Thank you for standing by. At this time, I would like to welcome everyone to today's ESAB Corporation Third Quarter 2024 Earnings 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. I would now like to turn the call over to Mark Barbalato, Vice President of Investor Relations. Mark, please go ahead.

Thanks, operator. Welcome to ESAB's third 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 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're pleased to report another strong quarter marked by positive volume growth, record third quarter margins, and robust cash flow in a challenging market. Our differentiated geographic footprint, award-winning products, commercial excellence initiatives, and strategic acquisitions continue to drive our organic growth. Let's move to Slide 3 to discuss specific highlights for the quarter. First, I want to recognize our teams globally for their relentless commitment to our strategy and EBX. Strong demand in high-growth markets such as India, other parts of Asia, and the Middle East have helped counterbalance slower markets. Our portfolio of light and heavy industrial equipment has continued to deliver, with equipment sales increasing in the low double digits this quarter. These new products continue to gain momentum across our channels. Additionally, we're seeing steady growth in our gas control equipment business with positive volume and price. Adjusted EBITDA margins expanded 130 basis points to reach a record 19.6% for the third quarter. And year-to-date, we have generated a record $215 million in adjusted free cash flow, enabling us to execute our compounded strategy. Turning to Slide 4; I've been sharing stories that reflect the passion of our teams and the power of our enterprise to shape the world we imagine. This time, I want to share my reflections from my recent trip to visit our teams and customers in the Middle East and India. As you know, we pride ourselves as an executive team in going to Gemba. This trip was reassuring. I know I've mentioned this to you all before; I grew up in India and have been visiting the Middle East since the early 2000s. I have to reiterate, the energy is different, and on every trip, you see meaningful change in infrastructure in both these regions and you get additional insights into new projects and plans. For those of you familiar with the Emirates, you now see development beyond Abu Dhabi and Dubai. There are ambitious plans in Ras Al Khaimah. Similarly, Saudi continues its progress, creating growth for ESAB and generating significant excitement. Our largest customers in the Middle East now have a backlog of orders extending five years. And if anticipated government investments in Saudi Arabia materialize, this could further increase the backlog at our customers. We're also focused on addressing the skilled welder shortage by training the next generation of welders. We've established several training schools in the Middle East. This quarter, I'd like to highlight our team's activities in India. Clearly, it's no longer the country I grew up in; the changes are noticeable now, with every visit, you see cranes and construction in Tier 3 cities. And our team in India is doing some exceptional work. We're proud of our business there, and we are the market leaders in this dynamic, rapidly expanding geography. We've made consistent investments in expanding our R&D capabilities in Chennai, as well as adding manufacturing capacity to meet both current and future demand. On the specific project called Project Bandhan, which means bond or binding in English, our team is very proud of this initiative where we are actively training the new generation of welders on ESAB's equipment to meet the unprecedented growth we're expecting. We are training over 5,000 welders annually in India. And more importantly, we're providing the new generation of welders special training around workplace safety. At ESAB, we believe that zero incidents is possible. As we shape our future in India, our teams have volunteered over 45,000 hours to this initiative in 2024. Let me leave you with another statistic on India. We know India's infrastructure needs are significant, and the government has announced investments of around $1.7 trillion over the next seven years. I'm proud to say that ESAB is playing a crucial role in training the skilled workforce necessary to support India's growth plans. Moving to Slide 5; let's explore how we're building the capabilities to accelerate sustainable long-term growth. As I mentioned during Investor Day and earlier in my comments today, we're seeing good progress in equipment sales globally. Let me share what our teams have been working on to enable this growth. First, our commercial excellence initiative, highlighted at our Investor Day, is gaining traction. By refining our approach to better serve customers and aligning our organization around ESAB's key customer segments through our product line simplification process, we're accelerating growth while enhancing customer experiences. As a result, we are going faster in equipment. We're also amplifying our innovation pipeline supported by our EBX open innovation model, which continues to shorten the time needed to bring new products to market. Alongside these efforts, we're enhancing our presence in the channel with targeted marketing initiatives, including creating social media studios across each geographic region to showcase new products and build brand equity. These digital marketing efforts supported by content creators are already generating a significant positive impact, resulting in approximately 900 million social media impressions for ESAB. All this hard work was validated by a brand market study we did that showed ESAB's brand recognition in North America has improved by 200%. Moving to Slide 6; let's review our quarterly performance. Organic sales increased by 100 basis points, reflecting continued strength in high-growth markets. These results reflect double-digit growth in equipment sales and positive growth from our gas control business. Adjusted EBITDA expanded 130 basis points year-over-year, setting a third-quarter record of 19.6%; all this was driven by EBX initiatives across the company. Turning to Slide 7 and focusing on the performance in the Americas. Organic sales rose by 200 basis points, driven by strong pricing performance which offset softer end markets that we expect. Our equipment and workflow solutions continue to drive excitement in the channel, and the team did an excellent job using EBX sales tools and lean initiatives to deliver a 190 basis point increase in adjusted EBITDA margin, reaching a third-quarter record of 20.6%. Moving to Slide 8 to discuss the performance in EMEA and APAC regions. Our teams in Europe, Asia, and the Middle East achieved another quarter of solid performance. Volume increased by 200 basis points, with high-growth markets offsetting the volume softness in Europe as expected. Effective use of EBX, net pricing tools, and strong operational execution led to a 100 basis points margin expansion year-over-year, reaching 18.9%. On that positive note, let me hand it over to Kevin for Slide 9.

Thanks, Shyam. Good morning. During the third quarter, ESAB delivered positive organic growth, 130 basis points of year-over-year margin expansion, and robust free cash flow generation despite more challenging market conditions. More specifically, on cash flow, we generated $96 million in the quarter and had a cash conversion of greater than 120% as we continue to use EBX to drive improvements in our order-to-cash processes. We used part of this free cash flow to fund the acquisition of Linde Bangladesh, which we completed in the quarter and is integrating well into ESAB. The combination of our strong balance sheet, coupled with our consistent cash flow generation, positions ESAB well to execute on our compounder journey. Moving to Slide number 10. Given our stronger-than-expected results in the third quarter, we have raised the midpoint of our guidance across the board. Sales guidance has been raised 0.5 points at the midpoint to 0% to 1%, benefiting from the performance of our high-growth markets and continued share gains in equipment. Adjusted EBITDA has been increased by $5 million at the midpoint to $500 million to $515 million as we use our business system EBX to drive further improvements in our business. Below the line, interest expense guidance has been narrowed to $68 million to $70 million while tax guidance remains unchanged at 23% to 24%. Adjusted EPS increased at the midpoint and is now $4.80 to $4.95, benefiting from our stronger performance. We are pleased with our team's execution so far this year and we expect to finish 2024 with positive momentum. On that note, let me hand back to Shyam on Slide 11 to wrap up.

Thank you, Kevin. Before I close, something I've not mentioned yet. In September, ESAB celebrated its 120th year in business. ESAB started in Sweden with the invention of a coated electrode by Oscar Kjellberg. Since then, ESAB has been a leading global innovator in fabrication technology. Our associates and customers joined us to celebrate our 120th anniversary. We received great feedback on the improvements we've made since 2016 and suggestions on what we could do better. It is also clear that there was great excitement about our future and in particular, our latest products and workflow solutions. As we look back on our 120-year history with pride, we understand we need to change and adapt to win the future. To summarize the quarter, our strategy continues to drive robust performance. We delivered another strong quarter with positive organic growth, record third quarter margins, and solid free cash flow generation. Our EBX approach continues to permeate the business. The innovation engine continues to deliver. And this quarter, we are bringing our manufacturing leaders together to share best practices and raise the bar on our standards of performance. Our balance sheet is at its strongest point. Our active acquisition pipeline is full and positions us well to pursue strategic assets that enhance growth and margin expansion. We are on track to achieve our 2028 goals, $4 billion in sales, 22% plus in EBITDA margins, and free cash flow that exceeds net income. Remember, we're just getting started. Thank you all for joining us this morning. With that, operator, let's open the line for questions.

It looks like our first question comes from the line of Mig Dobre with Baird.

I guess where I'd like to start, your comment on equipment sales being up double digits. I thought that was quite interesting relative to the more subdued end market or macro backdrop, if you would. So I'm sort of curious here, can you give us some sense for which geography you're seeing this growth in equipment? I don't know if it's broad-based or if it's just one or two select geographies? And then secondarily, is this just a function of pure new product rollouts? Is there like a channel stocking dynamic here that we need to be aware of? Yes, let's start there, if we can.

Yes. Mig, always good to hear from you. So a couple of things. First, I do believe there's a couple of things in play here for ESAB. The first one is the commercial excellence initiative that we embarked on which really drove training, selection, changes in our incentive plans, and training of our salesforce to sell what was a different portfolio for ESAB. The second piece and something that we've talked about is that today, ESAB plays with a full portfolio, both in consumables and in equipment. And don't forget, we also have our gas equipment business that performed well in the quarter. Our sales teams are out there selling a very good portfolio that competes extraordinarily well with our peer group in the marketplace. The third piece which I think you sort of highlighted, we're making great progress in North America. There's tremendous interest. We always knew that the North American market for us was going to be something that we would work on and slowly begin to make a turn. We are seeing significant interest there. However, in markets where we had positions of strength in the past like Europe, South America, and India, our equipment business is actually doing very well, and U.S. customers in those markets continue to shift to our brand. That's what's driving our equipment sales. And to your question if we're seeing some regular movements in the channel that's causing some stocking? The short answer is no. What we are seeing is good progress against our execution plans and our growth bridges.

That's great. Then I guess my follow-up question on Europe. It sounds like things have gotten tougher there. The auto sector, obviously, is going through some tougher times. I'm curious how your business, if you can kind of separate out in Europe specifically, how your business is performing there? And as you think about 2025 and I'm not looking for you to provide guidance but just some context here. Is there an argument to be made that eventually Europe starts to see a bit of a bottom forming and that becomes a little more accretive rather than detracting to growth?

Yes. I think for us, just so that we calibrate ourselves, we saw Europe perform similar to how it performed in Q2. So we didn't see necessarily a pronounced dip or change in how our European market performed. But that being said, I would also state that our teams are doing a phenomenal job in Europe gaining share. I pursued our product line simplification activity with 80/20 and where we're focused on related to growth. If you remember, I had mentioned to some of you that as we looked at our product line simplification, our view was to take that initiative with an inclination towards growth. That's really what our teams have been executing in Europe and doing extraordinarily well. So our view of Europe as we finish out the year is that it stays at similar levels. It is subdued. The question you asked me regarding end markets, you're right. We see yellow goods. We see automotive down a bit. But we generally are finding opportunities to grow share, to penetrate in terms of share of wallet. Our intention on that front is to continue to play that. We're not seeing a worsening market in Europe.

And our next question comes from the line of Nathan Jones with Stifel.

This is Adam Farley on for Nathan. Maybe we can start with pricing. Could you talk about the differences in pricing and input costs regionally? And is the price-cost still favorable in EMEA and APAC, despite the pricing compression?

Yes. I think let me start that question off, and I'll hand it to Kevin to give you a little bit more color. One of the things that we've often talked about with all of you is our pricing discipline and the process that we've instilled within our businesses. It's great to see that really show itself in how we performed in the third quarter. We've talked about value pricing, shifting the mix of our business to higher quality, higher calorie content product lines. Then the third piece is inflation-based pricing where, whether we see prices going down or up, we're very quickly going out to market with that aspect. So to answer your question on net price, we are positive in net price, both in the Americas and in Europe. Kevin can give you some color by region as to how we're thinking about pricing.

As Shyam mentioned, we're expecting flat organic growth in the fourth quarter, both in the Americas, EMEA, and APAC. In the Americas, the expectation is we'll have positive price and flat to negative volume, whereas in EMEA and APAC, we're expecting positive volume and negative price. We're very pleased with the performance of our teams. We've put a lot of effort and work into managing net price, and in both segments, our expectation is that we will be margin positive.

Okay, that's really helpful. And then just kind of shifting gears here. South Asia, India, Bangladesh, obviously, are very key growth markets for ESAB. Are there any key product or channel gaps that the company still needs to address in the region?

Well, I think there's a few things that we often talk about in those markets. I think our view is how do you create better brand equity, how do you create better demand, and how do you create a workforce that's very comfortable with your brand and trained on your brand. Our focus is in those geographies is establishing schools, training centers, creating content that make people familiar with our products much easier, and access to our products is getting easier through e-commerce. With the acquisition we did in Bangladesh, we're basically four to five times the size of our closest competitors and we've got a ground game with the sales team that's also multiple times bigger than our closest competitor. We are not resting on our laurels in those geographies where we have a lead; we are continuing to change the game using new tools that we're bringing to market and trying to expand our user base.

Our next question comes from the line of Tami Zakaria with JPMorgan.

Really nice quarter. Two questions. The first one is actually about EMEA, APAC; I thought that segment's performance was very good and interesting because your volume grew on top of a really strong number last year. And volume has been actually quite strong for some time for that region. Again, a very not-so-great macro backdrop. So I'm trying to understand, are you gaining share in that market or do you have a different type of end market exposure that's driving this volume growth? Anything you can share about what you're seeing in that end market and how you're sustaining positive volume growth for some time now?

Yes. Tami, thanks for the question. A couple of things that I want to start with. First is our teams. One of the things we've always spoken about is that we've got local teams with local leaders that understand their markets, that understand the distribution channel, and understand our products well. In the geographies where we've had legacy strength, you can see us outperform. As for our product line, we've developed over the last eight years. The second piece around that is the Middle East and India. We have worked extraordinarily hard over the last eight years to establish our leadership position and create separation between us and what's available in that particular market. Using our growth bridges, using our digital toolkits that we've brought to market along with our product continue to allow us to separate ourselves and make it easier to do business with. The short answer is all of these aspects are what's allowing ESAB to begin to separate itself in these geographies. I think the numbers would indeed state that we are gaining share, particularly because we focused on these markets and invested in them over the last eight years. Our margin expansion journey comes not just from typical cost management but also reinvestment in our business to create opportunities for future growth.

Got it, that's very helpful. So your investments in India and the Middle East seem definitely paying off along with the other stuff. Okay, great. And then my next question is going back to that equipment growth, I think you said low double-digit growth in the quarter. Can you sort of remind us of what your equipment share is in North America versus consumables share in this region? And do you see a path to bridging that gap? I'm assuming consumables share is higher. So do you see a path to bridging that gap between the two over time?

Yes. Let me answer that question. I think specifically, you were sort of talking about North America with that question, but let me sort of answer that question a little broadly. Broadly speaking, you're spot on. We are seeing our equipment portfolio perform extraordinarily well in markets where we've always had a brand presence in equipment. So in Europe, in South America, in India, and the Middle East, we're seeing our equipment begin to gain traction. As a result, we're seeing sales and equipment grow faster than our sales in consumables. That's really reassuring for a couple of reasons: one, because of the product line we've developed; two, because our sales teams are capable of selling it. The second aspect of that specifically for North America is that our customers there are shifting to our brand. Our position in North America in terms of equipment was low. We've not given out the exact numbers of our share in filler metal or in equipment; however, we are comfortable that our brand recognition has grown 200% in North America. We plan to work in the North American market by selling value, and our intention is to build best-in-class products with a great brand that we're establishing there. We'll be playing this game for the long term. So I'm very comfortable with the progress that we're seeing globally. We are seeing green spots also in North America. Over the next couple of years, we should see that grow and us gain share.

Our next question comes from the line of David Raso with Evercore.

I don't mean to take you through too many numbers here, but just a couple of quick ones. I believe you said flat organic for the fourth quarter. That would imply the full year is closer to the high end of the range. Is that fair to say, am I doing my math right? The midpoints now like 50 bps for organic but it sounds like if you think you can do organic in the fourth quarter, we're closer to 1% for the full year. Can you just confirm that math?

The math would take you there round about 50, probably at the midpoint of the guidance if you use the midpoint of the range of what's given, David.

Okay. My math would imply that the fourth quarter might be down 100 to 200 basis points to get you to only 50 bps. So we can discuss that offline if need be. But when it comes to the American volumes, the Americas, I think you said flat for the fourth quarter. Did I hear that correctly on volumes from you?

No. Yes, we say flat to negative on volumes for the fourth quarter.

No, he's talking specifically about the Americas. I think you mentioned that price would be positive...

Sorry, in the Americas, price would be positive, and we'd expect slightly negative volumes.

And it was the reverse for the rest of the world.

Correct. I got that. The spirit of the question is just making sure when I look at the consensus for next year on the top line, over 4%, the carryover in acquisitions from Sager and Linde, Bangladesh is probably 40 bps or 50 bps. The SUMIG acquisition, I assume that's still expected to close. Any help on the revenue there for helping for total sales for next year, assuming it closes...

Yes. So we've given out, David, on the last call, we expect something to have around about $30 million of revenue for the full year. We're still working through the process, and we still expect the SUMIG acquisition to close in the fourth quarter.

Okay. That's helpful. That adds about 100 basis points. Essentially, organic guidance is around 2.5 and above. The volumes in EMEA are clearly contributing positively to that trend, especially since Europe isn't deteriorating. Regarding the Americas volumes, I'm interested in the negative volumes. Could you explain what’s happening there? Is there a focus on pricing, which was impressive even in the fourth quarter, although there might have been some negative volume? Could you elaborate on which parts of the channel, light and heavy, are seeing negative volume? It seems that you don’t perceive the situation in the Americas as worsening from a macro perspective, but please correct me if I’m misunderstanding. I just want to ensure I grasp the forecast for '25, especially concerning Americas volumes.

Yes. I think in the quarter the best way to put it, the third quarter had a few weather-related items in there. The channel was a bit slower on its uptake; the DIY, the do-it-yourself channel was a bit slow in the quarter. But then we also had opportunities for growth and margin expansion but also to pull through some other product lines that we had brought to the market. So the short answer is the broad spectrum shows that North America is a bit sluggish but nothing getting worse. The growth bridges that I've worked with the team clearly show our plans and customers that we can go after in terms of share of wallet and activities that we can put together as a team. We feel confident about our execution against those plans regardless of what the market does. Our share position in equipment in North America is small enough where small increments in shifts are beneficial to ESAB and we're seeing progress on that particular front. We had not spoken about this enough; our gas control business is also doing well in the North American market, and all of that is benefiting us.

That's why I wanted to focus a little bit on gas control. For next year, is there any indication, even if we think welding equipment as an industry sluggish next year, maybe you can take a little share within it. Is gas control in a situation where, just obviously, you're gaining some momentum as the industry leader. Is that a business you would feel a lot of the things that we're talking about; obviously, you usually are confident on your margins. Gas control growth in '25, is that something you put pretty high on the comfort list of what we can expect?

We're expecting that business to grow in the mid-single digits over time. Next year, we anticipate it will be on the higher end of low single digits for the gas control segment. This sector has a premier industrial margin profile, and any growth we see will contribute to a higher caloric mix for ESAB. Additionally, it allows us to broaden our acquisition pipeline, which is the strongest it has ever been. We aim to pursue a few inorganic deals to bolster our position.

And our next question comes from the line of Chris Dankert with Loop Capital.

I guess, first off, just a point of clarification maybe. Great to hear about the double-digit growth in equipment. But looking at the 10-Q, equipment was up closer to 5%. Is the difference there just how Russian sales are disaggregated or maybe if you could just clarify on that point?

Yes, the numbers that would include some element of the total business. So it's on a GAAP basis, so that would have a little bit of impact. Also, when we're talking about equipment, we also would have some automation going through that mix number within the 10-Q that when we're just talking about the heavy industrial and light industrial equipment, are not included in the automation component.

Got it. That's really helpful. And I guess kind of a nice segue. Just when we're thinking about automation sales in the quarter, you gave us the CAGR, but any comment on automation sales growth specifically? And is that still around 10% of overall equipment sales or you kind of lump it all together?

Yes, that's right. It is about 10% of our sales today.

In terms of the automation business, on the cobot side, we're continuing to see good trajectory, Chris. So that was up nicely within the quarter. Obviously, the area that's a little bit slower is the work that we do with integrators, which has been a bit slower in the quarter.

On the order side and the backlog side of automation, the funnel looks really good. We're expecting that market to continue to grow. One of the other things I'd tell you, Chris, we've received several inbounds from integrators to partner with ESAB now that they've seen our workflow solution and what we've created, which is a pleasant surprise. We're comfortable partnering with integrators and not doing end-arounds, which has helped us position ourselves to access integrators. Good momentum exists as we go into the fourth quarter and 2025 on the operational excellence side of automation for us.

Our next question comes from Bryan Blair with Oppenheimer.

I was hoping you could offer a little more color on early-stage integration with Linde Bangladesh, where your team is really focused in the early going, if you've seen any surprises? And then in terms of M&A, you just mentioned that the funnel has never been better. Are near-term prospects weighted to gas control, consistent with the medium and long-term planning of your team, or should we think about funnel composition differently over the coming quarters?

Yes. To answer the question on Bangladesh, I was actually with the team and spoke to them more recently. The team is excited to be part of ESAB. One of the things we talked about is that having a focus on a business helps. I had a chance to review some of the growth bridges with our team, and they look extraordinarily strong. The opportunities for Linde Bangladesh extend beyond just the country, as it also serves the subcontinent and Southeast Asia. We're very excited; it was primarily a consumables business, and we now get to introduce equipment into the market. All in all, we're confident in how we're positioning ESAB in that subcontinent. Your question on acquisitions, we have a funnel pulled on both the FABTECH and gas control sides. It's tough to predict which one comes first. However, several prospects could come our way in the early part of 2025. We plan to extend both. If you remember from Investor Day, we had about $300 million of acquisitions planned for our FABTECH business and about $400 million for gas control. We've made strong progress on FABTECH; we could be finished with that side earlier while the gas control may take us until 2027. We feel good about the pipeline, the cultivation that our team is doing on the acquisition front, and the quality of businesses we’re considering on both sides.

Understood, very helpful color. And your team's multiyear focus on refreshing your equipment portfolio, particularly in North America, is obviously bearing fruit at this point. I guess, two-part question. One, I believe you're fully through the late industrial refresh. Is that the case? And then second, in terms of heavy industrial applications, where do you stand now? What's the timeline to complete the full...

Yes, I want to clarify that while the major refresh is complete, we are committed to continuously innovating our product line by introducing changes, better models, and improvements to existing products in the market. We have a few products we aim to finalize, including our engine-driven welder and additional offerings on the robotics side with Warrior Edge. We plan to roll out more product lines in 2025, likely during the first and second quarters, possibly extending into the third quarter. Additionally, we are exploring the creation of more battery-driven products to expand our successful Renegade VOLT range.

If I could just highlight one last thing. We talked very little about our gas control business; however, the innovation piece and the performance of our specialty and medical businesses on that side has done really well. We've discussed positive price and volume on that side. We're really pleased with how gas control is performing and the momentum it's taking into the fourth quarter and our expectations for 2025.

And that does conclude the question-and-answer session. So I will now hand it back over to Mark Barbalato for closing comments. Mark?

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

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect. Have a great day, everyone.