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

Good morning, everyone. Welcome to the 19th Annual Oppenheimer Industrial Growth Conference. Next up, we have the Lincoln Electric team led today by CFO, Gabe Bruno. Good morning, Gabe.

Good morning, Bryan.

Always nice to do these firesides with you.

All right. Same here, same here.

Before we get going, just for the audience, there is a dashboard you can submit questions. Gabe and I will take the vast majority of the time, but I will do my best to fit in any audience questions as well. So feel free to ping me. So that's it. Gabe, for those a little newer to the Lincoln story, maybe offer some background on the company, your portfolio of technologies, key strategic priorities and of course, highlight Higher Standard 2025, and the success of team its had to date.

Great. Thanks, Bryan. Thank you all for your interest in Lincoln Electric. So we are the leaders in welding and cutting. We lead with technology. So we've been around since 1895. And so we are very much focused in how do we introduce solutions to our customers to have them and their welding experience has become more productive, more efficient as they're continuing to look at their own fabrication needs. We operate with 3 segments: the Americas, International and Harris, emerging technology. And so we're very much tracking and reporting on innovation and all the work we're doing from a technology standpoint. We track the measures like the Vitality Index as an example for our equipment sales for 2023. 57% of those sales were from new product introductions over the last 5 years. We have been investing over the last 10 years in accelerating our automation business and how we engage in what we believe is an accelerator for growth over the long term, and we've seen the results of that from both our organic and inorganic type of perspective. So we lead with solutions technology, where in our 2025 strategy that Bryan has alluded to, very much focused on growth. We have targets of high single-digit to low double-digit type of CAGR. We are exceeding that. Within that framework, we point to acquisitions of 300 to 400 basis points of CAGR. We also are focused in driving improvements to our business model, of which we measure the average operating profit throughout the strategy period against our targets. Our targets have been, if you look at our investor deck, to expand the operating profit profile of our business by 200 points on average throughout the last 20 years in different cycles we've operated. And so our teams are very much focused on how do we drive continuous improvement, how are we shaping our business models to create more value. And so that's been a key part of our work. That's on top of very strong cash flows, very disciplined capital allocation strategy, focused first on growth both internal investment as well as acquisitions and then returning cash to shareholders. And our ROIC is very healthy, 24.1% over the last year. And so very disciplined in the execution of our business with a very experienced and seasoned management, gives you a little bit of perspective there.

Excellent walk-through. Yes. As I noted Higher Standard 2025 Strategy, we're certainly pacing ahead. Some moving parts there. Overall, ahead of expectations, good moment and I suspect we'll have Higher Standard 2030 rolled out relatively soon. So yes...

Yes. And we're shaping that, Bryan, as you point out, we're shaping through our 2030 strategy, and we're looking to communicating that as we start to wind down the 2025.

Understood. Your team has pretty diverse end market exposures you touched a lot of the global industrial complex. Maybe walk us through what you're seeing across key end sectors as well as geographies at this point for the year.

Yes. So Bryan, it's always helpful for investors to appreciate the broad footprint that we have across end markets. The welding technologies and solutions are different across the different end markets. And so it's important that we manage how we engage and that does provide different perspectives of the different cycles, whether it's short term or long term. We've been very intentional to also invest, as I mentioned, automation, that's a longer cycle, much more heavy capital investment. So that balances out a lot of the short-cycle activity that we tend to point to on a quarter-by-quarter basis. But let me just kind of walk through some of the end markets. So the largest of which is general industries, it's about 28% of our business. You'll see a profile within our investor deck of the mix of end markets. with 28% of general industry. We were down in this first quarter. And next, it's a mix of business as well as some softness we're seeing in equipment, in the European markets, some in the U.S. And one of the key things that we point to when we think about general industry is what's happening in short cycle and what's happening across consumable activity because that feeds into factory activity. And we like to point to industrial production trends, sentiment or PMI sentiment in the index and what does it mean for progressive short-cycle activity. We had seen, as we point to last couple of months entering May of some strength in the U.S. in sentiment. That's typically a leading indicator for us. We did comment that consumables in Americas and general industry was holding steady. So that was positive for us. Contrarily on the European side, more pressure as you've seen on industrial production sentiment being softer around the European market. So you're seeing that softness in the international sector. So that's general industries. Then we have about 23% of our business within the automotive end markets. You saw that first quarter we were down low 20s. That's largely driven by timing on capital investment. And so the comps, for example, year-over-year were much stronger first quarter, second quarter of last year. So you have a little bit of that, but also the timing of just investment in capital. We don't see a pullback in capital investment, just our automation business, strong in orders, strong in backlog, but we see -- do see a timing of how that will be comparably on a quarter-by-quarter basis. Within automotive, the consumable side of our business was softer in the first quarter. And that's, we believe, is largely driven by production levels historically 2023, 2022, that of which the markets were building back inventory levels back to pre COVID level. So a little bit of that is just the comps between consumable activity. We see production generally flat within the automotive sector. So that should progress. On the heavy industry side, we were down low mid-single digits during the first quarter, more strength on the capital side, we did point to some progressive softening on the consumable side of heavy industry that was driven by production schedules around some of the larger players in heavy industry. And we see that as part of their own destocking strategies that should progress into this second quarter, a little bit of more softness in demand from heavy industry standpoint. Structural infrastructure was down mid-single digits. A lot of that's going to be timing on capital projects, but we're still bullish on the long term, some of the drivers for growth there, particularly on the infrastructure side. And then lastly, energy was relatively stable, and that's a good place to be. We know there was some strength in the Middle East in oil and gas, and we expect that to continue. So that's kind of a profile of end market, some of the drivers by the various geographies that we serve.

Much appreciated. You did touch on some of this in your walk through, but obviously, the start to the year was a little slower than anticipated, not quite as robust in the recent quarters. Some of that's comp driven. You've mentioned Americas consumables being relatively steady relative to PMI. These being favorable leading indicators. Automation backlog here remains strong. Are those the key points in terms of maintaining your full year guide after the softer Q1? Are there other things to taken into account that your team seeing on a run rate basis that gives you confidence looking forward?

Yes. So just keep in mind, Bryan that these are overall operating assumptions that we provide in the markets. And we reported to February an organic assumption into that low to mid-single digits. And we've talked about that consistently to be driven by accelerated growth in automation. So that's consistent. And we continue to be bullish on what we see in orders and backlog for automation. And you'll see a large part of that is 80% of automation is within Americas segment. So we expect that. We had a little bit of pull forward in automation activity into the fourth quarter. So you saw a bit of that impact the first quarter. But that's the driver that we've pointed to in February, which we pointed to also in our first quarter call, and we continue to see just good strength orders, backlog within automation. We also pointed to in our last call, some strength we're seeing on the Harris side, albeit last few quarters regarding -- we're challenged with volumes, particularly on the retail and destocking activities there, and the comps do become easier. But we do believe that on the Harris side that we're starting to see green shoots and point of some inflection on volume. So we do see some strength there. But we talked about some of the challenges in Europe. We don't see any of that changing in the short term based on what we're tracking and seeing in industrial activity in Europe. So we expect to see more of the same of that as we are into this now the second quarter. But the drivers for our overall assumptions are driven by an acceleration of growth and automation. And just to point out, in 2023, organic sales growth for automation was 8%. So it accelerated beyond the core welding business.

Understood. And setting aside automation just for now, a great aspect of the LECO store, we'll start to dig in there. But even outside of that, your team has gotten a lot more credit than we think appropriately so for kind of megatrend exposure, reshoring, infrastructure spending, electrification everything at this point. Maybe touch on where you play in each of those kind of themes and what confidence you have sustained growth going forward?

Yes. So Bryan, thanks for asking that because it's point to a lot of the long-term dynamics that we see strategically as being accelerators to growth. Reshoring is interesting opportunity. In that we know that there's additional capacity being built out in the Americas, particularly in response to some of the supply chain issues that the market has kind of worked through since the pandemic. But it's hard to track specifically, but we know that as more industrial capacity plays out into the Americas that we're going to have an opportunity to also grow with that level of reshoring. So we're real positive about what reshoring means long term, whether it's in Mexico or the U.S. It's a nice opportunity for us. It builds into construction, into also the inherent infrastructure behind that. So we see that as a long-term driver in positioning and the strength we have in the Americas. When we think about the electrification, we see that as a very good long-term opportunity for us. You see what we're doing with DC fast chargers that are tied into that. It's an accelerator, it's not built into our targets but are some upside opportunity. You see from an automotive standpoint, whether it's ICE, whether it's EV, those are areas that we're very strong in positioning automation capabilities there. So we see that as a long-term growth driver that we're going to be actively participating in. When I think about infrastructure, you think about the IRA, the Inflation Reduction Act that was passed. Hard to track a lot of the specific, what the projects mean to us in terms of long-term growth. But when you have bridges, construction-type projects, it's a good business for us. So we see that as good long-term drivers for growth. And so when you tie, we put this in our investor deck, when you think about the electrification and renewables being an opportunity for us, that's almost 10% of our exposure. And so we see these long-term drivers as enablers for accelerated growth. So we're very, very pleased with our positioning in the markets. That on top of what we believe is a driver for long-term growth but automation, it positions us very well in the long term, which ties into our high single-digit, low double-digit types of targets for growth.

All makes sense. Yes, certainly a lot of steel-intensive investment, just thinking of everything that you walk through at a high level. So the utilization of that much steel, what has to be done to it, you're going to play in...

Yes. The joining of fabrication, I mean obviously, that's our sweet spot. Of course.

Absolutely. Now related to DC fast charger initiatives, remind us the emphasis of getting into the space, what your team identified in terms of market opportunity, how you could clearly differentiate relative to some of the challenges, in the inflation of the industry and where -- what those points are in terms of technology, service footprint, et cetera?

Yes. So let's back up a little bit. So we had an engineer who had an opportunity to see the technology footprint of the DC fast charger and recognize that a lot of what we do with power sources and welding have the same types of capabilities that we could potentially leverage within this DC fast charger market. So our teams went through a proof of concept. It went well, and we decided to do some market research and develop a potential strategy surrounding this early stage type of market. And one of the key drivers around some of the research was -- and this is focused, by the way, in the U.S., was that a high need for availability, reliability, quality in the market, and that fits what we do. So we decided that the value proposition and the model that could achieve that fits very well to how we operate. We've got the engineering resources, the technology. We can leverage our operational footprint, which is what we've done. We've made a modest investment in power electronics, PC board type manufacturing of $15 million that can source needs for both this DC fast charger, but also our core welding business. So fits very nicely for us, and we are very much focused, and we can be patient with this in developing the product that meets our expectations and our brand to be able to introduce in the market. So we're in a beta phase right now, working with charge point operators, engineering firms that source for charge point operators or fleet managers. And we just think this is a nice upside opportunity where we're leveraging all of our capabilities to be able to address a real need in the market. And being early in the development of the infrastructure is so important for us within the U.S. here. So we think this is a nice upside opportunity.