Greetings, and welcome to the Lincoln Electric 2022 Fourth Quarter and Full-Year Financial Results Conference Call. At this time, all participants are in a listen-only mode, and this conference 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, Kevin, and good morning, everyone. Welcome to Lincoln Electric's fourth quarter and full-year 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 me on the call today is Chris Mapes, Lincoln's Chairman, President and Chief Executive Officer; Gabe Bruno, our Chief Financial Officer; and Steve Hedland, our Chief Operating Officer.

Chris will begin with full-year highlights; Steve will provide the discussion of end market trends; and Gabe will cover our quarterly financial performance in more detail. And then finally, Chris will conclude with our full-year 2023 assumptions. Following our prepared remarks, we are 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.

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 turn the call over to Chris Mapes.

Chris?.

Thank you, Amanda. Good morning, everyone. Turning to slide three, I'm pleased to report another record year of sales at $3.8 billion, record profitability at 16.8% and record earnings performance at $8.27 per share.

We finished 2022 with volume levels at pre-pandemic 2019 levels and at a neutral price/cost position, but with substantially superior results. We also generated strong cash flows, ROIC performance and returns to shareholders. And while not records, these metrics all ranked among leading performance levels for our organization.

Our ability to stay focused under very challenging global conditions is a testament to our team and their ability to execute on our Higher Standard 2025 Strategy. We have several areas of the business where we have generated significantly improved performance.

One of these key areas was the strength of our automation portfolio, which achieved over 30% sales growth to $650 million. We also completed our company's largest acquisition with the addition of Fori Automation, which positions us at an $850 million sales run rate entering 2023.

We now expect to exceed our 2025 $1 billion automation sales target and have reinforced our industry's leadership position in automated solutions, offering the most comprehensive range of solutions from Cobots to lights-out automated manufacturing.

We also exceeded customers' expectations across our welding segments with notable strength in North America on the strength of our distribution model and our ability to bring new technologies to market and attractive industry segment applications.

Additionally, we excelled at an important part of our strategy with continued progress in ESG and achieved strong performance in water conservation and the reduction of our greenhouse gas emissions, again examples of our teams around the world living and leading by the golden rule successfully executing on our strategies for all stakeholders.

Now to share more detail on our end market performance in the fourth quarter, here is Steve Hedlund, our Chief Operating Officer..

Thank you, Chris, and good morning, everyone. As you can see on the slide four, we maintained solid 14% organic sales growth momentum in the quarter as we finished the year, largely benefiting from our diverse product, geographic and end market exposure.

Our industrial end markets remained relatively resilient, automation demand continued with strong backlog positions and we retained price to mitigate elevated levels of inflation.

Both of our welding segments generated double-digit percent organic growth, led by Americas, whereas Harris Products Group compressed slightly on continued softness in residential applications in retail, which we expected.

All of our geographies achieved double-digit percent organic growth, with both North America and International up mid-teens percent. On a product basis, automation expanded high teens percent and consumables increased mid-teens percent with strength in Asia Pacific.

Looking at our end markets in the fourth quarter 90% of our revenue served end markets that were growing in the quarter with automotive transportation up 30%. Energy and heavy industries remained strong, up mid-teens percent with higher growth rates achieved in Americas as we continued to benefit from our proprietary solutions.

General industries remained modestly positive. Our construction infrastructure sales compressed on a challenging record prior year period and some slowing in portions of the non-residential construction market.

Looking ahead to the first half of 2023, we are entering the year with good momentum and expect automotive, heavy industries and energy to continue to invest in capital and sustain healthy production levels as they continue to service demand, rebuild inventory, address aging fleets and infrastructure and support the transition to electrification and renewables.

And now I'll pass the call to Gabe Bruno to cover fourth quarter financials..

Thank you, Steve. Before I begin covering our fourth quarter results in detail, I would like to remind everyone that our fourth quarter operating results exclude our December 1st Fori acquisition.

We will begin to include Fori in our operating results in the first quarter of 2023, where we will be providing Fori’s results from December 2022 through February 2023. We have included Fori in our end-of-year 2022 balance sheet and have also reflected the additional interest expense from our new $400 million term loan in the fourth quarter.

Moving to slide five. Our consolidated fourth quarter sales increased 10% to $931 million. The increase reflected a 9.9% increase in price, approximately 4% higher volumes and a 70-basis point benefit from acquisitions. These increases were partially offset by a 4.7% unfavorable foreign exchange translation primarily from the euro and Turkish lira.

Gross profit increased 13% or $35 million versus the prior year on higher volumes, mix and cost management. We also recorded a LIFO benefit of approximately $700,000 in the quarter, which was a lower headwind than initially expected.

Our profit improvement was partially offset by lower operating leverage in areas of the business and approximately $10 million unfavorable impact from foreign currency translation. Our fourth quarter gross profit margin increased 80 basis points to 33.1% and reflected a neutral price/cost position.

Our SG&A expense increased approximately 9% or $13 million primarily due to $9 million of higher incentive compensation and employee costs, as well as $3 million of higher discretionary spending. SG&A as a percent of sales decreased 30 basis points to 17.6% on higher sales. Reported operating income increased 18% to $141 million.

Excluding $5 million of special items from rationalization and asset impairment charges and acquisition transaction costs related to our recent Fori Automation acquisition, our adjusted operating income increased 20% to $147 million. Higher volumes and automations operational improvements contributed to profit growth.

Foreign exchange translation had an unfavorable $5 million impact. Our adjusted operating income margin increased 130 basis points to 15.8%, generating a 28.4% incremental margin. Interest expense in the quarter increased approximately $3 million to $8.6 million on higher borrowings from our new $400 million term loan.

Our fourth quarter effective tax rate as reported and adjusted was approximately 20%, due to our mix of earnings and discrete items. We expect our full-year 2023 effective tax rate to be in the low to mid-20% range, subject to the mix of earnings and anticipated extent of discrete tax items.

Fourth quarter diluted earnings per share increased 50% to $1.87. Excluding special items, adjusted diluted earnings per share increased 21% to a record $1.94. We incurred a $0.07 unfavorable impact to EPS from foreign exchange translation. Moving to our reportable segments on slide six.

Americas Welding segment's fourth quarter adjusted EBIT increased approximately 37% to $114 million. The adjusted EBIT margin increased 260 basis points to 19% from solid volume growth, operational improvements in automation, effective cost management and a lower LIFO headwind than initially expected.

Americas Welding organic sales increased approximately 19% with growth across all of their end markets in the quarter, including an acceleration in automotive demand and strong 20%-plus growth in heavy industries and energy, reflecting solid regional production activity and capital investment.

Organic sales growth included an approximate 11% benefit from pricing, largely from actions previously implemented to mitigate inflation. We achieved approximately 8% volume growth led by automation and equipment, which continued to maintain high backlog levels. The Kestra acquisition contributed approximately 120 basis points to sales growth.

As I mentioned earlier, the Fori acquisition will be presented in our first quarter 2023 results Moving to slide seven. The International Welding segment's adjusted EBIT decreased approximately 20% or $6 million to $23 million, which was impacted by approximately $3 million of unfavorable foreign exchange translation.

The adjusted EBIT margin declined 200 basis points to 9.2%, due to lower overhead cost absorption. We expect our margin performance to improve sequentially.

Organic sales increased approximately 13%, led by 12% higher price, primarily from prior pricing actions and price adjustments made to mitigate inflation and unfavorable foreign exchange translation. Volumes increased 1% led by consumable growth.

Geographically, we continue to see strength across Turkey, the Middle East and India and improvement in China as the country shifts to the early stages of an industrial recovery. European demand was mixed and we faced challenging prior year comparisons. Moving to the Harris Products Group on slide eight.

Fourth quarter adjusted EBIT decreased approximately 23% to $12 million. The adjusted EBIT margin decreased 260 basis points to 10.3%, reflecting lower operating leverage, unfavorable mix and declining commodity pricing in certain metals offerings. Harris’ organic sales declined 2.5% on 2.4% lower volumes and relatively steady price performance.

While volume was strong in Specialty Gas Solutions, two-thirds of the Harris’ revenue exposure was challenged in areas tied to residential applications like HVAC and the retail channel. Moving to slide nine. We generated $112 million in cash flows from operations in the quarter, reflecting an 82% cash conversion.

Average operating working capital increased to 20.9%, due to the inclusion of Fori’s working capital on our balance sheet without commensurate sales.

Excluding Fori, our average operating working capital ratio was 18.6%, reflecting the higher levels we are maintaining to support sales and mitigate challenging supply chain conditions that persist in our equipment portfolio. Moving to slide 10.

We invested $20 million in CapEx spending and returned $57 million to shareholders through our higher dividend payout and approximately $25 million of share repurchases. On a full-year basis, we spent $181 million on share buybacks and repurchased approximately 1.4 million shares or approximately 2% of our outstanding share count.

On slide 11, you will see that we have maintained a strong balance sheet profile, while increasing our total debt with our new $400 million term loan. This positions us with an approximate 1.7 times leverage ratio, which is close to target and provides ample room to support our operating and M&A needs as we navigate the cycle.

We expect improved cash generation in 2023 from both Fori and improved inventory levels as we expect supply chain conditions will continue to improve. And now I'll pass the call back over to Chris to discuss our 2023 assumptions..

Thank you, Gabe. Turning to slide 12 to discuss our 2023 full-year assumptions. We remain in growth mode this year and expect the combination of organic sales and our recent Fori acquisition to generate low double-digit percent sales growth.

We anticipate our organic growth rate will ease to a mid-single digit percent rate against challenging prior year comparisons with roughly a 50-50 split between volume and price. We continue to see favorable market conditions for Lincoln Electric.

Quarter-to-date, we're seeing good momentum, and we entered 2023 with a higher backlog position than at the comparable period last year. We estimate that only 2 of our 5 end markets are back to their prior peak levels, with the balance of our market sectors still trailing peak from a mid-single digit percent rate down to 30%, specifically in energy.

As Steve mentioned, automotive, heavy industries and energy appear best positioned through the first half of this year to support continued growth.

We also benefit from strong secular demand drivers such as labor shortages, near-shoring to derisk supply chains and early-stage funding of civil and energy infrastructure, renewables and the electrification of the transportation sector.

Additionally, we expect to generate mid to high single-digit percent sales growth from our recent Fori acquisition, which contributes approximately $200 million in sales to our automation portfolio at a low double-digit percent EBIT margin, which will expand as we integrate the business.

In 2023, we expect Fori will contribute $0.12 to $0.15 to full-year EPS, reflecting integration costs, purchase accounting and added interest expense will double to $0.24 to $0.30 of EPS by 2025.

Our M&A team continues to work our pipeline of acquisition opportunities as part of our Higher Standard strategy, and we continue to be active in the market.

While operating conditions remain dynamic, given tight labor and supply, monetary tightening and geopolitical tensions, we are the most confident in continued momentum within Americas and global automation and improving demand in Harris Products Group.

While the recovery in China presents a possible upside, we see challenging market and demand dynamics in our International business.

Looking at profitability, we expect all of our reportable segments to be operating within their Higher Standard 2025 Strategy EBIT margin ranges by year-end, with Harris back in range in the first half of the year and International Welding in the second half of the year.

We expect our core Lincoln Electric business to generate incremental margins in the low 20% range, which is in line with prior performance. Including Fori, we expect consolidated operating income margin incrementals to be in the mid to high-teens percent range.

Our interest expense is expected to increase to $55 million to $60 million, and we expect our tax rate to be in the low to mid-20% range.

We are increasing our capital spending in 2023 to $80 million to $100 million to fund growth and productivity investments as we continue to automate the tough jobs on our platform, expand capacity in our core business and add capital investments to support our new EV charger initiative. Our EV charger initiative is on target.

Although our discussions here today do not contemplate revenue in 2023, we fully expect to be manufacturing and selling units in the fourth quarter of 2023 and are planning for capacity expansion in 2024. We anticipate higher levels of cash generation this year as we work down excess inventory levels and benefit from Fori.

We estimate a full-year cash conversion ratio of over 75% with improving inventory levels, which will be partially offset by higher capital expenditures.

So before I hand the call over for questions, I'd like to reiterate how proud I am of our global team's outstanding performance in 2022 and how well they have positioned the organization for continued success in 2023 and beyond.

By living our values, leading by the golden rule and executing on our Higher Standard strategy, we will continue to generate superior value for all of our stakeholders. And now I would like to turn the call over for questions..

[Operator Instructions] Our first question comes from Saree Boroditsky with Jefferies. Your line is open..

Good morning. Thanks for taking my questions.

I guess just starting off within your guidance for mid-single-digit organic growth, could you just talk about how you're seeing that in Americas versus International, given you seem to have a little bit better view on growth in Americas?.

Yes, Saree, good morning, Yes, this is Chris. As I mentioned in our discussions, we've got a lot more confidence in the trends that we see in our automation business and the trends that we see in our Americas business from a growth perspective, both as we were exiting Q4, as well as what we're seeing at the first part of Q1.

Look, it's not as if we don't have confidence in what we're seeing in other areas of the world. I think that China is a little bit of a wildcard relative to the International side of the business. We're still seeing very solid growth in some industry segments globally.

I personally have made a trip to Southeast Asia this year and have seen some of the activity in the energy market, especially the offshore markets that are very interesting and some of our solutions that I know we're bringing into those markets.

But when we think about the business in total, more confidence in what we're seeing in the trends associated with the Americas business and our automation business as we're moving into 2023..

And then you referenced the high backlog position in Americas.

Is most of this related to automation projects? And could you just talk about what's included in that backlog from an end market perspective and then also from a timing perspective?.

Yes. Saree, this is Steve. So the backlog that we have in the Americas consists of both automation projects, which tend to be long cycle based on the engineered-to-order nature of those systems. But we also continue to see high backlogs in our equipment business here in the U.S.

We have a lot of high technology solutions that we're deploying around the world for things like offshore wind towers, EV battery trays and other applications that are all leveraging equipment made here in Cleveland. And so we continue to see some challenges in keeping up with demand for those products..

Yes. Saree, this is Chris. Just also for clarity, when we talk about the higher backlog entering 2023 from what we saw entering 2022, that does not include the backlog from Fori, and Fori is performing very well. So that is just the backlog on an apples-to-apples basis of the business.

I'd also let you know that in Q1 of this year in our Americas business, we have the highest order run rate for our equipment portfolio in the history of the company. So we've got a very strong start as it relates to the order and demand levels for our solutions in the business..

That’s great to hear. Thanks for taking my questions..

One moment for our next question. Our next question comes from Bryan Blair with Oppenheimer. Your line is open..

Thank you. Good morning, everyone..

Good morning, Bryan..

In terms of your automation backlog on a legacy automation basis, has there been much of a shift in the composition of backlog as 2022 progressed between entry-level kind of offerings, Cobot rollout, Cooper, in particular, seem to be well-accepted standard solutions and then the more customized project work that’s there?.

First of all, the Cobot offering has done exceptionally well for Lincoln Electric, and it's one of our fastest-growing solutions that we had in the business in 2022. But with the broad growth that we saw across that portfolio, I really can't point to it as saying that any 1 area is growing faster than the other.

We're seeing very strong demand, both at the Cooper and the Cobot level, as well as some other solutions that we have that are tailored towards industry segment or applications, as well as growth across our larger engineered cells as we're seeing a lot of capital investment in those areas of the company like energy, general industries and automotive as automotive continues its transition with EV.

So very nice growth but that growth is really spread across applications as well as segments..

Brian, this is Steve. I'd add just specifically as it relates to the automation backlog, just note that the Cooper, Cobot is a make-to-stock item for us, so we do not carry a very large backlog on Cobots. We tend to ship those typically within a week of getting the order..

Okay, understood.

And I realize you're in the early days of owning Fori, but it'd be great to hear a little more about your integration plan, how that's tracking in the early going and whether OE conversations have shifted in any way since combining your legacy automation solutions with the unique capabilities set of Fori?.

Bryan, this is Steve. I'd say the integration is going extremely well. The team at Fori has really embraced a lot of the Lincoln business system processes and tools that we use to manage the automation business. They see that as helping them be much more efficient and effective in managing their business so that they've embraced that with open arms.

And we've seen tremendous interest from our customers outside of automotive in the solutions and technology that Fori brings to our portfolio, particularly the AGVs for handling large heavy unbalanced parts. So it's going very well..

Bryan, this is Gabe. Just to add from a financial standpoint, we're very much in line to what we see to what we've disclosed in the marketplace..

All good to hear. Thanks again..

Yes..

One moment for our next question. Our next question comes from Mig Dobre with Baird. Your line is open..

Thank you and good morning, everyone. I also have a question on automation here. Just kind of trying to understand how this business sort of operates because it's obviously different than your traditional equipment business.

So if you have $850 million of revenue run rate, what's kind of a normal or natural level of backlog that you would normally operate with? Maybe put differently, when you think about the visibility that you have in this business, how does that compare to your regular equipment business? And at this point, as you look at 2023, how comfortable are you with growth with, frankly, trends being able to kind of hold-up in ‘23?.

Yes. So Mig, I think one of the ways to think about it, so in the Fori acquisition and the products that they're providing, the solutions they're providing to the marketplace is even slightly different than the broader business that we had at Lincoln Electric.

But when you think about Lincoln Electric and the host of solutions and you average those out, you would say that in general, the average would be that our backlog and our utilization of the business would be in the six-to-eight-month range.

So that we're -- when we have some solutions that it might take two or three years for us to do the design, the engineering and move them out. We did have some solutions that, quite frankly, could be provided within, like Steve mentioned earlier, Cobot that could be provided either off the shelf or within a week.

But when you average all those out, it's probably looking at maybe somewhere between six to eight months. And the Fori business was actually slightly longer than that. The Fori business was actually looking at probably something closer to maybe 10 months.

So the Fori business, we pretty much already see the backlog that we have for that business for the full-year and understand what we should be doing is we're executing on those automation orders that we have. And as we sit here in February, we've got very good visibility into the rest of the automation business.

As we think about that in comparison to our equipment business, which is what you asked, obviously, our equipment business, we have some very large orders that we receive with large global OEMs or distribution partners or rental groups that might, quite frankly, provide us a large order that is being provided out by month or by quarter as they're releasing those orders, so we have visibility to some of those that provide a longer lead time.

And then we have some of our equipment solutions that, quite frankly, are on the shelf, right there for our customers as they need them immediately. But that's really a way for you to think about the backlog and the visibility that we have in comparing those two areas of the business at Lincoln Electric..

No, that's super helpful, Chris. And I'm curious, as you think about automation, it seems like the focus here is North America. Are there international opportunities that -- on the horizon as well? And I'm thinking of Europe specifically here..

Yes. So look, there are, but I will tell you that right now, we're so focused on capturing the growth opportunities that are in front of us. And because we have so much of that core that is America-centric, we're seeing a lot of growth there. We do believe there are opportunities for us to take this model in other areas around the world.

I actually was at our operations that we acquired from Fori in Korea this quarter. Excited about some of the things that they're doing in the market there. Provides us even deeper relationships with some of the core automotive OEMs that are manufacturers in that country. So that's a great example of where we may be able to grow from that footprint.

As you mentioned, Europe, there are opportunities for us to continue to look at Europe. Remember that a couple of years ago, we acquired the Zeman business in Europe, which is an exceptional automation solution that we drive into the structural steel marketplace. That's been in our portfolio now a couple of years. It's been exceptional.

We've actually put more capital into that business. We have to expand into that business. So an example of an automation solution in Europe, and we think that there are others that we can continue to identify.

That's why I think for people thinking about Lincoln Electric, it's important for my message to be that we have got a great balance sheet, we're still very active in the M&A market and looking at continuing to place strategic assets into the portfolio, quite frankly, as we find those strategic assets, whether they're in Europe or whether they're in the Americas, we want to bring them into the business..

Okay. If you'll allow me one final one, this EV charger business. I guess I don't know all that much about it. I'm sort of curious if you can frame the opportunity here for us. It obviously could be a big market, but I just don't know how you specifically will get to play in that. Can this be a needle mover for growth in 2024? Thank you..

Yes, Mig, this is Steve. I think it absolutely can be a needle mover in 2024. If you look at the EV charging market today, it really separates into three tiers. There's the home trickle chargers, there's what are called Level 2 chargers, which are out in public, but typically take several hours to charge a vehicle, so overnight at a hotel, for example.

And then the third category is the Level 3 DC Fast chargers. And that's the area of the market that we're choosing to play in. That really plays off of our strength in power electronics, our reputation for being able to design and build equipment that has very high duty cycles and very rough environmental conditions.

So that's where we think the market opportunity is for us. There is a lot of federal money going into building out the DC Fast charger network in the U.S. There's also tremendous demand from private fleets.

So people that have their own fleet of electric delivery vans, for example, don't want to have their drivers waiting in line at a charging station, so they want all their own charging infrastructure.

And then as you think further ahead in time, probably not in 2024 but ‘25 and ‘26, you get into things like Class 8 vehicles, you get into off-road construction equipment, you get into mining equipment. If you just read any of the press from people in those various industries, everyone is chasing electrification.

And for large heavy equipment, the ability to charge it quickly becomes even more critical. So as we're out talking to potential customers for our initial product, which is 150-kilowatt EV charger to meet the NEVI Formula requirements.

We're also getting calls from people in construction and ag equipment saying, can you scale up your product to meet our needs? And the answer is absolutely. We've built a very modular, scalable platform that we're very excited about. So I like the position that we have right now.

We're racing to get that first product into production, which we expect to start doing that in the fourth quarter of this year. And then we've got the ability to expand capacity if we need it relatively quickly in 2024 to meet demand..

Yes. Mig, I'd just add on to Steve's comments. Look, it's -- we're going to put $15 million of capital in this project, and most of that capital centers around the growth that we think we could see in ‘24 and ‘25. So we've got the ability to be able to be the market participant at the latter part of the year with the current capacities we have.

The other interesting thing that nearly all of that capital, just to show you that -- how it's being driven from the competencies at Lincoln Electric and our ability to understand and develop power electronics, nearly all of that capital could also be utilized for our welding equipment technologies, if needed.

So this is a great opportunity for us to leverage these core competencies, to move to this market, and I expect you'll continue to hear more from us on this throughout the year..

Great. Thank you..

One moment for our next question. Our next question comes from Nathan Jones with Stifel. Your line is open..

Good morning. This is Adam Farley on for Nathan..

Good morning, Adam..

My first question is around price/cost. So price/cost is expected to be neutral in 2023.

Could you provide color on what your expectations for inflation is in 2023, on costs in aggregate moving up, down or staying about the same? And do you expect to implement any additional pricing actions or is price mainly just carry over?.

Yes. So Adam, so think about -- I'll give you a perspective on LIFO. So we expect to continue to operate in an inflationary environment, not just from a raw standpoint, but also in in labor and other indirect costs within the business. So we expect to operate in an inflationary environment.

When you think about price/cost, we expect to respond to our cost drivers from an inflationary standpoint in keeping our price/cost position neutral. So we'll enact price actions to respond to cost drivers but maintain that price/cost neutral posture..

And Adam, this is Chris. Just so that you're aware, we -- as Gabe said, we're experiencing inflation. We've taken pricing actions already in many areas of our business and have a couple of other pricing actions that we're going to need to implement here at Lincoln Electric before the end of the quarter..

Okay. Thank you for that. And then just turning over to Harris. Business continues to see softness in the retail channel and some of the residential-oriented applications.

I was wondering, did you see any inventory destocking in the quarter within those channels that those may be outsized?.

Hey Adam, just think about it throughout the year 2022. We did see not only softening in demand from a consumer standpoint but also inventory adjustments for the big boxes throughout the year. Our perspective currently is that it should be relatively stable going into the new year, but those continued pressure on consumer demand.

The key thing for us as we think about Harris is returning to that target EBIT profile, that 13% to 15% EBIT target that we've established. And we believe that we have the mix of business now entering this first quarter to be at the lower end of that range in this first quarter. So that's a key driver to our business as we think about Harris..

Alright, great. Thank you for taking my questions..

Okay, thank you..

[Operator Instructions] Our next question comes from Dillon Cumming with Morgan Stanley. Your line is open..

Great, good morning. Thanks for the question. Just wanted to ask one on construction and infrastructure. Just wanted to see if you had any more color on the weakness in the quarter. I know there was a challenging comp, I think, down 20% was a decent chunk rate.

And I think you called out some weakness in non-resi, which is not something we've heard from the rest of the channel kind of quarter-to-date. So just curious what you're seeing on the ground there..

Yes. Dillon, this is Steve. I would say that the issue in -- for us in the structural construction industry is really -- we just had a fantastic first half of the year last year. And this year, we're comping against that.

On a sequential basis, we're reasonably optimistic particularly with the Zeman business that we have in Australia -- in Austria that really focuses on the structural steel market. They're seeing a tremendous demand for their solutions. So I really think it's a year-over-year comparison rather than a harbinger of things to come..

Okay, got it. And then if I can just ask a two-part follow-up on International margins. So first for the quarter itself, I think margins were a bit weaker than we expected. I think Gabe, you called out some lingering FX and then lower cost absorption. But just wanted to see if you have any more color there.

And related question in terms of the margin progression to the year. Gabe, you also mentioned that margins should be increasing sequentially, I believe, into the first quarter. But just given that you've got Fori rolling in, I think FX should be getting better sequentially as well.

Is the expectation at this point that margins will continue to improve sequentially through the rest of the year?.

Yes. We certainly expect it to improve sequentially through the rest of the year. As Gabe said, we expect them to all be back within their Higher Standard targets as we're exiting 2023. This is the week that we actually now have been managing through the war in Ukraine for a year. It certainly has caused some unique challenges in the business there.

But I do see some strength in energy. I expect to see some strength in defense. Our teams there are doing, I think, a very good job of managing in a very challenged environment. But we expect to see improvement and have got a lot of confidence in that business improving as we're moving through the year.

And as we shared, expect to see some improvements in our Harris portfolio earlier than maybe we'll see some of the improvements in the International side, but both improving throughout the year..

Just to add a little bit on pacing, just to keep a perspective of that. So we expect, as we exit the first quarter, to be at a double-digit EBIT range on the International side, continuing at that level into the second quarter. And as we mentioned in our comments, to be within the 12% to 14% EBIT range in the back half of the year.

So the way we look at it is 2022, we're very pleased with our performance on the International side, ending up on an EBIT profile at 12%. And we worked through some of the operational challenges, production challenges as we ended the year, and that positions us to return to double digits as we enter the second quarter..

It’s very helpful. Thanks very much..

One moment for our next question. Our last question comes from Steve Barger with KeyBanc. Your line is open..

Hey, thanks. Good morning. Chris, you said you expect mid-single-digit organic growth in 2023.

I just want to understand, just given how strong the momentum was into the first part of this year, do you expect to drive double-digit organic growth in Americas in the first half and then that's a lot lower in the back half? Or do you expect more balance through the year?.

Well, Steve, I would tell you that as we start to think about the segments on the Americas side and that secular trend that we say in automation, and we see automation being stronger in the Americas piece than the International piece, I mean I, quite frankly, could easily begin to get comfort with the fact that we should see growth within those areas of the portfolio throughout the year, that it shouldn't be certainly front-end loaded versus back-end loaded.

There would probably be those out there that are talking about potential risks associated with a recession in the marketplace. We're not seeing the demand drivers for that. We're not expecting that in the business. You followed us for a long time.

If that occurs in the business, we'll be able to adjust very quickly to those with the model we have here at Lincoln Electric. But really not thinking about the Americas and the automation business being a first half, back half stronger in the first half. I really believe we could see that strength accelerating throughout the year..

So that would put Americas more high-single, low-double versus a lower growth rate in International and Harris to get to that mid-single organic?.

Yes, it could. It could very well have that particular impact, Steve, as you think about the business. But again, I think that part of that comes back to what we see from the recovery, the rate of recovery in the other areas of the business.

We are seeing the improvement, as Gabe mentioned earlier, on the Harris side versus maybe the International side. But if we were to start to see some improvements in the International piece earlier, we may not see the ratios impact quite that way.

But again, much more confidence in what we're seeing in the business on the Americas side and the automation side..

Keep in mind....

Yes. Makes sense..

These are operating assumptions for the year, right? It's still very early. And as we've done in the past, we continue to shape and update the market as we progress throughout the quarters..

Of course, yes. And Gabe, as you drove really nice SG&A leverage in 2022, just given the top line growth.

Thinking about ’23, if organic moderates and you add in Fori, how are you thinking about SG&A on a percentage basis for the year? Or I guess, can you drive additional leverage?.

Well, we'll have some pressure on wages in SG&A and some upticks in discretionary spending. But in general, I mean, that's all built into the incremental assumptions that we've shared. And we believe that when we're in that mid -- low to mid-single-digits on volumes, that we're going to be in that low 20% to mid-20% type range.

And so that is the framework that we have operated historically and we're maintaining that posture. The Fori dynamic is the driver to why we're talking about mid- to high teens incrementals. When you add $200 million plus of business with low double-digit EBIT margins, that's the math.

So we do expect to continue to drive our business model as we've done in the past..

Got it. And if I can just ask 1 more, Chris or Steve, and I think you guys alluded to this. But historically, we've talked about automation as being a CapEx decision that is affected by the same cycles as maybe your Welding Equipment business.

As you think about strength in some of the automation, heavy industries and any reshoring activities or anything else, do you expect that automation will be less cyclical going forward than it used to be?.

Yes, Steve, that's a great question. And we're actually talking about that as we're beginning some of our early conversations around the next long-term strategy at Lincoln Electric because when we started to build out the automation strategy, really eight, nine years ago, we thought that it would be a more cyclical portion of the portfolio.

But some of these secular trends have accelerated much faster than we had estimated.

And the challenge with the ability to find labor, to keep labor, the sourcing challenges that have really become even a greater conversation since the economic supply chain issues around COVID may be can lead us to believe that it is not going to be as cyclical and that, quite frankly, at least through this particular window, we may see it being able to be a more stabilizing portion of the portfolio than we had expected.

The other benefit is that as we've seen with Fori and our ability to be the solution provider of choice for some of these large engineered cells that we've been providing, that because of the tail associated with those and some of those being out 12 months, 18 months, 24 months, it actually, if you think about the traditional cycle for the Welding business, would actually get you through what we might have seen in some of the down cycles that the business has had over the last 10 or 15 years.

So I think it's a great question. We're continuing to look at it. But I can assure you, it doesn't look any more cyclical. It certainly looks less cyclical. We'll be able to evaluate that and continue to update on that as we build that business..

Appreciate that detail. Thanks..

This concludes the question-and-answer session. I would like to turn the call back over to Gabe Bruno for any closing remarks..

I'd 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..

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day..