, on our 2025 outlook, we have raised our revenue assumptions by approximately $30 million, mainly due to provide acquisition and the risk from an improvement in FX. There has been no change to our organic growth guidance for the year, which remains at 0% to 2%.

We expect low to mid-single digit organic growth in EMEA and APAC, offset by negative low, mid-single digit organic growth. In Americas, our market conditions are more challenging. Our adjusted EBITDA guidance has been increased to $520 million and $530 million, reflecting the Bavaria acquisition, which was purchased for EUR60 million.

Interest expense guidance has been increased as a result. And we expect interest costs to increase in Q2 and decline throughout 2025 as we generated cash flow. Our cash flow guidance remains unchanged. We continue to commit to a strong cash flow performance and a robust balance sheet to support our compounder strategy.

With that, let me hand back to Shyam on slide 13 to wrap up.

Thank you, Kevin. To summarize, we've had a strong start to 2025, delivering another quarter of strong execution for protecting our growth investments, investing in sales excellence and AI, and tightening our belt, where needed.

We're gaining traction and shifting our portfolio towards equipment, flight automation, and gas control, all while strengthening our consumables platform. We have consistently raised the bar with ABX and enhancing our enterprise through strategic accretive acquisitions.

We've built a winning culture at ESAB, one that is positioned for creating long-term shareholder value. Thank you all again for joining us this morning.

Operator, please open the line for questions.

We'll now begin the question-and-answer session.

(Operator Instructions)

Bryan Blair, Oppenheimer.

Thank you. Morning. Good start to the year.

Morning, Brian.

I was hoping you could offer a little more detail in terms of gross or unmitigated headwinds from tariffs for their specific 2025 or annualized and with some incremental pricing to offset higher teams now, thinking about new volume, first price contribution in the full year guide. And if there any differences in the bridge for Americas versus EMEA and APAC?

Well, let me start that and I'll hand it over to Kevin to kind of go through some of the numbers, Brian. I think the important piece is something that we talked about earlier as well in our script, where we've positioned the business extraordinarily well to be in region for region.

We spent a lot of time, as you know, with our product line simplification, our footprint actions, and then also, everything that went along with it in terms of supply chain. So as a result from, yes, we do have some tariff exposure, but 80% of our product is built in region and as a result, the exposure is not as big.

We haven't talked about a specific number, but Kevin has a number that you will share with you on that particular front. We expect to cover that with price as we go into the year, but also, there's a bit of flux there, right?

I think, as you know, we'll know more at the end of these 90 days as to where things will end up. But for the short term, we've taken a few actions as you saw, we increased our inventory levels in the Americas, encounter some of the tariff’s action. We are moving manufacturing and assembly of the regions that that we are not affected by the tariffs.

And as a result, we feel very confident as to how we saw this place, not just for today, but for the long term.

Kevin, you want to talk about some of the numbers?

Yeah, Brian. In terms of numbers, I can imagine the EMEA and APAC, given particularly the dynamics which Shyam mentioned about our local manufacturing and supply chain is largely unimpacted by the tariffs.

The main impact is in North America, where we see something in the region of $15 million to $20 million of tariff impact. And we've already made the moves in currency price to offset any impact from that.

I understood and appreciate the detail. Those numbers are -- I guess they are not particularly daunting. It's good to hear.

Maybe offer a little more on gas control equipment trends and the outlook there. It seems like that business has very nice momentum. Just curious how growth shook out of Q1, higher [10s] picking it up core growth rates for the year. And Shyam mentioned a couple of tuck-ins that will hopefully be closed by the end of Q2, how additive to growth net of those be any additional detail, that would be great. Thank you.

Yes, you know, spot on, Brian. We were very pleased with how our gas control business has started off a piece and the team have done a real nice job with our EBX process of growth bridges and identifying growth opportunities.

Also, the acquisitions that we made a few years back are paying dividends for us, both in terms of the therapy acquisition that we made.

And then yes, you're spot on that we have two more acquisitions that we expect to close in the second quarter that will add momentum to the medical side of our gas control business, adding a bit more fuel to the growth profile of that business.

As I told you before, the margins are accretive. In fact, EBITDA margins are already higher than our 2028 goals as to add onto that business, in that business grows faster. It's accretive to overall ESAB.

All are encouraging.

Saree Boroditsky, Jefferies.

Thanks for taking my question. Within your organic growth guidance and you maintain that. But how are you thinking about price versus volume within that guidance and has that changed since you started the year?

And then just on your price actions, have you implemented surcharges are either normal price increases?

I'll take the last end of your question, sorry, we have not gone out with surcharges. We've gone out the general price increases. The tariff's scenario was a bit of a stop-and-go because initially, we thought it was on and then it sort of came off the board more recently.

So short answer is that as we think about tariffs over the long-term, we think about a general price increase and less about surcharge. I'll let Kevin talk about the rest of the year and pricing.

In EMEA and APAC, not really -- not significantly changed. We expect flattish price as we go through the rest of the year, similar to what we saw in the first quarter.

The main area where we did make some moves, we priced was in the North American business. Sorry, I'd expect what the price that we saw in the first quarter to read out the similar level for the rest of the year.

Appreciate the color and then you talk about possibly increase some inventory in the Americas. Just curious if you saw similar pre-buying actually from your customers?

The short answer is no, Saree. We sort of protecting ourselves. In fact, I would submit that there was there was a dynamic in the North American market, where we found the channel to be waiting for things to settle before they sort of engage completely or partially because they will not change where prices would go to.

They were unsure whether they would stick. So as a result, there was a bit of a sort of a lull in the North American market for us. So no, short answer is we didn't see a significant amount of inventory buildup at the channel.

Thanks, Saree. In terms of what we're [working by], we obviously learned a lot of lessons. The last time the tariffs came in, there was a number of skews. Well, at that point, you know created some issues. It's not in sales, a large part of our supply chain, but we did learn some lessons last time.

So we were very proactive this time to get ahead and make sure that we protect that are supplied to us by getting those components onto our shelves.

Appreciate the color.

Mircea Dobre, Baird.

Yes, good morning. On Americans, maybe be helpful to get a little more color or clarification in terms of how you're thinking about organic growth for the year and then maybe, splitting it between price and volume, not to put words in your mouth.

But the way I sort of heard it, you're going to get a little bit better pricing than we expected before just with tariffs and all that. But maybe volumes compress a little bit. Related to this, is there a difference in the way the price relative to volume flow through to impact your margins?

So in terms of the year, I think you're spot on make in terms of your overview on the organic growth. We expect overall, as we said in the script earlier, low to mid-single digit negative core volume as we progress through the year, which was in line with what we expected last quarter, where we will give our guidance for.

There's certainly a lot of shifts between volume and price in those numbers. In that, we did make that move to cover the impacts of the tariffs already. And we have seen some more challenge in the North American market in particular.

Our expectation in terms of volume for the year is that it will be in the range of negative, mid-single digit for the year. In terms of actually of margin, a large part of that price, we went for in the sort of back end of the group. We're trying to make sure that we cover tariffs.

We're obviously trying to make sure that we have a little bit extra there, but we'll see how that plays out as we go through the rest of the year.

And then make the EBX process of net pricing stays. And so our intention is to look at the entire business and ensure that both regions, our net positive on price. And you saw that sort of come through nicely with both of the region, sort of expanding margins and a tough environment.

And if I may follow up on margin, just the way, the really -- the last three years kind of played out, you had this nice, sequential build in margin through the year in the Americas business. And please, I model that at this point for 2025 as well, but this year and a little bit different with tariffs.

I'm wondering if there's a particular cadence that you have in mind here in terms of how margins might progress in the Americas business that would look maybe different than expectation?

So I think the big differences is the organic growth in the region and what that helps drive across the base of business make. So the short answer is sort of where we've started off the year and then we've given some seasonality numbers out there and we can talk more about it.

But my thoughts are that is surely is starting off as a year. That doesn't feel like all of the rest. But that being said, we've always been confident about the way that we've been running the business and the opportunities that we have to expand margins. But it does not feel like a year before in -- at least the last two.

But I think the team has done a nice job. We've got a slew of projects to work on to continue to improve margin and, but I think it will be incorrect to say that is like sort of 2024 and [2022].

Shridhar Acharya, Bank of America.

Hi, good morning. I just wanted to touch a bit more on Americas' margins. We've seen the margin expand, notably onboard volumes. How much of that expansion is driven by product mix towards equipment and gas controller automation versus EBX initiatives?

We've always thought about being three aspects to our margin expansion story. The first one obviously is a net price. The second piece is our ABX initiatives and lean activities and Kaizen activities that we run through our facilities.

And then the last portion of it is the portion that we talked about always, which is a shift in mix towards gas control and equipment.

So all three contributed to it. But I would also state that we accelerated some growth investments as well. And we made some growth investments in the quarter.

And so what you see here in our results is, yes, expanded margins. But within those expanded margins, we also invested in our business and Kevin talked about as investing close to $15 million to $20 million this year in growth investments and we kept those, and that's also reflected in our results.

Understood. And then earlier, you noted a low in North America, just given the tariffs. Could you unpack performance a bit more regionally?

For the rest of the globe, previous history for just in North America? Yes, you know, I think the North American market, as I talked about sort of went into a wait-and-see mode in the first quarter.

But what we did notice and I mentioned this year, even in my earlier commentary where we see Europe, India, in particular in the Middle East, continued to be very optimistic about what's ahead of them.

And so, as we saw the US go into a wait-and-see mode, we saw the other regions actually pick up and sort of look forward on investing and figuring out their own path forward in this new world. And so we're excited about that.

Obviously, because of the way ESAB is set up. We think Europe has a lot of upside potential. We saw Middle East continued to grow in strength. We see India also picking up in strength. We also saw green shoots in China, actually. We actually had a real the nice growth number out of our business in China.

But as you know, we play in the top tier that segment and so we also saw China business grow. And we were stable in South America. So all in all, what you see, is that the North American market is the one that's feeling the impact of all of these actions. The rest of the world seems to be one thing to shift away from the noise that's occurring here.

Tamu Zakaria, JP Morgan.

Hey, good morning. Thank you so much. I actually have only one question and nothing related to the quarter per se. And so your 2028 target and 22% plus EBITDA margin, do you think it's time to maybe update that target, given you're already at [20 years] this year?

And just by improving the mix of equipment within the total portfolio by eight percentage points would get you to a 22%? So just wondering how you're thinking about long-term margin targets?

And you know, your margin has been surprising to the upside, at least from our perspective, despite organic growth being lower than the long-term target of three to five. So if the top line improves, then probably the margin flow-through is going to be even better. So any thoughts on how to think about that 22% of 2028 target.

I always good to hear from Tamu. I think we often talk about in our when we would go out and talk about the next targets that we want to set for ESAB. I think, as I've mentioned before, it's very important for us to hit the numbers that we have stated and then raise the expectation off of that.

But you're right, that we're off to a great start, great momentum. We love where we're at, and we are considering sooner giving some thought towards how we take our targets are past the 2028 numbers that we've given, but nothing to date.

But you're spot on that as our mix changes, as EBX takes hold, as we drive more gas control and equipment business, you're right that the potential for margin continues to be that.

But we've also mentioned that we're investing in growth. One of the things that we learned back in 2016 is that for all great business to grow over the long term, you need to invest and we've made those investments.

And I spoke about them briefly and innovation, our relationship to the universities in some new AI use cases that we've got going on within the business. And so expect us to do both, expect us to grow margins, and invest back in the business and not just kind of take everything down to the bottom line.

Nathan Jones, Stifel.

Morning, everyone. I'll start with Kevin's comment on North America volume. And I think you said you'd already seen some further softening in volume North America.

Can you just maybe give us a little bit more color on where you're saying that whether it's deferred capital investments on equipment or lower production on consumables? And then perhaps, what end markets you're seeing incremental softness?

I think maybe the I'll start it off and I'll hand back to Kevin. I think we'll win we meant was allowed probably not a further deterioration, but just sort of a piece.

And we expect that once the data commentary came in, we anticipated that the channel and customers, all of them would sort of just wait to see where things land before sort of making investments.

Our exposure to the large capital automation is lower. But we did see the channel also sort of sit back and wait to understand where pricing was going, what was going to happen the tariffs, prior to making their plans for the year.

So we're sort of a broad based, what I call lull in the North American market, not one particular piece sticks out, although I'm going to assume that if you had exposure to yellow goods or the auto segment, you saw a bit worse conditions than we did.

Is that while continuing or it is started to kind of normalized and people going back to a more and more normal kind of gauge to buy. Now it, I mean Q2, at least North America started off similar to where we have ended. I think it will probably [unsaw] itself once there's more clarity on the carriers at the end of these 90 days.

And then I guess my follow-up question is going to be on Europe. It's interesting to people start to talk positively about the investment going on in Europe. There are a number of years of being a pretty poor performing market.

Maybe you could talk about when you expect some of that stimulus to start hitting the European market and that actually benefiting? You said, I think you'd had limited pretty limited exposure to Germany historically and the Bavarian acquisition will increase that, you just talk about how you would play in that market specifically?

Yes. You know, there's a there's a broad-based European stimulus and then there's the German base European stimulus and we're actively working both. And so the view for us is I think the Finance Minister in Germany went into place two days ago, if I'm not mistaken.

And so as a result, now we feel that the German economy begins to sort of activate some of the things that Dave talked about through the election cycle by the third and fourth quarter.

But that being said, there is other activity in Europe in terms of how we've seen orders come in, how we've seen the activity level, which gives us strong confidence that it only gets better from what we're already seeing in a trillion dollars into the European economy would be extraordinary, [native], and install.

Our view of that is no better [vat] that company positioned for that. No better gas control business positioned to take advantage of that infrastructure and build out in the European market.

So yes, it's a positive and none of that's in our forecast. And we expect that as those things come into play will begin to see things sort of shift more positive for us in the rest of the world.

Neil Burke, UBS.

Hey, thanks. And one question on the guidance. If my math is right, I guess Bavaria adds about $20 million of revenue this year and you increased EBITDA by about $2.5 million.

So I'm just curious how much of that increases from Bavaria and just the guidance embed any kind of like macro uncertainty given what we're seeing right now with tariffs?

Yes. Shyam mentioned -- so you're correct that it's just over $20 million is roughly the right number for a Bavaria that we put through. And then, the change in the profit guidance was largely Bavaria, reading through the numbers.

We expect Bavaria to be EPS neutral as Sean mentioned, the script in the first year, that means that it's slightly below our fleet average. We have a couple of [fields] synergy opportunities with our business that we're going to roll out in the first year. And it will be accretive in quite a bit, accretive by the second year, but in the first year at just slightly below.

So you're saying your $2.5 million to $3 million kind of that range of profitability through not only $20 million of revenue.

If I could just highlighted that, Neil, I think when I visited that business last week, very impressed with the manufacturing side, validated some of the synergistic opportunities that we have within the business.

In fact, they had just won a large contract as I walk through their site on that day. So there was a bit of a celebration going on our supply chain and our ability to source material would be extraordinary.

And so, we're really excited, very similar to what we did with the Sandvik acquisition. You know, where it was a bit lower than our fleet average in terms of margin. But within six months, we saw it being very positive and accretive to our margins.

And that's something similar that we expect here and for everything that is going to get investment, this code material influx is going to [key in]. And it really positions ESAB to be a leader in that space. So very excited about the deal.

And that concludes our question-and-answer session. I will now turn the call back over to Marc Barbalato for closing remarks.

Thank you for joining us today. And we look forward to speaking to you again next quarter. This concludes today's conference call. Thank you for your participation. You may now disconnect.