Thank you for joining us for the ESAB Corporation's First Quarter 2024 Earnings Conference Call.

Thanks, operator. Welcome to ESAB's First Quarter 2024 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 in 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 continue to make excellent progress towards our long-term goal of becoming a premier industrial compounder that is less cyclical with higher margins and delivering stronger cash flow. As you're aware, we exited 2023 with good momentum and have maintained it for the start of 2024. Throughout the quarter, our teams have continued to focus on their growth and margin expansion plans using EBX, and I'm very proud of the results we have achieved, allowing us to raise our full-year adjusted EBITDA and EPS guidance. Before diving into the numbers, allow me to share a story illustrating how we're actively shaping a better world and how the passion and commitment of our team is making a profound impact within ESAB and the communities we're part of. We've always believed in training the next generation of welders. In March, ESAB, as part of our future fabricators program, participated in the agricultural mechanics competition in Houston, Texas, where over 1,500 high school students from over 250 school districts took part. Many students were fabricating solutions for their farms while others were creating equipment to benefit their communities. This program aligns perfectly with our vision statement, 'Shaping The World We Imagine.' Such events provide a fantastic opportunity to engage kids in engineering and problem-solving, fostering their creativity. ESAB donated over $500,000 worth of equipment and accessories and prizes to empower these young innovators to continue creating new solutions and becoming the next generation of leaders in our industry. In the future, I plan on sharing more stories about how ESAB is shaping the world we imagine. Moving to Slide 3, another solid quarter, another step forward in the direction of our 2028 goals. Sales of $656 million were a first-quarter record as our team delivered 200 basis points of organic sales growth. Adjusted EBITDA improved by 140 basis points to a record 18.8%. Notably, what fueled our growth was our equipment and automation product lines, and within automation, our welding cobot expanded triple digits year-over-year and high double digits sequentially. We anticipate sustained demand for our automation products for the remainder of the year. Our gas control business also grew in the period with strong demand on the industrial side as a result of secular tailwinds associated with energy transition, while our specialty and medical gas business continues to execute well. Another standout aspect of the quarter was the strength of our global footprint. Our unmatched geographic strength continues to propel our growth buoyed by sustained high demand from pivotal markets like India and the Middle East. The completion of the Sager acquisition and today's announcement of our agreement to acquire SUMIG allows us to serve our customers better and continues to extend our portfolio to higher-margin products and into less cyclical end markets. Our focus on EBX continues to uncover fresh avenues and opportunities for margin expansion. I was pleased to see the quality and the number of Kaizens rise within the business. Furthermore, to strengthen our balance sheet, we successfully executed our bond offering, positioning ESAB well to deliver as a premier industrial compounder. None of these achievements would have been possible without the focus and hard work of our global associates. So let me take a moment to thank them for their dedication and commitment to our goals. Moving to Slide 4 to discuss the progress we've made in shifting our product mix, as I mentioned in the past, in 2016, we were primarily a filler metal business. Today, we have positioned ESAB for growth in both filler metal and equipment. This slide highlights the transformation of our equipment product line and how it's continuing to improve ESAB globally. Since 2016, our share in equipment as part of ESAB's total sales has grown by 500 basis points. Now, I'm the first to acknowledge that this is a gradual journey. But we can see what is possible as we continue to move to a more favorable mix. To add, our new equipment products continue to receive accolades; most recently, our battery-powered Volt, our Rustler and Rogue equipment received the prestigious European Red Dot Award. This is on the back of accolades from popular mechanics and construction equipment top 100 new products. We continue to invest in new products and are excited about the rollout of several game-changing products this year, as well as the extension of our InduSuite offering with FlowCloud, which will continue to differentiate ESAB and add value to our value proposition to customers. Moving to Slide 5 to talk about our acquisitions. Sager extends our product line and helps us service our customers better in the less cyclical, higher-margin repair and maintenance end market. SUMIG extends our product line into the higher-growth light automation end market and improves our higher-margin equipment portfolio in the Americas. Both these acquisitions are margin accretive and were acquired at attractive multiples. These acquisitions underscore our commitment to our compounder strategy and our discipline to ensure acquisitions meet both our strategic and financial goals. As a result, this allows ESAB to create long-term value for our stakeholders. Our M&A pipeline continues to strengthen with over $7 billion in prospective targets and supports our long-term growth objectives. With a strong balance sheet and free cash flow, we're well positioned to capitalize on these opportunities to achieve our 2028 goals. Turning to Slide 6 to talk about our first-quarter financial performance. As mentioned, quarterly sales reached a first-quarter record of $656 million with adjusted EBITDA also reaching a first-quarter record of $123 million, expanding 140 basis points year-over-year to 18.8%. Our end markets continue to be resilient with strength in India and the Middle East. In addition, we continue to move ESAB into less cyclical, higher-margin end markets. Moving to Slide 7. In the Americas, organic sales grew by 300 basis points, driven by strong price performance of 500 basis points. Volumes declined, reflecting adverse weather conditions in January. FX was negative as a result of our year-over-year headwinds in South America. Our continued focus on EBX initiatives translated into an impressive 130 basis points expansion in adjusted EBITDA margins. Our new equipment products continue to generate excitement with end customers and channel partners. We are seeing strength in oil and gas, renewables, and defense. This is being offset by softness in the capital goods end markets. Product simplification initiatives are now focused on growth and we're actively increasing our exposure to less cyclical end markets. Moving to Slide 8, which highlights the performance of our EMEA and APAC region. Another fantastic performance by our team in Europe, Asia, and the Middle East, with total sales growing by 100 basis points, driven by strong volume that grew 500 basis points. The region's performance reflected great execution and strong demand in India and the Middle East markets. EBX initiatives, including net price management, contributed to a significant 140 basis points expansion in adjusted EBITDA margins. Our strategic focus, coupled with operational excellence, positions ESAB for continued growth and value creation.

Thanks, Shyam. Good morning. We had another good quarter of free cash flow. We used this to fund the Sager acquisition, and we continue to deleverage, ending the quarter with net leverage of less than 1.8x. Since we last spoke, we launched a bond offering to replace our $600 million term loan A3, which was maturing next year. We received our first credit rating of Ba1/BB+. There was very strong interest in the bond and priced at an attractive 6.25%, which was ahead of expectations. With our strong balance sheet and cash flow, we are positioned to accelerate investments to drive growth and support acquisitions. We continue to leverage EBX on AI to support delivering ever-improving cash flow and our 2028 goals. Moving to Slide #10. We are updating our 2024 guidance to reflect the strong Q1 performance and better margin outlook. Total sales growth reflects approximately $10 million from the Sager acquisition, which has been offset by a 0.5 point of FX. We continue to expect organic growth of 2.5% to 4.5% with low single-digit price and volume. EBX continues to improve our margins, and we have increased our adjusted EBITDA guidance to $500 million to $520 million, with our year-over-year incrementals now around 40%. This includes $15 million of investment we are making in our business to support our product mix improvement and the commercialization of our innovative new equipment portfolio. Our adjusted EPS guidance increased by $0.10 to $4.75 to $4.95, reflecting improved profitability and a lower expected interest expense. Our cash flow conversion remains on track at 95%. Our guidance does not include the recently signed SUMIG acquisition, which is expected to close during the second half of 2024. SUMIG had sales of around $30 million during the last 12 months and is accretive to ESAB's adjusted EBITDA percentage.

Thank you, Kevin. To summarize, we're off to a solid start to 2024. As a result, we've raised our adjusted EBITDA and EPS guidance for the year. EBX continues to raise the bar as we continue to find new opportunities to improve margins and generate strong cash flow. We've kicked off projects using AI to reduce operating expense and improve our cash flow. Our acquisition funnel is robust, and our balance sheet is strong, allowing us to execute on our strategy to become a premier industrial compounder. We are moving the ball forward on our 2028 goals of becoming a $4 billion enterprise, delivering 22% EBITDA in the process, creating significant value for all our stakeholders.

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

I'm afraid I'm going to violate the one question and one follow-up this time around if you allow it. I guess what I'd like to start with is your comments on the usage of AI. You mentioned this several times, and when I'm thinking of your business, I'm not really thinking AI, but obviously, you're doing something internally operationally. I’m curious as to what that is and what the tangible effects are going to be going forward?

Yes. Mig, always good to hear from you. So let me start by answering. Obviously, there are a few things we'd like to keep to ourselves around what we're doing with AI. But let me sort of give you a gist of how we think about that particular technology and how it helps companies like us and ESAB in particular. We see it in sort of two buckets. One is commercial growth and the second side is on the operating excellence side of our business. Something that I've talked about quite a bit, whether it be on Investor Day, whether it be in several one-on-one discussions that I've had with other investors is around the fact that we think material planning and production planning can be significantly assisted by AI to help your planning processes, and as a result, create a significant amount of cost advantage over a long period of time. So that's one that I've actually spoken about. And there are a couple of things that we can actually do as well on the commercial side that will help drive better efficiencies of our sales personnel. And those are the ones that we haven't spoken about openly, but things that we're working on.

That's interesting. Is this a set of solutions that you've developed or customized yourself? Or are you using third-party providers?

Yes. We're not developing it ourselves is the short answer. We are using providers outside and working on solutions for ESAB.

Okay. The thing that really stood out to me this quarter was your growth. I know that I've asked this question in the past relative to your peers, how you're evaluating your performance and what's driving some of this outgrowth. I believe this might be the fourth quarter in a row that you've been able to outgrow what I see from your publicly-traded peers. So I'm curious if you can talk a little bit about that and maybe differentiate between Americas and EMEA and APAC?

Yes. First of all, I'm very happy with the team's performance, both in the Americas and the rest of the world. I thought our teams took the momentum that we had in Q4, engaged hard in Q1, executed some of the things that we talk about around policy deployment. The second piece is something that we've spoken about as well, which is back in 2016, ESAB was primarily a filler metals company. We have been over these last seven years building out our equipment portfolio. Today, as we get into the marketplace, several customers who bought our filler metal and our consumables, but not our equipment. Today, that has fundamentally changed. I see a tremendous amount of excitement. In fact, two weeks ago, I was with our distributor members, and I can tell you that there's a significant amount of excitement on their side around our equipment portfolio. What we hear is that they want us to do more, make it easier to do business with ESAB, to continue to put our products on their shelf and get them to their customers. So that was an exciting reassurance for us on that particular front. So primarily #1 is the fact that we have a portfolio today that works, that our customers want and that our channel partners want. The second aspect of it has been down to execution. I'm really happy with how we've standardized our EBX process around sales planning. We had a recent review with the North American region on their sales plan and how they were looking at their customers, the aspect of how we're using our product line simplification to identify key customers, determine what the share of the wallet is and what exactly needs to be done to drive share gain has been extraordinary. We're seeing that in North America. We're seeing that in South America and Europe and the Middle East, we're a little bit ahead on that journey.

Understood. Can you comment at all on how your gas control business has performed in the quarter and what your expectations are for 2024?

Yes. We obviously love that part of the business. We believe that there is an opportunity to begin to differentiate ESAB. The big portion of that business, as you know, is exposed to great secular trends in our view, the use of industrial gas. We saw some strong demand come out of all of our regions around industrial gas. Medical and specialty gas continued to stay strong, but more reasonable off of some strong comparisons to last year. So we expect that business to continue to perform somewhere in that mid-single digits this year. Margin expansion in that business was also strong. We have a great funnel for acquisitions as well, so we continue to expect to compound on that business in 2024.

Last point. Just to clarify this, when we're looking at your performance relative to peers, gas control is something that's unique to you. It's fair to say that the variance is not just the gas control business.

No, no. We actually saw very strong performance both on the FABTECH side and the gas control side. I would fundamentally say, and I think we mentioned it briefly in our commentary, Mig, is that we saw really good growth in equipment, and we saw strong growth in automation on the FABTECH side, with filler metal kind of staying quite stable. And then on the gas control side, very similar strength on the industrial side of gas with medical gas and specialty gas remaining in that lower single-digit range. And the other thing that I'd mentioned, we talked a bit about the weather, but otherwise, I really feel good about the team's performance in the first quarter.

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

I'll start with my one question and seven follow-ups. I wanted to start with some questions on pricing. Obviously, strong pricing in America up 5% and that outside Americas was down 3%. Can you talk a little bit about the disparity in the pricing there? What's driving that, whether it's just differences in the cost base that's coming in? Just any details you can give us on the disparity in pricing amongst the regions?

Yes. Thank you for that question, Nathan. Always good to hear from you. So a couple of aspects. We've talked about three aspects around pricing, the first being around just value pricing and new products coming into the market. Secondly, we discussed our PLS-led initiative around pricing. The third one was inflation-based. For us in North America, we're seeing a bit of both PLS and inflation-based pricing. In Europe and the rest of the world, we're focused on net price. Our teams are focused on what's happening to our cost structure and what we are doing to determine a net price situation to be positive. What we loved about both of our regions is that margins expanded in both the Americas and the rest of the world as a result of that activity, showing the robustness of our process around pricing and discipline that our teams have.

Could you then comment on what we should expect from pricing for the remainder of the year, whether it should stay nicely positive in the Americas? And if you expect it to continue to be on the headline number negative for the rest of the world?

Yes, let me give that to Kevin. He can go.

Yes, Nathan. We'll continue to monitor prices and our net price deal, as Shyam mentioned. At this point, our expectation is that we'll see low single-digit price for the overall business, but we'll react to anything that happens in the market as we've shown we're able to do. Our expectation would be that there will be a stronger price in the Americas as we go through the year unless the price in the EMEA and APAC regions.

Your next question comes from the line of Tami Zakaria from JPMorgan.

I do want to say quite a good quarter with organic revenue growth, considering what some of the welding peers have reported so far. So congrats on that. So my questions are actually related to the acquisitions. The first question is, you talked about incremental TAM. Can you size the total addressable market for maintenance and repair and light automation? How these new acquisitions would position you to penetrate these end markets? And what's really the growth algo of both MRO and light automation as you think about these markets over the next few years?

Yes. Thank you, Tami. We are very pleased with the business performance and really thrilled for our teams as they continue to execute in both the Americas and the rest of the world. In terms of the acquisition, you're spot on. I think the Sager acquisition in South America gives us greater exposure to the MRO market, which we find to be very stable, less cyclical, and better margin profile. It's not that you're expanding into the space; our exposure to that space increases as a result of this. We expect the MRO space to be very stable and less cyclical through any cycle of the market. So that's the piece on Sager. On the SUMIG acquisition, you're spot on; we love the aspect that it's light automation. By light automation, we put it in the categories of cobots and standardized robotics, nothing that has large material handling as part of the solution set. And if you remember our Investor Day deck, we talked about that market equipment and automation being about $12 billion and growing to $17 billion. Our intention is that those are the segments, especially on the lighter side, where you're focused on the process solution. We think that’s a great growth market, less capital intensive. We'll have better market characteristics, and obviously, we love the margin profile of that particular side of the business. That's what SUMIG gets us: a strong presence in the Americas with some beachheads also in the U.S.

That's helpful. How can you sort of size what type of sales and EPS accretions you expect from Sager and SUMIG in Year 1? I'm trying to understand what kind of EBITDA are these two businesses making now, and what kind of accretion can we expect?

Yes. Go ahead, Kevin.

Yes. So Tami, Sager, we've built into the guidance already. It's around $10 million of revenue we're expecting for this year. SUMIG for the last 12 months generated around $30 million of revenue. Obviously, we haven't built it into the guidance because it hasn't closed yet. We expect it to close in the second half of 2024. Once it closes, we'll give some update in terms of what we build into the guidance for this year. The good news is that both of these acquisitions are both EBITDA accretive and both will be EPS accretive in their first year.

If there are no more questions, thank you for dialing in today, and we look forward to talking to you on the next quarterly call.

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