ESAB's 2026 Strategy: Margin Growth Through Equipment and Innovation

Key drivers behind ESAB’s gross margin improvement and the 2026 “high-margin equipment” strategy

ESAB’s 2026 gross margin improvement is presented in the call as the mechanical result of (1) mix shift toward higher-margin equipment and inspection/monitoring, (2) discipline on pricing/cost offsets during volatile periods, and (3) acquisition execution plus operating-system initiatives that improve productivity and margins “through the cycle.” ¹²³⁴⁵

1) Mix shift: equipment becomes the dominant revenue stream (driving structural margin expansion)

Management explicitly ties margin trajectory to a product-mix change. Over the past decade, ESAB reports its gross margin moved from “approximately 35% in 2016 to nearly 38% today,” while the equipment share of sales rose from “roughly 38%” in 2016 to “roughly 44%” currently, with Eddyfi expected to push equipment revenue to “approximately 52%.” ⁴¹

This is important because ESAB frames equipment as the margin engine:

• ESAB states its equipment product carries gross margins closer to 45% and Eddyfi is close to 65%; combining these dynamics is expected to “push our consolidated gross margins to greater than 40% for 2027 and beyond.” ⁴
• The gross-margin uplift in the near term (2026) is therefore largely a mix math story: as the company’s revenue mix moves toward equipment and into higher-margin workflow/inspection assets, consolidated gross margin should structurally rise. ¹⁴

2) “Eddyfi” as the high-margin workflow/inspection catalyst (extension into equipment-linked services)

ESAB characterizes the Eddyfi acquisition as extending its workflow solutions into inspection/monitoring—“faster-growing, higher-margin” space. ³ It also provides the margin benchmarks:

• Eddyfi’s gross margin is about 65%, with “EBITDA margins around 30%.” ⁶
• Strategically, it “accelerates our shift towards equipment,” and management expects it to “expand margins” and “reduce cyclicality” and improve earnings predictability. ⁶²

While the question asks about 2026 specifically, management’s logic is that Eddyfi’s closing “midyear” increases the equipment/workflow mix during 2026 and sets up the broader gross margin expansion trajectory for subsequent years. ²⁴

3) High-margin equipment portfolio build-out (EWM + additive/TIG workflow + launches that deepen equipment competitiveness)

ESAB’s equipment strategy is not just about adding “any” equipment; it’s about building a portfolio it can win with—then cross-selling workflow content across the base.

Key elements from the call:

• ESAB says it created a “best-in-class equipment portfolio” and “filled out every gap” with EWM, and strengthened gas control equipment with DeltaP and Aktiv. ¹
• Management links additive manufacturing equipment to a growth and cross-sell funnel: EWM’s React technology is opening doors with distributors and defense OEMs, and ESAB is building cross-sell between filler metal and EWM equipment. ³
• ESAB highlights two product launches that support equipment competitiveness:
  • Ruffian 270: described as highly productive/operator-friendly; management notes it delivers “full power simultaneously” (270 amps and 11,000 watts at 100% duty cycle). ⁴
  • Aristo Edge: positioned as a performance benchmark, with arc control “10 to 20x faster than traditional equipment” and spatter reduction “up to 85%,” reducing defects and post-weld cleanup. ⁴

These product/portfolio actions matter for gross margin because ESAB repeatedly frames the compounder transformation as producing higher margin through mix and differentiated products (not solely through cost reduction). ¹⁴

4) Acquisition execution + synergy funnel + margin discipline (EWM and others)

Gross margin improvement is also supported by how acquisitions are being integrated and leveraged.

Management states it is “thrilled” with the acquisitions and that they have “moved the company decisively towards higher growth, higher-margin, lower-cyclicality” through 2026 and beyond. ² For the current year’s quarter:

• ESAB reports adjusted EBITDA increased 6% year-over-year in Q1, while acknowledging margins reflected expected impacts from EWM and conflict-related costs. ⁵⁷
• Specifically, it states Q1 margin reflected “an expected 40 basis points impact from EWM” and “an additional 30 basis points of headwind from the conflict in Iran.” ⁷
• Importantly, ESAB also says EWM is accretive to gross margins (while “dilutive to EBITDA margins for the first 3 quarters in 2026”), and expects EWM to be EBITDA accretive “as we exit the year.” ⁷

That combination—gross margin accretion from EWM even during early integration, plus later EBITDA accretion—strongly suggests management believes the gross margin improvement mechanism is working even before full operational leverage kicks in. ⁷

5) Operating system (EBXai) and cost-out / productivity gains that support margin profile

ESAB points to its internal operating system and execution cadence as a key lever behind “productivity and operational excellence,” describing that the combination of acquisitions and AI initiatives will “expand our gross margin profile.” ¹

Supporting evidence in the call:

• ESAB identifies three levers behind the transformation into a “faster-growing, higher-margin enterprise”: (1) sustained R&D, (2) EBXai as its operating system for productivity/operational excellence, and (3) “a disciplined M&A program.” ¹
• On cash-flow and process gains, management states cash conversion improved (not gross margin, but it corroborates execution): “cash conversion improved to 49% up from 40%… reflecting strong working capital management and continued EBXai-driven process gains in order-to-cash.” ⁸

In other words, the gross margin story is not only mix; it also includes ongoing operational improvements that help protect margin quality as the company scales equipment and workflow platforms. ¹⁸

6) Pricing/cost actions to prevent margin leakage during volatility (e.g., Iran conflict)

ESAB indicates gross margin improvement is supported by managing margin headwinds with pricing discipline.

For example, management reports cost impacts from materials and freight, but emphasizes pricing actions:

• They cite “cost impact… tungsten… nickel… steel,” plus freight costs rising, and state “we’re moving price to the market to sort of overcome and offset all of it.” ⁹
• They expect “price/cost to be neutral for at least the second quarter, and then… price/cost positive.” ⁹

Separately, Q1 margin headwinds are explicitly quantified as part of the margin bridge (“40 bps impact from EWM” and “additional 30 bps headwind from the conflict in Iran”). ⁷

This frames gross margin improvement as occurring despite macro/material pressures, which is consistent with management’s emphasis on “more durable through the cycle” margin expansion from the compounder and equipment mix. ¹⁷⁹

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Bottom line (what’s driving gross margin improvement and the 2026 high-margin equipment strategy)

1. Structural mix shift toward high-margin equipment and workflow: equipment share rises to ~44% currently and is expected to reach ~52% after Eddyfi closes; equipment gross margins (~45%) and Eddyfi (~65%) underpin the trajectory. ¹⁴
2. Eddyfi as the high-margin step-change in workflow inspection/monitoring: expected close midyear, positioned as faster-growing and higher-margin, accelerating the shift toward equipment and expanding margins. ²³⁶
3. Execution in EWM and equipment launches that build defensible competitiveness: EWM supports gross margin accretion even while EBITDA may be pressured early in 2026; new products and cross-sell funnels strengthen the equipment franchise. ⁷³⁴
4. Operating system + synergy/cost-out: EBXai and disciplined M&A/synergies are cited as drivers to “expand our gross margin profile” and reshape ESAB into a “higher-margin enterprise.” ¹²
5. Pricing/cost management to protect margins during volatility: management highlights specific cost and freight pressures and the plan to move price to offset them (neutral then positive price/cost). ⁹