Good morning. My name is Christa and I'll be your conference operator today. At this time, I would like to welcome everyone to the ESAB Corporation Fourth Quarter 2023 Earnings 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. Thank you. I will now turn the conference over to Mark Barbalato, Vice President of Investor Relations. Mark, you may begin your conference.

Thanks operator. Welcome to ESAB's fourth 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.

Thank you, Mark. Good morning everyone and thank you all for joining us this morning. ESAB has made excellent progress in 2023 and we finished the year and the fourth quarter on a high note. As always, let me take a moment to thank our dedicated associates for their hard work and commitment to our goals. Our 2023 performance demonstrates the power of EBX to drive growth, improve margins, and generate strong free cash flow. During Investor Day this past December, we announced our strategic vision to become a focused premier industrial compounder and set our 2028 targets to become a $4 billion in sales enterprise with a 22% EBITDA margin that generates 100% free cash flow conversion. The event also showcased our innovative products and solutions within our FABTECH and Gas Equipment businesses, allowing us to highlight the power of our portfolio and workflow solutions that are helping our customers solve their most challenging needs. Some of the other highlights from 2023 include the extraordinary progress we have made to enhance our equipment portfolio both in FABTECH and Gas Control. We completed our light industrial lineup and introduced the game-changing Renegade Bolt. Our battery-powered welder, the first of its kind, was a hit in the marketplace. An interesting news item for you on this product, it is now featured in the March Edition of Popular Mechanics as The Best Tool for the Trade. We also made significant progress on our heavy industrial line of products with the launch of our new Warrior Edge. This product specifically addresses the robotics and automation market. The Warrior Edge, combined with our digital solutions, has created a competitive edge for ESAB as we focus on growing our equipment sales. Additionally, we developed and introduced the first AI algorithm-enabled fully autonomous adaptive welding solution within the renewable industry. Within our Gas Control business, the innovation machine continues to deliver. The Vitality Index in our Gas Control business is a strong 33%. The team has introduced new valves for Industrial, Specialty, and Medical Gas, focusing on the North American and Middle Eastern markets. Additionally, our Gas Control team successfully integrated two bolt-on acquisitions, positioning us for continued growth in the coming years. ESAB is also benefiting from macro tailwinds related to onshoring, infrastructure upgrades, energy transition, agricultural investments, and medical and lab infrastructure improvements. Furthermore, we have added to our EBX toolkit. We initiated a few targeted AI-driven activities focused on improving our operations and are encouraged by the initial results. As we enter 2024, we just wrapped up our leadership meeting and rallied our team around growth, bolt-on acquisitions, and taking EBX up another notch. We have a proven and simple formula at ESAB; use EBX to drive growth, expand margins, and improve our cash flow within our base business, add accretive bolt-on acquisitions, and then use EBX to make them stronger. As a result, we're shaping ESAB into a less cyclical, faster-growing, and higher-margin enterprise. To talk specifically about the fourth quarter, let's turn to Slide 3. Another strong quarter and another step forward in the direction of our 2028 goals. As mentioned earlier, we delivered record fourth quarter results. Total sales grew by 600 basis points, adjusted EBITDA margins expanded to a record 19.4%, and our end markets continue to be resilient, with particular strength in India and the Middle East. We continue to be encouraged by the growth performance of our Cobots and Gas Control business, with our Cobot business experiencing close to triple-digit growth in the quarter and our Gas Control business growing in low double digits. All our regions continue to benefit from infrastructure investment and energy transition projects. General fabrication activity remained solid, which was partially offset by softness in retail. Our teams are making positive strides towards a more profitable product mix, and the impact of our EBX growth tools and product line simplification is reflected in the adjusted EBITDA margins, improving by 200 basis points and free cash flow improving by 39% year-over-year. Moving to Slide 4 and reflecting on the full year, sales reached a record $2.62 billion and our core revenue rose by 800 basis points, with standout performances in India and the Middle East regions. Adjusted EBITDA improved by 160 basis points to a record $483 million for the full year. Most importantly, we exceeded sales, adjusted EBITDA, and EPS guidance, demonstrating our ability to consistently deliver on our commitments. Our full-year free cash flow reached $305 million, with a record free cash flow performance in the fourth quarter. This once again underscores ESAB's commitment to financial discipline and continuous improvement. Moving to Slide 5, discussing our fourth-quarter performance in more detail, quarterly sales hit a record $650 million. Adjusted EBITDA reached a record $126 million, expanding 200 basis points year-over-year to reach an all-time high of 19.4%. As expected, we saw our Americas business return to positive volume, while our EMEA and Asia Pacific business continue its positive momentum. In the quarter, we benefited from FX favorability of about $2 million and about $1 million in promotional activities that shifted out to the first quarter in 2024. Turning to Slide 6, in the Americas, organic sales grew by 900 basis points, with strong price performance of 800 basis points, volume adding 100 basis points of growth, and acquisitions adding another 100 basis points. We did experience a small FX headwind in the quarter. Our investments in new products and solutions, especially in our light industrial line focused on distribution, along with our Cobots focusing on automation and robotics, are fueling significant growth opportunities. I had a chance to interact with a few of our distributors in December, and their reaction to our product line was remarkable. Several compliments were given on our Renegade Volt and our new Ruffian engine-driven welder. The distributors are thrilled with the new ESAB products. Additionally, our Gas Control business continues to perform well in the region with both FABTECH and Gas Control contributing to an overall 200 basis points improvement in adjusted EBITDA margin. Turning to Slide 7, our EMEA and APAC regions continue to perform as expected, with total sales growing by 400 basis points. Volume grew 200 basis points, and acquisitions contributed 100 basis points of growth. Our team in Europe, India, and the Middle East continue to execute well in the market. Our Gas Control team continues to win key projects in lab and hospital expansion projects. The region has made great strides in selling our equipment line and our fully autonomous adaptive welding solution. To add, the effective utilization of product line simplification and EBX has driven the region's adjusted EBITDA margins up 200 basis points to a record 19.3, underscoring our ability to drive growth and expand margins. On that positive note, let me hand it over to Kevin for Slide 8.

Thanks, Shyam. We delivered another strong quarter of free cash flow, up 39% versus 2023 to a record $305 million. Key to our improved performance was a 0.3 turn improvement in working capital, as we successfully deployed our EBX business system. This strong performance enabled us to deleverage better than expected, and we ended the year with net leverage of less than 1.9 turns. In 2024, we continue to see opportunities to use EBX and leverage AI to drive even stronger cash flow to support our compounding journey. Turning to Slide 9, we provide our 2024 guidance. Total sales growth of 1.5% to 3.5%, which includes a point of FX headwind on organic growth of 2.5% to 4.5%. We have also provided our 2024 seasonality by quarter on the slide. We expect year-on-year incrementals to be in the low 30s with an adjusted EBITDA guidance of $495 million to $515 million. This guidance includes $10 million of restructuring benefits and $15 million of additional investments in our business to support the commercialization of our innovative new equipment portfolio. Interest expense is guided to $74 million to $77 million, with an adjusted tax rate between 23% to 24% and offshore client around $62 million. Overall unadjusted EPS guidance is between $4.65 to $4.85. Finally, our cash flow conversion guide is greater than 95%, which includes two one-time capital investments of around $10 million that we're making to support future growth. To assist with modeling, we have included a more detailed guidance slide in the appendix. With that let me hand back to Shyam on Slide 10 to wrap up.

Thank you, Kevin. In conclusion, our teams are focused on executing our strategy, propelling us closer to our goal of becoming a premier industrial compounder. We exit 2023 with momentum, as our innovative new products ignite enthusiasm within our customers and our sales team. We're putting robust cash flow to good use reducing debt and adding strategic bolt-on acquisitions. Our M&A pipeline is the strongest it's ever been, positioning us favorably to augment organic growth. We're taking EBX up a notch with the presence of kaizen events occurring every quarter. We're off to a good start in 2024 and our focus is on delivering the year as we have guided and positioning ESAB to realize our 2028 objectives. We're just getting started, and as I said at Investor Day, it's a great time to be an investor in ESAB. This team is poised to continue to deliver significant value for our customers, associates, and shareholders. With that operator, let's open the lines for questions.

Your first question comes from the line of Tami Zakaria from JPMorgan. Please go ahead.

Hi, good morning. Thank you so much and excellent margin performance in the quarter. So my first question is along that topic. The in-flight incremental EBITDA margin in your 2024 guide seems to be in the mid-30% range and your 2028 target to reach a 22% EBITDA margin would imply it would require you to have an implied incremental of about, let's say, high 20%, meaning it seems like you're running ahead of that target. Should we then think about the target as pretty conservative and easy to reach? Or was it originally adopted assuming that incremental margin over time could slow down later towards the 2028 timeline and it was always going to be front-end loaded? So any thoughts on the incremental margin, please?

So first, good morning. It’s always good to hear from you, Tami. Well, first, thank you. I think we did have a great quarter both on the growth side and on the margin side of the business. I’m really proud of how the team has performed, thrilled that we finally peaked out positive volume in North America and continued our momentum in the rest of the world. To answer your question, we liked our margin performance in the fourth quarter and how we finished out the year. As you know, looking out your window, there are many things that can come at you—headwinds or tailwinds—as we look at 2028. What we've always said is that our team is very confident in delivering the margin growth targets that we've set within the business and focusing on augmenting our organic growth with inorganic opportunities and acquisitions. I mentioned earlier that we have a really strong funnel, so we feel that both in 2024 and beyond, we can accelerate the organic growth line while continuing to maintain our margin expansion pace. In short, I believe we're right where we need to be, driving the ship forward with some momentum.

Got it. Great to hear. So my second question is, I just wanted to understand the full year outlook in terms of sales. It seems like the first half is expected to be modestly lower than the second half, and the growth acceleration in the fourth quarter looks more substantial than what's implied for the first quarter. What is driving this expectation of a slower start? And what gives you visibility that growth is going to accelerate in the back half?

Yes. I think I mentioned we're off to a good start in the first quarter, but we had challenging weather in the Scandinavian region of Europe as well as in North America. The Chinese New Year falls squarely in February, and we expect Easter to land completely in the first quarter of this year as well. So you're seeing some impact due to weather and holidays that are outside of our control this year compared to last year. The rest of the year kind of shapes out the way we see it today, but it also doesn't include any acquisitions we may make in that period, which would provide positive upside to both growth and our intent is to acquire businesses that are accretive to margin. So we expect to continue that positive momentum.

Wonderful. See you in a couple of weeks.

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

Yes. Good morning. I also want to ask about margin. I can appreciate the discussion on increments that are baked into the guidance for 2024. However, performance in Q4 was quite strong, right north of 19%, and that's above the high end of where you're guiding margins for 2024. So, I'm curious how we should think about seasonality here. Why should we expect a step down in margin relative to Q4? Anything to clarify on that?

Yes. First, we were very happy with how both of our regions performed and really all across that Gas Control, which gives us great confidence in how people are incorporating EBX into their standard work. I mentioned we had a few good factors in the fourth quarter, including a few million in FX favorability and about a million in marketing activities that pushed out to the quarter. As Kevin briefly mentioned, we will continue investing about $15 million to drive equipment sales across all geographies, so those are the factors you should consider when looking at next year's guidance. We absolutely believe that now as the flywheel is turning at ESAB, we can reinvest some dollars into the business, which will lead to growth over the next three years.

Appreciate the clarification. I also wanted to touch on your organic guidance of 2.5% to 4.5%. Can you provide any insights on how you're thinking about pricing versus volume, especially if you see any differences between your two reported segments?

Yes, Kevin, do you want to take that?

Sure, Mig. We're expecting positive volume through each quarter with low single-digit pricing. The pricing has been fairly consistent year-over-year in each of the quarters, with volume expected to improve as we progress through the year. Additionally, we expect both segments to show positive volumes, with stronger pricing in the Americas segment compared to EMEA and APAC.

Can I ask why there's stronger pricing in the Americas? What's driving that?

We do have a portion of the business in South America, which contributes some additional pricing there. Our team continues to maximize value, particularly on the new products we're bringing to the market in North America.

Excellent. Thank you.

Your next question comes from the line of David Raso from Evercore ISI. Please go ahead.

Hi. Thank you. Picking up on the price commentary, I thought the price in the fourth quarter was a pleasant surprise in the Americas. Can you give us a sense of any incremental pricing you took in January or if the prices you expect in the Americas for 2024 are simply the carryover? Additionally, could you share insight into the negative pricing internationally, primarily focusing on whether that was driven by Europe?

Thank you, David. Always good to hear your voice. We did see some pricing adjustments in Q4 for America. But as Kevin mentioned, we've implemented additional pricing in the first quarter in our regions. When we looked at Europe, we noted that steel prices are moving very differently across regions and we have seen some deflationary steel pricing in Europe, which has influenced our pricing strategies. Despite this, we were pleased with the expansion in margins in the fourth quarter. ESAB is focused on achieving a net positive price number, which we were able to manage effectively.

That's fair, and just to clarify, you're expecting positive volume and pricing to lead to a flat first quarter, correct?

Yes, that's correct. Keep in mind there is a bit of noise in Q1 due to weather and holiday scheduling, which has impacted the days available for business.

Lastly, you referenced an M&A pipeline. Can you elaborate on that? What are your thoughts on M&A this year?

Similar to our past strategy, we're focusing on bolt-on acquisitions while keeping our debt levels in the 2% range. We seek to acquire businesses that are accretive, improve our geographic positioning, and fill product line gaps. We've identified a few potential opportunities that we believe could reach completion, which would be a pleasant upside to our current guidance.

Was there a hint on the size of potential acquisitions?

There are a couple of potential acquisitions in our pipeline that are similar in size to Ohio Medical and a couple that resemble Therapy.

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

Good morning, everyone. A couple of questions regarding the investments you're making in 2024. You mentioned $50 million of additional incremental investment to support growth. Kevin also talked about a couple of CapEx expenditures for growth. Can you provide more details on these investments and how they will drive growth over the next few years?

On the marketing side, we’ve launched several new products, and our aim is to create marketing structures and advertising for them globally as we bring them to the market. Additionally, we are establishing incentive plans for our sales teams to encourage them to correctly sell the new product mix. We're also working on augmenting our marketing strategy, which we hope to reveal by the third quarter, to create something special for the long term at ESAB. Kevin, do you want to talk about capital?

Yes. We are directing our capital investments into two main areas. The first area focuses on emerging markets, where we continue to see robust growth. We are enhancing our infrastructure to support this growth. The second area involves investments in AI and IT systems to support the growth we expect for ESAB in the upcoming years.

The second question is about the PLS initiative you undertook in 2023. Can you provide an update on where that stands and if there are any remaining headwinds for volume in 2024?

We are pleased with how the PLS initiative has been executed by our teams. While a significant part of PLS is now behind us, we expect to continue PLS initiatives in other regions, focusing more in Europe and Asia. Currently, we are positioned to achieve net positive growth from PLS, as we have made substantial progress in refining our product line. Our teams are focused on driving growth for specific customers while improving our product mix.

Thank you for the insights.

Your next question comes from the line of Chris Dankert from Loop Capital. Please go ahead.

Hey, good morning. Thank you for taking the question. In thinking about international trends, especially in Europe and China, how do you perceive the current situation? Are we expecting stabilization or a continued decline in the first half before a rebound?

We view our businesses by daily sales rate and observe performance across regions. Stability is evident in those rates. However, year-over-year comparisons are tightening. The German region is experiencing significant stress, while the rest of Europe seems stable. We're seeing positive momentum in the Middle East and India, while the U.K. is facing some difficulties; yet we maintain a strong position there. In China, we've noted some investments initiated by the government, supporting energy transition initiatives that are building infrastructure. We operate in the upper tier of the Chinese market and are less affected by the peaks and troughs that others face in this market.

Thank you for that explanation. Can you update us on manufacturing consolidation plans for the year?

Kevin and I have plans for several projects and we are prepared to accelerate or adjust based on market performance. We have allocated about $10 million in our guidance for these projects but may speed up initiatives if market issues arise. Most of the focus will be on refining existing operations rather than any drastic changes.

That's clear. Thank you, and best of luck for the year ahead.

Thank you.

Your next question comes from the line of Rob Jamieson from UBS. Please go ahead.

Hey, good morning. Congrats on your results today. I'd like to discuss the Gas Control business, which was up low double-digits. Could you comment on market performance there, and how it compared to your expectations? Also, can you remind us of what the split may be between equipment and consumables?

Certainly. Regarding the Gas Control business, we indeed saw low double-digit growth. The significant growth area was on the energy transition side, particularly in energy markets (oil and gas, etc.), which reported nice improvement. Constant growth was also evident in specialty and medical gases due to upgrades being implemented. However, we faced challenges in Germany, as our Gas Control sector is significantly exposed there. Nonetheless, we observed solid growth in industrial spec and medical sectors in other areas, with promising growth prospects set for 2024.

Could you describe what’s included in your guidance concerning Gas Control vs. core welding?

We have not differentiated these two segments in our guidance. However, it’s clear we’re coming off significantly strong numbers from the Gas Control side, so I expect that growth to moderate in 2024. You can make your projections accordingly for the FABTECH business as well.

One last question about the AI initiatives under your EBX strategy, especially regarding what you aim to achieve with cash flow.

We're focusing on utilizing AI in material and production planning, as we believe this will be a significant asset. While we're exploring other projects, we don't have enough data yet to discuss those. Our intention is to continue leaning into these emerging technologies that can fundamentally reshape our enterprise.

There's a lot of momentum happening at the moment, and we’re positioning ourselves to take advantage of it. My focus is primarily on back office support—and how AI can fuel enhanced cash flow. Numerous projects are ramping up, and we’ve got an exciting learning curve ahead as we develop strong expertise in AI.

Thank you for your responses.

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

Thank you for taking my follow-up. I have two questions. First, on share gains, is there any industry data you can share that indicates your performance improvements relative to peers? It seems your growth is outpacing theirs; thus, I suspect you might be gaining market share. Is that accurate?

Currently, there is no specific industry data available to clearly illustrate our market share progress. For us, it's centered on execution and mix shift. ESAB has primarily been a consumables company, but over recent years, we've significantly enhanced our equipment line. We've successfully promoted our industrial products and placed focus on high growth segments. Ultimately, by staying aligned with growing markets, customers, and profitable products, we believe that market share gains will naturally occur. Execution makes a notable difference.

Understood. Lastly, could you detail the automation business size in 2023? Considering the Cobot growth, what are the projections for 2024 and what’s included in guidance?

We’re quite optimistic about the progress in automation. This segment constitutes about 10% of our overall business and is growing rapidly. We expect continued double-digit growth in the automation segment for 2024, establishing a larger share of our business. However, we're focused more on process optimization than high volume sales. Regarding Cobots, we witnessed nearly 90% growth last quarter, and at our leadership meeting, the automation team expressed eagerness about our opportunities. While volumes are still modest, our solution set is gaining traction.

Thank you.

Thank you.

We have no further questions in our queue at this time. I will now turn the call back over to Mark Barbalato for closing remarks.

Thank you for joining us today and we look forward to talking to you next quarter.

This concludes today's conference call. Thank you for your participation and you may now disconnect.