ESAB Corporation (NYSE:ESAB) Q4 2023 Earnings Call Transcript
ESAB Corporation (NYSE:ESAB) Q4 2023 Earnings Call Transcript February 29, 2024
ESAB Corporation beats earnings expectations. Reported EPS is $1.13, expectations were $1.03. ESAB isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Christa and I'll be your conference operator today. At this time, I would like to welcome everyone to the ESAB Corporation Fourth Quarter 2023 Earnings 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. I will now turn the conference over to Mark Barbalato, Vice President of Investor Relations. Mark you may begin your conference.
Mark Barbalato: Thanks operator. Welcome to ESAB's fourth 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.
Shyam Kambeyanda: Thank you, Mark. Good morning everyone and thank you all for joining us this morning. ESAB has made excellent progress in 2023 and we finished the year and the fourth quarter on a high note. As always, let me take a moment to thank our dedicated associates for their hard work and commitment to our goals. Our 2023 performance demonstrates the power of EBX to drive growth, improve margins, and generate strong free cash flow. During Investor Day this past December, we announced our strategic vision to become a focused premier industrial compounder and setting our 2028 targets to become a $4 billion in sales, 22% in EBITDA margin enterprise, that generates 100% free cash flow conversion. The event also showcased our innovative products and solutions within our FABTECH and Gas Equipment businesses, allowing us to highlight the power of our portfolio and workflow solutions that are helping our customers solve their most challenging needs.
Some of the other highlights from 2023 was the extraordinary progress we have made to enhance our equipment portfolio both in FABTECH and Gas Control. We completed our light industrial lineup and introduced the game-changing Renegade Bolt. Our battery-powered welder the first of its kind was a hit in the marketplace. An interesting news item for you on this product, it is now featured in the March Edition of Popular Mechanics as The Best Tool for the Trade. We also made significant progress on our heavy industrial line of products. With the launch of our new Warrior Edge. This product specifically addresses the robotics and automation market. The Warrior Edge, combined with our digital solutions, has created a competitive edge for ESAB as we focus on growing our equipment sales.
In addition we developed and introduced the first AI algorithm-enabled fully autonomous adaptive welding solution with the renewable industry. And within our Gas Control business, the innovation machine continues to deliver. The Vitality Index in our Gas Control business is a strong 33%. The team has introduced new valves for Industrial, Specialty, and Medical Gas, focused on the North American and Middle Eastern markets. Additionally, our Gas Control team successfully integrated two bolt-on acquisitions positioning us for continued growth in the coming years. ESAB is also benefiting from macro tailwinds related to onshoring, infrastructure upgrades, energy transition, agricultural investments, and medical and lab infrastructure improvements.
And that's not all, we have added to our EBX toolkit. We initiated a few targeted AI-driven activities focused on improving our operations and are encouraged by the initial results. As we enter 2024, we just wrapped up our leadership meeting and rallied our team around growth bolt-on acquisitions and taking EBX up another notch. We have a proven and simple formula at ESAB; use EBX to drive growth, expand margins, and improve our cash flow within our base business, add accretive bolt-on acquisitions, and then use EBX to make them stronger. As a result, we're shaping ESAB into a less cyclical, faster-growing and higher-margin enterprise. To talk specifically about the fourth quarter, let's turn to Slide 3. Another strong quarter and another step forward in the direction of our 2028 goals.
As mentioned earlier, we delivered record fourth quarter results. Total sales grew by 600 basis points, adjusted EBITDA margins expanded to a record 19.4%, and our end markets continue to be resilient, with particular strength in India and the Middle East. We continue to be encouraged by the growth performance of our Cobot's and Gas Control business. Our Cobot business experienced close to triple-digit growth, in the quarter and our Gas Control business grew low double digits. All our regions continue to benefit from infrastructure investment and energy transition projects. General fabrication activity remained solid. This was partially offset by softness in retail. Our teams are making positive strides, towards a more profitable product mix.
The impact of our EBX growth tools, and product line simplification is reflected in the adjusted EBITDA margins, improving 200 basis points and free cash flow improving by 39%, year-over-year. Moving to Slide 4, and reflecting on the full year and sharing a bit more on our financial metrics. Sales reached a record $2.62 billion and our core revenue rose by 800 basis points, with standout performances in India and the Middle East regions. Adjusted EBITDA, improved by 160 basis points to a record $483 million for the full year. And most importantly, we exceeded sales, adjusted EBITDA and EPS guidance, demonstrating our ability to consistently deliver on our commitments. Our full year free cash flow reached $305 million, with a record free cash flow performance in the fourth quarter.
This again, underscores ESAB's commitment to financial discipline and continuous improvement. Moving to Slide 5, to discuss our fourth quarter performance in more detail. Quarterly sales hit a record $650 million. Adjusted EBITDA was a record $126 million, expanding 200 basis points year-over-year to reach an all-time high of 19.4%. As expected, we saw our Americas business return to positive volume, and our EMEA and Asia PAC business continue its positive momentum. In the quarter, we did benefit from FX favorability of about $2 million and about $1 million in promotional activities that shifted out to the first quarter in 2024. Turning to Slide 6, in the Americas, organic sales grew by 900 basis points, strong price performance of 800 basis points, volume adding 100 basis points of growth and acquisitions adding another 100 basis points.
We did have a small FX headwind in the quarter. Our investments in new products and solutions especially, our light industrial line focused on distribution, along with our Cobots focused on automation and robotics, are fueling significant growth opportunities. I had a chance to interact with a few of our distributors in December, and their reaction to our product line was remarkable. Several complements on our Renegade Volt and our new Ruffian engine-driven welder. The distributors are thrilled, with the new ESAB products. Additionally, our Gas Control business continues to perform well in the region. Both FABTECH and Gas Control contributed to an overall, 200 basis points improvement in adjusted EBITDA margin. Turning to Slide 7. Our EMEA and APAC regions continue to perform as expected, with total sales growing by 400 basis points.
Volume grew 200 basis points. Acquisitions contributed 100 basis points of growth. Our team in Europe, India and the Middle East, continue to execute well in the market. Our Gas Control team continues to win key projects, in lab and hospital expansion projects. The region has made great strides in selling our equipment line, and our fully autonomous adaptive welding solution. To add, the effective utilization of product line simplification and EBX, are driving the region's adjusted EBITDA margins up 200 basis points to a record 19.3, underscoring our ability to drive growth and expand margins. On that positive note, let me hand it over to Kevin for Slide 8.
Kevin Johnson: Thanks, Shyam. We delivered another strong quarter of free cash flow, up 39% versus 2023 to a record $305 million. Key to our improved performance was a 0.3 turn improvement in working capital, as we continue to successfully deploy our EBX business system. This strong performance enabled us to delever better than expected and we ended the year with net leverage of less than 1.9 turns. In 2024, we continue to see opportunities to use EBX and leverage AI to drive even stronger cash flow to support our compounding journey. Turning to Slide 9. We provide our 2024 guidance. Total sales growth of 1.5% to 3.5%, which includes a point of FX headwind on organic growth of 2.5% to 4.5%. We have also provided our 2024 seasonality by quarter on the slide.
We expect year-on-year incrementals to be in the low 30s with an adjusted EBITDA guidance of $495 million to $515 million. This guidance includes $10 million of restructuring benefits and $15 million of additional investments in our business to support the commercialization of our innovative new equipment portfolio. Interest expense is guided to $74 million to $77 million adjusted tax rate between 23% to 24% and offshore client [ph] around $62 million. Overall unadjusted EPS guidance of $4.65 to $4.85. Finally our cash flow conversion guide is greater than 95%, which includes two one-time capital investments of around $10 million, we're making to support future growth. To assist with modeling we have included a more detailed guidance slide in the appendix.
With that let me hand back to Shyam on Slide 10 to wrap up.
Shyam Kambeyanda: Thank you, Kevin. In conclusion, our teams are focused on executing our strategy, propelling us closer to our goal of becoming a premier industrial compounder. We exit 2023 with momentum, as our innovative new products ignite enthusiasm within our customers and our sales team. We're putting a robust cash flow to good use reducing debt and adding strategic bolt-on acquisitions. Our M&A pipeline is the strongest it's ever been, positioning us favorably to augment organic growth. We're taking EBX up a notch with the presence kaizen event occurring every quarter. We're off to a good start in 2024 and our focus is on delivering the year as we have guided and positioning ESAB to realize our 2028 objectives. We're just getting started and as I said at Investor Day, it's a great time to be an investor in ESAB.
This team is poised to continue to deliver significant value for our customers, associates and shareholders. With that operator let's open the lines for questions.
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