Lincoln Electric (LECO) 13 Feb 202019 Q4 Earnings call transcript

Greetings. And welcome to the Lincoln Electric Fourth Quarter and Full Year 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode and this call is being recorded.

It is now my pleasure to introduce your host Amanda Butler, Vice President of Investor Relations and Communications. Thank you.

begin. may You

well and results Carmen, release everyone. released the presentation, We an website Lincoln Thank lincolnelectric.com at today good and financial in as slide call's earlier to Relations our on you our the attachment Electric section. you, Investor this morning, as can as find

the Executive overview Vince call as our well full the on Mapes, Petrella. me and cover as will is Chris Vince an Lincoln's the in Financial Officer; Officer, discussion Chairman, year results Joining quarter today President of more Chris begin and with Chief will Chief detail. performance

our take your Following questions. happy remarks, prepared we're to

Before we our filings uncertainties due that number of are of forward-looking that be and and statements start actual discussion results provided and the in risk results risks and factors. on our to Forms made a A release materially note of expectations certain during may some may this our may SEC discussion, XX-Q. our our in call differ press XX-K affect please from

measures our is discussed Investor website found non-GAAP U.S. of section to And In most GAAP. which addition, release, lincolnelectric.com. tables at conform not the of reconciliation that to financial in GAAP the do measure a in the comparable available is in earnings again measures our we Relations financial

I'll And Chris? Mapes. with turn that, the call Chris over to

Thank you, everyone. Good Amanda. morning,

business a growth, serving portion to challenging long-term the in shareholders. value of We resilience investing demonstrate our executing customers, on our results strategic remain deliver cycle. year focused full initiatives Our to in the and

balanced approach stakeholders. business all position anniversary in value of XXXX, our As are for generation we that and the we XXXth to celebrate this for confident continues long-term growth our

$XXX spending. top and global the flows, working of weak of to capital In million trends to while industrial XXX% $XXX cash and mitigate share million $XXX cash record million XXXX, in We repurchases. production this quartile dividends and we did returns conversion, shareholders to impact returned generated decelerating

XX automation and points softer with volumes results. X.X% through consolidated compensation operations unfavorably declined lower spending. and organic driven the basis sales sales, We business our in to impact aligning impacted lower billion, by systems. offset lower Our incentive hours, net reduced consumables by discretionary to demand largely Acquisitions successfully for our core $X demand of financial

our a with point reported an full to adjusted basis year If approximate excluding operating XX% XX.X% have our represents margin. XX% XX.X%, We margin a remainder adjusted with point XX basis to operating in which decline XX decline would of relatively in business, income decremental steady, decremental our margin. held acquisitions, margin income a the

slide slowdown reduced And for to impacted sales persistent four trends of most Moving four. in spending X.X% deferrals project for of global decline a in This A in Two broad factors and an Fourth lowered quarter, quarter our consumables. rates weakened in our downturn a by orders sectors demand. sector. reduction demand resulted automated volumes. quarters organic industrial production the our through industrial across in driven systems. key end capital has

both global market in products equipment our of conditions. in to vitality basis in we On expansions equipment high the volumes are and tech our driving relatively improvement in single-digit product systems. XXX were a accelerate commercial a demand, incurred index to in steady all our line centers decline Investments challenging volume and consumables global a basis, launches, initiatives point product automation new new percent Equipment of XX, network quarter. despite

gas to the key strongest quarter, decline automotive, were industries, market of Looking global such Fabrication from international with the trends, oil customers. portion energy end up General demand the quarter. energy construction production heavy as at sectors industrial in in flat and of slowdown end performance infrastructure incremental and the and accelerated in in

five. slide to Moving

we're cautious year. top January, sales quarter decline in line first fourth of earnings in growth or deceleration the on continuing the the Given any through year-over-year and half similar

uncertainties. current the these maintaining measures year last reduction are implemented given we We cost macro

incentive addition, expected from In headwind rate in a will XXXX compensation higher and projected tax reduce earnings. higher

previous management cost cycles, actions done wages. we now challenging implementing have platform greater freezing additional also senior are We're we across achieve to during As productivity. our

these expect contribute the to all $XX $XX XXXX. approximately million cost of year. annualized second We to be will the are savings half of But the the second substantially, expected in million beginning in realized actions of of quarter benefits

measures, and are We we will merit. monitoring conditions if through be contingency implement, can which evaluating year the additional conditions

capital In to prioritize organic continue growth. XXXX, both we'll for inorganic and

line rate to by in increase. with $XX capital our our X.X% million expect increased in The invest the million spend. recently XXth marking We XXXX expenditures board $XX to payout dividend consecutive

to We continue debt-to-EBITDA repurchases times share achieve to gross also X.XX X to execute target. our times will

While productivity a strong positioned well balance cash flows and are value long-term challenging to innovation and improvements in environment with invest growth sheet for our to stakeholders. we the a generate

record we sustainability of across for and safety could year company company. On This performance accomplished each dedication be in XXXX, year. the a a was employees without a to of building sustainable exceeded on our and our the note, not final our our goals it safe

will the cover to call I Vince pass the to detail. more now, quarter And in

you, Thank Chris.

Moving to X. slide

point was basis from by unfavorable an XX a fourth volumes, sales benefit in consolidated as declined XX impact and a acquisitions X.X% Our quarter exchange. X% decline X.X% price point offset foreign basis from lower

was decreased XXX including gross weaker operating unfavorable costs margin Our and primarily $X.X and mix, automation credit basis from LIFO leverage a quarter points fourth acquisitions. as to offset XX.X%, price by systems million profit positive

the acquisitions, XX Excluding profit margin would have approximately decreased gross basis points.

decreased and XX.X% SG&A incentive acquisitions. of sales added a as to percent dollar in offset income SG&A expense from or points decreased terms, sales. XX basis XX.X%. XX.X% Reported lower operating SG&A lower Our declined expense as $XX.X million compensation spending discretionary to X.X% of

item our included and rationalization in Welding charges, Operating in impairments income results $X.X segment. related non-cash primarily approximately special asset million International to

versus point prior items, special basis million to $XX.X income operating year. a decline Excluding the adjusted sales, of XX.X% XX X.X% declined or

year-over-year impact operating our unfavorable the would been adjusted flat XX%. have from Excluding acquisitions, at margin income

was tax effective X.X% with year rate the quarter XX.X% compared period. prior in fourth Our

Excluding tax period. compares the This fourth prior rate quarter year items, special was with our in XX.X%. XX.X%

rate full the XXXX year and items. to in mix effective mid-XX% discrete tax low- to average our subject extent the timing future the expect of We and of tax to earnings range, be

XX.X% compared share diluted Fourth in period. to per quarter to the $X.XX decreased $X.XX earnings prior year

Excluding special items, share reflecting XX.X% to adjusted $X.XX of sales. decreased the organic diluted earnings lower per impact

volumes. EBIT Now moving declined XX.X% management EBIT to to The adjusted as the XXX declined Welding actions compensation, Americas lower margin price/cost lower XX.X% cost offset were basis million. segment's points quarter geographical positive adjusted incentive segments slide X. and on fourth $XX dollars to by

business segment's prior margins EBIT held have XX% the adjusted with decremental a Excluding steady the would versus the automation weakness in year our margin.

prior across the X.X% a reported declined year due production Looking Americas top consumables, in against end line. to decline comparison. high single-digit a an sales Americas reflecting broad X.X% industrial in organic percent volumes sectors. in Welding market at our largely a Welding decline challenging primary decline

narrowed low in our continued challenged quarter. demand percent Automation due modest the We remained solutions. growth decline the volume in achieved to to weak for demand but a on spending, new double-digit rate capital equipment

of the lower U.S. The surcharges business. reflects the price in removal segment's X.X%

sales performance pricing also we additive until first expect We welding the through XXXX Americas acquisitions. and surcharges. anniversary similar automation the half fee benefited of X.X% from the

mitigate from adjusted EBIT Improved points margin European sales X. in of primarily due East. and and to benefits to weaker in The helped Middle X.X% to activities in Germany declined France Moving macroeconomic softness decreased adjusted volume lower integration impact Europe the X.X% segment's the volumes. X.X%. decreased the International to XX and to mix rationalization $XX.X Welding and basis slide declines EBIT conditions Organic million and

a productivity Volumes quarter channel acquisition continued Fourth $XX.X adjusted mix, in demand to Harris Harris and solid X.X% million. on increased sales X% Moving also improvement aluminum late points XXX an EBIT acquisitions Group. in XX.X% to unfavorable basis increased the EBIT the increased channel. XXXX. retail OEM from margin in products the Adjusted Products and XX.X% and to accretive improvements. recognized

Moving Cash $XXX XXX% and improved million tax capital to payments, increased which conversion slide to working from ratio. generate flows reflecting helped cash lower a XX. operations XX.X%

increased lower working capital the volumes. to ratio Our sales due

dividend We $XXX paying capital million $XX XX million million our the and higher purchased in slide in dividends rate, we Moving in allocation. XX% payout shares. to $XX reflecting the deployed quarter, and

invested capital expenditures. million in in business $XX We also with the

in Board the repurchase noted outstanding the repurchase X.X common This stock. new in program, prior to expiration which the to from million a press our company authorizes share approved authorization of to no program additional date. release, addition As million our up remaining has shares $XX

With over questions. turn the that, for Carmen? like I would to call

conducting at Saree from is gentlemen And and we’ll [Operator ladies with first our And this time, the question-and-answer Instructions] Jefferies. be you. session. Boroditsky question Thank

Good morning. you. Thank

Good morning, Saree.

expect chain saw there? to color quarter? by demand the highlighted your in APAC. factory And issues Could indication if impacted occurring any and during that you what you in supply In some you on first by the improved market China shutdowns end you of slide be provide any the

concerned and of quarters that watching relative couple the impact we're first through certainly, coronavirus about customers' from we're the see business year. businesses our well to of as Well, as as our the we the migrating may

Electric so back our you provide XXth. on facilities facilities the we start intending businesses, February were on update To up with an Lincoln there to our

be approval, aware that may a but provincial not only governmental a requires approval. As you also

the to We receive government have those with been working approvals.

been time, at of Although there operate at we've this point. this our facilities to all unable

capacity. one at operating about have facility XX% that's We but only

to New those nearly the supply our operating ability So, the our with get ability our operating. to of have as a continue and and some up government their to facilities in able we'll to Year work and think Chinese We'll I up of get those then see facilities because have to supply month. our continue chains ability been to closed the for as be chains as is and and to their well operate to customer visibility what

confident be will QX trend believe and to supply chain work we'll us probably for in QX So, I through certainly those issues. they through it issues. that as an But into be work those able impact

unaware -- broad in important area. employees note and of our we On a operations been that any have of have not any contracted I'm have virus did that Wuhan the that more

that side some talking that through we had over They as in January region. was that came some placed be the to actually particular in to of region Singapore As window office technical demand just very team. it that relates may years. the last Asia I area, execution in couple the Southeast had customers aware, good centers in of you the our

We that that some nice offshore in activity particular I know executed was marketplace. actually had on

that through that As that XXXX. in And had world. we that benefits from well moving occurred some actually the of throughout wins then several equipment offshore as seeing marketplace wind area are there

broad. So, it was

there segments offshore see wind could would be that of global be that those think those and may as into I certainly market we Saree, markets XXXX. representative for continuing of wins also opportunities one we say, I necessarily be move the some us wind But than where on to Other wouldn't those say we basis.

I just just the it appreciate share new about could thinking new Then that your share talk in with buybacks? how cadence about little color. around of of authorization think more the count? a you repurchase you're in of share I given deployment bit XX% the and the represents Especially capital place, authorization light

Right.

say priced our priorities fit are So, experience attractive that on reinvesting that Saree. in in and XXXX, that own I our growing or our market be changed M&A this strategy may stock, those focused opportunities in our would and haven't identifying around the still capital appropriately. business, that We're

depending maintenance established would level continue within our take drive our our repurchase price that activities capital buyback our outlook those for to debt and XXXX range our is And a gross to the for our to we've well opportunistic least to EBITDA tell at share so total factors share allocation planning. as and be that activity as share you at upon I

Thank appreciate guys. color you. the I

You're welcome.

Thank you.

question comes Our next Research. Vertical O'Dea with from Joe

respect With to XXXX. morning. cost additional planned actions good Hi, for the

the segment anticipating? around why the additional you timing of we're earlier? pressure it's matter Just Just actions? volume Americas now assess not these why of that in of quarters four that cost actions the -- more you're sort as outlook, declines cost Is now, a into and some persistent so about

we're that actually Look perspective the cost it actions. on accelerating Yes. be my would

cost a trying take we migrated were of ratios the some understand we at you through in year, in the were improvements were that the of SG&A extent ratios saw the If within we of as slight taking that business. as we our experiencing the in look to the challenges marketplace. That some our XXXX actions you was

the that had coming especially the that Americas the of headwind some the in also And of in with acquisitions and you side piece. SG&A the market, associated associated were with

months. a working The we've made announcements we were for that few that have today things been on

of could end of to as response today, to just of wanted of wasn't this it if have a couple reviewed year. seen they The in that next internationally, the front we're the get the last and see months. But the them that over here So, doing activities. market we was activities so step the I

to forward, mitigate measures bring to a potential we we are XXXX. through I to mitigate that challenge move see favorable approach seeing that wanted that some we impacts the marketplace. the this, our XXXX. what impacts. more really of quite try to went some initiatives the we volume Expecting back think further expecting through as migrating productivity other view frankly that of have mitigate would some and we're But some volume and to we of volume continued to made also as in Those some we half to environment And really that accelerate cost of

about the volumes talk just costs come back are get And you level? these to XX% through the XX% better? segment flows if at how that Can

by start segment. could is Joe split relatively the saying the equal the and I Americas that between International

So be associated would balanced with that those it. between modest is very And Harris our expectation amounts has well it then two.

will distributed be and fairly it between So International. Americas equally

the our some – the to far some But time at manufacturing costs. will that of related are if facilities these of in some people them cost point as Yes, And reductions actions will these particularly of utilization volume these restoration in restored. improving more compressing be stress permanent. and then turns likely of certainly, and segment, that be that will our I as International

structure restored Much the volumes. of be with cost forward. of likely are So improved the could part improvements permanent International Americas going I'd our say,

Thanks very much.

You’re welcome.

And Mig R.W. comes from question you. Thank Baird. next our Dobre with

good Joe Hi, on morning, Grabowski It's Mig morning. everyone. for this

Joe. morning, Good

morning. Hey, good

the an automotive. within you quarter last volume mentioned in So acceleration compression

I end broad to automotive also just global but the think it weakness. the was in partly the trend fourth How due did from DM market strike quarter?

in Joe, to you what it's I we similar previous tell would experienced quarter. the

We the and automotive across have segment. transportation mid-teens decline compressions type of volume

the one is most significant automotive declines and and certainly is year-over-year of it's own, its declines. Americas then both the of in And by year-over-year simply, industries. automotive internationally. size on So business our of weak followed heavy magnitude the in because that's But the

Got it.

color. for I guess Okay. Thanks. that to switching Thanks International.

have been Liquide that for last As you years. of guys been lot the Air volumes acquisition. down of after quarter each know couple has A the self-inflicted

challenging declines are most still maybe into or – due going there the from now XXXX, some As here we and sit now some forward impacts still are of rightsizing the the to macro, business?

No.

and most that We are able able think more experience model become customer a to and markets our supply being in Europe on declines be service into from the a XXXX market-driven. align moving I a perspective. expectations of focus that we've if chain business more favorable experiencing to meet strong will been don't to those put

look metrics what frankly the are business, service months. rebounded. me at for last Those have four especially over And quite I'd to to six outstanding say, the

couple revenue the thinking with more the production from that some XXXX, as environment is challenges countries. But the the about of the but concerns only from numbers that that my this and I believe outlook Europe versus is thinking the furthering we've business across of the maybe into specific underlying economic me much done. So larger are industrial seen for business impacted move the by integration we've about work a not we that really

one in more. squeeze just could I if And it. Got

a the You what very Products just the on more and don't get during they Harris strong Maybe quarter? on a volume color a lot strength drove pricing. Group. of But questions both there little had quarter

They've an some They're comes it on We a for in only made execution. from an not that record product very business. investments had just XXXX quarter, some focused had team Harris business. new introductions. their but the outstanding strong the customers. And all-time Look,

job migrated the that those make couple into the to within to frankly, look the to years Over on And that was the team products conducted towards into to the new of did grow in investments the XXXX wholesaling They HVAC them executing last of very our and and for continued quite marketplace portfolio. the acquisition we to targeted portion business. a of a line, able them that in product that be XXXX category. aluminum expect very, launch at of product good an integrating end then continue marketplace

for my Okay. Thanks questions. taking Great.

You're welcome.

you. Thank

question Bryan Oppenheimer. next comes from Our with Blair

everyone. taking Thanks Good morning for my questions.

morning. Good

morning. Good

a weakness the obviously mentioned comps just which the growth added Based what strategy automation there impacts continued forward, and auto on XXXX? and today realistic You that see understanding can automation there your that is easier going reaccelerates during portfolio. rate you chance are

Well, couple as is, automation when things. rates entity. about and the a One about think think say a growth I I'd I don't additive of combined

is strategy there I We're that strategy have. as but we certainly additive. excited we're We're And investing additive within our the business think incubating investment really elements inside that's a company. So that technology, that working other strategy technology. are that long-term new a in about about that on

relates to as QX. our in our I challenges As have that It challenged thinking stay going we're automation, certainly to in QX. business may is automation performance about into expect it migrating some

As think we're the move we the improvements of at activity order as we've XXXX. seen, looking that, we're that rest in about we backlog that into business the and expecting

I dynamics towards spending and out As capital spend larger some right said, have they're that leads And industrial automation. XXXX will at productivity certainly be in the companies welding space the productivity. increasing I believe look their in come towards part within business capital plan. the of of space, you

us start expecting improvements QX back of business some that QX. of at we're expecting looking migrate challenges then to out year. again as the half in Expecting So, in to and in still challenges the those

to half? if maybe And for this that side. could underlying rate contribution on the year market market from equipment parse out on was some first good the us? impact level wondering you Got color run the products in Obviously, your expected helped the to continued weakness I a weakness it. of Appreciate offset there. new the

Well, out for product awfully Index I because us And that parse when to the difficult Vitality our it come of across saw we new introductions, there were think portfolio. them. it's look host a at our across equipment I

any multitude applications. So, it's of a not one application, it's

process. that will able twin to However, allows a rates to it's growing improve take our globally. I And HyperFill which frankly new improve deposition productivity technology be wire and in the technology, users technology, welding to up bring is the quite

the applications that, growth my During of believe even can of we're for provide first application can a in and to of segments. into that application the it continue a international But multitude part travels, couple the XXXX. in that I as year, us vector saw nice be across the utilized moving

for made difficult any towards new even in and late launched confidence that we've one the us products very towards to XXXX. investments it's So, that, we've that I've got point segment. in the And improvements across we be in in XXXX, have we're able our what to segments drive moving the through continue in coming we our as that equipment year. to should portfolio portfolio those

that. for level. that's a how on you then deployment strategy, touched high one you Thank unchanged And capital last Vince, Okay. one. at

you on particularly along the you do M&A see the of near come What side. If capacity opportunities term? the had right over deployment as

X right -- for we'd be that acquisition the could X the transaction. Up above. and for times to our to taking debt-to-EBITDA We between up and right X certainly comfortable

again. you Thank Okay.

Thank you.

Our with Steve next comes go KeyBanc question from Please ahead. Capital. Barger

Good morning Steve.

Steve. Good morning

or XQ, going one half down earnings rate XXXX. that conditions how year? a comment and are Chris full from tax a market to you higher in comment made bring end about Does

have focused based that the be have year, I a us. would where the the run best of our do headwinds year. of half we're second the challenged full first think, facing I is first year you the But the we tell But going early in rates sort experiencing Look that's of of we that turn in certainly if Steve – on that of the very visibility Yes. the we're we're that to part even half quarter. a

than rate what that we in experienced And XXXX. knowing be likely tax higher our will

that would you comments full tell the those apply I So to year.

the being challenging. first the most half really So

Got it.

Americas It And thinking saw high you -- will kind a decline kind XQ of international, so or down better went sequentially rates that on just mirror and will in get organic in is it XQ? about year-over-year that of in single-digit rate? what

and tracking the in month our That's quarter. right fourth see experienced decline Based we sales we're year-over-year the year, on No. experience that at trends now. for of order our mid-single-digit that the in first what we

quarter those in expectations So on of half on what's of line top little predictions, no tracking and And will that of from half those but year year, second knock-on be might first our a kinds kind year-over-year make it's at the that with global that early to the of have too probably certainly and kinds going performance are similar a perspective. effect of first second declines. economies likely the China the the

more If I margins guess. Americas in sustainable Okay. came XQ, at And that segment at level think down versus how margin or then just in or we level that that where the is given one are decremental similar should at running about the we headwinds? how

Yes.

incur our to year-over-year I that from savings of -- from we headwinds only will through So for the headwinds for the costs to these incentive And year. segment as those we our as we've we're think got driving incentive not have the we initiatives offset objectives part systems. Americas management is International need those the well topline, hope as but pay in the that declines reset cost we're

be a of bit seeing headwind enter the year. likely also first We're finish some quarter the perhaps input XXXX have in we XXXX. we will We another of inflation that we will as did have cost as and half little first declines

at this first that in some and of year. quarter believe the types savings headwinds should have, largely to -- I those in margins we risk the some the these of of we point us. downside maintaining mitigate we that in half know are of So cost the the do first front believe But initiatives certainly

Understood. Thanks.

welcome. You’re

Vincent session. Petrella back Q&A And for our to concludes call his remarks. this would to I like the closing turn

our your us continued into and of look to in move Electric. our for discussing thanks quarter forward interest We today the Carmen progression as for we Thanks joining Lincoln on you XXXX. the Thank first of call results again. and everyone

that disconnect. thank we And gentlemen and participating. ladies you may And with now you for