ESAB Corporation Q3 FY2025 earnings call

Management Statement and Operational Highlights

• ESAB delivered solid quarter with return to positive organic growth, closed EWM acquisition earlier than anticipated, and raised full-year guidance.
• Sales rose 8% to $687 million in Q3, with organic sales up 2% year-over-year. Adjusted EBITDA increased 7% to $133 million.
• Remake This Town initiative launched in Chicago, linking youth to jobs through various activities.
• EBX executed with discipline, and transition team using proven integration process for EWM acquisition, collaborating on growth, cross-selling, and margin expansion.
• EWM acquisition brings high-level talent, unmatched technology, and highly accretive gross margins, with React technology offering benefits like faster weld speeds and lower heat input.

Segment Performance

• Americas: Organic sales rose mainly from strong U.S. equipment and automation growth and price discipline. Acquisitions added 300 basis points, offsetting FX. Adjusted EBITDA margin was 19.6%, including ongoing investment for long-term growth and a drag from price/cost dynamics related to tariffs.
• EMEA and APAC: Sales grew 14% year-over-year to $395 million, driven by growth in Asia, India, and the Middle East as well as recent acquisitions including EWM. Organic sales were up 3%, with volume increasing 4%. Adjusted EBITDA margin expanded to 19.3%, rising 40 basis points year-over-year. Excluding EWM, it would have been 19.7%, an 80-basis point gain.

Guidance

• Raised full-year guidance: Total sales expected $2.71 billion to $2.73 billion (around 1-point organic growth, modest FX improvement from EWM acquisition). Adjusted EBITDA $535 million to $540 million, including ~$3 million from EWM. Adjusted EPS between $5.20 and $5.30. Free cash flow around 95% due to EWM. Aim to use Q4 cash flow to reduce net leverage to 1 to 2x and position for accelerated M&A in 2026.

Risks

• Tariff impact in Americas affected margin.
• Work remaining on compounder journey and integration of EWM.
• Need for continued work on SG&A structure during EWM integration.

Q: Sequential improvement in Americas, with consternation last quarter regarding deferred automation shipments and selling into Mexico. To what extent did team catch up on $15 million or so in combined revenue during Q3 and any lingering risks?

A: Bryan, there was a bit of catch-up, but not much. Good execution from teams, focus on commercial excellence. Mexico stabilized, equipment and automation did well. Caught up a bit on automation pushout, but feeds into Q4 and Q1. Feeling good about Americas print.

Q: Strategic fit of EWM, year 1 deal model, and SG&A structure. How to think about year 1 deal model and SG&A?

A: EWM has strong gross margins >45%. Sales teams pulling on product line. Kevin mentioned EWM expected ~$3 million profit this year, making investments to drive to 10% ROIC by year 3. Excited about EWM's addition and opportunities.

Q: Americas EBITDA margin moved down about 100 basis points. Was this expected, and what's driving it? Any tariff headwind?

A: Yes, expected some. Contributors include investments in sales and growth initiatives, and late quarter tariff impact. Moving manufacturing to regions sold in and restructuring initiatives to drive margin expansion in 2026.

Q: M&A, expanding footprint in Europe. Are you consciously expanding in Europe due to growth?

A: Agnostic, looking for best assets at best financial principles. Bavaria and EWM give extensions into other regions. Bavaria can supply North America, Middle East, Asia. EWM has inroads in North America and opportunities in Middle East and Asia, strengthening footprint in Europe and creating growth avenues elsewhere.

Q: Margin discussion in Americas, why margins get better in 2026?

A: Twofold. Some restructuring projects underway, expected to complete early Q1. Better comparables in 2026. Shifting supply chains to right spots. Pricing, tariff movements, and restructuring to drive margin expansion in 2026.

Q: EMEA and APAC, bifurcation between Middle East/India and Europe. How to think about Europe in 2026?

A: Strong orders and momentum in high-growth markets. Did well in Europe, with significant share gain. Orders and momentum increasing in Europe due to defense, infrastructure, and energy investments. Expect acceleration in 2026, with Asia, Middle East continuing momentum and Europe providing tailwind.

Q: EWM legacy distribution and global network. Talk about EWM's legacy distribution and putting product through global network.

A: In Europe, team excited about EWM acquisition. Distribution complementary, opportunities to move products into EWM's channel. Product lines complementary, filling gaps. Excited about avenues opened and opportunities, but execution needed.

Q: Color on 4Q start. What's seen in 4Q to date?

A: Finished Q3 at ~2% core growth rate, expecting better in Q4. October started on that run rate. Core growth improves from Q3, teams focused on execution, investments made.

Q: Price/cost in Americas, drag in third quarter and expectations for fourth quarter?

A: Slight drag in third quarter due to copper tariffs. Moving manufacturing capacity to region of sale and ongoing restructuring to finish early Q1, creating tailwind for margin expansion in 2026. Drag was on dollars.

Q: Consumables, what's seen?

A: Consumables business steady. New product introductions like engine-driven welder, Edge product line, Fabricator line doing well. Seeing success in getting channel and customers to pick up equipment. Driving full workflow solution set, picking up orders with large U.S. customer.

Q: Mexico and automation, mid-single-digit decline and 2026 outlook?

A: Mexico stable but down in volumes. U.S. grew mid-single digits. Comps against Mexico will get easier in 2026, expecting tailwinds on volumes from Q2 onwards when tariffs impacted.