ESAB Corporation Third Quarter 2026 Earnings Release and Conference Call - ESAB CORP

Financial Performance:

• Total core sales reached $787 million, a 14% year-over-year increase, with core organic growth of 2.3%.
• Adjusted EBITDA rose 17% to $156 million, driven by price increases and operational efficiency, resulting in an adjusted EBITDA margin expansion of 40 basis points year-over-year to 19.8%.
• Core adjusted gross profit was $316 million (40.2% margin), up 260 basis points year-over-year.
• Core adjusted net income was $83 million, with core adjusted EPS of $1.30.
• Adjusted free cash flow was $60 million, impacted by $38 million in cash interest costs due to Edify acquisition financing; excluding financing impacts, cash from operations grew 23% to $111 million.
• Net leverage decreased sequentially to 3.4x, with a target of the low threes by end-2026 and mid-twenties by end-2027.
• Foreign exchange contributed 1 percentage point to growth, while acquisitions contributed 11 points to top-line growth.

Guidance and Future Outlook:

• Full-year 2026 total core sales guidance narrowed to $3.055–$3.06 billion, reflecting 2% organic growth at the high end.
• Full-year 2026 adjusted EBITDA guidance updated to $603–$607 million.
• Full-year 2026 adjusted EPS guidance raised to $5.28–$5.33.
• Full-year 2026 adjusted free cash flow conversion expected at approximately 80%.
• Management forecasts Q4 2026 as the strongest quarter of the year for organic growth, margins, and cash flow, driven by the resolution of South American headwinds and additional price increases.
• Long-term goal is to enter 2027 with strong momentum, focusing on organic growth, margin expansion, and further deleveraging.

Business Segments and Product Lines:

• Americas: Total sales grew 15% to $337 million with 1% organic growth; U.S. and Canada showed high-single-digit organic growth, while South America declined due to natural disasters and elections.
• EMEA and APAC: Total sales grew 14% to $449 million with 3.4% organic growth; APAC delivered double-digit growth, and Europe returned to low-single-digit growth.
• Product Lines: Byproduct, equipment, and automation grew high-single digits; consumables remained flat; gas control equipment grew mid-single digits.
• Edify Integration: The acquisition is driving a $465 million cross-selling funnel, particularly in aerospace, defense, oil and gas, and nuclear sectors where welding and inspection are combined.
• EWM Acquisition: EWM technology is delivering high-single-digit growth in North America, with customers citing unmatched arc stability and precision; expansion efforts include establishing Centers of Excellence for additive manufacturing and TIG welding.
• EBX AI: Productivity gains from EBX AI are contributing to margin expansion and funding new commercial investments.

Market and Competitive Landscape:

• The "workflow" strategy (welding + inspection + monitoring) is creating a unique value proposition, with customers expressing a strong preference for a single "one-stop shop" provider.
• At Fabtech, EWM technology drew significant attention and leads, with customers noting superior performance compared to competitors.
• The nuclear market is highlighted as a high-growth vector, with Edify holding a leading position; nuclear plants require inspection and monitoring for 60–80 years after a single welding event.
• Management noted positive industry sentiment at the ASNT conference regarding the convergence of welding and non-destructive testing.

Risks and Challenges:

• Geopolitical & Natural: Headwinds included the Middle East conflict (impacting freight and logistics), the earthquake in Colombia, and the impact of Brazilian presidential elections on economic activity.
• Inflationary Pressures: Rising freight, raw material, and electronic component costs required targeted price increases to maintain price-cost neutrality.
• Conversion Risk: While the cross-selling funnel is substantial ($465 million), management acknowledged that converting these opportunities into revenue remains the primary near-term challenge.
• Cash Flow Timing: Q3 free cash flow was depressed by the timing of semi-annual bond interest payments related to the Edify acquisition.

Management Commentary and Tone:

• Tone was optimistic and confident, emphasizing the successful execution of the integration strategy and the transformative nature of the combined entity.
• CEO Shyam Kambyanda highlighted the "energy and optimism" across the organization, noting that the strategy of combining fabrication with inspection is resonating powerfully with customers.
• Management expressed strong conviction in the "razor and razor blade" business model, where installed equipment drives recurring sales of consumables and services.
• Confidence was reiterated regarding the team's agility and capability to navigate diverse global macroeconomic environments.

Analyst Questions and Answers:

• Funnel Conversion (Nathan Jones, Steeple): Management stated it is too early to quantify exact conversion rates for the $465 million Edify/ESAB funnel but noted 10–15 late-stage opportunities where customers are testing samples, with more clarity expected in Q1 2027.
• Competitive Differentiation (Tammy Zakaria, JP Morgan): Management emphasized that the "workflow solution" combining welding, gas control, and inspection is a unique differentiator that competitors lack, driving customer interest in switching to a single provider for data connectivity and reliability.
• Deleverage Strategy (Tammy Zakaria, JP Morgan): CFO Brent Jones confirmed plans to deploy excess cash flow toward debt reduction in addition to organic EBITDA growth to achieve mid-2s leverage by end-2027.
• Incremental Margins (Neil Burke, UBS): Management expects the high incremental margin trend to continue in Q4 and 2027, citing price adjustments and cost controls, with Q4 expected to be the best quarter of the year.
• Automation & EWM Growth (Brian Blair, Oppenheimer): Automation and Edify are expected to see high-single-digit growth; EWM is already a key driver of North American equipment growth and is being used to expand into geographies where ESAB previously had limited presence.

Other Key Points:

• Fabtech Impact: The recent Fabtech trade show was described as a "defining moment," showcasing the full enterprise workflow and generating significant leads, particularly for EWM equipment displayed in non-ESAB booths.
• Strategic Focus: The company is shifting focus from merely building the portfolio to "converting" the cross-selling funnel through disciplined go-to-market strategies with strategic customers.
• Inventory Management: Deliberately higher inventory levels were carried in Q3 to support Middle East customers and equipment sales in the Americas, temporarily impacting cash conversion.
• Capital Structure: Approximately 70% of debt is fixed at attractive rates with the next maturity not until 2029, minimizing interest rate risk.