Thank you for standing by. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the ESAB Second Quarter 2024 Earnings Conference Call. Please note that 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] It is now my pleasure to turn the call over to Mark Barbalato, Vice President of Investor Relations. Please go ahead.

Thanks, operator. Welcome to ESAB's second 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 intent 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 delivered another strong quarter, highlighted by positive organic revenue growth, while improving our product mix towards equipment. We utilized our EBX toolkit to achieve record margins and cash flow. As a result, lowering our net leverage ratio to 1.7x and we closed on another acquisition. It is important to highlight that we executed well and delivered strong results, benefiting from our high-growth markets exposure that was moderated by softness in developed markets. While I'm encouraged by our progress, we're far from satisfied. I'm confident that we'll continue to raise the bar, find new avenues for growth, expand our margins and improve cash flow. Before diving into the numbers, just like last time, let me share the passion our team has towards our mission of shaping the world we imagine. Maybe some of you read The Wall Street Journal article last quarter where Gen-Z has been dubbed the Toolbelt Generation. Here on a more personal note, I have led ESAB for the last eight years, and I'm very proud of our team's time and resource contributions every day to train the next generation of welders. We see this as a way to engage and connect with the next generation. This year, we teamed up with the non-profit organization Welder Underground, an innovative apprenticeship program that trains the next generation of welders through large-scale public projects. Students here apply to the program through established non-profit focused on youth empowerment. They receive a stipend during their apprenticeship and are prepared for American Welding Society's certification upon completion. I've had a chance to meet the current apprentices who are upgrading their skills. They're part of creating Welder Underground's first public project, a metal structure celebrating hip hop, which is…

Thanks, Shyam, and good morning, everyone. We had another terrific quarter. EBX continues to successfully drive improvements in cash flow, which was up 21% in the first half of 2024. We are using this improved cash flow to support our 2028 strategy. Firstly, we're investing to support our organic growth, improving our equipment mix and making investments that are taking share. Secondly, to fund bolt-on acquisitions that are fast growing, margin accretive and delivering strong cash flow like Linde Bangladesh. And thirdly, we increased our dividend in the second quarter by 33% to $0.08 per share. ESAB's balance sheet is in the strongest position since we spun out of Colfax, with net leverage today of only 1.7 turns. We are well positioned to drive even higher cash flow and continue to successfully execute our 2028 compounder strategy. Moving now to Slide #11, we have updated our full year guidance to reflect changes on the top-line, as Shyam discussed. Sales guidance of flat organic core growth reflects moderating developed markets and continued strength in our high-growth markets. We expect volume and price to be flat, 1 point of additional FX headwind due to a stronger US dollar and 0.5 point of M&A growth from the Linde Bangladesh acquisition. Our team is focused on controlling the controllable. Adjusted EBITDA margins at the midpoint of our guidance has increased by 50 basis points to 19.5%. This improvement is due to new EBX initiatives, improved product mix and $5 million of additional benefits from restructuring projects. Adjusted EPS remains unchanged, benefiting from a lower interest expense and cash flow conversion remains on track. With that, let me hand back to Shyam on Slide 12 to wrap up.

Thank you, Kevin. To summarize, we continue to execute well in a challenging environment as reflected in our strong second quarter operating performance. We continue to drive EBX across the business to deliver better margins and cash flow, strengthening our balance sheet while adding AI to our toolkit. Today, ESAB is a less cyclical, higher-margin and stronger cash flow generating enterprise, allowing us to execute our compounder strategy. We are confidently moving towards our 2028 goals of $4 billion in revenue, 22%-plus of EBITDA margin and 100% free cash flow conversion. We have a focused business and a focused team with a lot of runway ahead of us. With that, operator, let's open the line for questions.

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from the line of Mig Dobre with Baird. Your line is now open.

Thank you. Good morning, everyone, and congrats on a good quarter here. I guess my first question, Shyam, I'd love to hear more of your thoughts in terms of what kind of drove the adjustment in your growth guidance that you had to provide. Obviously, we know that the environment has gotten a little bit tougher, but from your perspective, are there some geographic callouts or maybe some end markets that you'd be able to highlight for us that are progressing maybe a little bit different than you thought three months ago? And as you look forward for the remaining -- for the remainder of the year, what are some of the puts and takes to your thinking? Where are you seeing maybe potential for downside risk or at the same time maybe some offsets to that?

Yeah. Good morning, Mig. Thanks for the question. So, I agree with you, a really strong quarter from ESAB. We felt that posting volume positive growth both in the Americas and the rest of the world was an extraordinary performance for us, gives us great confidence about the team's capability to execute. You're right, we sort of did a couple of things this quarter. One, we maintained our EPS guidance against the backdrop. We obviously improved our EBITDA percentage for the full year. And then, on the top-line, what we found is, our developed markets moderated and slowed a little bit from the start that we had in Q1. And that's really what drove us to sort of think about the rest of the year, and sort of guide to a point that we felt confident about at this point in time. Now, it's also important to state that we have got July behind us and it started off very similar to where we ended the second quarter. So, it gives us confidence about the forecast and the fact that -- yes, we did see some slowdown in the stuff that you've talked about yellow goods to some extent, ag and, in particular, auto in Europe a little bit, but then we've also seen energy stay up, we've seen defense stay up. So, all in all, it's a mixed bag that sort of points us to this flattish number that we're talking about.

Sure. Thank you for the color. And then, I guess, my follow-up, your balance sheet is increasingly good shape here and you've done three deals year-to-date. I'm curious as to how the pipeline is evolving here and whether or not we should be starting to think about maybe larger deals given that your balance sheet and cash flows seem to be able to support it. Thank you.

Yeah, Mig, I think our view on that topic is sort of solid and disciplined. We've talked about creating a less-cyclical, higher-margin business, and so that's probably the first set of lenses that we look at. And the second one is, we'd like the gross margins to be above 40% with great characteristics of cash flow. So, we're not going to be coming off of those two sets of lenses that we want to look at acquisitions for. That being said, the acquisition funnel looks good. Obviously, closing on some of these deals takes two, but we do have some prospects out there that have a chance of getting done in the back half of this year. But nothing that sort of gets us past that number that we've always put out there where we've got a two in front of our leverage ratio. And we think we've got plenty of things out there along with our cash flow to do both.

Great. Thank you.

Your next question comes from Nathan Jones with Stifel. Your line is now open.

Good morning, everyone.

Hi, Nathan.

Good morning, Nathan.

Just a couple follow ups on how the second quarter progressed, and where you saw the weakness coming from, and I'm kind of interested in it a little bit more from a product perspective as well. Did you see consumables start to weaken first? It sounds like consumables were weaker than the equipment side of it was. But just how you saw that progress? And then, you talked about stabilization into July. Do you expect the rest of the year to kind of stay stable with where it is now, like we've taken a step down and we maintain stability, or do you think there's risk that that we continue to see some downtrend here?

Yeah. I think, I mentioned it in the script as well, Nathan, I think we talked about filler metals, especially the auto side of it in Europe, slowing a bit, but then we did see a lot of strength when it came to our Flux code wire and Flux product lines associated with the wind side of things. So, it was sort of -- there was a piece that moderated and there were piece that looked good. So, I think the interesting part about the market today is that it's not a downturn across the board. There are -- yes, there's a bit of downturn, but there's also positives in the marketplace that are offsetting it. So that's probably the first thing that I've noticed. And I've been an industrialist now close to 30 years. So, it surely feels that it's not, sort of -- if I were to use the USC term student body left on everything, I think the issue for us here is that, we see a balanced piece on it. And then, we saw our strategy around standard equipment, and our equipment business pay dividends, right. We've always talked about the fact that six years ago, we were playing with one hand behind our back with just filler metal portfolio and today we've got a full portfolio. We are able to sell-through our equipment to existing customers, gain share on that particular front. The exciting product line in equipment is driving interest out there, not just in the developed markets, but in the developing markets. And that's been a great story for us. And we think that continues. As I had mentioned to you before, if we have the same share in equipment as we do in filler metal, this is a very different business and a very different sales point for ESAB. We spent -- if I just add a little bit behind that, we've done a lot of work with our teams around sales transformation. We did a big exercise at the end of last year to kind understand the capabilities of our sales teams to change incentive plans to train them around how to be able to get out there and sell our new equipment portfolio and that's showing dividends.

I guess, I'll ask a follow-up on the acquisition. With a 170 million people in high single-digit GDP growth, there should be a lot of opportunity in Bangladesh for ESAB. Can you talk about what you think your market share is there versus what it is in the rest of the world? And what the opportunity is to not just grow with the market there, but to really drive share gain through ESAB, to build that business into something that's more material for ESAB?

Yeah. Well, first, I think it puts us in the lead spot, and it puts us in the lead spot very similar to how we're positioned in India, where we haven't talked about specific market share information, but we are very confident that the consumables business is number one by far. But then, the aspect for us here is that a lot of equipment is sold in Bangladesh. And today, our view is that ESAB equipment has a great way of entering that dedicated channel, and being able to sell both consumables and equipment. And so, if you look at the opportunity for us, as I mentioned, even in my call, the growth opportunities are significant. The synergy opportunities of selling through gas control equipment along with the consumables for ESAB and upgrading to the repair and maintenance and high alloy consumables is significant. And so, we're really excited about that opportunity. And some of you may have known this, but we were supplying, what we call, some key ingredients to the filler metal business in Linde Bangladesh to begin with. So, we're well aware of that market, very familiar, and we obviously have a great team that is very close to Bangladesh out of Calcutta in India that speaks the language and can -- and is already mobilized, and they're off to a good start in July. So, really excited about that business.

And then if I could just get one more in on pricing, flat over [Technical Difficulty] in Americas, down 3% in the rest of the world. Can you talk about the dynamics there in terms of net price versus inflation, and what you're seeing -- in terms of margin contribution, are you still margin positive, on that even in the EMEA, APAC segment with price down 3%?

That's right. The short answer is that, that net price metrics for ESAB is a significant and important metric. If those of you that are familiar with our value drivers, that is a key [eight] (ph) value drivers for ESAB, and so we measure that on a monthly basis. Net price is positive in both regions. We have seen steel prices move differently in the different geographies, and hence, you see the pricing position being slightly different in the Americas versus the rest of the world. But yes, net price positive on both sides contributing to the margin expansion, but also other aspects. We continue to do our lean activities. We continue to shift mix. So, I would submit that all three contributed the margin expansion in both geographies.

Thank you. The next question comes from Tami Zakaria with JPMorgan. Your line is now open.

Hi, good morning. Great to see the Linde acquisition and that slide on Bangladesh, should be exciting. So, a couple of questions. The first one is, the flattish organic growth guide, can you help us frame how to think about the third quarter and the fourth quarter? And within that flattish guide, price versus volume, where has expectation changed versus last quarter?

Yeah. So, Tami, as we said on today's call earlier, we're expecting flat volume and price for ESAB for the full year and also in the second half of the year. In terms of the segments, in the Americas, we're expecting flat volumes and we're expecting positive price very similar to what we saw in Q2 and in line with Shyam's comments about things expected to stay very similar to Q2 as we progress through the rest of the year. In EMEA and APAC, we do have negative price, but as you can see with the margins moving forward nicely, we've got that in good control with our net price toolkit, and we're expecting flat volumes in the EMEA and APAC as we step through the rest of the year. Key for us is really just staying disciplined, and as with Shyam, continuing to use our net price toolkit, continuing to drive the growth aspects of EBX to make sure that we're gaining market share as we step through the second half. And in terms of sequentials, as you normally would expect in the third quarter, we stepped down because of largely the European summer holidays. And as we go into Q4, we will step up.

Got it. That's very helpful color. So, the other question I have is I think you announced the distribution agreement with INFRA in Mexico. Just wanted to get your thoughts on what the group potentially see there? Who are the leading players in the Mexican market? So, any color there would be helpful.

Yeah, I think I'd mentioned before that our team has a strong position in Mexico. INFRA is actually one of the larger distributor of hard goods in the region and we were able to build a relationship with them to pull-through ESAB products, both filler metal and equipment. The relationship is actually just getting started. The potential for us is significant. We've not given out any numbers out there, but what we do have is a start of a relationship, an executive partnership in some ways to continue to drive in a positive direction in Mexico. We think Mexico benefits from reshoring. We think the infrastructure buildout in Mexico also benefits ESAB and this relationship. And so, we've got a lot of positive momentum, and it's been a good start, but it's early days, Tami. So, maybe a better question sometime next year.

Got it. Thank you.

Your next question comes from the line of David Raso with Evercore. Your line is now open.

Hi, thank you. I was curious, the channel inventory, can you give us an update around the globe on where the inventory is currently and how you're expecting that to end the year heading into '25?

Yeah. Thanks, Dave. Always good to hear from you. We actually did our check. In fact, we did a check as early as the end of the second quarter, just to make sure that we were prepared to sort of answer that question in particular. The short answer is that there is no buildup of inventory in channel, and we were particularly interested in that for Europe, specifically in Germany and the Nordics. And so, the answer back was actually a [good/better] (ph) surprise that there was no inventory buildup that was preventing any growth prospects in those particular markets. And a similar answer for us in North America that there isn't a significant channel inventory buildup. And so, the good news there is that if there's any uptick in the market, we should see an immediate pull-through on that particular front. But that being said, our teams are out there with our EBX-proven methodology and growth bridges to drive share gain, to drive share of wallet, and to drive through our new equipment product line with the channel partners.

All right. Thank you. And maybe I missed it, I apologize, but the EMEA, APAC declines, I'm just curious the Europe drag within that, right? You mentioned the high-growth markets, assuming India, Middle East are still growing nicely. Can you update us on what Europe is doing specifically?

Yeah. We haven't given that specific number out, but the way to kind of do the math is that we saw double-digit growth out of the markets in India and the Middle East. And then, you could say sort of single-digit declines out of Europe, which is the largest part of our business with filler metal being the one that sort of performed on a relative basis down the most. But I think the biggest piece for us in Europe really is around yellow goods and automotive, that took that part of the business down, but strengthening in renewable energy and strength in defense.

And sorry, just a clarification from an earlier comment about the second half of the year. I missed the aggregate. The organic sales decline for the second half of the year, kind of 1% to 1.5% that's baked in, can you split that between EMEA, APAC and Americas?

Yeah. So, I mean, David, I think as I said we're expecting in the Americas the volumes to be flat and positive price similar to what we saw in the second quarter. In EMEA and APAC what we expect is negative price, similar to what you saw in the second quarter and then flattish volume as we step through the rest of the year. So, fairly similar on both of the businesses in terms of volume outlook within that sort of negative 1% to positive 1%, and price at sort of similar levels to what you saw in the second quarter.

And your next question comes from Bryan Blair with Oppenheimer. Your line is now open.

Thank you. Good morning, everyone.

Hi, Bryan.

Very solid execution in the quarter. Apologies if I missed some color here, but wondering if you could offer a little more detail on the performance of your gas control business in the quarter and whether there are any notable callouts and -- or differences in trend between industrial and specialty and medical.

Yeah. So, actually, solid performance out of our gas control business, benefiting from the energy transition and also HVAC. And so, we saw some really good performance on the industrial side in the Americas. We saw really good performance on the specialty gas side, which is benefiting from semiconductors, and then also to the same extent in Europe with some the life sciences and medical exposure. And then, the second piece for us that I spent a little bit of time talking about is that we continue to improve our digital solutions proposition in that space, trying to create really strong value propositions, for our customers as a result of managing their gas flow in their facility. And that also benefited our business and the pull-through. So, all in all, strong position there for us in the gas control business and we see that business building on its strength for the second half of the year.

And somewhat of a follow-up to Nathan's question on Linde Bangladesh. Just hoping you could elaborate a little more on synergy prospects, specifically what we should think about as near-term versus longer-term, given channel dynamics? And then perhaps I'll also offer a little detail on Sager and SUMIG integration and how those deals are performing out of the gate?

Yeah. So, just to kind of calibrate, the SUMIG acquisition we announced, but it hasn't closed yet. We expect it to close sometime in the latter part of fourth quarter. So -- and Sager is doing well. We're off to actually a good start. In fact, we have a team out in South America this week visiting. I just had the 100 day review for that particular business. We were looking at a lot of synergies associated with footprint and sales team consolidation. We've actually executed on those, so we're off to a great start there. On the Linde side, it was really the piece that I talked about, right? It sort of fills out the geography that we are very interested in, that we wanted to be in a leadership position, we are. And so, we're very thrilled about that business. The channel, and as you know for -- just to give you some history, where ESAB has had a strong position in the past is when we picked up businesses that have had a historic record in the region. And so, in this particular case, Linde has been in Bangladesh for many decades and have established that business and the channel over those particular decades. And so, this is something that we have done in Bangladesh or in India before and we expect to rinse and repeat it in Bangladesh. So, pulling through our broad set of gas control and equipment products in a market that was only selling consumables. And so, we see significant amount of synergies coming through on the growth side as well as operating synergies based on implementing EBX and lean initiatives at the manufacturing plant.

And Bryan, on SUMIG, we're still going through the process of closing that deal and our current expectation is that we would close it at the end of the fourth quarter.

Understood. Thank you again.

Thank you. And your next question comes from Chris Dankert with Loop Capital. Your line is now open.

Hey, good morning. Thanks for taking the questions. Maybe we could just start on the cost side a little bit. Encouraging to see the higher implied operating margin for the year here I guess. Could you provide a little bit more detail? I know you called out some restructuring actions in the deck. Just any detail on what's going on there in the back half of the year?

Why don't I start it off and then I'll hand it to Kevin. I think one of the things we've always talked about is that we start every year with a set of actions within our business. Some of them associated with EBX, the lean activities that we do at the facility. We've talked about our net pricing initiatives. And then, we've talked briefly about improving the efficiency of our businesses using AI and data analytics. And so, the idea for us here is that we can be more efficient with a lot less SG&A as a result of some of these actions. And so, what you see reading out in our performance this quarter is exactly the execution on those aspects. Kevin, did you want to...

Yeah. So, Chris, there's sort of three buckets that we -- where we see good positive momentum, and we're ahead of where we expected when we started the year. The first area is in EBX. We've got a strong funnel and we've been able to execute on a number of projects, which has had the benefit of improving the margins. The commercial excellence program that Shyam talked about earlier is ahead of where we had expected and we are seeing that mix improve significantly, which is also having a benefit on our margins. Then finally, on restructuring, we had baked in around $10 million of benefits this year from restructuring projects. We've increased that by a further $5 million. And that's accelerating a few projects, but one larger project in particular where we're looking at doing a factory consolidation. We believe that we can drive an additional $5 million of benefit before we finish this year.

Got it. And that was actually the follow-up I had here. I was curious on just the factory consolidation. Is it, like, as you framed it an acceleration of previous plans or we expanded to additional locations at this point?

No. We have a long-term strategy in terms of our factory consolidations, and we accelerated one of those projects which we were really only planning to start at the end of this year. We're now starting it now, which is driving that additional benefit.

Got it. Well, thanks so much for the color, guys, and best of luck in the back half year.

Thank you.

Thanks, Chris.

And the next question comes from Mig Dobre with Baird again. Your line is now open.

Thank you for taking a follow-up here. Just a quick one for me. Looking at the equipment side of your portfolio, I'm wondering how progress is in North America, US, maybe specifically as far as rolling out new products, maybe the Renegade VOLT. I remember you talking about having some tailwinds as some of your channel partners are starting to stock this product. So, a quick update there, and I'm wondering if this can still be a source of outgrowth in the back half of this year or maybe even going into '25.

Yeah, we are actually very pleased with how our teams have been performing with the new set of light industrial products that we've launched into the North American market, Mig. We haven't shared exact numbers on it, but what I can tell you is that we monitor it on a monthly basis and we like what we see. The other aspect for us is that with the new HIP launches that are happening, with WeldCloud, and our digital portfolio in InduSuite, we've actually seen conversions of some of the OEMs to yellow on their shop floor as a result of it. We've seen another customer come at us where we've introduced FloCloud, WeldCloud, and our new heavy industrial machinery along with the adaptive welding technology that we had for wind take hold. So, all in all, a lot of excitement on the ESAB side, around process-focused automation, light industrial into the channel. I think, we like our performance in the Americas. Really proud of how that team has come together, the intensity that they've brought to their sales plans. What I can tell you the growth bridges in North America look really good, with clear targets, with clear customers, with clear plans for share of wallet, but a great amount of discipline that continues to drive margins forward.

All right. Thank you again.

There are no further questions at this time. I'd like to turn the call back over to Mr. Barbalato. Please go ahead.

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

This concludes today's conference call. You may now disconnect.