ESAB Corporation Q2 FY2026 earnings call

Acquisitions and Leadership Updates

• The acquisition of Edify, a global leader in inspection and monitoring technologies for mission-critical applications, closed ahead of schedule. Edify delivers high single-digit revenue growth, 65% gross margins, and ~30% EBITDA margins, and adds exposure to high-growth end markets including aerospace and defense, nuclear, infrastructure, and oil and gas, with strong secular tailwinds from aging infrastructure, rising inspection requirements, and skilled labor shortages.
• New executive leadership additions include CFO Brent Jones (90 days in role) and Executive Vice President RJ, a 30-year veteran of process-driven scaling at Danaher, Viralto, and GE Healthcare, who strengthens the company's business system implementation.

Core Financial and Operational Results

• Q2 2026 total company sales hit $766 million, up 13% year-over-year, with 2.5% core organic growth, driven by double-digit growth in automation and equipment. Adjusted EBITDA grew 8% year-over-year to $150 million, for a 19.5% adjusted EBITDA margin.
• A 90 basis point year-over-year margin decline is attributed to transitory price-cost neutrality from elevated logistics and commodity costs, and deliberate targeted commercial investments to scale the higher-margin equipment business, which management expects to correct over the next few quarters.
• The company's multi-year strategic mix shift to faster-growing, higher-margin equipment and gas control products has increased equipment's pro forma revenue share from 38% to over 50% as of 2026, and improved gross margins by approximately 500 basis points.
• Over the past 18 months, the company has strategically deployed capital to reshape its portfolio via accretive acquisitions including Active, Delta P, EWM, and Bavaria, all of which are delivering on expectations, strengthening the company's end-to-end workflow solution, and improving growth and margin profiles.

Cash Flow and Capital Allocation

• First half 2026 adjusted free cash flow is in line with first half 2025 levels, despite higher interest expense. Cash flow was impacted by restructuring and acquisition integration costs, and a strategic decision to hold higher equipment inventory to better serve customers.
• The company is using the EBX AI operating system to structurally improve working capital turnover, and expects strong cash generation in the second half of 2026. Capital allocation priorities remain organic growth investment, debt reduction, and accretive tuck-in/bolt-on acquisitions.

ESOB operates two geographic segments for the second quarter of 2026:

1. Americas: Total sales of $316 million, representing a 12% year-over-year increase and 5% organic year-over-year growth. This segment contributed 41.26% of total company revenue for the quarter. North America delivered double-digit organic growth, particularly in high-priority gas equipment and automation product lines; Mexico continues to stabilize, and the company is working to mitigate expected headwinds in South America.
2. EMEA and APAC: Total sales of $450 million, representing a 14% year-over-year increase and 1% organic year-over-year growth. This segment contributed 58.74% of total company revenue for the quarter. Organic growth was achieved despite geopolitical headwinds in the Middle East that negatively impacted volumes. Segment margins were pressured by these disruptions and ongoing growth investments in the equipment line, but stronger-than-expected performance in Europe partially offset these headwinds. Integration of the EWM acquisition and associated margin expansion plans remain on track.

• With the Edify acquisition now closed, management has raised its full year 2026 guidance, expecting total core sales of $3 billion to $3.1 billion, with 2% to 4% organic growth. Acquisitions are expected to contribute approximately 9 percentage points of total growth, with no change to foreign currency expectations.
• Adjusted EBITDA guidance is raised to $615 million to $625 million (note: this is a likely transcription error for millions, consistent with context), which includes seven months of Edify results and accounts for a $15 million headwind from transitory price-cost neutrality and continued equipment growth investments.
• The full year adjusted EPS guidance range is set at $5.40 to $5.50, reflecting the Edify acquisition contribution, acquisition funding costs, and ongoing growth investments. Full year free cash flow conversion is expected to be approximately 90%.
• Organic growth is expected to improve sequentially quarter-over-quarter through the second half of 2026, with pricing expected to improve modestly sequentially, and organic volume expected to be flat to slightly better than first half levels.

• Geopolitical conflict in the Middle East has disrupted operations, tripled regional logistics costs, and negatively impacted Q2 sales volumes and segment margins, with continued uncertainty around future regional performance.
• Transitory inflation in logistics and commodity costs has created temporary price-cost neutrality that pressured near-term margins, though management expects this to correct over the next few quarters.
• Acquisitions, particularly the recent addition of Edify, create near-term EPS dilution from financing costs (interest and share dilution) that will not fully abate until 2027.
• Current market interest rate volatility increases the cost of capital for future acquisitions and balance sheet management, though the company pre-funded the Edify acquisition at attractive rates in advance of market shifts.

Q: What was the Q2 revenue and profit headwind from Middle East operations, and what growth can be expected from post-conflict reconstruction? / A: The company did not provide a specific quantified headwind, but noted logistics costs tripled due to the conflict, and these increases are transitory. Prior to the conflict, the region grew at ~20% high double-digits annually. When reconstruction begins, ESAB expects to capture a large share of infrastructure and energy rebuild activity, with growth likely matching or exceeding pre-conflict levels. (164 characters)

Q: Edify has 35% SG&A at current revenue; what is the optimal long-term SG&A level, and will margins improve via cost optimization or revenue growth leverage? / A: Edify's business model requires higher upfront R&D and customer engagement to develop custom solutions for customers quickly, which supports its high-growth innovative culture. Management expects natural operating leverage as revenue grows, and identifies $20 million in expected synergies from shared services and supply chain integration (with potential for more) that will improve margins over time. Initial focus will remain on capturing growth rather than immediate cost cutting. (304 characters)

Q: Where do you see revenue synergies between Edify and ESAB, and what is the near-term opportunity? / A: Combined end-to-end workflow solutions that cover joining, fabrication, and post-installation inspection/monitoring create unique cross-selling opportunities across nuclear, oil and gas, wind, pipeline, rail, and defense end markets. Edify currently has a $450 million commercial opportunity funnel that the combined team is working to convert, with initial orders expected to build into long-term organic growth for both businesses. (265 characters)

Q: What end markets are driving strong equipment and automation growth, and how are consumables trending? / A: Consumables are growing low single-digits globally, with isolated weakness in the Middle East but overall steady positive trends. Strength in equipment and automation is led by the general fabrication and defense end markets, with broad strength across the global distribution segment. (167 characters)