5/1/2025

speaker
Operator
Conference Call Moderator

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 Barbalotto, Vice President of Investor Relations. You may begin.

speaker
Mark Barbalotto
Vice President of Investor Relations

Thanks, Operator. Welcome to ESOP's first quarter 2025 earnings call. This morning, I'm joined by our President and CEO, Shyam Kambianda, and CFO, Kevin Johnson. 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 intent 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 and today's slide presentation. With that, I'd like to turn the call over to our President and CEO, Shyam Kambianda.

speaker
Shyam Kambianda
President and CEO

Thank you, Mark, and good morning, everyone. Thank you all for joining us today. We had a strong start to the year. These results reflect our ability to perform in a challenging market and underscores the performance-driven, accountable culture we have built at ESOP. Let me step back and share how we're creating a comparative advantage and why we're confident about our future. We deliberately shaped ESA to be locally responsive while leveraging our unmatched global scale. This dual advantage allows us to serve customers more effectively and maintain secure, resilient supply chains in a dynamic market. Additionally, we have deployed our capital well, invested in innovation, resulting in a fully refreshed equipment product line, and acquired 15 outstanding businesses. enabling us to expand our serviceable market and strengthen our global presence. Our focus is on building a long-term winner, one that thrives regardless of economic backdrop. Today, we're driving sales excellence, shifting our portfolio towards equipment and gas control. Looking ahead, we're intensifying our investment in innovation, deepening partnerships with universities, and harnessing the power of AI and continuing a steady cadence of high-impact acquisitions. Over the past four weeks, I've had the opportunity to make three trips to Europe and one to India. There's a noticeable sense of optimism and excitement about the future in both regions. The stimulus and investment plans announced by the EU, Germany in particular, are especially encouraging and signal significant upside potential once stimulus and investment spending begins. I was also encouraged by our team's ability to execute effectively. We're seeing strong traction with our new equipment offering and our gas control business is gaining momentum, both organically and through promising acquisition opportunities. I want to take this moment to recognize the extraordinary efforts of our associates, their tireless work, dedication to our customers, and commitment to EBX gives me confidence that we're well positioned to navigate the current environment and continue winning. At ESAB, we're shaping the world we imagine without limits. Let me turn to slide three to review our first quarter financial performance. We delivered 100 basis points of margin expansion on slightly positive organic growth, resulting in a record first quarter adjusted EBITDA margin of 19.8%. This strong performance underscores our discipline execution of the EBX framework complemented by accelerated strategic growth investments that are expected to generate returns in the long term. As I mentioned last quarter, ESAB's unmatched global footprint is a key competitive advantage. With 80% of our manufacturing located in region for region, we're uniquely positioned to manage today's global dynamics with agility and scale. Our commercial excellence initiative, coupled with a steady stream of innovative product launches, continues to drive momentum. In Q1, both our global welding equipment and gas control equipment businesses grew by mid single digits, reflecting strong channel acceptance of our new offerings. We're also leveraging EBX to enhance supply chain performance, drive process improvements, and expand margins. On the acquisition front, I'm thrilled to share that we have received all regulatory approvals and officially completed the Bavaria acquisition yesterday. This strengthens our proprietary consumables portfolio and positions us to gain share in faster growing end segments. As a result of our strong execution driven by EBX initiatives, new product launches, and recent acquisitions, I'm confident in our outlook for 2025. It is important to note that our full year guidance also reflects the expected impact of tariffs, which Kevin will detail shortly. Turning to slide four, over the past few quarters, I've highlighted the passion our associates have for both our business and their communities. This quarter, I want to spotlight another initiative on how we're making a difference by investing in the next generation of fabricators. Three weeks ago, I visited Denton, Texas, where we hosted students from the agricultural welding class at MacArthur High School in Irving, Texas. The students toured our facility, engaged in hands-on training at our customer innovation center, and received ESAB equipment, PPE, and consumables for their lab. We also awarded a scholarship to the students in memory of our beloved ESAB associate, Charlie. It was an inspiring day for both our team and the students. Similarly, in India, we've partnered with two organizations, to establish a state-of-the-art welding training institute in rural Tamil Nadu. This initiative supports grassroots development of talent and provides local youth with a sustainable career path in welding and automation. These are just a few examples of how our associates are shaping a better world, one community at a time. Moving to slide five. Over the last eight years, our strategy has been clear to improve operational performance with EBX, invest in innovation, delight our customers to local agility, and deploy our capital effectively. By optimizing our footprint, executing our product line simplification strategy, and streamlining our supply chains, we have built the capability to manufacture all our major products within each of our three regions, the Americas, EMEA, and APAC. a key factor in mitigating tariffs. Our footprint combined with our EBX net pricing tool positions ESOP to outperform even in volatile markets. Long term, we're building a higher margin, less cyclical, and higher cash flow enterprise. Moving to slide six to talk about our journey to premiere. Through open innovation and our EBX stage gate process, we've revitalized our equipment line. At the same time, we've exited unattractive capital-intensive automation projects and focused on high-growth swim lanes, most notably gas control. Our gas control business has grown from 10% to 18% of total revenue and is on track to reach 25% of revenue by 2028. With gross margins in the mid-40s, this segment has opened new adjacencies in medical and specialty gas markets. This shift in mix towards gas control and welding equipment supports our 2028 target of 22% EBITDA. At the bottom of the slide, you can see the progress we've made in adjusted EBITDA since 2016. We've steadily moved towards a more profitable mix and achieved approximately 700 basis points of margin expansion, all while generating strong cash flow to fund our compound strategy. Turning to slide seven and sharing more on our compounder journey. Our disciplined capital allocation has been the cornerstone of our success. One of our primary objectives has been to grow our gas control portfolio, strengthen digital and standard automation capabilities, fortify our core fabtech business, and expand our addressable market. We've executed this plan with discipline, adding 15 high-quality businesses, including Bavaria, as of yesterday. Last week, I visited our Bavaria team in Munich and was deeply impressed by their manufacturing capabilities, the proprietary flux they've developed, and the innovative culture they have fostered. This acquisition significantly strengthens our portfolio of proprietary consumables and strategically positions us to benefit from the EU and German stimulus programs targeting key sectors. For context, flux is the secret sauce in submersion welding. By combining Bavaria's flux and our sub-arc wire, we're unlocking growth opportunities across key sectors like oil and gas, wind, nuclear, transportation, infrastructure, and defense, where Bavaria products are already specified. While the acquisition is expected to be EPS neutral in year one, we see significant margin expansion upside to ESAB's global distribution and scale efficiencies. Our balance sheet is the strongest it's ever been, and our acquisition pipeline is robust. In fact, we may close two more tuck-in gas control deals before the end of Q2. We continue to prove ourselves as a premier industrial compounder. On that note, let me hand it over to Kevin for slide eight to discuss our financial performance.

speaker
Kevin Johnson
Chief Financial Officer

Thanks, Shyam. Good morning. Despite a challenging market environment, our quarterly sales met our expectations. High-growth markets in India, Asia Pacific, and the Middle East performed strongly and offset softness in the Americas as we had expected. Our welding and gas control equipment product lines showed strong growth supported by the investments in new products we've made over the last several years. Our recent acquisitions in Bangladesh and Sumic in Brazil are performing well and added 200 basis points of growth in the quarter. Adjusted EBITDA increased by 100 basis points due to strong price discipline, product mix improvements, and EBX initiatives offset by continued growth investments. Our global teams made a strong start to 2025, and I thank them for this performance. Turning to slide number nine. In the Americas, organic sales declined by 200 basis points, as expected, with lower volumes being upset by a strong price performance. The SOMIC acquisition continues to perform well and added 300 basis points of growth, upsetting some of the FX headwind due to the stronger US dollar. Investing in long-term growth remains a priority for ESAP. as reflected in the mid-single digit growth in welding and gas control equipment this quarter. As Sian mentioned earlier, our global operations positions us well to handle tariff fluctuations. And in the quarter, our adjusted EBITDA improved by 110 basis points, reaching 19.4%, showcasing our team's resilience. Moving to slide number 10, our teams in Europe, Middle East, and Asia delivered strong results this quarter. Total sales rose 200 basis points with adjusted EBITDA margins at 20%. Volume increased by 400 basis points driven by high growth markets. And we saw some positive signs out of Europe with Germany's recent stimulus decisions likely to create some opportunities for ESAB in 2025 and beyond. Equipment sales grew mid single digits year over year with positive customer feedback on new product launches. The ESAB Bangladesh acquisition added 100 basis points of growth and is performing well. Our teams delivered another quarter of strong performance and we are confident that this positive momentum will continue throughout the remainder of 2025. Moving now to slide number 11 to discuss our cash flow. This quarter we generated $30 million in free cash flow, including approximately $10 million inventory pre-purchase ahead of tariffs. We expect a stronger cash flow in the second half of 2025 as we invest to protect our supply chains in the first half Our consistent strong cash flow has enabled ESAP to complete several acquisitions since our spinoff, whilst at the same time reducing our net debt to one and a half turns. We have significant financial flexibility and are well positioned to execute our compounder strategy. Moving now to slide number 12 on our 2025 outlook. We have raised our revenue assumptions by approximately $30 million, mainly due to the Poveria acquisition and the rest from an improvement in FX. There has been no change to our organic growth guidance for the year, which remains at zero to 2%. We expect low to mid single digit organic growth in EMEA and APAC, offset by negative low to mid single digit organic growth in Americas. where market conditions are more challenging. Our adjusted EBITDA guidance has been increased to $520 to $530 million, reflecting the Bavaria acquisition, which was purchased for €60 million. Interest expense guidance has been increased as a result, and we expect interest costs to increase in Q2 and decline throughout 2025 as we generate cash flow. Our cash flow guidance remains unchanged. We continue to commit to a strong cash flow performance and a robust balance sheet to support our compounder strategy. With that, let me hand back to Sham on slide 13 to wrap up.

speaker
Shyam Kambianda
President and CEO

Thank you, Kevin. To summarize, we've had a strong start to 2025, delivering another quarter of strong execution. We're protecting our growth investments, investing in sales excellence and AI, and tightening our belts where needed. We're gaining traction in shifting our portfolio towards equipment, light automation, and gas control, all while strengthening our consumables platform. We are consistently raising the bar with EBX and enhancing our enterprise through strategic, accretive acquisitions. We've built a winning culture at ESOP, one that is positioned for creating long-term shareholder value. Thank you all again for joining us this morning. Operator, please open the line for questions.

speaker
Operator
Conference Call Moderator

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. We ask that you please limit yourself to one question and one follow-up. Your first question comes from the line of Brian Blair from Oppenheimer. Your line is open.

speaker
Brian Blair
Analyst, Oppenheimer

Thank you. Good morning, guys. Good start to the year. Morning, Brian. I was hoping you could offer a little more detail in terms of gross or unmitigated headwinds from tariffs, whether specific to 2025 or annualized. And with some incremental pricing, So I'll ask that how your team's now thinking about, you know, volume versus price contribution in the full year guide. And if there are any notable differences in the bridge for, you know, America's versus the ANA back.

speaker
Shyam Kambianda
President and CEO

Well, let me start that and I'll hand it over to Kevin to kind of go through some of the numbers, Brian. I think the important piece is something that we talked about earlier as well in our script where we've positioned the business extraordinarily well to be in region for region and We spent a lot of time, as you know, with our product line simplification, our footprint actions, and then also everything that went along with it in terms of supply chain. So as a result, yes, we do have some tariff exposure, but 80% of our product is built in region. And as a result, the exposure is not as big. We haven't talked about a specific number, but Kevin has a number that he'll share with you on that particular front. We expect to cover that with price. as we go into the year. But also there's a bit of flux there, right? I think, as you know, we'll know more at the end of these 90 days as to where things will end up. But for the short term, we've taken a few actions, as you saw. We increased our inventory levels in the Americas to counter some of the tariff actions. We are moving manufacturing and assembly to the regions that are not affected by the tariffs. And as a result, we feel very confident as to how ESAB is placed not just for today, but for the long term. Kevin, do you want to talk about some of the numbers?

speaker
Kevin Johnson
Chief Financial Officer

Yeah, Brian, in terms of numbers, as you'd imagine, the ME and APAC, given particularly the dynamics that Sean mentioned about our local manufacturing and supply chains, is largely unimpacted by the tariffs. The main impact is in North America, where we see something in the region of $15 to $20 million of tariff impact. And we've already made the moves in terms of price to offset any impact from that.

speaker
Brian Blair
Analyst, Oppenheimer

I understand. I appreciate the detail. Those numbers are – I guess they're not particularly daunting. That's good to hear. Maybe offer a little more on gas control equipment trends and the outlook there. It seems like that business has very nice momentum there. Just curious how growth shook out in Q1. Tire teams thinking about core growth rates for the year. And, John, you mentioned a couple of tuck-ins that will hopefully be closed by the end of Q2. How additive to growth may those be? Any additional detail would be great.

speaker
Shyam Kambianda
President and CEO

Thank you. Yeah, you know... Spot on, Brian. We were very pleased with how our gas control business has started off. Piyush and the team have done a real nice job with our EPX process of growth bridges and identifying growth opportunities. Also, the acquisitions that we made a few years back are paying dividends for us, both in terms of the therapy acquisition that we made. And then, yes, you're spot on that we have two more acquisitions that we expect to close in the second quarter. that will add momentum to the medical side of our gas control business, adding a bit more fuel to the growth profile of that business. As I told you before, the margins are accretive. In fact, the EBITDA margins are already higher than our 2028 goals. So as we add on to that business and that business grows faster, it's accretive to overall ESOP.

speaker
Brian Blair
Analyst, Oppenheimer

All very encouraging. Thanks again.

speaker
Operator
Conference Call Moderator

Your next question comes from the line of Suri Boroditsky from Jefferies. Your line is open.

speaker
Suri Boroditsky
Analyst, Jefferies

Hi, thanks for taking the question. So within your organic growth guidance, you maintain that, but how are you thinking about price versus volume within that guidance and has that changed since the start of the year? And then just on your price actions, have you implemented surcharges or are those normal price increases? Thank you.

speaker
Shyam Kambianda
President and CEO

I'll take the last end of your question, Suri. We have not gone out with surcharges. We've gone out with general price increases. The tariffs scenario was a bit of a stop and go because, you know, initially we thought it was on and then it sort of came off the board more recently. So a short answer is that as we think about tariffs over the long term, we think about a general price increase and less about surcharge. I'll let Kevin talk about the rest of the year in pricing.

speaker
Kevin Johnson
Chief Financial Officer

Yeah, in the main APAC, not really much significant change. We expect flattish price as we go through the rest of the year, similar to what we saw in the first quarter. The main area where we did make some moves in price was in the North American business. And sorry, I'd expect the price that we saw in the first quarter to read out at a similar level for the rest of the year.

speaker
Suri Boroditsky
Analyst, Jefferies

I appreciate the color. And then you talked about proactively increasing some inventory in the Americas. So just curious if you saw similar pre-buying activities from your customers.

speaker
Shyam Kambianda
President and CEO

The short answer is no. We sort of were protecting ourselves. In fact, I would submit that there was a dynamic in the North American market where we found the channel to be waiting. for things to settle before they sort of engaged completely, partially because they were not sure where prices would go, two, they were unsure whether they would stick. So as a result, there was a bit of sort of a lull in the North American market for us. So no, short answer is we didn't see a significant amount of inventory buildup at the channel.

speaker
Kevin Johnson
Chief Financial Officer

Thanks, Sari. In terms of what we're pre-buying, We obviously learned a lot of lessons the last time the tariffs came in. There was a number of skews that at that point, you know, created some issues. It's not in themselves a large part of our supply chain, but we did learn some lessons last time. So we were very proactive this time to get ahead and make sure that we protected our supply chains by getting those components onto our shelves.

speaker
Suri Boroditsky
Analyst, Jefferies

Appreciate the call.

speaker
Operator
Conference Call Moderator

Your next question comes from the line of Meg Dobre from Baird. Your line is open.

speaker
Meg Dobre
Analyst, Baird

Yes, good morning. On Americas, maybe it would be helpful to get a little more kind of color or clarification in terms of how you're thinking about organic growth for the year and then maybe splitting it between price and volume, not to put words in your mouth, but the way I sort of heard it. we're going to get a little bit better pricing than we expected before, just with tariffs and all that, and maybe volumes compress a little bit. Related to this, is there a difference in the way price throughout the volume flow through to impact your margins?

speaker
Kevin Johnson
Chief Financial Officer

Yeah, so in terms of, you know, I think you're spot on, Nick, in terms of your overview on the organic growth week. We expect overall, as I said in the script earlier, low to mid single digit negative core volume as we progress through the year, which is in line with what we had expected last quarter when we gave our guidance. But there's certainly a little shift between volume and price in those numbers in that we did make that move to cover the impacts of the tariffs already. And we have seen some more challenge in the North American market in particular. Our expectation in terms of volume for the year is that it would be in the range of negative mid-single digit for the year. In terms of margin, a large part of that price we went for in the back end of the quarter. We're trying to make sure that we cover tariffs. We're obviously trying to make sure that we have a little bit extra there, but we'll see how that plays out as we go through the rest of the year.

speaker
Shyam Kambianda
President and CEO

And then, Meg, you know, our EBX process of net pricing stays, and so our intention is to look at the entire business and ensure that both regions are net positive on price. And you saw that sort of come through nicely with both of the regions sort of expanding margins in a tough environment.

speaker
Meg Dobre
Analyst, Baird

And if I may follow up on margin, you know, just the way really the last three years kind of played out, You had this nice sequential build in margin through the year in the Americas business. And at least I modeled that at this point for 2025 as well. But this year being a little bit different with tariffs, I'm wondering if there's a particular cadence that you have in mind here in terms of how margin might progress in the Americas business that would look maybe different than expectation. Thank you.

speaker
Shyam Kambianda
President and CEO

I think the big difference is, you know, the organic growth in the region and what that helps drive across the business, Meg. So the short answer is sort of where we've started off the year. And then we've given some seasonality numbers out there and we can talk more about it. But my thoughts are that it surely is starting off as a year that doesn't feel like all of the rest. But that being said, we've always been confident about the way that we've been running the business and the opportunities that we have to expand margins. But it does not feel like a year as before, you know, at least the last two. But I think the team has done a nice job. We've got a slew of projects to work on to continue to improve margin. Um, and, uh, but I think it would be incorrect to say that it's like sort of 2024 and 2023. Thank you.

speaker
Operator
Conference Call Moderator

Your next question comes from a line of Sharif from bank of America. Your line is open.

speaker
Sharif
Analyst, Bank of America

Hi, good morning. I just wanted to touch a bit more on America's margins. We've seen the margin expand notably on lower volumes. How much of that expansion is driven by product mix towards equipment and gas controller automation versus EBX initiatives?

speaker
Shyam Kambianda
President and CEO

You know, we've always talked about being three aspects to our margin expansion story. The first one, obviously, is a net price. The second piece is our EBX initiatives and lean activities initiatives. and Kaizen activities that we run through our facilities. And then the last portion of it is the portion that we talked about always, which is our shift in mix towards gas control and equipment. So all three contributed to it. But I would also state that we accelerated some growth investments as well, and we made some growth investments in the quarter. And so what you see here in our results is, yes, uh expanded margins but within those expanded margins we also invested in our business and kevin talked about you know us investing close to 15 to 20 million dollars this year in growth investments and we kept those uh and that's also reflected in our results understood and then earlier you noted a lull in north america uh just given the tariffs could you impact performance a bit more regionally uh for the rest of the globe uh You mean Sharif or just in North America? Yeah, you know, I think the North American market, as I talked about, sort of went into a wait and see mode in the first quarter. But what we did notice, and I mentioned this even in my earlier commentary, where we see Europe, India in particular, and the Middle East continue to be very optimistic about what's ahead of them. And so as we saw the U.S. go into a wait and see mode, we saw the other regions actually pick up and sort of look forward on investing and figuring out their own path forward in this new world. And so we're excited about that, obviously, because of the way ESAB is set up. We think Europe has a lot of upside potential. We saw Middle East continue to grow in strength. We see India also picking up in strength. We also saw green shoots in China, actually. We actually had a really nice growth number out of our business in China. But as you know, we play in the top tier of that segment. And so we also saw our China business grow. And we were stable in South America. So all in all, what you see is that the North American market is the one that's feeling the impact of all of these actions. The rest of the world seems to be wanting to shift away from the noise that's occurring here.

speaker
Sharif
Analyst, Bank of America

Thank you.

speaker
Operator
Conference Call Moderator

Your next question comes from a line of Tammy Zakaria from JP Morgan. Your line is open.

speaker
Tammy Zakaria
Analyst, JP Morgan

Hey, good morning. Thank you so much. I actually have only one question and nothing related to the quarter per se. So your 2020 target, 22% plus EBITDA margin. Do you think it's time to maybe update that target given you're already at 20-ish this year? And just by improving the mix of equipment within the total portfolio by a few percentage points would get you to a 22%. So just wondering how you're thinking about long-term margin targets and, you know, your margin has been surprising to the upside, at least from our perspective. despite organic growth being lower than the long-term target of three to five. So if the top line improves, probably the margin flow through is going to be even better. So any thoughts on how to think about that 22% of 2028 target?

speaker
Shyam Kambianda
President and CEO

Always good to hear from you, Tammy. I think we often talk about when we would go out and talk about the next targets that we want to set for ESOP. I think, as I've mentioned before, it's very important for us to hit the numbers that we've stated and then raise, you know, the expectations off of that. But you're right that we're off to a great start, great momentum. We love where we're at. And we are considering, you know, giving some thought towards how we take our targets up past the 2028 numbers that we've given. but nothing to date, but you're spot on. That as our mix changes, as EBX takes hold, as we drive more gas control and equipment business, you're right, that the potential for margin continues to be there. But we've also mentioned that we're investing in growth. One of the things that we learned back in 2016 is that for all great business to grow over the long term, you need to invest. And we've made those investments. And I spoke about them briefly in innovation, our relationships with universities, in some new AI use cases that we've got going on within the business. And so expect us to do both. Expect us to grow margins and invest back in the business and not just kind of take everything down to the bottom line.

speaker
Tammy Zakaria
Analyst, JP Morgan

Understood. Good to hear. Thank you.

speaker
Shyam Kambianda
President and CEO

Thanks, Tammy.

speaker
Operator
Conference Call Moderator

Your next question comes from a line of Nathan Jones from Stifel. Your line is open. Good morning, everyone.

speaker
Nathan Jones
Analyst, Stifel

Hi, Nathan. I guess I'll start with Kevin's comments on North America volume. I think you said you'd already seen some further softening in volume in North America. Can you just maybe give us a little bit more color on where you're seeing that, whether it's deferred capital investments on equipment or lower production on consumables, and then perhaps what end markets are seeing incremental softness?

speaker
Shyam Kambianda
President and CEO

Yeah, Nathan, I think maybe I'll start it off and I'll hand it back to Kevin. I think what we meant was a lull, probably not a further deterioration, but just sort of a piece. And we expected that, you know, once the tariff commentary came in, we anticipated that the channel and customers, all of them would sort of just wait to see where things land before sort of making investments. Our exposure to the large capital automation is lower. But we did see the channel also sort of sit back and wait to understand where pricing was going, what was going to happen with tariffs prior to making their plans for the year. So it was sort of a broad-based, you know, what I'd call lull in the North American market. And not one particular piece sticks out, although I'm going to assume that if you had exposure to yellow goods or the auto segment, you saw a bit worse conditions than we did.

speaker
Nathan Jones
Analyst, Stifel

Yeah. Is that while continuing or has it started to kind of normalize it and people gone back to a more, more normal kind of cadence of buying?

speaker
Shyam Kambianda
President and CEO

No, I mean, Q2, at least in North America started off similar to where we've ended. I think it'll probably, uh, unthaw itself once there's more clarity on the tariffs at the end of these 90 days.

speaker
Nathan Jones
Analyst, Stifel

And then I guess my followup question is going to be on Europe. Um, It's interesting to hear people start to talk positively about, you know, the investment going on in Europe after, you know, a number of years of being a pretty poor performing market. Maybe you can talk about when you would expect some of that stimulus to start hitting the European market and actually benefiting ESAB. And I think you'd had limited, pretty limited exposure to Germany historically. I know that the barrier acquisition will increase that. But just talk about how you would play in that market specifically.

speaker
Shyam Kambianda
President and CEO

Yeah, you know, there's a broad-based European stimulus, and then there's the German-based European stimulus, and we're actively working both. And so the view for us is, I think the finance minister in Germany went into place two days ago, if I'm not mistaken. And so as a result, now we feel that the German economy begins to sort of activate some of the things that they had talked about through the election cycle. by the third and fourth quarter. But that being said, there's other activity in Europe in terms of how we've seen orders come in, how we've seen the activity level, which gives us strong confidence that it only gets better from what we're already seeing. And a trillion dollars into the European economy would be extraordinary, Nathan. And so our view of that is No better Fabtech company position for that. No better gas control business position to take advantage of that infrastructure and build out in the European market. So, yes, it's a positive. And none of that's in our forecast. And we expect that as those things come into play, we'll begin to see things sort of shift more positive for us and the rest of the world.

speaker
Nathan Jones
Analyst, Stifel

Great. Thanks for taking my questions.

speaker
Shyam Kambianda
President and CEO

Thanks, Nathan.

speaker
Operator
Conference Call Moderator

Your next question comes from a line of Neil Burke from UBS. Your line is open.

speaker
Brian Blair
Analyst, Oppenheimer

Hey, thanks.

speaker
Neil Burke
Analyst, UBS

One question on the guidance. If my math is right, I guess Bavaria adds about $20 million of revenue to this year, and you increase EBITDA by about $2.5 million. So I'm just curious how much of that increase is from Bavaria and does the guidance embed any kind of macro uncertainty given what we're seeing right now with tariffs?

speaker
Kevin Johnson
Chief Financial Officer

Yeah, as Sean mentioned, so you're correct. It's just over $20 million is roughly the right number for Bavaria that we've put through. And then the change in the profit guidance was largely Bavaria, reading through in the numbers. We expect Bavaria to be EPS neutral, as Sean mentioned in his script in the first year. That means that it's slightly below our fleet average. We have a couple of good numbers. synergy opportunities with that business that we're going to roll out in the first year. And it will be accretive and quite a bit accretive by the second year. But in the first year, it's just slightly below. So you're seeing, you know, two and a half to three million kind of range of profit reading through on that $20 million of revenue.

speaker
Shyam Kambianda
President and CEO

And, you know, if I could just highlight that, Neil, I think when I visited that business last week, very impressed with the manufacturing side. validated some of the synergistic opportunities that we have within the business. In fact, they had just won a large contract as I walked through their site on that day, so there was a bit of a celebration going on. Our supply chain and our ability to source material would be extraordinary, and so we're really excited. Very similar to what we did with the Sandvik acquisition, where it was a bit... lower than our fleet average in terms of margin. But within six months, we saw it being very positive and accretive to our margins. And that's something similar that we expect here. And for everything that is going to get investment, this code material and flux is going to be key. And it really positions ESOP to be a leader in that space. So very excited about the deal.

speaker
Neil Burke
Analyst, UBS

Thank you. Thank you. I'll pass it on.

speaker
Operator
Conference Call Moderator

And that concludes our question and answer session. I will now turn the call back over to Mark Barbalato for closing remarks.

speaker
Mark Barbalotto
Vice President of Investor Relations

Thank you for joining us today, and we look forward to speaking to you again next quarter.

speaker
Operator
Conference Call Moderator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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