Thank you for standing by, and welcome to the ESAB Corporation to acquire Eddyfi Technologies, creating an unrivaled provider of complete workflow solutions conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. I'd now like to turn the call over to Mark Barbalato, Vice President of Investor Relations. You may begin.
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 in today's slide presentation. With that, I'd like to turn the call over to our President and Chief Executive Officer, Shyam Kambeyanda.
Thank you, Mark, and good morning, everyone. Thank you for joining us today. Today marks a significant moment for ESAB. I want to begin with our purpose of shaping the world we imagine. This acquisition reinforces the purpose and reflects our commitment to our values as we continue to shape ESAB for the future, driving faster growth, higher margins, and stronger, more durable value creation for all our stakeholders. Before turning to the slides, let me provide some context on how we arrived here. For the past two and a half years, we've been working deliberately in this space. Through our EBX process, we value mapped the entire end-to-end workflow of our customers, looking at where customers create value, where complexity resides, and where returns on capital are structurally more attractive.
What became very clear through that work is that inspection and monitoring represents one of the most compelling extensions of our current workflow. It is technology-led, mission-critical, supported by strong secular tailwinds, and characterized by high single-digit growth, attractive margins, and lower cyclicality. We also concluded that if we execute the right acquisition, this space would provide ESAB with a long runway to deploy capital at very attractive returns. But to do that, we first needed to establish a credible entry point, a true beachhead into inspection and monitoring. That brings us today and to Eddyfi. We are excited to announce that we have signed a definitive agreement to acquire Eddyfi, an exceptional company defined by technology leadership, a growth mindset, deep customer intimacy, and a strong entrepreneurial culture. These attributes align closely with ESAB's own culture.
At ESAB, we believe long-term success is built by investing in people, empowering teams, and fostering a winning culture. We are confident the shared philosophy will enable the Eddyfi team to thrive and accelerate their growth within ESAB. Together, we are uniquely positioned to reshape workflow solutions for our customers while positioning ESAB for a faster growth, higher margins, and lower cyclicality. Moving to slide four. There are several compelling reasons why we are excited to welcome Eddyfi to the ESAB family. First, with Eddyfi, ESAB becomes a clear, unrivaled provider of a fully integrated workflow solution spanning fabrication, inspection, and monitoring. Second, this acquisition positions ESAB as the partner of choice for our most important global customers, customers for whom quality, productivity, and asset integrity are mission-critical.
Third, Eddyfi expands ESAB's total addressable market by approximately $5 billion and strengthens our M&A pipeline, supporting sustained higher growth and higher margins over time. Turning to slide 5, let me briefly highlight Eddyfi's profile and financial characteristics. Eddyfi is a market leader in electromagnetic testing, ultrasonic testing, and automated inspection, with clear leadership across these categories. The company serves mission-critical end markets with attractive secular tailwinds, including aerospace, defense, nuclear, and energy infrastructure. Eddyfi also brings increased North American exposure while benefiting from ESAB's global footprint, creating immediate geographic expansion opportunities. Their solutions address powerful structural trends, aging infrastructure, rising inspection requirements, growing power generation demand, and skilled labor shortages through automation and advanced inspection technologies. Financially, Eddyfi is a premier asset. The business delivers high single-digit growth, gross margins about 65%, and EBITDA margins of approximately 30%....
For ESAB, this acquisition accelerates our shift towards equipment, enhances our ability to deliver differentiated workflow solutions, expands margins, reduces cyclicality, and ultimately improves the predictability and resilience of our earning profile. Turning to slide six. Since becoming a publicly traded company, our ambition has been clear: to build a premier industrial compounder capable of consistently outpacing the markets across cycles. Eddyfi directly advances this objective. As you know, ESAB is a global leader in filler metals, welding equipment, gas control, and in-process monitoring through InduSuite. Eddyfi, including its Magnifi digital platform, adds post-weld inspection, structural integrity, and lifecycle monitoring capabilities across both metal and composite structures. Together, we're uniquely positioned to serve critical markets while accelerating the industry's shift towards connected digital workflow solutions that integrate inspection, traceability, and lifecycle monitoring into a seamless process. Moving to slide seven.
Since 2016, we have consistently expanded ESAB's total addressable market. Eddyfi is a meaningful step forward in that journey. By combining Eddyfi's inspection and monitoring capabilities with ESAB's global scale, we extend these solutions into new regions and customer segments. As shown on the slide, Eddyfi increases our total addressable market by approximately $5 billion, bringing ESAB's TAM to roughly $45 billion. Importantly, it establishes a foundation in inspection and monitoring, creating additional long-term compounding opportunities. Turning to slide eight. Through our diligence process, we've identified $20 million in run rate synergies. Leveraging EBX AI, we see opportunities across sourcing, shared services, digital workflow integration, geographic expansion, and operational efficiencies. As with prior acquisitions, synergies will build over time. Turning to slide nine. Over the past several years, we have deliberately shifted our portfolio to higher margin product lines, particularly equipment and gas control. Eddyfi meaningfully accelerates that journey.
We have previously outlined our goal of achieving a 60/40 ratio of consumables to equipment, and this acquisition moves us decisively towards that target. On a pro forma basis, we expect 2025 ESAB revenue of approximately $3 billion, with EBITDA margins of around 21%, just a hundred basis points below our 2028 target of 22%. In fact, we now expect to reach approximately 22% EBITDA margins by 2027. With that, I'll hand it over to Kevin to walk you through the financial details of this acquisition.
Thanks, Shyam, and good morning. Turning to slide 10 for the transaction summary for Eddyfi. The acquisition is projected to bring in about $270 million in 2026 revenue, with an EBITDA margin over 30%. The purchase price is $1.45 billion, cash-free and debt-free. The deal values Eddyfi at 14.5x 2026 earnings, factoring in $20 million of annual run rate savings. Funding will come from a combination of cash in hand, debt, and $318 million in privately placed securities, made up of $175 million of a mandatory convertible preferred and $143 million of common equity.
This acquisition will greatly enhance ESAB's growth and profitability while creating new opportunities for additional acquisitions that can further improve the ESAB business and accelerate our journey to a premier industrial compounder. At closing, net leverage is expected to be in the low 3x, dropping below 3x by year-end, well within our targeted range of 2x-3x net leverage. Turning now to slide 11. We provide our preliminary results for the fourth quarter of 2025. The ESAB team sustained a robust performance during the fourth quarter, achieving total core growth of approximately 8.5%. Organic growth experienced a decline of 1.8%, attributable to a softer December, as we experienced unexpected softness in Europe and South America as customers ceased operations for the holidays a week earlier than anticipated.
High-growth markets, particularly the Middle East and India, continued to demonstrate strength. I am proud of the performance of the ESAB team, which used EBX to boost EBITDA and widen margins, achieving around 9% growth at the midpoint and approximately 50 basis point margin increase, excluding EWM. EWM integration is progressing well, with promising opportunities for long-term equipment growth and market share gains. Moving to slide number 12 on our full year 2025 highlights. We are proud of our strong reputation for following through on our commitments. Since our spin-off, we have been to set realistic goals and surpass them. Although 2025 brought challenges, our team managed to increase both revenue and EBITDA throughout the year. I'm happy to report that we ended the year, again, well above our original guidance. Moving to slide number 13, and ESAB's 2026 outlook.
Please note, our guidance excludes the impact from the Eddyfi acquisition, which will be incorporated following its expected closure in the middle of the year. We anticipate organic growth in the range of 2%-4%, driven by positive price and in volume. Additionally, we expect approximately a four-point benefit from M&A and a FX tailwind of 0%-1%. To address seasonality, the quarterly breakdown is outlined on the slide. Organic growth is projected to be flat in the first quarter, with improvement forecasted sequentially quarters two through four, attributable to more favorable comparisons and progress in growth initiatives. Our adjusted EBITDA is projected to range between $575 million-$595 million, representing a margin expansion of approximately 40 basis points at the midpoint, excluding EWM.
We aim to deliver savings of roughly $25 million during the year through productivity enhancements, back office efficiencies, and restructuring initiatives, which will be partially offset by $15 million allocated to growth investments. Interest expense is expected to fall within the $80-$85 million range, with an anticipated adjusted tax rate of 20%-21%. Cash flow conversion is projected at approximately 90%, as we maintain a disciplined focus on robust cash generation while investing in EBX AI initiatives, including some large one-time restructuring activities to enhance our manufacturing competitiveness. We are confident in our operating plan and optimistic about delivering another successful year in 2026. The momentum will be further enhanced upon closing the Eddyfi acquisition. With that, I will return the discussion to Shyam.
Thank you, Kevin. Turning to slide 14 to summarize. Today is a defining day for ESAB. Eddyfi strengthens our technology leadership and positions us as the unrivaled provider of end-to-end workflow solutions. Eddyfi expands our presence in higher growth, higher margin markets, and enhances the quality and durability of our portfolio. In addition, inspection and monitoring is an attractive space to deploy additional capital at attractive returns. Equally important, the strong cultural alignment between our organizations gives us confidence in our ability to integrate effectively and move with speed. We expect this acquisition to be EPS accretive in 2027. Let me end by thanking our teams and our partners who worked on this acquisition, and welcome the Eddyfi team to ESAB. Together, we're well-positioned to unlock extraordinary long-term value. With that, operator, we're now ready to take questions.
Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. We ask that you please limit yourself to one question and one follow-up. Your first question today comes from the line of Bryan Blair from Oppenheimer. Your line is open.
Thank you. Morning, guys.
Hi, Brian.
Deal checks a lot of boxes. It's certainly a little more transformational in nature than what we had anticipated, but, you know, certainly like the profile, the fit seems pretty clean. You mentioned a few times that Eddyfi will, you know, serve as a true beachhead to pursue growth and then scale in inspection and monitoring. I guess, to level set on that and think about competitive landscape, how should we think about the major competitors in the market? You know, who you're likely to bump up against, you know, more frequently, and then how much fragmentation is there beyond, you know, the, quote-unquote, "big guys?
Yeah, you know, first, what I'd tell you is that this is something that we've been working on for over 2.5 years, Bryan. And, you know, one of the things that we pride ourselves in is our process and how we identify opportunities and how we connect the dots. What became very clear to us, as we were going through this process, was that the connection between our traditional fabrication technology business and inspection and monitoring was very clear. The customer base, the people that are involved in the purchasing of it, and the interactions that we have with the general marketplace.
And the additional cherry on the top was the fact that this was a very attractive space in terms of margin, in terms of growth, and the aspect that it was lower cyclicality. To answer the second part of your question around what are the opportunities to compound? As I mentioned to you, it's about a $5 billion market. Apart from a few larger competitors, the space is actually quite fragmented. Think of this as an acquisition that creates a platform within ESAB, upon which we can bring, acquire, and integrate any other acquisition in the space with much more velocity and much higher and much more attractive return on investment metrics for ESAB.
In terms of the competitive landscape, yes, there are a couple of people, but it depends on the space that you're working on, and the characteristics within that space. So let me just mention a few. You know, you look at, on one side, probably liquid penetrant and visual inspection, and on the other side, there's electromagnetic testing and ultrasonic testing. And in each of those categories, there are actually different competitors that provide you either a product that you may need or a geographic expansion opportunity, or possible access to customers. We've got a very robust list of targets off of this. We think we continue to build out and strengthen our workflow.
What we're most excited about are the growth and the margin characteristics in this business, and thrilled about what we can do as we begin to deploy capital in this space. And as you know, Brian, we now have three places to deploy capital. And what I'd like to also add is that this is an extension, not an adjacency, right? This is a space that we now know well. It's a customer base that we know well. It's a customer base that we interact with. So this is, this acquisition, in many ways, is us walking along the path of creating additional value for our customers as well, our shareholders.
Understood. It all makes sense. Helpful, color. And to quickly touch on the preliminary 2026, core outlook you provided, are you anticipating a meaningful difference in, you know, the organic growth path of Americas versus EMEA and APAC, within the 2%-4% consolidated?
No, Bryan, we're expecting similar growth, similar price, similar volume in both the segments.
Okay, understood. Thank you again.
Your next question comes from a line of Mircea Dobre from Baird. Your line is open.
Thank you for taking the question. Good morning. So the 55% recurring sales, can you talk about that a little bit? You know, from what I can tell from the website and so on, but this company seems to be selling products rather than services. But correct me, correct me if I'm wrong about that. Is there a service component to all of this, and that was in recurring sales? And what ex- How does demand play out in the space? Is there a replacement component to it, where some of these products need to be replaced every so many years? Or how- what exactly is kinda like the fundamental demand driver?
Yeah. So, so first, obviously, a general trend, when you look at the energy infrastructure that's going up, the demand in aerospace and defense. So there's an underlying, demand that's, that's sort of driving growth within this business. When we look at the characteristics... So let me sort of break that down for you. There is positive pricing in this business of about 200 basis points. We think that the underlying markets are about 200-300 basis points, and the technology leadership allowing this business to actually gain share in the market is the rest of the number to getting us to the high single digits number that we talk about in terms of growth.
The second point that you made to me, there is a service component, yes, but think of all of these equipment that go out there for inspection and monitoring, having probes and sensors out in the marketplace. And most of these probes and sensors in many applications are single use, and as a result, create a really strong recurring revenue stream for the business. And as a result, you have about a 55% recurring, and then you've got, you know, the general marketplace doing very well, especially in aerospace defense, in the nuclear segment, in the energy segment, and general infrastructure build as things happen both in North America and in Europe.
Okay. As far as the matter in which you're financing the transaction, can you give us maybe a little more detail on the convert and also on the common equity as well? Maybe like the... How do you think about the number of shares issued and so on? Thank you.
Yeah, so Mig, let me take that question. So on the mandatory, it's $175 million. It's a 6.5% dividend with a 15% premium on it. So, in terms of shares, you'd be looking at a max of around about 1.45 million shares, and then of about 1.26 million shares on conversion, which would be in three years. On the common equity, it's $143 million. And you'd be looking at the shares of around about 1.25 million shares associated with that.
We, we love the combination, Mig, obviously, 'cause it sort of gets us out into the low threes in terms of leverage. We believe, as Kevin mentioned in his script, very quickly by the end of the year, we're down below three in terms of leverage. So we think that the ability for us to go out and do this was extraordinary, obviously, and a vote of confidence in what we're doing and how we're changing the profile of ESAB, and puts us in a great position from a balance sheet perspective by the end of the year.
All right. If you'll allow one final one. If I heard you correctly, in your guidance, you're anticipating flat organic growth in Q1. Can you talk about that a little bit more? You know, looking at my model, the comp in Q1 was relatively easy, maybe not as easy as Q2. How do you think about Americas versus EMEA, APAC, organic, and what gives you confidence that we have enough acceleration for the rest of the year to get to your guidance? Thank you.
Yes, I'll start it off, and then Kevin can take the rest of it. The first piece for us is that last year, if you remember Q1, we had an anticipation pull ahead based on what was gonna go on in the U.S. with tariffs. And so as a result, in general, we feel that Q1, from a comparative perspective, is probably the toughest on a year-over-year basis. And then from the second quarter on, the comparables become quite favorable to ESAB. And, Nick, you know this, our view at the start of the year is to go in with what we believe gives us the best chance to execute and deliver. You saw our numbers from this year as well, from our original guide to where we ended.
It's no different for 2026. We're going in with several activities, both around growth and margin expansion. And we believe that we're well positioned to have a strong year in 2026, and I'll let Kevin talk about the quarters.
Yes. Yes, so, Mig, as you picked up, it's flat organic growth in the first quarter for the business. In terms of the two segments, we're expecting relatively similar year-over-year numbers in both the segments in the first quarter. And in both segments, we will see improvement as we step through from Q2 to Q4, partly due to the fact that we do have easier comps, particularly in the Americas segment, related to what happened last year.
All right. Good luck.
Thanks.
Thank you.
Your next question comes from a line of Tami Zakaria from J.P. Morgan. Your line is open.
Good morning. Thank you so much. I wanted to clarify. I think I heard you say the deal is accretive in 2027. Should we expect dilution in the stub year 2026 versus the EPS guide of $5.70-$5.90, should it close midyear?
Yeah, Tami, obviously, the closing, we're a bit at the mercy of some of the regulatory, you know, bodies. But, our expectation at this point would be we would close at the midyear. And you're correct, we would expect some, you know, dilution in 2026 , but, we're modestly accretive as we move into 2027 .
I think what we see here-
Understood.
Tami, would be obviously margin would be very accretive, both on the gross margin side and the EBITDA percentage side, but then dilutive on the EPS line.
Understood. That's helpful color. And thanks for all the comments on the recurring revenues. Just to build on that, I think I saw the Eddyfi has robotics and software revenues. Could you comment on the mix of that, and could you comment on the growth profile if the robotics or software piece is sizable enough at this point?
Yeah, I don't think we've... We'll sort of come out and give more detail as we go forward. The software business obviously is a fast-growing piece within Eddyfi, but from a scale perspective, it's embedded within the technology and not called out separately as we go about it. But I'll take a look at it, Tami, and get back to you. On the robotics side, there is clear activity. In fact, at several of our visits to the site, we did see some significant activity around robotics. They also play very similar to us in tight spaces, especially around defense, and as a result, need robotics to allow for these probes to enter tight areas. And then, obviously, automation and the ability to capture data is a significant piece.
But we don't break out automation per se on that particular front, but they are integrated into the development of the new products and the new innovation pipeline that exists within Eddyfi for the next couple of years.
Understood. That's very helpful. If I can add one more, could you comment on the mix of the key end markets? I saw you mention nuclear, aerospace, defense. Is there a way to quantify what makes up some of the larger end markets for Eddyfi right now?
Yeah, you know, I think the... Let me, let me sort of... walk you through a couple, right? I think we did give you, I think on slide 5, a piece that talks about the nuclear space. So let me just pull that up and make sure that I have the piece in front of me. So if you look at slide 5, Tami, it sort of talks about nuclear being at 30%, infrastructure. This is civil infrastructure, whether we'd be bridges, roads, dams, being about 24%.
Energy infrastructure, this would be oil and gas, liquid natural gas as well, liquefied natural gas as well, and then 12% with aerospace and defense, which is the fastest growing aspect of this business, and then the rest fall into the other categories across the industrial landscape.
Understood. Thank you.
Your next question comes from the line of Nathan Jones from Stifel. Your line is open.
Good morning, everyone.
Hi, Nathan.
Just maybe on some of the potential to expand the Eddyfi business here. You talked about being able to leverage ESAB's global footprint with them being, you know, a bit more overweight in North America. This would seem like completely different products, so completely different manufacturing. Can you maybe just talk a bit about how that works and how you would go about generating some of those revenue synergies using ESAB's footprint, ESAB's customer lists, et cetera?
Yeah. We did a tremendous amount of VOC on this front, Nathan, and what we determined was that every customer that buys fabrication technology products also spends money on inspection and monitoring. The more critical the application, the larger the spend on inspection and monitoring, along with the fabrication technology spend. And in some cases, the percentage was, you know, 30%-40% of the fabrication technology spend. So think of this as, they, you know, if they were to buy $1 million worth of fabrication technology equipment, they were then spending about 30% of that on inspection and lifetime monitoring of that particular asset.
So the view for us is that there is an entitlement piece associated with the fact that all of our customers are doing some of this, and the most critical customers are using technologies that Eddyfi has a significant amount of strength. We have, as we did some of the work, some of our customers. Eddyfi is not the primary provider of product, but we strongly believe that with the position that we have with these customers, we can begin to make that shift to Eddyfi. The one thing that is in Eddyfi's favor is that they are, by far, the best technology in the marketplace. In terms of ease of use, they're the best. In terms of speed and accuracy, they're the best in the categories that they play in.
So as a result, as we've done some of the initial work and got feedback from some of our big customers, there is an interest to be able to get everything from one provider, but more importantly, a need to kind of work through the entire workflow to provide integrity for the entire value chain.
I guess that's less about, like, leveraging your actual, you know, physical footprint.
That's right.
It's leveraging customer relationships to grow the business.
That's, that's right, Nathan.
Okay. And I guess just a follow-up question. Go ahead.
No, no. No, after you.
I was gonna say, follow-up question, you know, talking about 3-ish tons of leverage at the end of the year, which means, you're gonna really have to prioritize the areas that you use capital for M&A. You had laid out the two buckets before, and now you obviously have the third bucket here for M&A. Can you talk about the priority and how you'll, you know, think about allocating capital to M&A going forward here, given the increased leverage and the less optionality that you have on the balance sheet deck?
Yeah, you know, I, I'd actually state it slightly differently. We, we don't see this as an additional leg in our business. We see this as an extension of the fabrication technology business into more attractive returns, and sort of really creating a workflow that continues to move ESAB up on the value chain. And so when it comes to capital allocation, we see ourselves... Obviously, with this particular space, we think there are some opportunities to create some really attractive returns. And we'll focus obviously on gas control and Fabtech as well. But as we get into 2026 and a part of 2027, obviously, our focus is gonna be to deleverage.
And we've talked about it, you know, we come out into the low 3s and quickly get down into the 2s. So we'll have plenty of balance sheet capacity for the kind of stuff that we wanna get done. I think, I think the important piece-
Thanks for taking the question.
Yeah, Nathan, I think the important piece here for us is that it's an incredible opportunity. We felt that as we went through this particular process, that we found an opportunity and a way to connect the dots that we felt no one in our space was looking at. It was sort of sitting out there in the open, a really attractive space within the fabrication technology realm, but a very different characteristic in terms of margin and growth. And so, we are thrilled that we were able to connect the dots first, but more importantly, able to execute on this particular transaction. We believe Eddyfi is the best asset in this particular space, and it now allows us to continue to compound in this space with really attractive returns for our shareholders.
Your next question comes from the line of Tom Hayes from Roth Capital Partners. Your line is open.
Thanks. Good morning, guys. Congrats on the deal. Sean, maybe just one question on the inspection and monitoring market itself. I was just wondering, maybe you could provide a little bit of details on, is the industry kind of a regional function? I know that Eddyfi has fairly broad sales by region, but I was just wondering, in general, is it a fairly regional business? And then just kind of on the competitive nature of it, is it a regulatory, you know, a fragmented market, or there are some, you know, large players besides Eddyfi?
Yeah, there, there are some larger players, but, none of them sort of drive above the threshold of taking any particular, as we did the M&As, whether you look at by geography or by product category, that sort of rise collectively to a number that's, that's larger than 25%. So that, that I think, is the incredible part about this, this business. So plenty of fragmentation, plenty of opportunity for us to go after, other assets in the space, as we see fit. When you talk about the geography, what we loved about this business was its, largest exposure was to the North American market. We wanted to increase our exposure in the North American market. And then obviously, they do have exposure in Europe, where they can build on our strength.
They have smaller exposures to South America, the Middle East, and India, where we have great positions of strength and expect to take them along. And this business also has some great strength in Japan and Korea that we expect to leverage.
Appreciate the color. Thank you.
That concludes our question and answer session. I will now turn the call back over to Mark Barbalato for closing remarks.
Thank you for joining us, and we look forward to talking to you soon.
This concludes today's conference call. Thank you for your participation. You may now disconnect.