ESAB Corporation Q1 FY2026 earnings call

Thank you for joining us today. We're pleased to report a strong start to the year with record first quarter sales. Core sales grew 10% yoy, adjusted EBITDA up 6% yoy. Encouraged by acquisition performance, EWM and ACTIV grew double digits. We're accelerating our compounded journey with Edify acquisition expected mid-year. Over past decade, reshaped ESAB via R&D, EBX AI, M&A. Equipment mix changed, now ~44% of revenue, expected ~52% with Edify closing. Gross margin moved from ~35% in 2016 to nearly 38% today, expected >40% by 2027. Launches like Ruffian 270 and Aristo Edge driving momentum. EWM's additive manufacturing gaining traction, Tetrix 350 adding growth lane. Edify acquisition extends workflow solutions, financially strong. NASA's Artemis program benefited from our technology. Balance sheet and cash flow improving, adjusted free cash flow $40 million, cash conversion 49%.

Total core sales grew 10% year over year, generating sales of 715 million and adjusted EBITDA of 136 million, an increase of 6% year-over-year. Americas: Total sales were 288 million, up 3% year-over-year, and adjusted EBITDA was 56 million, also up 3% year-over-year, with margins flat at 19.4%. EMEA and APAC: Sales increased 16% to $426 million, and adjusted EBITDA rose 9% to $80 million, with margins declining 130 basis points. EWM and ACTIV both grew double digits year-over-year.

Reiterating previously announced guidance. Core outlook assumes total sales growth 6 - 9% (organic 2 - 4%, M&A 400bps, FX ~1%). Adjusted EBITDA range 575 - 595 million, adjusted EPS range 570 - 590.

Impact from conflict in Iran with higher costs and margin headwinds. Uncertainty in dynamic operating environment affecting business.

Q: At a fairly high level, volume in the first quarter is minus three, and I would have thought that price should be fading from the plus two that we had in the first quarter, maybe not with all the renewed inflation. Does it imply an inflection on volume to get to the two to four percent organic growth for the full year? So can you maybe talk about where you see the inflection in volumes as we go through the year from that negative three to something that's positive?

A: Yeah, I think, Nathan, we obviously were going against the comparable last year, if you remember, with the pull ahead with tariffs. So comparably, we knew Q1 would be just a bit softer as a result of the pull aheads that happened last year when the tariffs went into play. So we sort of landed in Q1 even a little stronger than what we thought based on when the conflict started. So very pleased with the top line number and how the teams performed. And as you go through the year, a couple of things happen. One, obviously, we go in with some additional price into Q2. Second, in the back half of the year, as you know, some of the acquisitions that today show up, the acquisitions that show up today on a different line become organic as we go into the third and the fourth quarter, driving up organic sales as we finish out the year. So the thoughtful way to look at it, down slightly, neutral, a little bit more positive in Q3. And then when the acquisitions become part of the base, you really see that organic driver kick in. Clearly for us, the teams have done, in my view, a phenomenal job navigating through the first quarter. Even though the war came upon us as we finished out February, the team sort of really rallied, figured things out quickly in terms of supply chain, handled the quarter strong. and we've finished well, and we've set us up nicely for Q2 and beyond.

Q: We have heard from companies about lack of site access and things like that that are impeding, I guess, work being done in the Middle East. Can you talk about the impact that's having on your business? You know, we're only at war for one month out of the quarter in the first quarter. Should we expect a little bit more impact than... I think you called out 50 basis points of margin in EMEA and APAC. Does that get a little bit worse in the second quarter or maybe talk about the mitigation activities that you've deployed to help offset that?

A: Yeah, so the way to think about it, at least in the first quarter, was when it came upon us, I think we drove to get supplies into the Middle East so that we had the right inventory in place for the business. And so think of it as some additional costs that came at us in Q1 that we thoughtfully engaged with to make sure that the business was in a good spot. We've gone out for price as the month went on. And so think about that margin gap actually reducing. That being said, we are going out for price to match costs. So we don't have any additional price there. So we expect to be price cost neutral. So it's an improving scenario. And as the year goes along, we'll continue to work the price piece to continue our journey forward like we've done in the past. So that's the way to think about it. So a little additional hit in Q1, getting better as we get into Q2 with the additional price that we've gone out with, and then getting slightly positive as we finish out the year in the third and fourth quarter.

Q: I heard you talk about acquisitions growing double-digit percent. Did those acquisitions have unusually easy compares, or that's a good gauge for the rest of the year? And within that double-digit percent, how much was price versus volume?

A: All right, so let me start with the first piece. You know, the two businesses that I highlighted were EWM and, and active. Uh, the short answer is year over year. It was, wasn't about easy comparables. It was the actions that the team were taking, engaging with new customers, getting new orders, uh, especially in Europe, uh, the middle East, uh, and to some extent also in North America for the EWM business. And so we feel really good. Uh, one about the acquisition to about the funnel that we've created, that's now creating momentum. in the equipment business. There was some price in it, but most of it was volume, which is what's exciting for us as we go through the year. So I hope that sort of answers that question. The other piece that I think I want to reiterate as we look at the second half of the year as well, we have some automation orders that we booked, several of them that stack up quite nicely. adding to that organic growth number that we expect to see in the second half of the year in Q3 and Q4. So additional price, additional orders and automation, these businesses that we've acquired that are really matching the strategic fit that we saw are today outperforming our plan, creating additional tailwind for volume as we finish out the year.

Q: Regarding the 30 basis points headwind you saw in the quarter to EBITDA from the Iran conflict, do you expect a similar 30 basis headwind in 2Q or that steps down?

A: You know, I think the way to think about it is we'll obviously see, you know, let's start with the positive. You know, the war could settle in a week and maybe we're talking about something different. But on the side, if the war were to continue, we would see two additional months of volume that would then get offset by some additional price that we've gone in. So the way to think about it is that it's not going to get worse, could get slightly better as the quarter goes on.

Q: I want to talk a little bit about the Americas segment. And I guess the moving pieces here, I'm trying to think through them. You know, you had the negative one organic in the quarter, but you kind of call out here that excluding Mexico, North America is up mid-single digits. Mexico is stable. Obviously, something else acted as a drag here. Can you comment at all on that?

A: Yeah, we were actually very pleased with our US and Canadian businesses for the quarter. We felt that both on price and on what I call created volume, we were very happy with how the business performed. And I would also say that in April, we did better than how we finished out in Q1. So really happy about how that business is performing, the traction that we're getting with customers and the channel. I was actually out with some of the distributors. Our team had an EDAC, you know, our distributor meeting out in Albuquerque. That went really well. I've done some Gemba with the North American team down in Texas and also down in Mexico. And we feel really good about the traction, the funnel, the growth bridges that the teams have that are now driving results in US and Canada. When it comes to Mexico, as you remember, this was the last quarter and those comparables that we spoke about. And so what I meant by stable is that the business continues to be at the levels that it was in Q4. As I visited with the team last week, there are shoots of improvement as we go through the year. So optimistic about how the year sort of shapes up also with Mexico kind of lapping itself in Q2. To give you some additional color on the volume, obviously the rest is South America, where they also had some tariffs as related volume bump last year. That sort of goes away and neutralizes now and puts us in a better spot for Q2.

Q: Well, America's volume, we expect to be, So let me just sort of thoughtfully walk you through that. When you look at U.S. and Canada, we feel that we're going to be volume positive. And when it comes to Mexico as well, we think as the year goes on, we're going to be volume positive, slightly positive on volume also in Mexico. South America, in my view, will stay slightly volume positive. They were a bit volume negative in the first quarter, just on the back of year-over-year comparables with the tariff year. they also go positive. So the way to think about the year as it plays out is you saw Q1 be slightly negative. You'll see Q1, Q2 be neutral, Q3 getting positive. And then Q4, in my view, will be nicely positive because some of the acquisitions that today are not considered part of our base become part of our base. In addition to that, obviously, we're really excited about the Edify acquisition that'll close here in mid-year, that then allows us additional opportunities for growth for our base business and to be able to pull to ratify with our customers.

Q: I just wanted to go back to the Middle East question just to clarify this 50 basis point drag that was on segment EBITDA margin. Was there any impact on volumes? And is there any sense that more broadly higher commodity prices are in any sense weighing on overall demand?

A: Yeah, the short answer is we did not see it and we have not seen it yet. But we have seen cost impact, specifically some, you know, like tungsten. We've seen nickel move a little bit. We've seen steel move a little bit. So, yes, the war has created a little bit more costs in some of the steel and components that we buy. The other piece that we've really seen is around freight. Freight costs have gone up, and partially that's rightly because of fuel costs. And so those are two aspects. We're moving price to the market to sort of overcome and offset all of it. We expect price costs to be neutral for at least the second quarter, and then we'll continue to sort of work to be price cost positive as the year plays on.

Q: I think incremental margin in the quarter was about 12%. for the total company and the guide seems to embed something around 20%. So can you just kind of walk through the progression through the rest of the year of how incremental margin should improve?

A: Yeah, I think the first one obviously is we expect better price from Q1 to Q2. So that's assumption number one. The things came at us a bit fast in March. We went out with some price. We didn't get all of it in Q1. We get price in Q2. The second piece is that we are seeing good momentum in the North American market, and those margins for us are also accretive. We see really nice activity in Europe. One of the things that we have not talked about is how well Europe performed for us to offset some of the issues that we had in the Middle East. So those are basically the two aspects of it. And then we continue to make improvements in the acquisitions. We talked about EWM being ahead of schedule in terms of its integration plan and the plans that we had to continue to improve EBITDA percentage in that business. So Q1 will be sort of the, in terms of EBITDA, the lowest quarter for EWM. And every quarter sequentially, the EBITDA percentage for EWM improves, becoming accretive in Q4.

Q: You mentioned Europe's strength a couple of times. Can you just delve into that a little bit and sort of share versus kind of what you're seeing from an end market perspective? I think you might have mentioned something. stimulus benefits over there in past calls or something? Just an update on what's happening there.

A: Yeah, there's a couple of pieces playing in our favor. One, obviously, we have a phenomenal footprint. And now with the two acquisitions that we've made in the Germanic region, really have a position of strength in Europe. We are local. We are able to supply and serve our customers locally, giving us a significant advantage in the region. In moments of conflict, in the moments of uncertainty, what we find is customers begin to realize that they can rely on ESOP. The second thing that's driving it to some extent is the defense spending that's happening in Europe. We're seeing quite a bit of orders associated with that come to us. We're also seeing a lot of momentum on the equipment side, especially with EWM that's benefiting our business. actions underway in Europe that could also benefit us. One is this carbon tax piece that is expected to land in 2027. That's giving us a little bit of an advantage. And then there are some additional tariffs and quotas that the European Union is expected to put in mid-year that would advantage local companies in Europe. So those are the aspects that are giving us a benefit. Really pleased with how our European business did. Obviously, if the Middle East conflict resolves, There's some additional significant tailwind for us in Europe and in Asia.

Q: I know it's early days, but has your team been able to think about what type of sort of rebuilding and upgrades might be required in the Middle East and how that you might participate in that?

A: Yes, we actually have We met with our leader in the Middle East this week to look through what the opportunities will be once peace finds its way into that conflict. We feel that with the damage that has occurred in the conflict and the repair that would be needed, ESAB would have a position to take advantage of that rebuild because most of our filler metal is pecked into most of the damaged sites. As a result, we find ourselves in a position of advantage.