Good morning, and welcome to the ESAB First Quarter 2023 Earnings Conference. All line have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Mark Barbalato, Vice President of Investor Relations at ESAB. You may begin your conference.

Thanks, operator. Welcome to ESAB's first 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. Thank you all for joining us today. The ESAB team has been busy. More importantly, we have been impactful and have made meaningful progress towards accomplishing our strategic goals. I'm very proud of our team's effort and focus. Our EBX business system continues to drive innovation, margin expansion and higher cash flow. I've actually been out visiting several of our sites and recently had a chance to visit Gothenburg, Sweden and Chennai, India to meet with our engineering teams. I was delighted to see our truly global innovation process at work and the new products we expect to launch in the coming quarters. In Q1, we published our first sustainability report where we highlighted our activities and governance practices. I am pleased with our design efforts to make our products more sustainable and with continued positive community involvement of our associates globally. I'm looking forward to sharing more about our ESG initiatives during our Investor Day. Moving to Slide 3 to talk specifically about the first quarter. We had another quarter of strong performance that exceeded expectations. Organic sales in the first quarter rose 7%, driven by robust demand in our APAC, Middle East and Europe regions and solid performance from the Americas. Adjusted EBITDA was up 12% and margins expanded 80 basis points to 17.4% as our EBX initiatives push margins up and improved working capital. We are pleased with the performance of our new acquisitions. The teams continued to make great strides in integrating and finding synergies for growth and margin expansion. In a few weeks, I'll visit our newest acquisitions, Therapy and Swift-Cut for their 100-day EBX review. At this meeting, we do a deep dive into the business to review progress on synergies and resolve any roadblocks. We're off to…

Thanks, Shyam. Good morning. We had a strong start to the year, a record Q1 free cash flow for ESAB as we continue to use EBX to improve our performance. Our strong free cash flow allowed us to further reduce our net leverage, as well as fund the Therapy acquisition that closed in the first quarter. ESAB continues to work with AI partners to identify opportunities for working capital improvement. We have projects lined up that give us confidence in delivering our 2023 guidance, a long-term goal of greater than 100% cash conversion. Turning to Slide 11. As Shyam mentioned earlier, we are raising our full year 2023 guidance. Total sales growth has increased 2 points now guided to between 4% to 6%. We have raised our organic growth guidance 0.5 point to 3.5% on to 5.5% based on our strong first quarter performance. Our end markets continue to be resilient and volume and price assumptions for the rest of the year remain unchanged at low single-digit volume, with the rest coming from price. FX has improved 1.5 points on a weaker U.S. dollar. We expect a low single-digit FX headwind in the second quarter and for it to turn to tailwinds in the second half of the year. Adjusted EBITDA guidance increased by $10 million, half coming from improved organic growth in the first quarter and the other half from improved FX throughout the year. Interest guidance has been increased $3 million to $73 million to $75 million as we now expect the Fed to increase the cash freed up a further 25 bps to around 5.25% by the end of the second quarter. Tax rate guidance remains unchanged and adjusted EPS guidance has been raised by $0.05. Finally, our cash flow conversion guidance remains on track at greater than 90%. As in prior quarters, we have included a more detailed guidance slide in the appendix. Before I hand back to Shyam, I'm pleased to let you know that our 2023 Investor Day has been confirmed for October the 4th at the New York Stock Exchange. We will provide more details on this closer to the time. With that, let me hand back to Shyam on Slide 12 to wrap up.

Thank you, Kevin. In summary, we're making great strides towards our long-term goals. We have positive momentum in the business with more opportunities to accelerate our journey. Our bolt-on acquisition funnel is healthy, and we're pleased with the performance of our three recent acquisitions. Our teams are focused on profitable growth and taking EBX based lean activities up a notch. As a result, ESAB is well positioned to deliver another strong year of growth, margin expansion and cash flow. We have raised our guidance for the year and are laser-focused on delivering for our shareholders. 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 JPMorgan. Your line is open.

Hi, good morning. Thanks so much for taking my questions. So my first question is on the Americas volume. It seems like it was down about 3% [ph] in the quarter. Is it because of the product line simplification you're doing in the region? Or was there any end market weakness there? Any color on why the volume was down?

Yes. Good morning, Tami. Thank you for that question. So a couple of things. One, we've always talked about reshaping our enterprise, driving our business into a less cyclical higher-margin portfolio. And I think we're making great progress on that front across the globe and specifically in our Americas region. And you're absolutely spot on that product simplification has accelerated. We continue to focus on product lines that we believe have longer secular tailwind and we're driving that through. In terms of end markets, we continue to see great strength, especially in our Ag segment, Renewable Energy, along with Automotive where we see the retail segments being slightly down. So we believe that our North America business is performing as expected. We expect to continue to see margins improve as we go into the year and into next year. So nothing really to talk about in terms of specific actions, except for what I mentioned, which was the product line simplification piece.

Got it. Any thoughts on when product line simplification would be largely done and when the headwind would largely abate?

Yes. We expect to go through most of this year with that particular exercise. And so I'll probably share more as we get into the next quarter, Tami. But we think that we're in the middle innings on that particular initiative and expect to be on the late innings into 2024.

And your next question comes from the line of Nathan Jones from Stifel. Your line is open.

Good morning, everyone. I'm going to follow up on the PLS in Americas volume. There was a pretty wide disparity between ESAB's Americas volume and one of your main competitors volume. I'm sure it is. So I'm hoping you could give us a little more color on the quantifiable impact of PLS, whether or not you think there's any market share losses there? I know obviously, PLS is going to be some deliberate market share losses. Just hoping you can give us some more color around the disparity of that versus your competitor? And what the actual impact of PLS is here?

Yes. Thanks for that question, Nathan. So the view that we have on that particular front is, we do a deep dive across all of our product lines. We look at how we're shaped with particular end segments, particular product lines. And what I can tell you is that when we looked at the data, our performance on the product lines that we want to grow on the customers we want to grow with was actually very comparable and strong along with anybody that's sort of presented out there. So that's phase number one. The second piece that we've always talked about is how we are approached towards capital goods in this particle case automation, where we're really focused on process-driven value-add. And what you will find, in fact, even in the presentation that I made today around cobots, our focus is around work flow [ph] solution and process solutions, which is better margins and lesser cyclical businesses over the long term. So in the short term, there may be some noise. But over the long term, we believe we're setting ESAB up for steady growth, higher margin profile and less cyclicality. And in addition to that, I think it's important to state, as we go through this product line simplification, what you're seeing is margins and EPS dollars continue to improve in the region. And that's really where our focus is based. We think we're clearly on our way to creating an incredibly strong enterprise in the fab tech space. And as I mentioned to Tami, we're in our middle innings on that particular front. But if you look at the comparatives, Nathan, especially all the things that we're focused on, our numbers, we're very pleasing to say the least.

Yes, that's important because PLS obviously creates some nose as it's going along. Maybe just on price cost, are your prices where they need to be in order to cover inflation. Do you need to go back after the market with any further price increases or just where you think you're positioned on that?

Yes. And so Nathan, we've talked about this a couple of times, that we have three processes around price. The first obviously being inflation-related price. And we've seen some commodities, whether it be nickel or copper sort of move and we've immediately reacted to those and gone out for pricing. And then the second and third piece is where I think there's continued opportunity for ESAB. The second one being value-based pricing, and the third associated with our product line simplification activity. So I think that this continued activity at ESAB, one on the inflation side that we've gone out with a couple of price increases. But on the second piece, we continue to sort of evaluate our portfolio as we introduce new products, bringing it at the right value proposition and then obviously PLS driving some additional price. But that being said, we've also seen some volume growth within our business, especially in the areas that we're focused on. So really pleased with how both of those are playing out as we started the year.

[Operator Instructions] Your next question comes from the line of Mig Dobre from Baird. Your line is open.

Yes, thank you. Good morning. Going back to the ESAB cobot, maybe can you talk a little bit more about this in terms of how you're selling this the solution, what is proprietary that you're kind of adding versus what you're sourcing from third parties? And as it pertains to the volume discussion in the Americas, I guess I'm curious if maybe some of the variance between you and your competitor has to do with the various exposures that you might have in automation versus what they're doing. So maybe we can start with that.

Yes. Thanks for that, Mig, and always good to hear from you. So a couple of things. I think we've had a couple of questions on the Americas. I think it's also important to state that our EMEA and APAC business really had a phenomenal quarter. And we've always talked about our global enterprise and the value our franchise brings to the table. And so it's important to also state that what you can see is what is possible with our franchise when it gets focused and what we can drive across the enterprise. Specifically to your question around cobots, we do have some proprietary stuff. We do have some disclosures that are waiting, so I can't share a lot of it. But I think the bottom line, other three things that I spoke to you about, where we've differentiated ourselves from some of the stuff that's out there, I'm happy to share some of that with all of you at Investor Day or if some of you want to visit one of our office, please happy to sort of showcase that particular technology. What we're seeing essentially is the ease of use being the primary reason, along with our digital package that comes with our cobot as being extraordinarily valuable to our customers. I'll give you an example. We've been doing a couple of advertisements on social media. We've had a couple of influencers talk about it, and we had a customer call as more recently where they were actually having some significant past dues on a requirement to a large [ph] retailer . They called us, they asked us to send us a sample, we send the sample out to them. That afternoon, a team member of ours went out along with one other technician. By the afternoon…

Understood. Maybe my follow-up is on Slide number 4, talking about your shifting the mix over time towards equipment. So as we're looking at this 2026, 2027 goal, I'm curious as to how you get there? Is it a function of, again, capitalizing on automation, the way you sort of described here? Or is it really primarily introducing new product and trying to take share on the equipment side? And then also, as you think about the margin goal that you have outlined, how much of that 20-plus percent EBITDA margin target is really driven by this mix shift towards equipment? Maybe you can comment on that as well. Thank you.

Yes. So Chris, one of the things that we've mentioned several times with this particular community has been is that we have great confidence regardless of where our top line heads up, whether on the top end of the range or the bottom of the range that we are confident that we have the tools necessary to get at and north of 20% as an enterprise. So there's a tremendous amount of confidence and that comes our activity associated with price, our activities associated with EPX, where we're taking cost out, rooftop productions, along with a significant amount of work that we're doing on OpEx transformation and focusing our sales team. So there's a significant amount of confidence that regardless of what we do on the top line, this team has line of sight to get us north of 20%. What we're talking about here are things that accelerate that journey and help us get beyond that particular percentage. And so on the mix, you're spot on, there is a couple of things that we've done. We have a full line-up of light industrial equipment with the Renegade VOLT launching this year, a lot of excitement and a lot of pre-work being done by the teams in Q1 to drive the activity on that particular front. Later this year, we'll be launching the Warrior Edge. And I think I mentioned this to you in the past, and I'll give you another example. More recently, that given you a Middle East example where we sort of changed out a competitor on the shop floor with a significant amount of Warrior Edge along with our industry technology. Similarly, recently in Europe for a very large customer that does Wind, we actually had them come in, look at our Warrior Edge combination with our ICE, which is the integrated coal electrode technology that we talked about. We've re-upped the game in terms of ease of use and what we control along with some AI within that particular activity that allows the customer to do things that they have never been able to do before. And so we're seeing a significant amount of pull-through of these sub equipment like we've never seen before and a lot of excitement out there about finally our equipment line driving the kind of excitement and the entitlement that ESAB deserves globally. And so it's early stages, but clearly, a lot of excitement. We've done a lot of work filling out our equipment portfolio. So it's a combination, equipment sales, automation and don't forget gas equipment that we've been building upon. And so those targets are set up on those three platforms. And we're confident all three of them drive margins to a better spot. But I don't want you to look at just those three things is what drives the margin for us 20 [ph] We've got plenty in the kit to kind of get there on our own.

Your next question comes from the line of Chris Dankert from Loop Capital. Your line is open.

Hey, morning. Thanks for taking the question, here. I guess you cited some strength in APAC in the Middle East. Maybe could we dig in just a little bit and if you could just give us some update on the dynamics between China, India, Europe here, any detail you can provide?

Yes. I spoke about this briefly. Obviously, we don't share specific details by the region. But what I can tell you is that the APAC region in its entirety did extraordinarily well with India being the clear outlier. And a lot of us have read in the press around what's happening in India. There's a lot of manufacturing moving in. There's clearly government investment happening. And so it's things that we often talk about, right, the investment around infrastructure, the investment into agriculture, the investment into oil and gas, refining capability, renewable energy are all doing extraordinarily well in India. Then you look at China, it's coming out of the COVID piece. We've seen the government invest in infrastructure, invest in renewable energy, along with sort of what I call LNG storage tanks that's got driving our business forward. And then all of that actually, as you can imagine, creates a tailwind for Southeast Asia and Australia. And so as a whole, that region actually seeing some significant amount of tailwind that I think is a bit isolated from anything else that you see globally. The Middle East, in my opinion, it's never seen this kind of sustained energy. You're seeing investments in infrastructure. You're obviously seeing the oil and gas steady investment come in. LNG being a big piece within that particular front. And so there's a fundamental shift, at least in the time that I've interacted with that region, but we're seeing a sustained amount of investment, a sustained amount of activity both from an infrastructure economic diversification perspective. And ESAB, as you know, in this particular locations are phenomenally well placed. And I think I've mentioned this to you before, we're for emphasize of anybody in India. We have a great ground game, both in the Southeast Asia region, Australia region and in India. And in the Middle East, our team, again, continues to perform extraordinarily well, find new ways of growing the business. Some of the examples that I talked to you about on automation, driving some of our equipment sales and digital sales, they've actually been the leader. And it's interesting to see that region adapt quicker than some of the other regions. Now the good part about that adaptation has been the fact that most of the customers are either European and U.S. based. So the stories are filtering back. This is obviously a cycle of sales that we've got to go through. So I'm not sitting here saying that we've sort of climbed the hill yet, but we're making significant progress and are excited about our journey as we transform and reshape ESAB.

That's really great color. Thank you. Thank you for that. And then on the Slide 4, I mean, we talked about it a little bit here, but the equipment you put up some targets in terms of kind of where we want to go from '22 to 2026 and beyond here. Can you just remind us what's automation as a percent of sales today and kind of what's contemplated in that more kind of 5-year outlook? And as we look at the outlook, is it a combination of organic and M&A. Can you just maybe break down how we should think about automation growth kind of from days into – to 5 years from now?

Yes. Well, we've set out a few targets out there. I wouldn't give out a specific number, but it's probably reasonable to assume that about 10% of our business today is in the automation space. And we expect – now remember, on that particular space, our focus now is getting more refined and more laser around just working on process automation, using integrators, using partners to drive our business forward, creating a less cyclical, higher margin profile. But also being reliable partners for our customers out there. And so the view that we have in this particular space, it's a high quality portion of our business, where margins will be accretive. And we feel that, that is the right way to focus on it. And yes, the short answer to you is that, yes, it does have a growth number for automation that's significant. We'll look at sort of sharing a little bit more on that during our Investor Day. But you're spot on that, yes, it does have growth within it. Now does it have M&A in it? The short answer is no. But we do see ourselves continue to build out any gaps that we may have to M&A, but nothing that's imminent or in the numbers today.

[Operator Instructions] And we have a follow-up question from the line of Chris Dankert from Loop Capital. Your line is open.

Hey, sorry, just one little housekeeping item. Just curious, has there been any update on the disposal of the Russia business, anything to write home about there?

No, nothing more to add on that particular front than what we've spoken of. So nothing more to update n that front.

Fair enough. Thanks so much, guys.

And there are no further questions at this time. Mr. Mark Barbalato, I turn the call back over to you for some final closing remarks.

Thank you for joining us today, and we look forward to speaking to you on our next call.

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