ESAB's Q3 2025: Contradictions Emerge on Automation Orders, Mexico Volumes, Americas Growth, Tariffs, and Europe

Date of Call: October 29, 2025

Financials Results

• Revenue: $687M, up 8% YOY; organic sales +2% YOY
• Gross Margin: EWM gross margin >45% (company-level gross margin not disclosed)
• Operating Margin: Adjusted EBITDA margin ~19.4% (Adjusted EBITDA $133M, up 7% YOY); margin down ~20 bps due to EWM

Guidance:

• FY2025 revenue raised to $2.71B–$2.73B, implying ~1 point of organic growth
• Adjusted EBITDA guidance $535M–$540M (includes ~ $3M from EWM); adjusted EPS $5.20–$5.30
• Free cash flow targeted at ~95%; targeting net leverage 1–2x and acceleration of M&A in 2026
• Investing in EWM to drive synergies; expect >10% ROIC within 3 years

Business Commentary:

• Organic Growth and Geographic Performance:
• ESAB achieved positive organic growth, with sales rising 8% to $687 million, and organic sales increasing 2% year-over-year.

• The growth was driven by solid sequential improvement in the Americas, particularly in the U.S., and continued strength in EMEA and APAC, supported by high-growth markets.

• Acquisition Impact and Strategic Integration:

• The acquisition of EWM contributed approximately 2 points of growth and $1 million in adjusted EBITDA in Q3, supporting an increase in ESAB's total sales.

• Integration is progressing using the proven EBX playbook, with expected positive impacts and margin initiatives starting in 2026.

• ** Margins and Profitability Amid Tariff Challenges:**

• Adjusted EBITDA increased 7% to $133 million despite tariff impacts and ongoing investment in sales and AI initiatives.

• The company plans restructuring and cost initiatives in the Americas, expecting significant margin improvement in 2026 as volumes improve.

• Regional Growth and Market Dynamics:

• EMEA and APAC delivered 4% volume growth, with high single-digit growth in equipment and automation, supported by strong execution in high-growth markets.
• ESAB is well-positioned to capture market opportunities as developing markets are expected to outpace developed markets in GDP growth over the next five years.

Sentiment Analysis:

Overall Tone: Positive

• Management: "delivered another solid quarter and returned to positive organic growth" and "we're raising our full year guidance." Results: sales rose 8% to $687M; adjusted EBITDA increased to $133M. Management emphasized completed EWM acquisition, early integration, and raised FY sales and EBITDA guidance, signaling confidence in growth and margin trajectory.

Q&A:

• Question from Bryan Blair (Oppenheimer & Co. Inc., Research Division): Sequential improvement in Americas, this is obviously good to see. There was obviously some consternation last quarter regarding deferred automation shipments and then selling into Mexico. To what extent did your team catch up on that $15 million or so in combined revenue during Q3? And are there any lingering risks or concerns on either front?
  Response: There was modest catch-up on deferred automation shipments but not all; remaining backlog flows into Q4 and a bit into Q1; Mexico has stabilized.

• Question from Bryan Blair (Oppenheimer & Co. Inc., Research Division): The strategic fit of EWM seems quite powerful. It's nice that your team can begin integration a little earlier than anticipated. That in mind. How should we think about the year 1 deal model? I suspect cross-selling will be a solid lever at least over time. We know gross profit is very strong. It does seem like there's some relatively heavy-handed work to be done on SG&A structure. Just curious how we should think about those moving parts through the first year and perhaps the first couple of years?
  Response: EWM has strong gross margins (>45%); ESAB will invest in front-end growth and SG&A optimization; expect ~ $3M profit this year from EWM and will refine modeling and synergies for Q1 guidance.

• Question from Tami Zakaria (JPMorgan Chase & Co, Research Division): Great results. Question on the Americas segment. EBITDA margin moved down about 100 basis points. Was this according to your expectation. If so, what's driving it? And is there any tariff headwind to call out there?
  Response: Margin decline was largely expected — driven by investments in sales/growth and late-quarter tariff impacts; plan to relocate manufacturing regionally and execute restructuring to offset and drive margin expansion in 2026.

• Question from Tami Zakaria (JPMorgan Chase & Co, Research Division): Understood. That's very helpful. And one question on M&A. I think you did Bavaria and then EWM, both seem to be Europe-based. Are you consciously expanding footprint, particularly in Europe because you see more growth in the region? Or you remain agnostic, and you don't mind spending in the Americas or Asia?
  Response: M&A is opportunistic and geography-agnostic; recent deals strengthen Europe footprint but also extend reach into North America, Middle East and Asia.

• Question from Mircea Dobre (Robert W. Baird & Co. Incorporated, Research Division): If we can go back to the margin discussion in Americas, I think I heard Kevin or maybe it was you, Shyam, saying that 2026, we should be seeing much, much stronger margins in this segment. I realize you're not providing '26 -- detail '26 guidance, but it would be helpful for us to understand why margins get better in '26? What's sort of within your control and maybe some of the restructuring that you're doing as opposed to just kind of a broader call on end market reacceleration?
  Response: Margin improvement in 2026 will be driven by three controllable levers: restructuring actions already underway, supply‑chain/manufacturing localization to remove tariff drag, and pricing/better comparables, producing momentum early in Q1.

• Question from Mircea Dobre (Robert W. Baird & Co. Incorporated, Research Division): Maybe in your EMEA and APAC segment, others pointed out, you are increasing your exposure to Europe, maybe with some of the deals that you have done. But as we're looking at 2025, right, it does seem that there's quite a bit of bifurcation between what you've experienced in Middle East and India versus what's been going on in Europe. So I guess it would be helpful maybe delineating the European region versus some of the other ones in this segment. And as a general framework for 2026, how do you think about Europe relative to these other regions? I mean can we count on actual volume acceleration in '26 if Europe picks up? Or are there some other factors that we need to keep in mind here?
  Response: Orders are strong in high-growth markets (Middle East, India, Asia) and Europe is gaining share (equipment/automation); management expects European momentum tied to defense/infrastructure/energy to accelerate volumes into 2026.

• Question from Mircea Dobre (Robert W. Baird & Co. Incorporated, Research Division): When we're talking about EWM, can you talk a little bit about their legacy distribution and how that compares to your footprint? And how easy or maybe not easy, is it to take that product and be able to just kind of put it through your global distribution network?
  Response: EWM distribution is complementary to ESAB's; it enables cross-selling (consumables and torches into EWM channels) and provides channels to accelerate EWM into North America and other regions, execution-dependent.

• Question from Nathan Jones (Stifel, Nicolaus & Company, Incorporated, Research Division): I'll start with asking for a bit more color on your comment that you're off to a pretty good start in 4Q. If you could just expand on that and talk about what you're seeing to date in the fourth quarter?
  Response: Q4 is starting stronger than Q3: Q3 core growth ~2% and October began at an improved run rate, so management expects slightly better core growth in Q4.

• Question from Nathan Jones (Stifel, Nicolaus & Company, Incorporated, Research Division): I guess a follow-up on price/cost in Americas. Obviously, it seems that's where the tariff impact is. You talked about getting some costs later in the quarter. Did you get to price/cost neutral on a dollar basis in the third quarter? Is there any color you can give us on what the drag was to margins in the third quarter and then your expectations for the fourth quarter on price cost? And I'll leave it there.
  Response: Price/cost was slightly negative (dollar drag) in Q3 due to copper tariffs late in the quarter; management plans to move manufacturing to local regions and complete restructuring in early Q1 to remove the drag.

• Question from Neal Burk (UBS Investment Bank, Research Division): Good to see solid growth in equipment and automation. Can you just talk about what you're seeing in consumables?
  Response: Consumables are steady and outperforming the market but grew more slowly than equipment; new product introductions and workflow solutions are driving cross-sales and share gains.

• Question from Neal Burk (UBS Investment Bank, Research Division): And just a follow-up. If my math is right on last quarter on this Mexico and automation headwind. I thought the headwind implied about like a 20% decline in revenues in those businesses in the Americas. And this quarter, it seems like it's -- it's more like maybe a mid-single-digit decline. I guess, is that math like roughly, correct? And I guess, like going forward, I mean, it looks like you're going to exit this year growing at around 3% to 4% in aggregate. So I mean, absent anything dramatically changing kind of the absence of the negative in those 2 businesses in Mexico and automation, is that like a good starting point for next year? Like any kind of like major puts and takes on the growth rate exiting the year and entering 2026?
  Response: Mexico volumes remain down while U.S. recovered mid-single-digits; management expects easier comps vs. tariff-impacted periods and anticipates volume tailwinds into 2026 (notably from Q2 onward).

Contradiction Point 1

Automation Order Recovery

It impacts expectations regarding the recovery timeline for automation order volumes, which directly affects company revenue and investor expectations.

What drove order trends this quarter, and what’s the expected revenue impact for Q3 and Q4? - Bryan Blair (Oppenheimer & Co. Inc.)

2025Q3: Automation orders are down significantly, particularly in Mexico and the U.S. Most of Mexico's automation orders shifted to Q4. U.S. automation is also down as we caught up on the backlog from last year. - Shyam Kambeyanda(CEO)

Could you clarify the tariff impact and your confidence in a second-half recovery? - Tami Zakaria (JPMorgan)

2025Q2: Automation orders are set for recovery in the second half. The team is confident in the robustness of their automation funnel and orders to ship in the second half. - Shyam Kambeyanda(CEO)

Contradiction Point 2

Mexico Automation Volume Stability

It involves contradictory statements about the stability of Mexico automation volumes, which impacts revenue projections in the region.

What are your growth expectations and headwinds in 2026 for Mexico and automation? - Neal Burk (UBS Investment Bank, Research Division)

2025Q3: Mexico volumes are down more than 10% year-on-year. Mexico played a bit of a catch-up game, delivering more in Q3 than through the first 6 months. - Kevin Johnson(CFO)

How much did automation sales decline, and what impact did it have on overall business? - Nathan Jones (Stifel, Nicolaus & Company, Incorporated)

2025Q2: Mexico volumes remain stable, with challenges impacting second-quarter growth. Easier comps expected in 2026, contributing positively to growth. Significant tailwinds anticipated from Q2. - Kevin Johnson(CFO)

Contradiction Point 3

Volume Growth in the Americas

It involves differing expectations regarding volume growth in the Americas, which impacts revenue forecasts and strategic planning.

To what extent did your team recover the $15 million in deferred revenue during Q3? - Bryan Blair (Oppenheimer & Co. Inc.)

2025Q3: Next, sequentially, we saw volume growth improve again, with OEM and equipment leading the growth. Americas had a good quarter with sequential improvement in all of our categories. - Shyam Kambeyanda(CEO)

Can you break down the organic growth between price and volume in the Americas and its impact on margins? - Mig Dobre (Baird)

2025Q1: We expect negative mid-single-digit volume growth in the Americas. And we do see some softness there, but we do expect pricing actions to more than offset that. - Kevin Johnson(CFO)

Contradiction Point 4

Tariff Impact on the Americas

It involves differing explanations of the impact of tariffs on the Americas, which affects financial forecasts and strategic decision-making.

Did the 100-basis-point decline in EBITDA margin in the Americas meet expectations, and what factors are driving it? - Tami Zakaria (JPMorgan Chase & Co.)

2025Q3: Some of the tariff impact came late in the quarter, which will be offset with appropriate manufacturing adjustments. - Shyam Kambeyanda(CEO)

Can you provide more detail on growth or unmitigated headwinds from tariffs and how your team is considering volume versus price contributions in the full-year guidance? Are there notable differences in the bridge for the Americas versus EMEA and APAC? - Bryan Blair (Oppenheimer)

2025Q1: ESAB is well-positioned with 80% of products built regionally, reducing tariff exposure. Tariffs are mainly impacting North America, estimated at $15-20 million. ESAB covers tariffs with price increases, maintaining a mix of price and volume growth. - Shyam Kambeyanda

Contradiction Point 5

European Market Growth

It affects the company's growth strategy and market outlook for Europe, a significant region for ESAB.

Can you clarify Europe's role compared to these in 2026? - Mircea Dobre (Robert W. Baird & Co. Incorporated, Research Division)

2025Q3: Strong orders in high-growth markets and good momentum in the Middle East and Asia. Europe is gaining significant share with strong equipment sales. Infrastructure and defense investments are increasing in Europe, expected to accelerate in 2026. Overall, positive outlook for strong growth in 2026. - Shyam Kambeyanda(CEO)

How do you see the organic growth of the Europe business in 2025? - David Raso (Evercore ISI)

2024Q4: We expect low to mid-single-digit organic growth in Europe, with steady growth throughout the year. - Kevin Johnson(CFO)