Good day and welcome to the ESAB Corporation Third Quarter 2022 Earnings Call. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I’d now like to welcome Mark Barbalato to begin the conference. Mark, over to you..

Thanks, operator. Welcome to ESAB’s Third 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 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. Good morning, everyone, and thank you all for joining us today. I’m on Slide 3. ESAB delivered another solid quarter of revenue growth, margin expansion and cash flow. This quarter, we made great progress towards shaping ESAB into a faster-growing, higher-margin and less-cyclical business. Organic sales increased 10%.

Adjusted EBITDA margin expanded 40 basis points to 16.6% as EBX initiatives continued to gain traction. We continue to shape our enterprise towards our long-term strategic goals by introducing exciting, new products; making bolt-on, accretive acquisitions; and using EBX to expand margins and improve cash flow.

I’m proud of our team’s effort and execution against these 3 goals. Moving to Slide 4 and focusing on organic growth. Our vitality index continues to be robust at 27%. On the left of the slide, I’ve highlighted some of our exciting, new products.

You will note on the slide that we’re focused on developing industry-leading products that are eco-friendly, efficient and digitally connected. These new welding equipment and gas control products will shape ESAB towards faster organic growth and higher gross margins. Let me start with our gas control products on the slide.

The new MediVital product has enhanced safety features and is digitally enabled. We also launched an upgraded GCE medical gas system, which is the most innovative medical central gas system on the market with the highest flow rates and the best precision control.

These products increase safety; reduce maintenance; and most importantly for our customers, reduce gas leakage and waste, resulting in significant cost savings for our customers. Moving to FABTECH, let me first talk about the Warrior Edge.

This new product offers best-in-class pulse wave technology with enhanced digital connectivity and provides the market leading power source for robotics and automation.

Next is our new Renegade ES, which further builds out our light industrial offering, providing our customers a product with lower energy consumption and a best-in-class user interface. Both the Warrior and the Renegade provide ESAB a scalable platform for our equipment growth globally.

Moving now to Slide 5 and continuing the conversation about our evolving equipment portfolio. Let me introduce a category-defining new product, our battery-powered welder, the Renegade VOLT. This product was developed using our EBX process of open innovation and in partnership with our friends at Stanley Black & Decker.

This product will create a whole new category in the welding segment. The Renegade VOLT leverages DEWALT’s industry-leading FLEXVOLT battery technology which is interchangeable with other DEWALT products. The battery is rechargeable, recyclable and noise free, making this product the most environmentally friendly welder in the market.

The new battery-powered welder improves transportability, allowing users to bring a welding machine to remote and hard-to-access areas. The VOLT also opens exciting opportunities for ESAB to continue to reach new customers and channels.

The Renegade VOLT is a fantastic addition to our equipment brand and, alongside the Warrior and Renegade, allows us to shape our business to a higher equipment mix and as a result expand our margins. Moving to Slide 6. I’ve spoken to many of you about our gas control business. Let me take a moment to calibrate all of us.

Gas is an integral part of welding and cutting. And gas control is critical to a successful well, making it a natural adjacency to our core business. We acquired Victor in 2014, which included a leading mission-critical industrial gas control business. Then in 2018, we acquired GCE, a leader in industrial and medical gas control in Europe.

These acquisitions provided ESAB with access to faster-growing, higher-margin and less-cyclical end markets. The gas platform today is about $350 million, with gross margins greater than 40%. This platform also generated an annual growth rate above our base business with accretive gross margins.

As we move forward, we’ll continue to focus on strengthening our gas control business, and that brings me to Slide 7 and our exciting acquisition of Ohio Medical. I’m thrilled to welcome the Ohio Medical team into the ESAB family.

This acquisition strengthens our position as a leader in gas control technology; and continues to shape ESAB into higher-growth, less-cyclical, mission-critical and higher-margin businesses. With Ohio Medical, we now have a $400 million global gas control platform with gross margins north of 40%.

Ohio Medical is a leader in oxygen regulators and flowmeters, providing our gas control business with a strong presence in the attractive North American market. When combined with our existing gas control platform, there are significant opportunities to cross-sell given our complementary geographic footprints.

In addition, we will use EBX to accelerate innovation, improve efficiency and drive productivity savings. There will be more to come on this front, and I will look forward to sharing more updates with you as we continue on this exciting journey. Moving to Slide 8.

As an enterprise, we are focused on growing organically through introduction of new innovative equipment like the Renegade VOLT and the Warrior Edge, supported by our InduSuite and robotics workflow solutions, improving our mix and margins going forward; bolt-on acquisitions like Ohio Medical; and EBX, driving margin expansion and improving cash flow.

We are confident in our ability to achieve our long-term strategic goals of greater than $3 billion of revenue, 20%-plus EBITDA margins and 100%-plus cash conversion. Turning to financials on the quarter on Slide 9. Sales grew organically at 10%. Europe continues to show resiliency.

North America performed as expected, and our businesses in India and the Middle East outperformed. New products continue to generate excitement with our customers. We continue to cover inflation with price using our EBX process. The teams are executing well, expanding EBITDA margins by 40 basis points year-over-year. Moving to Slide 10.

Americas had a solid quarter. Sales rose 10% organically. And we continue to run our playbook, which is aimed at lowering our cyclicality and rationalizing our product lines. As I mentioned earlier, our North America business performed in line with expectations.

South America continues to strengthen and is performing well sequentially but was faced with a difficult year-over-year comp as a result of post-COVID buying patterns. EBITDA increased 9% and margins expanded 10 basis points, in line with what we expected. Moving to Slide 11. Our EMEA and APAC business had a strong quarter.

Our third quarter sales rose 9% organically. This segment was negatively impacted by a strong U.S. dollar. And despite the FX headwind, EBITDA margins improved 50 basis points year-over-year, reflecting strong execution of our EBX process to reduce costs and improve efficiency and productivity. With that, let me turn it over to Kevin for Slide 12..

Thanks, Shyam. Good morning, everyone. ESAB had a strong quarter for cash flow. Free cash flow was up 26% versus the prior year and cash conversion was greater than 100%. Supply chains continued to improve in the quarter, allowing us to flex inventory and drive improved cash flow.

As Shyam already discussed, we announced the Ohio Medical acquisition, and we have been able to fund this acquisition with our year-to-date cash flow. In the fourth quarter, we expect another strong quarter of cash flow generation; and expect to end the year with a net leverage of 2.8x or less, well within our 2x to 3x targeted leverage range.

As I spoke earlier in the year, at our Investor Day, we still have significant opportunities to further drive higher cash flow. We are embracing new technology. And our team continues to focus on improving our processes using EBX and delivering our long-term goal of consistent annual cash conversion of greater than 100%.

For 2022, we remain on track to deliver greater than $210 million of free cash flow. Turning to Slide 13. We provide an overview of our updated 2022 guidance. Our guidance numbers exclude Russia from the second quarter of 2022 and 2021. Total sales guidance has been reduced, which reflects approximately $30 million of additional FX.

Organic growth remains unchanged, with market conditions remaining in line with what we -- was expected last time we spoke. With 1 quarter to go, we narrowed our adjusted EBITDA guidance, which includes an approximately $4 million impact from FX.

Adjusted EPS guidance has been raised to $4 to $4.10, reflecting improvements in our operating performance as we continue to use EBX to expand margins and from lower interest expense due to the favorable financing we secured last quarter. We expect another strong quarter in Q4 and look forward to exiting 2022 with positive momentum.

With that, let me hand back to Shyam on Slide 14 to wrap up..

Thank you, Kevin. To summarize. We delivered another solid quarter as we shape our business towards higher growth, less cyclicality and higher margins. We are introducing game-changing, innovative new products to the market; and these products will increase our mix towards equipment.

We are positively shaping our portfolio with accretive acquisitions like Ohio Medical. We continue to drive EBX across the business to reduce our operating costs and deliver strong free cash flow. We’re off to a good start in Q4 and we’re well on our way to shaping our business to deliver 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 Tami Zakaria from JP Morgan..

So my first question is it seems like pricing in North America was up 9%.

And it’s lapping almost 20%-plus pricing from last year, so as compares get tougher on pricing, how are you thinking about price realization maybe in 2023?.

Yes. Thanks for that question, Tami. So there are a couple of things for us. I sort of mentioned this before. We have 3 different processes for pricing within ESAB as part of our EBX process. The first one was associated with inflation, and you’ve seen us do a really strong job on that. So price-based inflation.

And I would expect, as we see the markets develop over the next 12 to 15 months, we’ll see what inflation does, but pricing on that will continue to be very disciplined. But there’s 2 other processes that we have in place that I think will play a larger role as we go into 2023.

The first one is value-based pricing based on the new products that we’re coming out with. We’ve done a really strong work with our teams around our stage gate process as we develop products. And we feel that these products are going to be [value priced] in the marketplace, continuing to drive margins to a better spot.

And then the last piece is this piece around product line simplification and rationalization, where we think there’s again opportunity for us to go out to the market with some targeted pricing going forward, so I expect pricing to continue to be positive. Kevin and I continue to work on 2023.

We’ll have probably more detail as we finish out the year and give you some guidance sometime in Q1 next year..

So we’ve been hearing about a lot of noise in Europe, demand moderation in different end markets.

From your perspective, any comments on what you’re seeing with regard to order trends in the EMEA region?.

Yes. Thanks for that question. Tami, I -- we have a very strong European business. We’ve talked about the strength in our European business, our team, our ground game in Europe. And as I mentioned earlier in my call, Europe continues to be resilient. We’ve started Q4 well in the continent. There are -- obviously we read the news.

We understand what’s in the press, but there are a few factors, in my view, that could be in our favor as we go through the next 12 to 15 months. We think agriculture spending in Europe is going to continue to be strong.

We think renewable energy, which includes wind tower and possibly nuclear, will continue to be a strong sort of investment opportunity and growth opportunity in Europe.

We also believe that oil and gas investments of some sort will continue to sort of make their way in Europe with maybe possibly LNG port investments, et cetera that will drive welding products needs.

And ESAB is well equipped on all those 3 fronts, when you look at our ICE technology for the wind space, the certified products that we have for the nuclear space. And then also, as I talk about, oil and gas, we have some phenomenal products there. The last piece is defense.

We think that defense will continue to sort of make its way forward as the European economy spend a little bit more of their GDP on that particular line, and ESAB is well positioned to take advantage of that.

So we think that there are some negatives, but there are also some positives that could moderate the impact on ESAB as we go into the next couple of years..

Your next question comes from the line of Mig Dobre from Baird..

I want to follow up on the discussion here with Tami and maybe since we’re kind of talking about the growth outlook.

Volumes clearly slowed in the business relative to where we were earlier in the year, so from your perspective, what is going on in terms of end market demand? Is this a function of comparisons and sort of like channel dynamics like you highlighted in Latin America? Or is this more about just the tone and momentum of the business? Should investors at this point sort of expect decline in volumes, especially as we’re contemplating 2023? I think -- or how do you think about managing your business within that context?.

We’ve just started our process for 2023, so we’ll sort of talk about that sometime in Q1, but what I can say to all of you today is that we started Q4 well. I don’t see anything that sort of makes me, would make me want to say to you that we’re seeing any downward trend in volume that sort of has us concerned. Orders continue to be at a strong rate.

We continue to work our growth bridges. Our team continue to be excited about the possibility of driving share gain. The one thing, Mig, that we’re really thrilled about is the new products that we’re launching in the marketplace.

We think that that’s going to drive new customers, drive new channels and opportunities for us in all geographies; and I think that’s the exciting part about what we’re doing. And the other piece of that is also the acquisition that we made of Ohio Medical.

We think that the geographic opportunities for us to cross-sell our products, whether it be GCE products in North America or the Ohio products globally -- we think that there’s a real opportunity there for some volume growth; and build out and strengthen our gas control portfolio that, again, drives high growth, better margins, lower cyclicality and better cash flow for the business.

So all in all, as the team at ESAB sits here, yes, and we finish out Q3 and go into Q4, there’s sufficient amount of optimism, but just like anything else -- we’re strong and seasoned leaders. We’re making plans for everything that could come at us, but as we sit right now, markets are resilient. Markets are performing as expected.

There’s as much opportunity for growth as there is sort of in the newsprint on things that could go the other way, but we’re very excited about the products. We’re very excited about the acquisitions that we’ve made and feeling really good about where the business is positioned for the long term..

Okay, fair enough. And in your discussion from a moment ago on pricing, the way I was sort of interpreting your commentary is to really -- it was really pertaining to your -- to the equipment side of the business, more so than consumables, things like value pricing and so on. I am wondering, though.

As you -- as we’re kind of looking at raw material costs going back, do you think it’s reasonable for consumable pricing to remain flat or better in 2023? Or is that going to start manifesting as a potential headwind?.

Yes. Mig, the way that I would ask you to look at this is, in the past, what has happened is that we have seen commodity prices drop. And we’ve held onto some of the price on the way down.

We’re very quick as we go out with pricing to the marketplace and we sort of are very deliberate on the way down, so I think that’s an expectation that we continue to have within the business going forward.

The second piece that I would say to you is that [there’s another] inflation out there that continues to sort of justify pricing to be where it’s at or possibly move north as we go into 2023. So the team, as you know, we have a very disciplined process of understanding all inflation.

As a team, we review net price on a monthly basis within the business and in every region and with all of our sales teams, so as a result, we know exactly where we’re at, at any moment in time vis-à-vis where our cost position is no matter if it’s commodities-based inflation or other inflation that the business sees within the month of the quarter.

So I’m very comfortable with the process that we have. And the process is geared to sort of focus on net price and the impact on the business, driving margins forward, and that’s really where we’re focused as a leadership team..

[Operator Instructions] And your next question comes from the line of Chris Dankert from Loop Capital..

I guess -- and forgive me if I missed it, but thinking about EBX in the quarter, any update just kind of on the product line rationalization, what’s going on, on that front?.

Thanks for that, Chris. We continue to make progress on that particular front. The view that we have is that we’re just early innings on that particular piece. We expect that initiative of ours to sort of move on to different geographies as we go through 2023, and so as a result, what I’d say to you is EBX continues to drive that piece.

There’s another piece right behind it that’s footprint rationalization that we’ll continue to kind of drive forward and then OpEx reduction within the business. And so we’re sort of looking at 3 different pieces of product line rationalization, continued sort of improvement in our footprint and then OpEx transformation within the business.

And so we’re working all 3, early innings on the product rationalization piece, seeing some good progress actually and encouraged by what’s sort of ahead of us in 2023..

Got it. Well, then that touches on something else I kind of wanted to ask you about. So I mean, on the footprint rationalization, is it fair to assume we’re in the planning and evaluation stages here? That’s probably like a 2024 benefit, for the most part..

I don’t think we’ve given out a specific number on benefit, but expect to hear from us sometime in Q1 as to what the restructuring or footprint benefits would be as we go into it.

It’s something that we continually do within the business as we ratchet up our performance and ratchet up the expectations within our team, and so the view for us would be that there’s going to be something in there. We’re just not ready to talk about it.

Kevin and I are going through our budget processing for next year, and so expect to hear more about that in Q1..

Your next question comes from the line of Nathan Jones from Stifel..

This is Adam Farley on for Nathan. So I appreciate the detail on the new products in the pipeline, vitality index. They all sound really interesting. I was wondering if you can provide a little more color on maybe how many products are you expecting to launch in 2023.

Have you had any difficulties from maybe supply chain on launching new equipment? And then maybe are there any technology product gaps that ESAB might go after inorganically?.

Yes. So thank you for that. So I really appreciate the question around innovation because we’re really excited about what we’ve done over the last couple of years with ESAB. As you know, we started off with 24 products. Today, we’re at 110.

The bigger piece for us is, as we’ve made those innovations, what we’ve done and something that I talked about also on the call is create scalable platforms. And the view for us is when you look at the Renegade, the Warrior. What you see are platforms that are now scalable, and so what you see is design integrity.

You see design sort of that are now part of the foundation. And so as a result, what we have is a better supply chain, a better production efficiency as a result of it going forward and not to mention the Renegade VOLT which was absolutely game changing. It’s something that we’re really excited about. You will see us talk about it at FABTECH.

We’re going to be launching it in a big way here next week. This was the first time that we’ve talked about it publicly. It’s a device today that performs as well as any other product that’s out there for the applications that are needed for remote welding.

And it has interchangeable battery, so if somebody has a power tool that belongs to DEWALT, they can use that exact same battery to run the welding equipment. So really excited about that piece. And to your question on will we keep up the pace, the short answer is yes.

The number of innovations may sort of slow down a bit only because we’re focused on some specific platform, some specific foundation. I’ve talked about equipment, but we continue to also innovate on the filler metal side of our business, also on the torch side of our business.

So all in all, what we’re doing is rationalizing the number of product lines, rationalizing the number of SKUs, creating truly innovative products that start on a foundation and a platform that can then be built upon [both] consistency and simplicity of our supply chain, really exciting stuff that in my view will continue to pay dividends in terms of margins and customer satisfaction over the next 3 to 5 years..

That’s really helpful. I did want to ask another question on forward outlook for growth. We’ve heard from some other companies in our coverage of this divergence between industrial and consumer markets, so I’m wondering if maybe you’re seeing that in your end markets, industrial holding stronger than maybe more of your retail-oriented markets..

So our story is a bit different on that particular front partially because we’re new to the retail market. And you’ll see us sort of talk about this, but another announcement that should come out in the next couple of days is our move into retail. And so we’re new to that space.

So as we move into that space, especially in North America, it’s really all growth for ESAB. So we’re actually seeing positive momentum both on the retail side because of some share activity. And the industrial side for us has actually held up.

It’s been resilient is the best way to sort of -- is the best word to use on that particular front both in the Americas and also in Europe. And then I sort of mentioned to you India and the Middle East have sort of been the outperformers as we look to Q3. And we’re off to a good start in Q4 as well..

[Operator Instructions] There are no further questions at this time. I would like to turn the call back over to Mark for closing statements..

Thank you for joining us today. And we look forward to speaking to you on our next call. Have a good day..

This concludes today’s conference call. You may now disconnect..