ESAB Corporation (ESAB) Q2 2026 Earnings Report, Transcript and Summary

Hello, everyone. Thank you for joining us, and welcome to the ESAB Corporation Second Quarter 2026 Earnings Release and Conference Call. [Operator Instructions] I will now hand the conference over to Mark Barbalato, Vice President of Investor Relations. Mark, please go ahead.

Thanks, operator. Welcome to ESAB's Second Quarter 2026 Earnings Call. This morning, I'm joined by our President and CEO, Shyam Kambeyanda; and CFO, Brent Jones. Please keep in mind that some of the statements we are making today are forward-looking and are subject to risks, including those set forth in today's SEC filings and 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 can be found in our earnings press release and today's slide presentation, which is available on our website. 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 for joining us today. Let me start by welcoming our Eddyfi teammates to ESAB. I was in Quebec for day 1, and the positive energy was palpable. The teams are working extremely well together, building plans for growth and innovation. Eddyfi adds talented leaders to our organization. To add, Brent has been with us now for 90 days, and he's done a great job jumping right in and raising the bar for ESAB. In addition, we've scored a real win, bringing RJ to ESAB as an Executive Vice President. RJ brings over 30 years of experience with Danaher, Veralto and GE HealthCare. At each of those companies, she built process-driven organizations at scale and delivered outstanding results. She's also an expert practitioner of our business system. I believe the combination of Brent, RJ, EBXai and our current leadership team is exactly what ESAB needs to drive organic growth, margin expansion and strong cash flow generation. We've been busy in the first half. Our teams have kept their heads down, focused on executing their plans and controlling the controllable, and it shows. Turning to Slide 3 to discuss our second quarter highlights in particular. ESAB delivered a strong second quarter, headlined by record total core sales and adjusted EBITDA and a return to organic growth in both segments. Demand in North America and Asia remained robust. Europe continues to be resilient and the Middle East performed in line with expectations in a tough environment. These results reflect the strength of our team and the power of our global enterprise, showcasing the value of our unrivaled workflow solution that addresses our customers' most complex issues. Total sales for the quarter were $766 million, up 13% year-over-year with core organic growth of 2.5%. Driven by double-digit growth in automation and equipment, adjusted EBITDA grew 8% to $150 million. Margins reflected transitory price/cost neutrality driven by increased logistic costs and commodity costs, which we expect to correct over the next few quarters with price and cost-out activities. Our teams did a fantastic job thoughtfully navigating this transitionary inflation, all while protecting our investments in equipment growth initiatives. We closed the acquisition of Eddyfi ahead of schedule, a defining step that positions ESAB for faster organic growth and higher margins. Brent will walk you through the financial details and our updated outlook, which now incorporates Eddyfi. The ESAB you see today is a transformed enterprise with equipment now representing over 50% of our revenue and powering our ability to accelerate organic growth. Before we move on, I want to thank our teammates around the world for their passion and commitment to our shared vision. Together, we're raising the bar of performance at ESAB. Moving to Slide 4, showcasing Eddyfi. I want to take a moment to remind everyone why this asset is so important. Eddyfi powers the next phase of ESAB's workflow and is a global leader in inspection and monitoring technologies for mission-critical applications with clear leadership in electromagnetic testing, ultrasonic testing and automated inspection. It serves attractive end markets with strong secular tailwinds across aerospace and defense, nuclear, infrastructure, and oil and gas. These tailwinds are driven by aging infrastructure, rising inspection requirements, growing power generation demand and industry-wide skilled labor shortage. Let me bring this to life for all of you. In early July, we hosted several customers at Eddyfi, where we showcased the power of our combined workflow solution across various end markets. This was the first time our teams from Eddyfi, EWM, GCE and ESAB worked together to demonstrate the full power of our enterprise. The event showcased our unrivaled workflow solutions and our customers walked away with a clear understanding of the connection between ESAB and Eddyfi and the value it creates for their operations. That excitement is already converting into an active funnel of commercial opportunities, and our teams are energized to capture them. Just this week, I visited Eddyfi site in State College, Pennsylvania and got a firsthand view of this talented team. Their ability to partner with large aerospace customers to quickly build prototypes to solve the toughest problems, it reinforced what I believed all along. We've picked up a team that is maniacally focused on the customer, capable of innovating at the speed of our customers' problems and carries an entrepreneurial spirit that will serve ESAB well over the long term. For our shareholders, this translates directly into a stronger ESAB, faster organic growth, higher margins, reduced cyclicality, a more predictable and resilient earnings profile that compounds value over time. Financially, Eddyfi is a premier asset. The business delivers high single-digit growth, gross margins of approximately 65% and EBITDA margins of roughly 30%. Eddyfi also brings meaningful North American exposure that pairs naturally with ESAB's global footprint, creating immediate geographic expansion opportunities for both companies. Turning to Slide 5. By combining ESAB and Eddyfi, we have created an unrivaled end-to-end workflow solution that supports our customers from initial preparation and joining all the way through real-time asset management, data-driven insights and full traceability. Our teams are focused and our growth funnels have never been stronger, and we're very optimistic about the opportunities that lie ahead. Together, we're uniquely positioned to accelerate the industry shift towards connected and digital workflow solutions. Moving to Slide 6. This is ESAB's transformation in one picture. Over the past decade, we have deliberately shifted our mix towards faster-growing, higher-margin portfolio of equipment and gas control products, which has become the foundation of our complete end-to-end workflow solution. From our leadership in gas control to our advanced equipment portfolio, every step we have taken, including our recent acquisitions has been accretive to our growth and gross margin profile, and has significantly strengthened our offering and geographic reach. The execution of our strategy has moved our equipment mix from 38% to 50% plus on a 2026 pro forma basis. At that same period, we have improved our gross margins by approximately 500 basis points. Turning to Slide 7. This slide is the proof point of our capital allocation strategy. Over the last 18 months, we've deliberately deployed capital into high-quality assets that have fundamentally reshaped ESAB. Every one of these acquisitions is delivering. We have already discussed the merits of Eddyfi. Aktiv and DeltaP strengthen our gas control leadership with unique products in fast-growing geographies. EWM establishes ESAB as the technology leader in equipment, bringing cold metal transfer technology, which we call React, along with additive manufacturing capabilities. And Bavaria extends our proprietary filler metal product line while deepening our presence in Germany. Each asset improves our growth profile, enhances our margin and extends our workflow solution, exactly what we set out to do. The results validate our playbook and the runway ahead is long. We have reinvigorated EBXai, sharpening our focus and driving out cost. ESAB is on a new trajectory. On that positive note, let me hand it over to Brent to walk you through the financial details.

Thank you, Shyam, and good morning, everyone. It is a pleasure to be on the call today. I have been spending my first few months diving into the business and getting to know the team. Based upon everything I've seen, I believe we have a strong foundation in place to drive long-term shareholder value. Let's turn to Slide 8 to review our financial summary. As Shyam noted, we delivered $766 million in total sales, a 13% increase over the second quarter of 2025. We delivered 2.5% organic sales growth, reflecting double-digit growth in automation and equipment as well as an 8% contribution from acquisitions. Adjusted EBITDA was $150 million, up 8% year-over-year at 19.5% adjusted EBITDA margin. We experienced a 90 basis point year-over-year margin decline because of transitory price/cost neutrality and deliberate targeted commercial investments to accelerate growth in our equipment product line. We view these investments as essential to driving future growth and margin expansion as equipment becomes a larger slice of the pie. Moving to Slide 9. Excluding the impact of 1 month of Eddyfi and the related financing transactions, core adjusted EPS was $1.41. Given the number of moving pieces related to this transaction, we have provided a simple walk. As you may recall, we prefunded a large portion of the debt financing with an exceptionally well-timed bond offering in March, where we raised $1 billion at a very attractive cost of capital. This financing is even more attractive in retrospect given current market volatility and interest rate trends. The total debt financing impacted EPS by $0.13 in the quarter, of which $0.03 was attributable to the prefunding. Our committed equity financing consisting of common shares and mandatorily convertible preferred stock, which helped fortify our balance sheet led to a $0.03 headwind. We are extremely excited to have Eddyfi as part of the ESAB team. The teams are already working together exceptionally well, and we are making targeted commercial investments to accelerate our long-term growth and margin expansion. Turning to our Americas segment on Slide 10. The Americas delivered a strong Q2. Total sales grew 12% to $316 million with 5% organic growth. North America had double-digit organic growth on the back of particularly strong performance in equipment, one of our key growth priorities. Gas equipment and automation rose double digits. Finally, Mexico continues to stabilize, and we are working to mitigate expected headwinds in South America. Moving to Slide 11. Our EMEA and APAC segment sales grew 14% to $450 million, representing 1% organic growth. We were able to drive organic growth despite the meaningful geopolitical headwinds in the Middle East, which impacted volumes. Margins in the segment were pressured by these disruptions as well as continued equipment growth investments. However, better-than-expected performance in Europe helped partially offset these headwinds. We continue to be excited about what EWM is doing for our business, both in Europe and globally, and the EWM integration and associated margin expansion plans remain solidly on track. Turning to Slide 12. Regarding cash generation, our first half adjusted free cash flow was in line with the first half of 2025 despite the meaningful increase in interest expense. Our cash flow was impacted by costs associated with restructuring and acquisition integration activities that are enabling future growth and margin expansion and a strategic decision to carry higher equipment inventory levels to serve our customers. We are focused on leveraging EBXai structurally to improve our working capital turns, and we expect strong second half cash generation. In terms of capital allocation, we continue to focus on investing in organic growth, debt reduction and accretive tuck-in and bolt-on acquisitions. Moving to Slide 13 to update our full year 2026 outlook. With Eddyfi now closed, we are raising our full year 2026 outlook. We expect total core sales of approximately $3 billion to $3.1 billion. This assumes organic growth of 2% to 4%. Acquisitions are now expected to contribute approximately 9 points of growth and foreign currency remains unchanged. We have increased adjusted EBITDA to $615 million to $625 million, which includes 7 months of Eddyfi. We have assumed about $15 million of drag from transitory price/cost neutrality driven by logistics costs and commodity inflation while protecting investment in equipment growth initiatives. The adjusted EPS range of $5.40 to $5.50 reflects these changes as well as the contribution and funding of the Eddyfi acquisition. Our free cash flow conversion should be approximately 90%. We have the right strategy and are executing it with discipline and focus and are on track to deliver another year of strong results. Thank you for your time, and I will now turn it back to Shyam.

Thank you, Brent. To summarize, we delivered a record second quarter with positive organic growth in both segments, and we closed Eddyfi ahead of schedule. We're building momentum in our business. We transformed ESAB. We're continuing to reduce rooftop and optimize our manufacturing footprint. We are simplifying EBXai so that every team member is fully engaged with our tools. Our teams are driving 4 powerful funnels, a funnel for new customers, a funnel for synergy sales, a funnel for cost out and a funnel for Kaizen. We have renewed focus on Gemba, starting with me. Our priorities are clear: driving organic growth, margin expansion and deleveraging the balance sheet. We have reshaped ESAB into a faster-growing, higher-margin enterprise. True to our values, we will keep helping each other win, valuing every voice as we deliver long-term shareholder value. With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from Bryan Blair with Oppenheimer.

I was hoping you could offer a little more color on how orders progressed through Q2 and into Q3 and how your team is thinking about organic growth in the back half, both in terms of Q3, Q4 cadence and segment contribution?

Yes. Thanks for that question, Bryan. Obviously, we were very happy with how things progressed for us from Q1 to Q2. We've seen that trend continue into Q3. As you've always known, we felt that the back half of the year, we had a lot of initiatives in play. We felt that sequentially, our growth profile and our performance improves. And you've seen that from Q1 to Q2, our performance improved both from a margin perspective and a performance perspective on sales. We expect to continue that core growth trend into Q3 and Q4. The other piece that I would add there, Brent, is that we have -- as I'd mentioned before, there were a couple of things that we were very comfortable with. One was EWM and the initiatives that we're working on for equipment in the second half of the year. And then we also had some really nice automation -- standard automation orders that ship in the second half of the year, giving us confidence about the organic growth guide that we've given.

Okay. Understood. And you mentioned that the Middle East performed in line with expectations given the well-known circumstances at hand. To level set, what was the Q2 revenue and profit headwinds for Middle East operations? How are you thinking about the back half? And then looking forward, is there any way that you can quantify or dimensionalize the prospective catalysts from rebuild efforts and incremental investment in energy infrastructure?

Yes. A couple of things there, Bryan. First, obviously, very proud of our team in the Middle East. I think I may have mentioned it to you before, our teams are actually in the office and working. Our sales teams are out there finding new accounts, continuing to deliver, protecting our customer, protecting our share and in some cases, gaining share in the region. As we mentioned before, the region is about 7% to 8% of ESAB's business, and it was down double digits. So really in that 10%, 11% range. The margins are good for us in the region. So we haven't given out any guidance on that particular piece, but you can make an assumption there. But we did see logistics costs sort of triple in the region as a result of the conflict, which we think are transitory. Depending on what happens today and tomorrow, things could sort of really shift very favorably in our direction. From a rebuild perspective, we've said this before, most of the assets that will need rework and rebuild have ESAB products spec-ed in. And so when those rebuild activities come in, we expect to get a larger share of it. We -- as you are aware, prior to the conflict, that region was growing high double digits for us, closer to 20%. We would expect that for a period of time as they rebuild and reconstruct that the numbers would be equivalent to that or maybe slightly better.

Your next question comes from Tami Zakaria with JPMorgan.

A question on your organic growth outlook. I think it remains unchanged. You spoke about some price/cost neutrality impacts that you expect to cover in the next few quarters. Has your pricing outlook changed versus the last time we spoke? And in lieu of that, does that mean your volume outlook is now weaker? And so on the net, your organic growth expectation remains the same?

Yes. I think the way to think about it is there's just a little bit of uncertainty out there, Tami. So the view for us is sequentially, our pricing does get slightly better. And then things have to sort of improve for us globally, Middle East being one of them. And I think the view for us is that we feel confident about where we are and where we've guided. The view for us is that pricing gets slightly better. We're sort of flat to slightly better on organic volume as we go through the second half of the year.

Understood. And then the second question, would you be able to parse out the components of the $0.35 EPS guidance reduction at the midpoint? How much of that is Eddyfi sales, EBITDA, higher interest expense, how much from price/cost impact? If you could bucket those, that would be helpful.

Yes, certainly. It's Brent. Good to speak with you. So when you look at that at the midpoint, most of the dilution associated with Eddyfi, we absorbed in Q2. Now Eddyfi, as the year progresses will be -- will improve sequentially each quarter, and then it will be kind of just modestly dilutive in Q4, but you'll see most of that. So that's kind of 40% or more of the impact. So that's both the contribution of the business net of the interest expense and the share and preferred stock issuance. Then the balance of it is the comment on the trimming the EBITDA there, and that's probably about 60% of it.

Well, it's really the investments in growth that we're doing and then the price/cost neutrality.

Understood.

Yes. So the way to think about that also, Tami, is that we think that we'll be slightly dilutive to neutral in Q4 and then confidently positive as we get into '27 with Eddyfi.

Your next question comes from Nathan Jones with Stifel.

I'm going to start with a couple of high-level questions on Eddyfi. Obviously, 65% gross margins and 30% EBITDA margins are very good. But that does imply 35% SG&A. So I wanted to talk about that a little bit. Is that something that's a result of a different commercial model that requires more SG&A to support it? It's built for a higher revenue base? Or is it something that you think you can outright shrink or grow into? And what's kind of a normalized optimized level of SG&A that Eddyfi should run at?

A couple of things that we're beginning to observe. One, it's an extremely innovative culture. The way that the business grows is that they're able to develop solutions in a short period of time. I just mentioned the comment about State College, Pennsylvania, where a customer comes in, discusses an issue and within a week, the team has developed the probes needed and provide the solution for the customer. And these were for some large aerospace customers. So there's fundamentally a way that this business works that requires a level of engagement, especially from the R&D and the development team that creates both growth and innovative products. Now the level of what is the optimal level, we're working through our plans. We're just getting past our 60-day plan. We -- as you know, Brent, we have an EBX process of a 100-day plan that we will be sitting with the team. But we do expect, as the business grows, we don't need to increase OpEx as much. So there will be some natural leverage there. And then there's obviously things that we do, whether it be the shared service center or other things where -- and supply chain where the team can leverage the base ESAB business continuing to improve that category. So when we went in, as you remember, we had talked about a $20 million synergy between us and them. We feel that, that is real, and there may be more in it. but we're going to gradually do it. Our focus will be to capture growth rather than focus on the cost out side initially. But rest assured, we'll be doing both.

That leads to my second question, which was going to be the opportunities for revenue synergies and growth from Eddyfi and ESAB together. Maybe you can talk a little bit more about where you see those opportunities and what kind of revenue synergies you might target in 2027, 2028? I know those take a little bit longer to materialize.

Yes. Well, first is we talked about the session that we had with the combined teams at Eddyfi. And I have to tell you, I talked about it about day 1, but even that session that we had in the parking lot of Eddyfi in Quebec City was amazing. It was phenomenal to see our teams, EWM gas control, our traditional FabTech team sit with the Eddyfi team and work out the workflow solutions. And we looked at segments when it came to nuclear, oil and gas, wind, pipelines. And fundamentally, the team sat in and looked at synergies across all of those customers. And what I can tell you is that the funnel at Eddyfi is close to about $450 million. Now we got to convert on that funnel. The view for us on that particular front is that it's going to take a bit of time. We've introduced the concept to our customers. We're seeing great feedback. We're seeing the Department of Defense engage very differently with us as a result of both the additive manufacturing technology that we picked up with EWM and now Eddyfi, so the opportunities exist. We expect to get a few orders and those then become the base case for us to continue to drive organic growth across several other segments for both ESAB and Eddyfi.

Your next question comes from Mig Dobre with Baird.

I just kind of want to follow up on this discussion with Nathan here. Just conceptually, if I'm a customer and I'm buying product -- testing product from Eddyfi, what would be the benefit for me from buying ESAB equipment or ESAB consumables in conjunction with the testing equipment that I'm getting from Eddyfi. Like how do you go to market and you package these things together?

Yes. We actually spent a significant amount of time discussing exactly that with the teams up in Quebec City, the short piece is full traceability to when the material was joined together. And so fundamentally, you look at -- we actually showcased one nuclear example for some of our customers where you're basically disposing of nuclear waste or product that comes off of a nuclear plant and sealing it in a container. What you need for that particular aspect is, first, a full workflow analysis of what went into sealing that container. And then after that, what you need is to ensure that there's no deterioration in that container over a period of time. That was one of the simplest examples that I can give you. The second aspect was on pipeline, where you join some pipes, you put them out into the field and then you monitor degradation of that particular aspect of the product line. And what we noticed with the customers is that's exactly what they want to know is that what was the original product looking like when it was placed where it was and how has it moved over time. And that combination today only ESAB can provide. We did something similar on rail, where, as you may know, in India today, we actually supply product for all the rail repair. And one of the big aspects is visual inspection of the rails to sort of monitor where the wear has occurred on the railway tracks. And today, what you can do with ESAB and Eddyfi product is actually monitor where the wear is occurring, apply where ESAB filler metal and equipment need to go in and monitor it over a period of time for better serviceability to our customers. I can give you another example associated wind, but you get it. The view for us is -- and that applies in spades when it comes to the defense sector. And it's been actually quite exciting for us in the initial days, the response from our customers, the way that we're thinking about combining the data capturing, the data monitoring ability between both of the companies and combining those workflows. So excited, early days. We've got a few early bites that have got us sort of really focused on developing that, which is why the earlier comment that we made is that we want to continue to invest in the front end to make sure that we capture all of this for 2027 and beyond.

That's very interesting. My follow-up, a clarification here on the adjusted EBITDA increase. Can you tell us exactly what the contribution from Eddyfi is in your updated guidance?

So Mig, the -- when you look at the increase there, the contribution is primarily Eddyfi netted by the other investments that Shyam noted when we had the previous answer.

Right. But the numbers are what -- I mean, you increased it by $35 million. So Eddyfi...

Yes, we increased it by $35 million. We said we had $15 million of price cost headwinds and investments. So it's approaching $50 million, the Eddyfi contribution.

Your next question comes from Neal Burk with UBS.

Shyam, I just wanted to go back to your comment earlier on -- you said sequentially pricing getting a bit better to offset the cost inflation, but you also said flat to slightly better on organic volumes in the second half. Can you just clarify, is that comment relative to previous volume expectations? Or like, I guess, another way, how do you [indiscernible]

Yes, just sequentially, Neal. We're looking at this now sequentially as to where we are and the current environment. So what this assumes -- our guide assumes is that the Middle East stays where it is. We get a little bit more price. We continue to invest in our business on equipment growth and the strategies that we have to grow our equipment business along with sort of pulling Eddyfi through a little bit. And then obviously, we've got some really nice commercial opportunities that could -- that we had planned on in the second half of the year related to automation as well.

Okay. That's helpful. And then a lot of strength in equipment and automation. I mean, we've seen that from some other peers this earnings season. But can you just maybe elaborate a bit on how -- or what end markets are driving that growth in equipment? And also any update on how consumables is trending?

I'm sorry, what was the last part, Neal?

Consumables.

Oh, consumables. Consumables continue to be steady. There are pockets of weakness, obviously, specifically in the Middle East. But overall, it continues to trend positively, although not as positive as equipment. So what I'll basically say there is that sort of in the low single digits is what we see global consumables doing with equipment and gas control doing quite well along with automation. To sort of specifically talk about...

Can you repeat the first part of your question?

Yes. Just kind of give us a sense of like how broad by end market was the strength in equipment and automation?

Yes. Just talking about the end market pieces. What we found was general fabrication is where we found significant uptick in our portfolio. We also saw some uptick in defense, which we've always said has been a tailwind for us. And so those were really the 2 things that stood out. Our distribution segment did really well across the globe on both equipment and to some extent, standard automation.

The next question comes from Chris Dankert with D.A. Davidson.

Hoping to dig in a little bit on Europe. I think you called out some improvement in defense spending. Again, is that strictly Germany? Maybe any kind of quantification in terms of uptick? Any sort of update in terms of what we're seeing in Europe more broadly?

For Europe, we obviously have a phenomenal presence and a great position of strength in general, Chris. What we are seeing is Eastern Europe, Scandinavia and Germany sort of making some moves, especially in the segment that you mentioned earlier in defense. We're also seeing some investments come in, in those particular markets for energy that's helping us out as well. And then the second piece here is that we play from a position of strength. So our teams continue to gain market share, both in consumables and in equipment. We do get some data publicly in the space that sort of validates that piece for us.

Got it. And I guess, forgive me if I missed it, but did you quantify kind of what the sequential pricing improvement is expected to be into the back half of the year here?

We have not quantified that, but it's modest sort of moving. I think we had 2% this quarter, sort of moving up into the 3% and then sort of exiting at a better rate in Q4.

This concludes the question-and-answer session. I will now turn the call back to Mark Barbalato for closing remarks.

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

This concludes today's call. Thank you for attending. You may now disconnect.