Greetings, and welcome to the Lincoln Electric 2022 Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. And this call is being recorded. It is my pleasure to introduce your host, Amanda Butler, Vice President of Investor Relations and Communications. Thank you. You may begin..

Thank you, Dylan, and good morning, everyone. Welcome to Lincoln Electric's second quarter 2022 conference call. We released our financial results earlier today, and you can find our release as an attachment to this call's slide presentation as well as on the Lincoln Electric website at lincolnelectric.com in the Investor Relations section.

Joining on the call today is Chris Mapes, Lincoln's Chairman, President and Chief Executive Officer; Gabe Bruno, our Chief Financial Officer; and Steve Hedlund, our Chief Operating Officer. Chris and Steve will begin with a discussion and overview of our results and business trends. Gabe will cover our quarterly financial performance in more detail.

And finally, Chris will conclude with a review of updated assumptions for the year. And following our prepared remarks, we're happy to take your questions.

Before we start our discussion, please note that certain statements made during this call may be forward-looking, and actual results may differ materially from our expectations due to a number of risk factors.

A discussion of some of the risks and uncertainties that may affect our results are provided in our press release and in our SEC filings on Forms 10-K and 10-Q. In addition, we discussed financial measures that do not conform to U.S.

GAAP, and a reconciliation of non-GAAP measures to the most comparable GAAP measure is found in the financial tables in our earnings release, which again is available in the Investor Relations section of our website at lincolnelectric.com. And with that, I'll pass the call over to Chris Mapes.

Chris?.

Thank you, Amanda. Good morning, everyone. Turning to Slide 3. We I'm pleased to report another quarter of record sales, profitability, earnings and returns. The organization did an excellent job capitalizing on growth and effectively manage the challenging operating environment.

Demonstrating the success of our customer-first approach and the strong execution of our commercial and operational Higher Standard 2025 Strategy initiatives. We achieved record sales of $970 million, led by 21% organic growth on 17% higher price and a 3% increase in volumes, including a solid 10% increase in volumes in our Americas Welding segment.

We benefited 3% from acquisitions which partially offset a 6% unfavorable impact from foreign exchange. We achieved record second quarter profitability with a 17.3% adjusted operating margin and a 30% incremental margin.

We are maintaining strong operating leverage from the team's effective management of inflation, supply chain constraints, and the improved operational execution in automation and Europe. These factors helped to offset higher employee costs and unfavorable foreign exchange. Adjusted earnings per share increased 31% to $2.18, a record performance.

Additionally, we achieved a record 26.3% return on our invested capital and generated solid cash flows in the quarter. We returned approximately $58 million to shareholders in the quarter through dividends and share repurchases bringing our year-to-date returns to $196 million, which includes $130 million of share repurchases.

And now I'm going to pass the call to Steve Hedlund, our Chief Operating Officer, to cover organic sales trends..

Thank you, Chris, and good morning, everyone. Looking at second quarter demand on Slide 4, we had solid momentum across most of our business with growth in all reportable segments in all three of our main product categories and in every region except for Asia Pacific.

A key driver of the momentum has been the acceleration in demand across all of our end markets in the second quarter, led by nonresidential construction and infrastructure, which increased mid-40% and the automotive transportation and energy sectors, which both increased high 20%.

Heavy Industries remained strong at mid-20% and General Industries achieved mid-teens organic sales growth. This level of activity reflects the near-term need for our customers in many segments to increase capacity and improve productivity to satisfy current demand, reduce their record backlogs and rebuild their depleted inventories.

In addition, we continue to see several long-term growth catalysts, including the chronic shorter -- of scale bolters globally, the reshoring and nearshoring of supply chains in North America and significant government support in many regions for investments in infrastructure, energy and electric vehicles.

These factors suggest that underlying demand in the industrial sector should continue to remain strong even with a slowing consumer sector. And now I'll pass the call to Gabe to cover second quarter financials in more detail..

Thank you, Steve. Moving to Slide 5. Our consolidated second quarter sales increased approximately 17% to $970 million.

The increase reflected a 17% increase in price 3% higher volumes and a 3% benefit from our Kestra and FTP acquisitions, which was partially offset by a 6% unfavorable foreign exchange translation, primarily from the Turkish lira and the euro.

Our gross profit margin increased 120 basis points to 34.4% as benefits from volumes cost management and improved operational execution and automation in Europe offset broad raw material and freight inflation across the business, including an approximate $10 million LIFO charge in our Americas Welding segment.

Due to persistent inflation in key raw materials, we will continue to take actions to mitigate inflation as necessary. Our SG&A expense increased 10% or $15 million primarily due to $9 million of higher incentive compensation and employee costs. as well as higher discretionary spending. SG&A as a percent of sales decreased 110 basis points to 17.2%.

We continue to expect our upcoming quarterly 2022 SG&A expense on a dollar basis to be in line with the current run rate.

Reported operating income increased 38% and to $168 million, and we achieved a record reported and adjusted operating margin of 17.3% of sales, a 220 basis point improvement versus the prior year's adjusted operating income margin.

Our margin performance reflects volumes, favorable geographic mix, diligent price and cost management and structural savings, which generated a 30% incremental margin. We incurred an other income expense of $1.1 million in the quarter from nonrecurring items.

Our second quarter effective tax rate was approximately 20% due to our mix of earnings and discrete items. We continue to expect our full year 2022 effective tax rate to be in the low 20% range, subject to the mix of earnings and anticipated extent of discrete tax items. Second quarter diluted earnings per share increased 36% to $2.18.

Excluding special items, adjusted diluted earnings per share increased 31% to a record $2.18. We incurred a $0.07 unfavorable impact to earnings per share from foreign exchange translation. Moving to our reportable segments on Slide 6. Americas Welding segment second quarter adjusted EBIT increased approximately 40% to $118 million.

The adjusted EBIT margin increased 200 basis points to 18.9% from solid volume growth, effective cost management and operational improvements in automation, which maintained low double-digit percent EBIT margin performance in that product area. Americas Welding organic sales increased 30% as all end markets in the region accelerated in the quarter.

Organic sales growth was led by an approximate 20% benefit from pricing implemented to mitigate inflation and approximately 10% volume growth. We achieved volume growth in all product areas in the region, led by automation and equipment. The Kestra acquisition contributed approximately 120 basis points to sales growth. Moving to Slide 7.

The International Welding segment's adjusted EBIT increased approximately 17% to $35 million. The adjusted EBIT margin increased 260 basis points to a record 14.2% primarily from cost management, geographic mix and benefits of operational improvement initiatives.

Organic sales increased approximately 12% due to price actions taken to offset broad inflation in the region and to mitigate unfavorable foreign exchange translation. Volumes declined by approximately 7% due to continued slow industrial activity in Asia Pacific associated with China's COVID shutdowns that persisted through May.

In Europe, volumes were relatively steady versus the prior year. Excluding the impact of our Russian business, Europe volumes would have increased modestly on improved demand trends in the automotive heavy industry and energy sectors in the quarter. Moving to the Harris Products Group on Slide 8.

Second quarter adjusted EBIT decreased approximately 2% and to $18 million, and the adjusted EBIT margin decreased 250 basis points to 12.8% and as the organization continued to incur higher expenses associated with acquisition integration initiatives, unfavorable mix and declining commodity pricing in certain metals offerings.

We expect these factors to persist into the third quarter.

Harris organic sales increased approximately 4% on 4% higher price to recover rising raw material costs and a 50 basis point reduction in volumes as strength in industrial applications and specialty gas was offset by weakness in the retail channel, which is expected to persist through year-end on weakening consumer trends.

The segment also benefited from a 16% increase in sales from the FTP acquisition serving the HVAC market, which will anniversary in August. Moving to Slide 9.

We generated $98 million in cash flows from operations due to higher uses of cash and working capital to support higher sales as well as investments and inventories to mitigate supply chain constraints and service customers.

We expect cash generation to accelerate in the second half at or above a 90% cash conversion rate, reflecting seasonality in our initial actions to normalize inventory levels. Moving to Slide 10.

We invested $16 million in CapEx spending and returned $58 million to shareholders through a higher dividend payout and approximately $25 million of share repurchases.

We achieved a record 26.3% return on invested capital in the quarter, reflecting strong operational execution, but continue to target an 18% to 20% ROIC range to accommodate our active M&A program. And now I will pass the call back over to Chris to discuss our updated assumptions for the balance of the year..

Thank you, Gabe. Turning to Slide 11. We are performing exceptionally well under extremely dynamic conditions. As we enter the third quarter, we are raising our consolidated full year organic sales growth rate and our incremental operating income margin assumptions.

We now expect organic sales growth to be in the mid- to high teens percent as compared to our prior mid-teens percent range, with volume growth still anticipated to be in the mid-single-digit percent range.

The increase reflects our strong first half performance and solid momentum in our Americas Welding segment as end market demand accelerates, and we work through record backlogs in that region.

We are incrementally more cautious on Europe as the Ukraine invasion raises concerns around regional energy inflation and availability and its potential impact on industrial activity. We also expect third quarter headwinds in our Harris business in retail and within some areas of their supply chain.

We do expect that the net impact will be typical seasonality in sales in the back half of the year for all of our segments. We've also raised our incremental operating income margin assumption for the full year to mid- to high 20% range as we continue to execute in this positive industrial cycle.

Our team continues to do an outstanding job servicing our customers while effectively managing these dynamic operational conditions. I'm proud of our team and confident in our ability to continue to drive improved earnings cash generation and returns through this positive industrial cycle. And now I'd like to turn the call over for questions..

I show our first question comes from the line of from Jefferies. Please go ahead..

This is Saree Boroditsky from Jefferies. You talked about the ability for industrial markets to decouple with the weak consumer.

Could you just talk about where you are in the cycle for some of these end markets such as energy, infrastructure and autos that gives you this confidence? And what are you hearing in the channel from some of the secular trends such as reshoring?.

Yes, I just got to tell you, this is Chris. Look, I think that's one of the real positive elements that I see across the portfolio today, not only the regional strength associated with the business, but also the multitude of segments that are migrating towards a positive momentum. And it really continued positive momentum.

Think about where we're at in the energy cycle, still very early. I still believe we're very early in the heavy industry cycle, whether that's mining and the things that we're hearing out from ag. So I think early in the cycle.

And as you know, we believe we're still in the earlier portions of a positive industrial cycle when we see the breadth of this type of demand across our portfolio. I do also believe that Linc Electrics probably seeing the better portion of that demand.

I believe many of the solutions that we brought forward into these segments over the last couple of years and the ones we've entered recently are positioning themselves and positioning us in those marketplaces as the solutions leader.

So we are also receiving the benefit of positive underlying demand as well as solutions that are being adopted into the marketplace..

And then international margins maintained at strong levels even as you had some volume decline.

So I guess, what are you seeing from a demand perspective today, how are you thinking about that going forward, given you're more cautious kind of outlook? And as volumes kind of continue to see a decline in 2023, how should we think about margins?.

Well, Saree, first, look, you've followed us for a long time. I think the performance in our international operations considering the dynamics that they had in the quarter were exceptional.

I mean, between the industrial shutdowns that were experienced in the Asia Pac region and then the challenges associated in the European market because of the invasion of the Ukraine. The team is performing exceptionally well.

We've always shared that for that business long term to be operating at the range that we want to see it at on an operating profit perspective that there was a level of volume that was required for us to be able to accomplish that. I do think that the August time frame this year is interesting in the European market.

I think that because of that and the uncertainty associated with the energy position, that's why we've highlighted it as an area of more risk. But quite frankly, the impact of that, I think we'll just have to continue to manage through the rest of the year and see exactly what impacts will have from those two variables.

But very confident in the structural improvements we've made in our international business over the last few years and confident that we'll be able to meet our expectations as it relates to having them within the ranges we've identified in our higher standard 2025 strategy for the performance of that business..

And look forward to seeing you guys in early August..

I show our next question comes from the line of Bryan Blair from Oppenheimer. Please go ahead..

Good morning, everyone. Very strong quarter. I apologize if I missed this detail. Is your automation business still on track for $600 million or $600 million plus in revenue this year. I know you cited low double-digit margin again for the first half meets the full year goal in terms of profitability. Just curious about the growth trajectory.

And then looking forward, is there anything in terms of backlog progression, customer discussions, quoting activity, run rate order flow that would worry your team about continued growth into 2023..

Bryan, this is Steve. I'll answer that. We are confident in achieving the revenue targets that we've laid out for the automation business. We continue to see very strong quotation activity, good order intake, building the backlog for the business. So we're very confident in our performance in the automation business this year..

I appreciate that color. And a follow-up on international. Americas tailwinds seem very much intact, understandably more cautious tone on international market activity and then what may take place over the coming quarters. You have obviously structurally reset costs. We see that reading through.

Is there any other detail you can offer about incremental cost levers if we do end up in more of a downside case scenario with prolonged demand weakness?.

Well, look, the only thing I would tell you is that the team there was continuing to work on process improvement that we're driving across all the businesses at Linc Electric, and they have a robust process in our international business to be able to continue that also.

So I wouldn't want to imply that the work that we had done to get the business to the position it's in today had completed all of the operational and process improvements that we're driving inside the business.

And look, I think the other element, and it's an element I've seen, and it's a positive for us at Linc Electric is I mentioned it earlier in my comments, many of the solutions that we've developed for these segments are penetrating into the marketplace and they're penetrating into the marketplace globally.

And that will provide us with a little bit of underlying foundational demand because of solution preference that will assist us at least in maybe mitigating some of the challenges we may see there depending upon how those markets continue to evolve..

And I show our next question comes from the line of Mig Dobre from Baird. Please go ahead..

Hi, good morning, guys. It's Joe Grabowski on for Mig this morning. So I guess my first question is, thus far in 2Q earnings season, we've heard from a lot of industrial companies. The supply chain issues continue to impact production rates, but your Americas volume growth picked up in the quarter.

I know you've talked about this in the past, but I'm going to ask it good again.

How have you been able to mitigate supply chain constraints this past quarter and the past several quarters?.

Well, Joe, I'll tell you I appreciate those comments, and I'll tell you, it starts with our people. And I think our people have just done a remarkable job of managing through the challenges. We've not been able to hide from those challenges.

But because of our underlying strategies within the business and what we're trying to do as it relates to creating a more flexible supply chain inside of Lincoln Electric, I think the fact that we have our own printed circuit board manufacturing facility here to support our equipment offering, especially the equipment that we spend globally has been an advantage for us in this cycle.

And I think when we saw the initial pandemic in early 2020, Lincoln Electric made a decision to utilize our balance sheet as a customer-first approach to be able to try to ensure that we could have the solutions available in the marketplace for our customers.

And we have been managing to that strategy for the last several quarters, and I believe that has assisted us in mitigating some of the impacts that are out there in the marketplace. But again, I'll say I start with our team, and I think our team has just done a really remarkable job in managing us through these challenges..

Excellent. Okay. And my follow-up question.

I believe I heard in the prepared remarks that there was improved execution on automation in Europe, and I was hoping you could expand upon that comment?.

No, I think we talked about improved execution in automation and Europe..

Okay. All right. All right. Well, maybe I'll ask another follow-up question then. Last quarter, you thought there might have been a pull forward into Q1 due to the April price increase. But again, volume growth looked really good in the Americas in Q2.

In retrospect, do you think there was a pull forward or perhaps not?.

No, I'm pretty confident that there was a pull forward from early Q2 into Q1. It's just that our Americas business just had a really solid quarter, solid execution across the board strength in all those industry segments. And again, that customer-first approach allowed us to be able to meet that demand as it was coming.

And as we've shared, our backlogs are still very strong. So we still to see strength within that area. But I'm confident that we had some pull forward from Q2 to Q1..

And I show our next question comes from the line of Chris Dankert from Loop Capital. Please go ahead..

Good morning, guys. Thanks for taking the questions. I guess to ask a question on international, just a little bit differently. Like you said, execution there has been exemplary.

But if we do get into a downturn, how do we think about the decrementals perhaps? I mean, now that the cost structure has shifted, do we kind of go back to a typical decremental in international? Just trying to think about how to property stress test that given you guys has mentioned pretty substantial changes there..

Chris, this is Gabe. When we think about decrementals, I mean, I would look to our overall posture as a kind of a consolidated company. But that said, we're confident that we have structured our business model in international to be in those targeted ranges. So we ended the first half, frankly, at the higher end of the range.

The second quarter will go through some traditional seasonality and some pressure, we believe particularly in Europe. But we feel confident that we're within the range in our targets, within the structure that we have established..

Got it. And then just thinking about growth into the back half of the year took the growth number up a bit here.

I guess a wire rod price is really not giving up or is part of that increase in the back half on pricing? Or is the majority on pricing, I guess?.

I would keep it steady, Chris, in your assumptions. And we're still working through inflationary pressures on the raw material side and broadly speaking. But if you hold steady and we start to anniversary some of the price increases that we put in place in the third and fourth quarter is that's how we get to the overall organic sales assumption..

Okay.

So -- but still no additional increase is kind of assumed in that guidance commentary then?.

Yes..

I show our next question comes from the line of Nathan Jones from Stifel. Please go ahead..

Good morning. This is Adam Farley on for Nathan. I wanted to ask another follow-up on the pricing question. Once inflation, net of all costs hit an inflection point.

What is your view on holding price as cost come down?.

Well, look, that's a very broad question. I mean Linc Electric, we're serving a multitude of markets around the world with a multitude of different products and solutions.

So I will share with you that, look, we've seen more inflation in areas of our business over the last 12 to 18 months than we have seen for a considerable period of time, decades level of a ramp-up in inflation.

I think the confidence that I have at Linc Electric is our ability to manage the inflationary cycle on the upside and our ability to manage it on the downside.

And quite frankly, there may be areas of the business where raw materials dropped so significantly that we may have to make adjustments to actually the prices that are provided to the marketplace.

At Linc Electric, I've got a lot of confidence that our teams will be able to manage us through that portion of the cycle, and we'll be able to maintain a lot of confidence that our teams will be able to manage us through that portion of the cycle, and we'll be able to maintain the performance that we've driven inside the business.

So there's probably never going to be a scenario where we can give you a broad answer to that question. we really think about the way we're managing that regionally and within the product portfolio that we have within the company and exactly how those raw materials may or may not be impacting that particular product pricing..

And I show our next question comes from the line of Chris Dankert from Loop Capital. Chris, your line is open..

Thank you. Just a quick follow-up. Thinking about the automation trends, obviously, historically it's very tied to automotive, assuming kind of helps diversify there. But I guess, how do we think about automation orders, any kind of demand trends as we look longer term here, I mean, still very much tied to automotive.

Is it kind of as goes, one goes another.

Just any comments on the outlook for kind of organic growth there right now?.

Yes. Actually, one of the interesting elements associated with our automation portfolio is we've had a very strong diversification across industry segments. And quite frankly, that's not as automotive-centric as it might have been a couple of years ago.

So we're not as tied to just one particular segment, the acquisition that we've made recently, especially the acquisition that expanded our presence in the structural steel market has been doing exceptionally well. We've got the development of the Cobot portfolio, which is a very fast-growing product within our portfolio today.

So not as tied to that, although there are many favorable variables talking about automotive and automation needs. This conversion in the automotive space to electric vehicles generally creates a lot of need for automation, you're retooling lines or retooling processes. We've seen some of that activity in our automation portfolio.

So don't want to imply that we're tied to it, but we've seen many favorable opportunities that we're currently working on and think that it's a positive demand driver irrespective of maybe the unit sales in that space over the next couple of years.

As many of the automakers and the OEMs manage through the conversion of portions of their product portfolio to electric vehicles..

And I show our next question comes from the line of Steve Barger from KBCM. Please go ahead..

Good morning. Yesterday, we heard from a big Cobot manufacturer that growth slowed in part due to a lack of distribution channel, labor availability for installations. Obviously, that makes you move into integration look advantageous.

But can you talk about your ability to staff to demand there? And maybe talk about the competitive dynamics in the marketplace?.

Yes, Steve, I can only share with you that, quite frankly, when we developed that product portfolio, and I've mentioned to you the customer first strategy that we've had around inventories and investments that are needed to try to ensure we have the products and solutions in the marketplace.

We've been managing through that relatively well in our Cobot performance also. And then recognize, Steve, we have another variable that's available to us at Linc Electric.

We have nearly 200 individuals, quite frankly, across the United States that are trained TSR representatives that can assist us in bringing those technologies into the marketplace and into the channel.

So even here in Cleveland, Ohio, we've had a multitude of sessions with our channel partners educating them on that product portfolio and others as a way for us to minimize some of those risks associated with adoption and integration.

So I will share with you those types of challenges are not getting to me as it relates to bringing that product to the marketplace..

That's great.

Are you continuing to build that staff out? Or are you looking at more integrators as acquisition targets or are there turnkey OEMs out there that you might look at as ways to further that business?.

Look, Steve, we might do all of it. I view the Cobot portfolio, just like I do our broad strategy around automation, our 2025 higher standard strategy is to get that automation business to $1 billion We're certainly well over $600 million on a run rate basis. We've got really strong demand behind that.

And whether that's continued investment in the Cobot product category or the structural steel category like we did last year with the Zeman product in Austria. We'll continue to make those strategic investments to accelerate the execution of the automation strategy within our higher standard strategy..

Yes. I'll just ask one more about this. Obviously, you've been super successful in this strategy. The growth trends are there. The underlying demand is there. But just more for the deals that you don't close.

Is there an underlying theme there and something you're trying to address just to make yourself a stronger participant in the market than you already are?.

No. But I would tell you, we're constantly listening to the voice of the customer to try to understand what are the features or function that they might be looking for as it relates to applying the Cobot into their particular application or other automation cells into their application.

But look, that's where our product management teams are working with our customers and working with our field sales team to try to continue to enhance our offering. So that's almost like a rhythm within the business. So I'm certain there are examples of that.

But certainly, no example that is in front of us that's saying that it's a major hindrance across the product category in an industry that's minimizing our ability to bring those solutions to the market..

I show no further questions in the queue. This concludes our question-and-answer session. I would like to turn the call back to Gabe Bruno for closing remarks..

Thank you, Dylan. I would like to thank everyone for joining us on the call today and for your continued interest in Lincoln Electric. We look forward to discussing the progression of our strategic initiatives in the future. Thank you very much..

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect..