Lincoln Electric Holdings, Inc. (LECO) Earnings Call Transcript & Summary

Great. Thank you, everyone. Hello, my name is Adam Seiden. I am the U.S. machinery and construction analyst here at Barclays. And welcome, everyone, to the first presentation of the Industrial Select Conference. I believe it's 38 iteration here. For our first presentation on this track, we're pleased to have with us Gabe Bruno from Lincoln Electric as well as Amanda Butler, the IR from Lincoln Electric. So just some administrative things since we're starting off here for the day. We will be doing our audience response questions this year, like in prior iterations of this conference. Since we are joining everybody here today virtually, you will see there will be -- those questions will be on the side of your screen. So we would appreciate if you can take a second sometime throughout this presentation to fill out those questions. We think information is certainly pretty informative for everybody on the back end of that. So with that, we'll -- actually, before we jump into the presentation here in the fireside chat, I do want to remind folks that I have -- if you are interested in submitting questions for Gabe, you shoot me an email at adam.seiden@barclays.com, and we'll be sure fit those towards the end of this presentation today. So with that, we'll shift over to Gabe from Lincoln. And Gabe, if you'd mind just starting off for the folks that are new on the line, giving folks a quick introduction on who Lincoln Electric is. And thanks very much for joining us today.

Sure. So thank you all for joining us this morning here at Barclays Conference. Lincoln Electric, we're the world leader in Arc welding. In 2020, we celebrated 125 years in business. And so just reflecting in that before this conference in what we've experienced in the last just about 12 months. If you think about the pandemic. This will be the second pandemic that we have navigated through. So we've global operations. And we're all over the world. Wherever you expect to join metals, you can expect to see Lincoln Electric. And so we have a very mature strategy, very much focused in executing in our strategy, and we're pleased to be here and to share how we're progressing our business in this kind of environment.

Great. Thanks very much, Gabe.

So it was about a year ago, you officially got the nod to the CFO role and then COVID spread globally. So probably not the first year in the seat that you had expected. We're asking all of our companies today, and you led off with it a little bit in your opening comment there, but how has COVID influenced the business that you think -- how does it influence the business? And how do you think the lessons learned from COVID will play into how Lincoln operates going forward?

Yes, Adam, that's a great question. And I think about, as I mentioned, 125 years in business. I've been with the company 25 years. And so lots of different challenges, right? I mean, we wake up every day with a new challenge, a new opportunity. You know I've been through different roles. So I've had a role in Corporate Controller, I was Chief Information Officer, Chief HR Officer. So I expect change and challenges. And the pandemic surely brought a whole host of different sites -- types of challenges. We're very proud of our teams, the resilience in how we have executed on our strategy, the agility to be able to change our operating environments and be able to really drive the execution and our ability to serve our customers. And you saw that we had the third highest earnings of record after 125 years. We had the third highest cash flow generation in our business. Our fourth quarter, we had a record fourth quarter cash flow. So we're very proud of the resilience and the agility that our teams have shown throughout this environment. One of the things that I'd highlight is this dynamic of working in a remote, flexible environment. I just don't see that going away. We've learned how we can manage effectively and executing our strategy, working from a global standpoint across all of our teams. We're able to harness the ability to leverage technology. How do we continuously drive best practices, we have what we call the Lincoln Business system. How do we foster that level of collaboration throughout all of our various teams. So we know that's not going away. We learned how to operate very effectively in that environment. And so that introduces an ability to accelerate the level of business execution. So we're very pleased in how we operate in this environment.

Yes. No, I appreciate that answer. And I could think back to everyone on this call, including myself, we've all become Zoom experts in the last year. So work from home and things like that feels like definitely here to stay. So maybe if we transition a bit into the business, the gen fabrication market was up, and generally, that's been a good bellwether for your business. So while the directions, I think, of each of the individual markets that you guys break out in your pie charts where you're exposed to, it seems pretty apparent. I was hoping you could give us a bit more about where these individual end markets are versus their peak and trough levels?

Yes, it's a great lead into a broad discussion in our business. So about 1/3 of our business, as you know, Adam is in general industry, general fabrication. And as I reflect back 2019 into 2020 and where we are at now in the cycle, I think about the European business in the early part of 2019 going into a contraction in the industrial cycle. We measure and we track all the same measures that you all track. The PMI, the ISM, all the different measures. The U.S. entered more of a contraction mode in the middle of 2019. So as we were going into 2020, we knew we were navigating in a challenging industrial environment. Obviously, the COVID experience and the depth of what that did to the industrial markets were pretty significant. That said, you saw it starting in the third quarter, into the fourth quarter, general opening up. We saw the expansion unit above 50 is the ratings that we know we track really accelerating those markets. So now we're seeing positive momentum. That has been consistent now, third, fourth quarters on general industries. And we feel we're pretty nicely seated in an expansionary type mode in general industry. That's a 1/3 of our business. I move to heavy industries. Heavy industries, we estimate about 18% of our business. That cycle peaked in the early part of 2019 and then showed steady declines, contraction throughout 2019. And then when the COVID pandemic hit, there was a push to conserve cash. There was a pullback on capital investment. That continued throughout 2020. A lot of discussion in the normal cycle now of an acceleration in the cycle for mining, for ag, for construction type of equipment. So we're pretty optimistic. The comparables do get easier, but we expect to start to seeing some growth probably the middle of the year. And as we exit the year, you're going to start seeing -- approaching, I believe, back to 2019 levels, albeit at the downside of the cycle. But we believe that the heavy industry segment is on a growth trajectory, probably the middle of the year. I think about automotive, transportation, that amounts to about 17% of our business. One of the challenges that we know all of is dealing with the electronics, semiconductor shortages. So the automotive sector transportation was positive in the fourth quarter. We expect that to continue, although because of those dynamics, it may be a bit challenge to get to production levels back to 2019. But generally positive as we look at transportation, automotive real demand in that cycle. When you think about structural. Structural is a smaller part of our business. 10%, was down fourth quarter. We're up third quarter. Our teams are generally positive on structural for the year, although I would say, I feel it's more choppy. So I think overall bullish for the year, although we may be up one quarter down the other quarter. And that's really depending on projects on the infrastructure side, whether it's on bridges or roads repairs and equipment used for as well as energy, power generation, that sort of thing. Broadly speaking, though, as the last segment I'll comment on is energy. That's been compressed, largely driven by oil and gas, as we know. And that continued to be compressed throughout 2020 since that March, April time frame. And we expect energy to be challenged, more of a bearish outlook for energy for the balance of the year. So most industry segments, with the exception of energy, we believe will be driving towards growth mode by the middle of third quarter time frame, and we're pretty positive in the outlook from an industrial standpoint.

Got it. And that's a great overview of all the individual pieces there. Just a little bit more on trends. And I think you alluded to some -- you mentioned some of it, for some of the end markets. But when we think about intra-quarter in Q4 and then even how we're shaping up here in January, early February, how would you describe the trends, the intra-quarter, intra-month trends there within the various end markets?

Well, inherently, the momentum was more positive as we progressed into the fourth quarter, and we didn't see a pullback on that momentum into January. So we're pretty optimistic in the full year. We talked about -- we gave some assumptions for the full year of us being in the growth mode for 2021, and with an expectation of being in the high single-digit type of growth, organic growth for the year. So we're positive in that. We see growth, not just because of a recovery of the pandemic, but starting to see some movement within the cycles, that gives us pretty good trajectory as we go into this first quarter. Now our comments on the first quarter, we were talking about flat to slightly above prior year levels. But we feel now it's largely pre-pandemic. So we feel pretty good that we're going into a growth mode for 2021.

Great. I just wanted to dive into a line that you guys talked about on the call, but -- because I think it's impactful for the broader trends of the business. And that is that equipment has been running ahead of consumables, it seemed to be a little bit of a reversal in Q4. So what does that tell you about the market? And was that a function of consumables improving? Or was equipment falling back? Or what was the balance [indiscernible]?

Maybe I'll start off with equipment. We've been very positive to how our equipment business has progressed. Standard equipment. This doesn't include automation. Our new product introductions, we're really excited about. We've had good trajectory with the structure of our strategic business units we had developed a couple of years ago. Those SBUs are focused on opportunities to improving our market positioning. So we've been very excited about the trajectory of our equipment business over the last couple of years. That said, when we're coming out of a recovery, we generally would expect to see the consumable side of our business accelerate. So we had not seen that into that second -- end of second quarter, third quarter. So because we saw that actually accelerate beyond equipment, that's a good signal that the factories with -- around the globe are starting to operate. And we're very nice to see that. We're actually up on the international side on consumables. So it was a pretty positive trajectory and seeing the consumables activity start to kick up. And you're seeing that the pressures within the market as a result of that.

Got it. So I was trying to think about a bit of your guidance for 2021. And I was looking back for historical precedent here, and what I -- I guess what I had seen here was that sales in 2020 in the Americas were about in line with where they were in 2011 on an absolute dollar basis, and margins were the same, too. So the year after, in 2012, volumes grew by 7.5% and price by 3.5%. And that doesn't feel too far off from where your guidance is on a consolidated basis. So my question is, should we be looking back to 2012 with how the margin trajectory should play out in this business? Or what -- could you just remind us of some of the structural changes that have been made to the business and how the business mix may or may not have shifted since then?

Okay. So when I think about the Americas segment and your point to that 2012, '13 time frame, I think about that EBIT profile of hovering around that 18% to 19%. Our business in the Americas is the biggest structural change we had in the business, is the acceleration in the investments in our automation business. So that's a key difference. Our automation business has grown through acquisitions, and having organic growth, but it's a larger component of business with a lesser margin expectation than the traditional Americas business. So we're confident that we're going to return to that 18% to 19% type range on the EBIT profile. But we need our automation business to reach the targets of that we would expect. So -- and what we've talked about is that the automation business should be at the consolidated average. So while that is less than the profile of the Americas segment, with what we've continued to do in driving our Americas segment, we're confident that 18% to 19% is kind of where we need to be at, and where we expect to be, as we're operating at the normal levels. Our automation business, the EBIT profile has been more -- it's about half of where the target has been and where we actually achieved a couple of years back, but we need to continue to drive that profile and the EBIT profile within automation to achieve to where our expectations are for Americas.

Got it. And when you think of the -- when you think of margin equation, pricing is certainly part of a component and how you guys can offset raw materials cost inflation. So I think you had spoken to price cost-neutral to positive in 2021. I'm just wondering, is there any variation by segment here?

Well, I look at the international and the Americas segment, pretty similarly. That's our core welding offering. I kind of put Harris to the side. And Harris, when you see commodity pricing, which is what you saw in the third and fourth quarter, is really driven by silver content and brazing as well as copper. It's very a mechanical approach in how we price those products. And you saw we got elevation in pricing as a result of the escalation in commodity costs there. So I pick Harris, put that to aside for a moment. But on the international and the Americas side, we have very disciplined structure in how we manage pricing. We expect to be responsive to where we see material cost trends. And we would expect that to continue. I don't see any significant variation between the segments.