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

Good morning, everyone. Welcome to Day 2 will be Oppenheimer Industrial growth Conference. Next up, we have outperformed our Lincoln Electric with CFO, Gabe Bruno, joining us today. Morning, Gabe?

Good morning, Bryan. Thanks for hosting.

Thank you for being here. Always good to catch up. I guess to start out, I was a little less familiar with your story, maybe walk through Lincoln's history, your portfolio of technologies and a key strategies.

Sure. Great. Thanks, Bryan. Thank you for all of you joining us this morning on this webcast to learn a little bit more about Lincoln Electric and kind of get an update on our business. Just a little background for those of you who not maybe understand the background of our story. We've been in business for 125 years plus now. We are the global leaders in art welding, cutting, brazing, technologies. We've been investing significantly over the last 15 years or so in automation capabilities. So we lead -- we believe we've got the leading position in automation capabilities tied to the welding, cutting industry. Very well known for a leading brand and the innovation and solutions that are tied to our brand. We have recently, over the last year or 2 launched our 2025 higher standard strategy. Just recently, we updated targets that are anchored around really driving customer-first type of business model, driving technologies, including that meant to automation, other adjacent technologies that position us and our value proposition to drive for accelerated growth. So we did provide a framework of targets that include high single-digit, double-digit organic growth. We updated our operating targets, expanding our operating profit objectives by 200 basis points during this strategy period, very balanced perspective in capital allocation. And so we feel we're well positioned to continue to drive a market-leading position in our industry. And continue to do so with a very much customer focus as well as operational excellence within our initiatives.

That's great overview. We'll definitely circle back to a lot of those points and the levers for your strategy. They have pretty diverse end market exposures overall, given weldings importance to manufacturing, construction, energy, et cetera. So maybe walk through what you're seeing in terms of end market activity and the confidence you've had in continued growth across the key fronts.

Bryan, I always enjoy walking through the end markets. We spent a lot of time in thinking through our position and solutions across all the various end markets that we serve. So as you saw in the first quarter, we had very good momentum across all of our end markets, organic growth across all the various industries. When we think about the progression of industries, we think about an acceleration we saw across structural infrastructure types of end markets. We also saw continued strength on the automotive side of the markets we serve as well as the general industries. The fundamentals are pretty strong, we believe, still in heavy industries as well as starting to see progress around energy. So when we think about the positioning in the current cycle, we see acceleration in markets such as heavy industries such as automotive and continued strength in general industries. The drivers there include the backlog positioning in many of the end markets. When you think about heavy industries, you think about heavy construction or ag and mining. We see a lot of potential for growth. And so on balance, we looked about half of our end markets continuing to accelerate in the balance of holding pretty steady. When you think about infrastructure or what we're seeing across EV technology on the automotive side of things, still a lot of potential, whether it continues in this year even into 2023. We see ourselves in a cycle that continues to grow. So well positioned for acceleration in about half the markets and relatively stable outlook for the balance. On the energy side, while we still think there's some time to progress in real capital investment in certain parts of oil and gas, we see some of the renewables like wind as being a catalyst for accelerated growth. So we think there's a pretty balanced favorable outlook on the industrial economy still while there's a lot of navigation through some of the international markets, in particular. But we're excited at the positioning we have with different industry segments.

And you just offered the right segue way in terms of regional discussion. Americas Welding has led volume growth in recent past, a little bit more noise in terms of international markets. Should we expect that Americas is going to continue to lead growth given the backdrop that we see today? And for what -- that at least from our perspective, seems to be more isolated risk in terms of international [Indiscernible].

Yes, when we look at kind of the markets, Americas is strong, and we believe we'll continue to accelerate. When we talk about automotive, transportation, heavy industries, general industries, the fundamentals are particularly strong, we believe, in the Americas segment. And then in addition within the Americas, the largest portion of our automation businesses within the Americas. So we had a very nice acceleration on the automation side in the first quarter. That's a nice contribution within the Americas segment. So we see good strength within the Americas segment here as we progress into the second quarter. On the International side, we're looking now there's some challenges surrounding the Russian, Ukraine conflict. It's a small part of our business, less than 1%. We see the pressures around the lockdowns around China. Again, smaller part of our business, again, that's less than 5% of our business. So while those parts of the markets, we believe, will continue to be obviously constrained going into the second quarter. Because it's a lower part of our business, we don't see that as a significant driver in the outlook as we progress here. They are more of the downstream types of issues that we have a close eye on supply chain dynamics, whether it's in the European context because of the conflict or because of supply chain dynamics with the lockdowns in China. So we're very disciplined in working through those supply chain dynamics. We talked a little bit on the call last week about seeing an acceleration in European business at the end of the first quarter. And we think that may balance out in the second quarter because we do believe some of that was positioning in the supply chain because of the conflict. But overall, in Americas, we expect that to continue to be strong. The driver is automotive, heavy industries, general industries continue to be very healthy. And so we see Americas maintaining that kind of strength that we saw in this first quarter.

Got it. That makes sense. And in terms of America's demand outlook, how should we think about your exposure to the pending infrastructure build spending an ongoing focus for a lot of companies in terms of onshoring activity. What kind of tailwind should we see from an electric over, I guess the coming years is a multiyear context.

Yes. So Bryan, I mean, you're touching on some key drivers to accelerate demand and a lot of investment, whether it's through the administration on the infrastructure bill and what that means downstream the continued onshoring and the capacity needs for those in the Americas are building capacities and a need for labor and automation productivity type of opportunities. So on the onshore, that's going to progress. I look at that in the context also of EV is new technologies that are just going to drive for continued investment in capacity. Our automation capabilities lined up very nicely with that, and we expect that to continue. Hard to track exactly what it means in terms of this is a particular investment from a customer for reshoring versus incremental capacities or capabilities. On the infrastructure side, we know there's significant investment coming through the administration. We largely expect that to come into the latter part of 2022, beginning part of 2023. We haven't seen significant movement yet. We know it takes some time for that build to really start to take hold of investment. But we know it's going to come, and that's going to -- we're going to play right into that, whether it's through heavy industry equipment using construction or which required for rolls and bridges and the infrastructure work that's been outlined in the bill. But we haven't seen it yet, but that's going to be a nice tailwind, we believe as we get into the latter part of this year and into 2023.

That makes complete sense to me better. I've been somewhat surprised to that Lincoln is not viewed as a player source, there's an additive catalyst on the infrastructure. It's extremely steel intensive, investment that's going to take place. That does play into exactly what you do.

Yes. We're excited about that opportunity, and there's going to be a lot of investment as we know.

All right. And focusing on 2022, your mid-teens organic growth guide. What are you contemplating for price versus volume within that framework. And given the really strong start to the year, how should we think of seasonality relative to norm?

Yes. So we talked about the acceleration we saw at the end of the first quarter, very strong demand, record backlogs going into the second quarter. But we think that second quarter should be more in balance with the first quarter. Traditionally, there's a little bit of a seasonality pickup in the second quarter versus the first, that low single digits type of an impact. But we look at it that is more balanced based on everything that we saw as we ended the first quarter. But strong, very healthy momentum going into the second quarter. That's then we -- in the first quarter, we had just over 3% volumes, largely driven by the Americas segment. So we're pretty excited about that with the continued momentum into the second quarter. When we think about the assumptions we updated the mid-teens for organic sales growth been anchored around a mid-single-digit view of volumes, that anticipates then an acceleration of what we saw in the first quarter. So that mid-single digits anchors around what we saw across those industries continuing to accelerate. As I mentioned, automotive, general industry has been relatively stable and moving accelerating as well as having industries. So -- and then back-end potential with energy and stability within the infrastructure side and structural side of our business from what we see currently. So we're pretty excited about what we see in volumes and some acceleration of volumes. And I think we're well positioned because of what we saw of the demand profile going into the second quarter and the strength of our backlogs as well.

That's great to hear. And price cost is always a focus for investors, even more so in this environment given the inflationary pressure that everyone is facing in all directions. Your team has been very diligent in terms of price cost management that's consistent with Lincoln's history. There really hasn't done as per from my standpoint, surprise on the go. But you do seem to be in a good position, you're remaining on the front foot in terms of pricing as you need to. How should we think about price/cost throughout the year? How is that baked into your guide, the impact on months we look at Q2 through Q4?

Yes, Bryan. So we're very disciplined in managing our cost structure and also our response as they deal with inflationary-type pressures and price. So price/cost was favorable in the first quarter. We ended the year slightly negative. And because of that, full year last year was price cost neutral. But we started the year favorable. We did respond at the end of last year with some pricing actions because of how we were trending in terms of, well, how we saw inflation so were favorable. Our philosophy in general is to be price cost-neutral, and that's all in margins and [Indiscernible]. So that is our philosophy to be neutral. So we start off the year favorable. You saw that the operating margins, we've expanded broadly on, and that's just not obviously price costs. Those are all the structural actions we've taken, the volume contribution just the continued work on our business model and the mix of our business across Harris and International, the Americas side of our business. So that's our philosophy as the market progresses will remain very disciplined. And we'll continue as you know, we've held price over long periods of time and despite kind of the challenges in the market, and we'll just remain disciplined in managing price costs.

Understood. And focusing on automation for a minute. We're in a bullish on that part of your story. I think as a huge differentiator in terms of Lincoln's position and growth prospects. You've gotten back to prior record levels and then so. I think run rate is now low, low $600 million range in terms of revenue. Profitability stepped up nicely. What underpins the competitive advantage that you have in this space? And what kind of growth should investors expect going forward, inclusive of your organic trajectory and, I assume, continue to [Indiscernible]

Yes. So we're very excited about how we've progressed our investment in automation capabilities. We feel we are the market leader in our industry and how we have developed our business model around automation. Now this has been long-standing. We saw an acceleration over the last 15, 10 years in investment. And you mentioned our portfolio. Our run rate now is $600 million. We ended 2021, slightly behind $500 million, we were $400 million. In 2020, throughout the down cycle in 2020 with the pandemic initiating in that environment. So very nice progress. We're very excited about our position. And what that means is that we have developed deep automation capabilities within our core welding, cutting, laser offering and then wrap that around. This is a comprehensive set of capabilities that include material handling positioners, tooling, other capabilities that surround an automation offering in the industrial space around metal joining as well as key needs within our customer base. So we're very excited of how we build out a broad-based level of capabilities and well positioned for the growth that you mentioned, which I'll comment on in a moment. When you think about our organization, we've got a deep talent pool of broad-based engineers. We had over 1,000 engineers within our automation business. We have over a couple of hundred robotic technicians, 100-plus service technicians. So we're well positioned to serve a broad base of capabilities within the automation the space. Because of our footprint, and that has been developed over the many acquisitions and over the last 10 years or so. We have broadened the footprint where we're building out capabilities around our facilities. We've got over 1.5 million square feet of capabilities to build out customer solutions on the automation space touching on various end markets, and also offerings from very complex custom solutions to simple. We just introduced [ Cobot ] as an example, very much more simplified automation solutions within the robotic space. So we cover the gamut of solutions within our space that really drive a value proposition that we believe is very exciting from a customer standpoint. When you think about growth, we've mentioned that we're at a $600 million plus run rate currently. We believe that core automation because of the fundamental drivers and needs within industry, core productivity, quality highly reliable solutions within the space and the labor need and capacity drivers within industry are going to continue to drive for more and more automation requirements. So those fundamental drivers in our proven technologies that are going to drive this organic growth, we believe, are going to be 2x for industry welding issue type growth. So we're pretty excited about that. If you think about some of our -- the key metrics around that. We've deployed over $2 billion of solutions over the last 5 years to over 1,000 customers, 10 countries. And just tracking our ability to drive automation solution in a broad way. We'll continue to look to acquisitions to complement organic growth in a much more accelerated way. And we feel we're well positioned. One of the things on top of the growth drivers that we look to is shaping our business model. And when we talked in February, we talked about 2022 being the year we're going to have consistent double-digit EBIT margins. And so we started off the year strongly, and we met that. We're looking for sustained performance in that part of our business. But we're targeting that mid-teens view on our EBIT margin profile. So we're very confident with our execution, continue to shape our business, and we're on a growth trajectory to meet our longer-term target in 2025 target for automation, which is $1 billion in sales at that mid-teens EBIT profile. And lastly, I'll mention this, we don't talk about it a whole lot, but it's tied to our automation strategy, but we've been investing in an additive business, and that really anchors on a lot of the capabilities inherent in automation like within robotic capabilities, our wire-based strong capabilities in that. And we're really excited about that potential as well. So we're well positioned to drive towards our strategy, and we're pretty excited about the portfolio of capabilities that we've put together to drive our value proposition in the market that needs and desires the automation solution to drive the productive need within the market.

Understood. Momentums are exciting there. And you mentioned increasing installed base tracking new wins and expanding global presence. Just to confirm, the $1 billion does not contemplate any consumable sales, correct?

That does not include. Yes. We don't track the consumable portion of our business within automation, although. But we know that the consumable content that come off of our automation is very sticky. So most of our installed base that leverages our capabilities are buying Lincoln wire. We just don't track it within our automation business.

Understood. My simple point is that the $1 billion you're perhaps understanding the economics there, given the stickiness of the follow-on to what that will mean to [Indiscernible]

Yes, for sure.

All right. Now within your higher standard 2025 strategy, but you mentioned the high single-digit or double-digit sales growth target seems to be on good track that they're 300, 400 basis points from which is relatively consistent with historical experience for your company. How does your funnel look in early 2022, that was macro volatility impacting funnel activity, solar expectations, et cetera. What should we expect over the coming forward in terms of that part of your growth trend?

Yes, we're very focused and disciplined around M&A. We're pleased to report first quarter. You can see the run rate or almost 5% of sales contribution from acquisitions, completed 2 meaningful acquisitions in 2021. We announced a small acquisition here in the first quarter. So we are very disciplined strategically in driving our M&A strategy. Continue to have a pretty active portfolio that we're working through. And so you can expect to continue to see the execution along those lines. And then we have, as part of our [ adapt ] for growth at the 300, 400 basis point contribution in CAGR on sales. And we're right in line with that and we'll continue to drive that. So you can expect a very disciplined execution around M&A strategy.

Got it. And then with regards to capital allocation overall, just given the market environment, the trends in the stock market is volatile as we've seen market activity year-to-date. How are you thinking about and prioritizing share buybacks and the capacity you have on that side relative to new strategy?

I used the word just spend a lot in my comments because that's key to how we operate our business. And we're very disciplined when we think about capital allocation. First and foremost, we want to drive growth. And you saw in the first quarter, we had over $18 million of CapEx. So we're looking to invest internally and opportunities to drive new product introductions and automation and cost reduction opportunities and the productivity initiatives within our business or capacity needs. So very, very much focused on growth and investing in internal capabilities. M&A is part of that as well. So as we just talked, M&A is part of our growth agenda, and we'll continue to invest. And that becomes the first parts of our capital allocation agenda. And then we have a long-standing discipline around dividends, returning cash to shareholders in over 25 years. And role of increasing our dividend payout rate. And that becomes a core part of how we think through returning cash to shareholders. And then lastly, our share repurchases. I mean we're our maintenance level is around $50 million to $60 million a year. And so you saw in the first quarter, we had $105 million of share repurchases, and we'll continue to be opportunistic in share repurchases, but we remain pretty balanced in looking at capital allocation where we prioritize growth and have a very disciplined response in returning cash to shareholders.

Makes sense. And then you have a consolidated 2020 to 2025 average EBIT margin to around 16%. What are the key levers by reportable segment in terms of hitting the target ranges and then netting to that, that 16% over time? And given the structural changes that you've made, particularly International and Harris, there seems to be some conservatism baked in. Is that the case given what we've seen in recent past, given the positioning of those platforms, implying that perhaps before we get to the end of the higher stand strategy that we're going to be looking at higher targets for the same.

Yes. So Bryan, when I think about our targets around OP EBIT, we have continued to make great progress in shaping our business model. We just increased our target to 16% and that includes plus or minus 150 basis points through the cycle. It was at 15% for the last 2 years. We were averaging 13%. So we continue to progress our portfolio of businesses to shape our business model. When we think about Harris, we are anchored around that 13%, 15% type of EBIT profile. We ended the first quarter at 14.4%. We're well within that range and the higher end of the range. We just -- as you know, second quarter last year, we had double-digit EBIT for international. We wanted to see some consistency and the performance throughout the ebbs and flows of the third and fourth quarters, which are typical in the international markets. And we continue to make progress in shaping and dealing with some of the structural opportunities that we know we had within the International business. We're very pleased to see we hit 14% EBIT in the first quarter. So we're pretty excited about how we shape the business models and how we have continued to accelerate our ability to contribute profitability within those 2 segments. That step change on the European side really drove the international margin profile. When I think about the Americas, we know we had some pressure on our EBIT profile because of our automation business. As we were investing around for the years in automation into a growth trajectory. We knew that would be a drag on the EBIT profile of the Americas. But you saw that trend very positive has been this first quarter. It means just shy of 20%. So we're at 19.8%. Core, very strong part of our business, the coal welding but in the automation business contributed. So walking through the segments. You're right, we're hitting the higher end of all the ranges as we continue to perform and see consistency in our execution. And we'll revisit those targets, but we feel we've got our arms around the key drivers around the potential of our business model. You saw some of that in the first quarter. We were at 17.6% of OP. So it was a very positive trajectory. And we want to see that play out in a few more quarters, and we'll come back and revisit the targets, but we feel very well positioned for within our business model. I mean one of the things that I mentioned, we talked about volume assumptions. Those volume assumptions essentially take us back to 2019 levels. And we look to continue the shaping of our business model at those volume levels to achieve this type of EBIT profile. So look some consistency as we see consistency in performance, we'll revisit those targets.

Understood. It's the culture of your team to the direct line of sight is something that we're going to speak to it and make it official in terms of some targets, but it seems like you have plenty of traction -- correction to level set on automation. You had mentioned just under $500 million in run rate sales for 2021, stepping up to $600 million perhaps a little bit more 2022 at consistent low double-digit EBIT profitability in '21, that was what range of EBIT mid-single digits, a little bit more.

It was mid- to high single digits. We're looking to double the pacing, ultimately within our strategic targets for EBIT. So making nice strides in 2022 continued progress.

Excellent. Okay. We've covered quite a bit, Gabriel. Anything that you would like to leave the audience with today?

No, particular except that we're very excited about what we see in our business. We saw the strength of the execution along our strategies in the first quarter, excellent momentum into the second quarter. Obviously, a lot of dynamics in the markets. The supply chain challenges, we don't see that going away anytime soon, but our team has been very well executing with all the various challenges. It has been very interesting operating environment to say the least, over the last couple of years. But even with those very challenging environments, our teams have just done an excellent job in executing alongside our strategies and really keeping our customers first focus in play. We've invested in inventories to give us the flexibility, leverage -- leveraging the strength of our balance sheet to be able to do so. and we'll continue to be very focused on how we execute along lines of our strategy. And so we're pretty excited about our positioning across all of our segments and the growth engine that we have invested in, in automation. So we're pretty pleased in how we're driving our strategy and what that potential looks like.

Absolutely. Great color there. And we're excited to see the path of Lincoln this year, next and future years. Thanks for your time, Gabe.

Okay. Thank you, Bryan. Appreciate it.