Good morning and welcome to the ESAB Second Quarter 2023 Earnings Release and 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. [Operator Instructions] Thank you. Mark Barbalato, Vice President of Investor Relations, you may begin your conference.

Thanks, operator. Welcome to ESAB's Second 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 today. I'm very proud of the ESAB team. Our first half results are a testament of our team's focus on executing our strategic vision. These efforts have yielded expected results and strengthened our conviction in our strategy. We're creating a narrowly diversified premier industrial that is less cyclical, focused on growth, expanding margins and delivering impressive cash flow. One of the key drivers of our success has been harnessing the transformative power of EBX which has propelled ESAB to new heights of efficiency and effectiveness. Our commitment to streamlining our product line has not only fueled growth, but also boosted profitability. In addition, our Kaizen activities at manufacturing sites continue to improve our productivity and create opportunities to consolidate our footprint. But that's not all, we are making significant progress on our ESG journey. Workplace safety is a top priority and our team's efforts have yielded excellent results. We are equally dedicated to making a positive impact in our communities. Lastly, we've entered into partnerships to accelerate our commitment to green energy and the possibilities ahead are truly exciting. Moving to slide three to talk about the second quarter in particular. ESAB achieved record sales and margins, reflecting the dedication and hard work of our global teams. Total sales grew 8% and organic sales in the second quarter rose an impressive 600 basis points driven by robust demand and solid execution by both regions. I was happy to see our automation business grow above 20%, an indication of our innovative solutions. Adjusted EBITDA margins expanded 200 basis points to 18.6%. Our EBX initiatives have improved our operational efficiency and cash flow generation. As a result of our positive momentum and strong performance, we are raising our full…

Thanks, Shyam. We delivered another strong quarter of free cash flow, which was up 61% versus 2022 and allowed us to pay down debt and further reduce our net leverage 2.4 turns. Excluding recent acquisitions, which were funded with our free cash flow, our leverage is closer to three times. We are continuing to leverage our EBX business system and work with AI partners to identify opportunities for working capital improvement. This work is delivering strong results with our working capital turns improving by 0.3 turns. In the third quarter, we also increased our dividend payment by 20% to $0.06. You can expect us to continue to increase this in future years. We are on track to drive even higher cash flow in the second half of this year. Turning to slide 12. As Shyam mentioned earlier, with a strong first half and increased confidence in our second half performance, we have significantly raised our full year 2023 guidance. Our business continues to benefit from resilient end markets and improved FX outlook and recent acquisitions performing ahead of plan. As a result, we are increasing our full year sales guidance to $2.56 billion to $2.61 billion for a total growth of 6% to 7.5% and organic growth of 4% to 5.5%. Our guidance for the remainder of the year continues to assume low single-digit volume and price growth and FX, turning to a tailwind. Adjusted EBITDA guidance increased to $450 million to $465 million, which includes $5 million from improved FX and continued progress on margins from further manufacturing consolidation, product line simplification initiatives and automation in our factories and back office. We are continuing to invest in our business on our second half guidance assumes $4 million of added investment on initiatives to fuel long-term growth, $2 million of this deferred from the second quarter. Interest expense guidance has been increased to $74 million to $76 million, which accounts for one additional fed rate hike. Tax rate guidance is unchanged and adjusted EPS guidance has been raised by $0.25. Our cash flow conversion remains on track. I'm pleased to let you know that we are scheduling our Investor Day for the 5th of December in New York City and will be issuing details shortly. We have had a strong first half and expect to continue our momentum into the second half of this year. With that, let me hand back to Shyam on slide 13 to wrap up.

Thank you, Kevin. In summary, we're focused on driving our strategy forward. Product line simplification is taking root, delivering both growth and margin expansion. Our acquisitions are performing above expectations and we're seeing great progress on our automation strategy. We continue to drive EBX within our enterprise and I'm pleased with our team's energy and commitment towards continuous improvement. As a result of our first half performance and confidence in our team's ability to execute, we have significantly raised our full year guidance. We're on track to deliver another year of significant progress towards our strategic goals. As a team, we're focused on creating significant value for our associates and 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. Thank you so much for taking my questions. So my first question is just to clarify, you expect both price and volume to be up low single-digit in the back half. So both pricing and volume up?

Hi. Good morning, Tami. Yes, that's accurate. Obviously, we've had a strong first half. We started off the third quarter well as well. And so our current estimates are that the second half of the year will have low single-digit price and volume.

Does that mean pricing will be positive in both markets, because I saw, I think, EMEA and APAC pricing was flat in the second quarter? So do you expect that to reaccelerate in the back half?

No, I think -- I think the view is that we see pricing in the rest of the world to kind of stay where it's at and then the North America pricing to start to lap and then sort of that's the estimate that we have or the assumption that we have into the second half.

Got it. If I can ask one more question. The 3% volume, negative volume in the Americas, could you give us a sense how much of that is attributable to the PLS initiative? And when you expect that to dissipate?

Yeah, I think, first, it's important to sort of reiterate that we had a really strong quarter overall at ESAB and you saw our global volumes sort of be very strong. We also saw our American volumes be good and positive in the low single-digits when you took out our PLS activities. But that being said, I think I've mentioned several times before that we have a complex business that we continue to work on in North America and execute our PLS strategy. Our view is that it takes the rest of this year to get through that. Now it may happen earlier but we're committed to the process, we're committed to driving our margins to a good spot. Making sure that we have a business that's sustainable but, we're very happy with the results, when you exclude PLS and you saw a slight volume growth in the America.

Got it. Thank you so much.

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

Good morning, everyone.

Hi, Nathan.

I'll just follow up on Tami's question there. It's obviously an impact from PLS on the volume numbers, but I assume that there is also an impact from PLS on the margin profile of the business. So any commentary you can give us on kind of the improvement that you're seeing in the margin profile directly from these PLS actions?

The first piece is that I think I was very proud of the team and the way we executed in the second quarter. Multiple things went right from our team's perspective. We delivered well on price. We grew the accounts that we wanted to grow. We improved the mix in the business. And then obviously PLS and EBX. And so, one could sort of take a look at this and say EBX and PLS delivering half of it and the rest of it coming from execution on the growth accounts along with price.

I guess a follow-up to that, I mean, the comment there was a lot of things went right in the second quarter. Do you think you can maintain those kinds of margins in the back half? I mean 4Q is probably going to be a strong volume quarter, which should result in good margins, so, just any commentary on whether there's some good guys in the second quarter that maybe don't repeat in the back half?

Yeah, I think the intention of this leadership team and the entire enterprise for us is obviously to hit a watermark and then continue to go from that particular point. There's a couple of things that we want to sort of add in it. We had about $2 million of operating expense that sort of got pushed into the third quarter. That is a growth investment for the rest of the year and into 2024. So that was a good guy in the second quarter, but what I can also say is that our teams are focused on driving growth, maintaining where we are today. We see the similar seasonality kind of playing out and I know Kevin has given you some numbers on the seasonality and we expect our business to perform in that seasonality with us kind of gaining momentum as we go into 2024.

Just a quick one on innovation. You guys relate to a bunch of new products last year, and you have EDGE and VOLT coming out in the second half. Can you talk about customer reaction to the new products, kind of, what kind of traction you're seeing on those and what kind of revenue growth contribution you're looking at from EDGE and VOLT as we get into the back half of the year or if that's more '24?

Yeah, thank you for that question. I think clearly, we have been really excited about our equipment line. We sort of call our light industrial line now the ultimate lineup. We're seeing a significant amount of growth in that product line. The Renegade Volt launch was actually in the third quarter. We're going to actually talk about it in a big way at FABTECH and also at Essen and then at the same time launch also that Warrior Edge product line. The initial reaction from the customer has been very positive. In fact, I was in Europe a few weeks back. I had a chance to interact with a couple of our large customers and distributors and they were very impressed with the performance of the Warrior Edge. Similarly in North America, we've had a few customers come in and look at that particular product line. And now, I truly feel that we will be in play on the heavy industrial line of category of product lines. And so really looking forward to what the second half brings from that category. But that being said, we -- that hasn't prevented us from sort of gaining momentum. The automation part of our business was a great story. The solution set that we're bringing in, in terms of programing, in terms of our data analytics and creating a workflow solution was very well received. In fact, in one of the customers that I met with when we showcased them the combination of our power unit, our data analytics and also a piece of adaptive welding. They were thoroughly impressed to the extent that we've got a pretty large order from them in the wind sector as a result of our technology and our innovation. So really thrilled about the progress. We've also realigned our teams to be focused on automation. So all of that is now paying dividends. So looking forward to us gaining more traction and talking more about this especially during Investor Day.

Thanks very much for taking my questions.

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

Good morning, everyone. Thanks for taking the question. So sticking with the automation discussion. I'm wondering if you can maybe remind me how big is this business for you and you're -- when you're talking about this 23% year-over-year growth. Can you delineate a little bit as to what you're seeing in the Americas, Europe versus -- versus other regions?

Yeah, good morning, Mig. So we've talked about our automation business being about 10% of our total revenue within the business and so you can do the math to that 23%. What we had been working on if you remember, Mig, was to really create a business that was a more differentiated solution around automation where we were less focused on large material handling, but focused on process-based automation and I've really spent the last couple of years building out that solution set adding programing capability, adding digital analytics capability, along with a workflow solution that we are talking to integrators about and end users. That's gained some traction. We actually saw growth of similar volumes both in North America and in the Rest of the World. So really excited about that category and then also in that space comes our automated cutting business as well and so that also did extraordinarily well. And we shared a brief on our Cobot product line, which obviously comes off a really small base, but we've really seen tremendous amount of excitement in that front. Last time, I had shared with you a Canadian customer that had improved the throughput, almost tripled their throughput as a result of our Cobot applications and held onto our equipment until we actually got them our new products. So, really thrilled about what all three are doing for us in the marketplace and we see growth actually quite balanced both in the Americas and the Rest of the World.

And you talked -- you say rest of the world, but I'm presuming that Europe is where most of this demand is occurring or maybe I'm wrong about that. Are you seeing it in emerging markets as well? Demand for --

Yeah, actually we are. We are seeing India adapt a lot of automation. We're seeing places in the Middle East adopt a lot of automation and then obviously, Europe is a big piece of that as well.

Understood. You already got asked the margin question a couple of times, but I'll try it as well. When I look at incremental margins in the quarter, they were considerably better than what I -- what I was expecting and I'm sort of curious if there's anything that's unique about Q2 that potentially, you might not have going forward? And if not, then how do you frame the margin opportunity because we're not that far from that 20% goal that you've outlined before and I'm curious as to kind of how you see the path going forward?

Yeah, obviously, we were very thrilled with the execution from our teams in the second quarter. We felt that both the regions performed very well and executed through the opportunities that we had to drive the business forward. Apart from the amount that I spoke about which was the $2 million, that sort of got pushed out to the third quarter, we didn't see any one-time benefits in the quarter, but that being said, there is a seasonality to our business and I think the way that we forecast the rest of the year, plays to that. Kevin, do you want to add something?

I think, Mig, our expectation is sequential incrementals, decrementals in that 30% range as we progress through the rest of this year.

I'm sorry, just to clarify here, when you talk about sequential incrementals, I mean, I guess the way I think about it is on a year-over-year basis to --

Yeah, year-over-year.

Typical seasonality.

Yeah, year-over-year will be in the mid to high '20s as we go through the rest of the year.

Yeah, I remember, Mig, we are planning to invest a bit into our business. We talked about that earlier with the launch of some of the new products that are coming in the third quarter and the activities that we have planned for the fourth quarter that we believe will set us up really well for 2024. We've got some additional investments coming our way in the second half.

Yeah. There's around $4 million out of investment we put in, Mig. As well as the half of the $10 million. So we have already communicated that we were going to spend additional for -- for this year.

Last question from me, maybe a comment on your M&A pipeline and sort of how -- how aggressive you think you want to be over the next call at 18 to 24 months, maybe that's a question for the Investor Day later in the year, I don't know.

Yeah. We're obviously happy to take questions on that front. One, I would say that our funnel is very strong. I think our team has done a really nice job identifying what we called bolt-on and tuck-in acquisitions that continue to move our strategy forward meaningfully. Thrilled about the three acquisitions that we've made thus far and all of them are performing above expectations. And we're thrilled about the value that they've added to our business and the opportunities for growth that they are providing in different geographies. We expect our acquisition strategy stay very similar to that, you saw on the slide that Kevin presented our leverage now is down to close to 2.4 and if we had done, none of the acquisitions, we would have been down to 2.0, 2.1. We expect to stay within that two range as we do our acquisitions. We're obviously generating as we had mentioned to all of you in the past we're a great generator of cash, we expect the second half to continue that trend. And so we expect to generate cash in acquired companies keeping our debt rates to where they are today or in that two range.

All right. Thank you.

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

Hey, good morning. Thanks for taking my questions. Really appreciate all the color. You've given us around just the margin moving parts here and there, particularly around -- around product line simplification here, I'm just curious, and forgive me if I missed it, but on the price cost side, can you just kind of give us a sense for how big of a benefit that was in the quarter and kind of what we can expect in the back half from a price cost perspective?

Yeah. So we've always said that on a price cost side, we expect to be neutral. And so -- so our view on price cost, that is our strategy. Now, we've got other activities underway, whether it would be value pricing, whether it would be price related to product line simplification that we think will continue to add tailwind to our sales, but that being said, our intention with pricing is always the three-fold. And we've talked about this before. One is related to inflation and we expect -- if we do see inflation, we'll go to market. The second one was related to value pricing and the third one now is around our product line simplification. And so we expect to do all three. Inflation-based pricing, obviously, we don't see as much inflation now towards the second half of the year. We did see some inflation in North America, as a result, you see that pricing number would be a bit higher, but otherwise we continue to expect to play those second and the third play around value pricing and PLS as we move into the second half of the year and into 2024.

Understood. That's really helpful. And I guess to zoom out a little bit here, obviously -- maybe you can talk about gas control of some of the opportunities there. Obviously, nice growth in the quarter, but when you look at gas control more specifically, what gets you the most excited, whether we're talking -- is it the core industrial applications or is it more like the diverse market in terms of medical and that type of thing?

Yeah, the great part about that business as we sort of began to focus on it back in 2017 and 2018, we saw that the industrial side of that business actually has better characteristics and the broader industrial business that ESAB has. So we like the characteristics of the industrial side of the business. And then when you map it over to Med and Specialty, we then see lesser cyclicality, greater growth, higher margin and then the possibility is obviously to acquire and stack of businesses in that category. So we're actually happy about the entire breadth of that product line. We like the performance of the industrial side of that business and we've talked about it being accretive to the gross margins of ESAB and then you pick the spec gas on the medical side of that business and that continues that journey further north for us.

Perfect. Thanks so much for the color there.

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.