Greetings, and welcome to the Lincoln Electric 2024 First Quarter Financial Results Conference Call. 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, Sarah, and good morning, everyone. Welcome to Lincoln Electric's First Quarter 2024 Conference Call. We released our financial results earlier today, and you can find our release in this call's slide presentation at lincolnelectric.com in the investor relations section. Joining me on the call today is Steve Hedlund, President and Chief Executive Officer, and Gabe Bruno, our Chief Financial Officer. Following our prepared remarks, we're happy to take your questions. But 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 and uncertainties, which are provided in our press release and in our SEC filings on Forms 10-K and 10-Q. In addition, we discuss 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 turn the call over to Steve Hedlund. Steve?

Thank you, Amanda. Good morning, everyone. Turning to Slide 3. I am pleased to report that we continue to demonstrate solid execution in the quarter. We achieved record gross profit margin performance, a 120 basis point increase in our adjusted operating income margin, and record earnings and cash flows. ROIC remained top quartile, and we doubled returns to shareholders, led by $110 million in share repurchases, all while navigating a challenging portion of the cycle with a slower than expected sales start to the year. In this environment, we are staying focused on serving our customers and investing for long-term growth. We are diligently managing costs and working to accelerate productivity gains from our higher standard 2025 strategies operational initiatives. This positions us well to continue to drive profit and earnings expansion in 2024 despite softer end market conditions. Turning to slide 4, organic sales declined approximately 6% in the quarter, challenging prior-year comparisons in equipment, project timing and automation, along with slow industrial activity in the automotive, heavy industries and HVAC all contributed to choppy organic sales performance through the quarter. Areas of strength continue to be in the Middle East and Turkey on strong project activity. By end sector, energy remained resilient against challenging prior year comparisons with notable strength in up and midstream oil and gas projects. We are also pleased to see Americas Welding consumables organic sales steady versus prior year in the general industry sector. This suggests early stages of an underlying recovery in regional industrial production activity and aligns with macroeconomic data, which tends to lead orders by a few months. On the capital equipment side, we are maintaining a strong automation backlog from solid order activity through the quarter and current quoting activity remains elevated as customers continue to seek solutions that deliver higher productivity, consistent quality, and help address the acute shortage of skilled welders. Moving to Slide 5. As part of our long-term investment for sales and earnings growth, I would like to highlight a few of our recent developments. First, we announced our acquisition of RedViking, an automation system integrator based in Michigan, specializing in automated material handling solutions such as AGVs. They also add new capabilities to our portfolio, including dynamic testing and a proprietary MES software solution that offers enhanced connectivity between customers' automated production solutions and their ERP systems. The addition of RedViking brings our global automation sales run rate to over $1 billion, marking a key higher standard strategy milestone a year ahead of schedule. Their addition along with our extensive range of non-welding automation capabilities brings our global automation sales mix to approximately 55% welding-related and 45% non-welding. The non-welding portion includes automated cutting, material handling, assembly systems, testing, additive manufacturing and high precision machining. I'm also proud to announce that we celebrated the sale of our 1,000th Cobot during the first quarter. This is a key milestone, since the launch of this solution in mid-2021, and we believe this reaffirms our position as the leading welding Cobot provider in the industry. Many of you may have seen our recent announcement outlining the creation of a new Chief Transformation Officer role at the company, which will be led by Michele Kuhrt. We felt the time was appropriate to dedicate a senior executive to accelerate the impact of a range of enterprise-wide productivity initiatives currently underway that bolster long-term margin and earnings growth. In addition, I am pleased to welcome Susan Edwards to the company, who succeeds Michele as our new Chief Human Resources Officer and brings extensive HR leadership and expertise to the company. To conclude before passing the call to Gabe, I'm confident in the progress we have made to date. We have a strong team that continues to execute on our strategic initiatives to strengthen our market position, improve margins and accelerate growth via industry-leading innovations in a full and active M&A pipeline, all of which contribute to attractive long-term value creation for our stakeholders. And now I will pass the call to Gabe Bruno to cover first quarter financials in more detail.

Thank you, Steve. Moving to Slide 6. Our first quarter sales declined 6% to $981 million, primarily from 6.1% lower volumes. We maintained price at prior levels and benefited 60 basis points from a combination of acquisitions and favorable foreign exchange. Gross profit dollars increased approximately 4% to $368 million to a record 37.5% gross profit margin. Effective cost management and operational improvements drove strong profit performance. Our SG&A expense increased 4.5%, primarily due to $6 million of higher employee-related costs including approximately $3 million of incentive compensation associated with our CEO transition, which will not progress in the second quarter. SG&A as a percent of sales increased 200 basis points to 20.3% on lower sales. Reported operating income was relatively steady versus prior year at $165 million and includes approximately $6 million of special items, including rationalization and asset charges from plans initiated with International Welding and the Harris Products Group as well as acquisition transaction costs. Excluding special items, adjusted operating income increased 1% to $171 million, and our adjusted operating income margin increased 120 basis points to 17.5%. Interest expense net in the quarter declined 34% to $8.8 million, which is more consistent with our expected quarterly run rate. Our first quarter effective tax rate as reported and adjusted was approximately 22%. We continue to expect our full year 2024 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. First quarter diluted earnings per share was $2.14. Excluding special items, adjusted diluted earnings per share was a record $2.23. Moving to our reportable segments on Slide 7. Americas Welding sales decreased 5% in the quarter, primarily due to 6.5% lower volumes with compression across all 3 product areas. Price and the benefits of our Powermig acquisition contributed approximately 1% of sales growth. We expect acquisition contributions to increase in the second quarter, reflecting the RedViking acquisition. Americas Welding segment's first quarter adjusted EBIT increased approximately 3% to $136 million. The adjusted EBIT margin increased 160 basis points to 20.8% on effective cost management and operational improvements in the automation portfolio as the team recognizes benefits from the Fori integration. We expect Americas Welding to continue to operate above their 17% to 19% EBIT margin target for the remainder of the year. Moving to Slide 8. The International Welding segment sales declined approximately 7% on 5% lower volumes. Strong project activity in the Middle East and Turkey was offset by weak industrial activity in Europe and challenging prior year comparisons in Asia Pacific. While price declined 1.6%, disciplined cost management held International Welding segment's EBIT margin steady year-over-year. We expect their margin performance to improve sequentially to the lower end of their 12% to 14% target EBIT range. Moving to the Harris Products Group on Slide 9. First quarter sales declined approximately 5%, with 7% lower volumes. Volume softness was primarily from weak residential sector trends impacting the HVAC industry. Price increased 1% on higher metal costs. Adjusted EBIT increased approximately 5% to $20 million. The adjusted EBIT margin increased 150 basis points to a strong 16%, reflecting effective cost management and structural improvements to the business. We expect the team to continue to operate at this higher level in 2024. Moving to Slide 10. We generated a record $133 million in cash flows from operations in the quarter, resulting in 83% cash conversion. Average operating working capital decreased 80 basis points to 18.8% versus the comparable prior year period on improved inventory levels. Moving to Slide 11. We invested $26 million in CapEx spending and more than double our returns to shareholders at $152 million in the quarter through a higher dividend payout and approximately $110 million of share repurchases. We maintained a solid adjusted return on invested capital of 24.1%. We will continue to repurchase shares opportunistically for the balance of the year, but expect to prioritize acquisitions in the quarters ahead due to a strong M&A pipeline as seen by our recent RedViking acquisition. Turning to Slide 12. We have not changed our initial full year assumptions despite a slower start to the year and stronger margin performance. We will continue to monitor economic conditions and the progression of order trends, including any recovery in Europe, the continued strength in automation investment and improvements in automotive and general industries sectors. We're expecting second quarter organic sales to trend flat to up on a consolidated basis primarily from improved performance in the Americas Welding and Harris Products Group segment. We also anticipate continued strong margin and EPS performance on a consolidated basis through the balance of the year. In addition, we expect a sales contribution of approximately $45 million to $55 million and an estimated $0.05 to $0.07 adjusted EPS contribution in 2024 from our April 1 acquisition of RedViking. During this portion of the cycle, we are staying focused on our customers, driving innovation and executing on our strategic initiatives, which will continue to generate superior value for all of our stakeholders. And now I would like to turn the call over for questions.

Your first question comes from the line of Bryan Blair with Oppenheimer.

Thank you. Good morning, everyone. It's encouraging to see how you framed the second quarter, and you noted that Americas consumables are relatively steady, obviously, a key leading indicator. Just curious to get you to offer a little more color on end market and regional trends entering the second quarter and what gives you confidence in the stabilization of top-line trends and then the improvements going forward?

Yes. So Bryan, I'd start just giving a little color on the drivers of why we say flat-to-up for our business in the second quarter. As we've been pointing to over the last quarter, the strength of orders and backlog in automation is evident. We know we had a pull forward in the fourth quarter that impacted first quarter, but we see that continued strength driving the Americas profile in the second quarter and for the balance of the year. So we have confidence in the contribution from the automation business in Americas. We've also seen an inflection point on the Harris part of our business. We've been now, I think, three quarters of compression and organic trends at Harris, but we're seeing in April a good pivot point on both retail and core business in Harris. So that gives us confidence that progression is strong there as well. We are cautious as we are here in our comments in Europe. If you look at the macro metrics, Europe continues to be challenged, and we continue to see choppiness in our business. We are more optimistic when you look at the macro metrics like PMI in the U.S., which we typically lag and is a leading indicator, so we would lag a few months there. So it’s pretty important for us to see short-cycle business in the Americas, particularly in the progression of PMI. So those are the drivers in how we think of our business.

Yes. I appreciate the detail there. RedViking seems to be a pretty high-fit acquisition for you. Maybe offer a little more color on the strategic fit within the automation platform, the synergies with your existing assets and capabilities. And you touched on year 1 revenue and bottom-line contribution. What is the current margin profile, where do you expect that to be? And how much could creation accelerate from the stated range for this year?

Yes, Bryan, I'll start by talking about the strategy for automation with RedViking. Our strategy is fairly simple in the sense that we're following the needs of our customers and leveraging the capabilities and competencies that we've developed to serve them while continuing to expand those competencies. One of the big problems a lot of our customers have is moving material through the factory, particularly as you're completing various steps of the fabrication and assembly process. These parts get cumbersome, large, heavy, and hard to move. If you think about the Fori business we acquired a little over a year ago, their AGV platforms really function as a replacement for the assembly line. So think about very large parts in a fairly standard configuration of the AGV. What RedViking brings to the table is a smaller, more modular platform, if you think about the cells that might be feeding an assembly line, that gets material from those cells to the main assembly line. So we view them as very complementary. In fact, in many customers, we see them already purchasing both Fori and RedViking. So we think that’s a great fit for us. And it's really, again, just following the customers' needs and continuing to build and extend our competencies.

And Bryan, just to add, from a valuation standpoint, we're pretty excited about how nicely it fits into our model. Initially, we're looking at a low double-digit EBIT profile, and they will just move right into our LBS system and we have the confidence they'll fit within our overall targets within the automation business. It's a second-quarter transaction, but expect to see the purchase price in the range of $115 million. And so we're very satisfied with where we're at with this acquisition. It fits very well.

Your next question comes from the line of Saree Boroditsky.

So Americas margins were extremely strong in the quarter, I believe the highest in recent years. You mentioned, I think, being above or at the high end of the range, but these margins are even stronger than that. So just talk about the sustainability of margins at these levels.

Yes. So yes, you're right that we're confident we're going to be over the higher end of the range, which is 19%. Just the mix of business is very good. Our posture in driving cost management actions, and it's just been a very good mix of business. And we also had very nice improvement in the margin profile of automation, which we expect to continue throughout the year. So that's what gives us confidence that we're going to be over the range.

And I guess building on that comment, you talked about the operational improvements in automation. So where are margins in the automation business today? And where can they go as you exit this year?

Yes. So I just want to remind you that we ended 2023 low-teens. We're progressing ahead of that. So our target is to be at that corporate average of 16%. And so we have a very focused agenda through 2025 to hit those objectives.

Your next question comes from the line of Nathan Jones with Stifel.

I just wanted to ask about the creation of this Chief Transformation Officer role. Can you give us any color on what Michele's focus will be in that role and what you're looking to achieve by having a specific leader in that role? Just any details around the creation of that?

Sure, Nate, happy to do that. I think the important thing to note is we're not trying to change who we are or what we do, but really just to get better at how we do it. So if you think about the opportunity for us to simplify, standardize and automate some of our core business processes to enable us to service customers much more effectively and to relieve some of the administrative burden of managing those processes on our employees so they can focus on higher value-added activities. We just think there's an opportunity to help continue to accelerate our growth above market and our margin expansion by just getting better at what we do. And this may sound fairly boring to investors and shareholders, but we're excited about it internally because we see the opportunities in front of us just in these core business processes: the forecast to ship, the ship to lack, the buy to pay. It's the nuts and bolts of the business where we just see opportunities to get better and to leverage new technologies and capabilities to become much more effective and efficient.

I don't think making more money is ever boring for investors. I did want to ask about the EV charging business. Any update on the progress you’re making there in terms of testing the equipment, building the commercial organization? Just an update on how that's going?

Yes, Nate, we are confident in our strategy and are actively working through testing, validation, and customer acceptance. As we stated on the previous call, we will provide a more detailed update after the second quarter. Currently, we are preparing to host the CharIn Testival again in June, an excellent opportunity for us to demonstrate our capabilities and technologies to key decision makers in the industry. We will continue to execute our plan and share more updates in the future.

Your next question comes from the line of Mig Dobre with Baird.

I guess the thing that stood out to me in the quarter was the volume decline in Americas and International. And I'm sort of curious how that matched relative to the expectations that you had coming into the quarter? And someone already sort of asked the question as to what gives you the confidence that you're going to see a ramp here, but essentially, what's kind of baked into your guidance is a pretty significant ramp in the back half of the year. So is that entirely predicated on automation, or are there some other assumptions that you're making that investors need to be aware of?

To address the first part of your question about what was softer than we anticipated, I would highlight Europe where we experienced a volatile first quarter and a notable increase in softness. The comparisons in Asia also affected the volume mix in the international markets. We expected what you observed at Harris. In the Americas, we faced challenging comparisons going into the quarter. We noticed some intensified softness on the consumables side, especially within heavy industries. As we moved through the first quarter, OEM production schedules applied pressure. Those are some of the contributing factors. Regarding our full year expectations, we have not altered our organic sales or margin assumptions, and our margins have actually exceeded our expectations. On the organic front, we continue to see robust orders and backlogs in automation which we highlighted for the second quarter and the latter part of the year. While we remain firm in our assumptions, we will keep monitoring the short-cycle activity in our business. We are optimistic; key macro indicators like the PMI in the U.S. are positive, even as we observe contraction in industrial and PMIs in Europe. That's what's driving this discussion.

Just a follow-up on this, if I may. The part that I struggle with is we just heard from the likes of Caterpillar. We're going to hear from the ag OEMs. It certainly seems like machinery production is going to be pressured. So this is not just a Q1 event. And in your slides, you're even talking about construction and infrastructure being down mid-single digits, which I found to be a little bit surprising personally. So again, as you're looking at your end markets, and I recognize the comment on automation, but as you're looking at your core business, whether it's equipment or consumables, where do you see those signs of incremental stabilization, which verticals?

I want to highlight that our capital investment remains robust. However, we consistently face challenging comparisons due to the timing of projects from one quarter to the next. In the short term, a key focus is managing production schedules with major OEMs, as this influences the level of consumable activity. Long-term investments in productivity and equipment automation are still strong, but effectively managing production schedules is crucial from an OEM perspective in the near term.

And Mig, I would just add that there are long cycle portions of our business and short-cycle portions as well. The long cycle that we have visibility to, we're pretty confident and comfortable in. The short cycle is choppy, with a lot of puts and takes. As you note, the yellow equipment guys are likely going to take down production. We saw that starting to happen in the first quarter and we expect that to continue to happen in the second quarter. The expectation that Gabe outlined earlier already incorporates that continued softness in that sector. We see challenges in Europe where macroeconomic conditions are not very favorable for us at the moment. But we see some encouraging signs in the Americas, particularly when you look at the general industry consumable portion of our business, which is probably our best canary in the coal mine. It's holding steady and we see improving sentiment, and we're expecting that sentiment to translate into higher activity and higher orders in the second half of the year. Again, we don't have a lot of orders on the books for consumables for the second half. So those are still to come, but we're optimistic. Beyond that, we can't really control end market conditions. We can control our strategy and our execution. We're very happy with our performance to date, very confident in our strategy and confidence in the team, and we're just going to keep driving our agenda forward.

Your next question comes from the line of Steve Barger with KeyBanc Capital Markets.

In the slides about RedViking, you mentioned new capabilities with the MES software. Can you talk about the need, if any, for software interoperability across your portfolio? And then longer term, what do you expect recurring revenue from software and service will be as a percentage of the automation business?

Yes, Steve. So if you think about an automation cell or a collection of automation cells, there's a lot of information we can take out of that system in terms of production throughput and part genealogy so we can trace which cell at which shift a given part was made and the like. That information is all available in the cell, and we have access to it. But getting that from the cell into the customer's ERP system is a challenge for a lot of customers. They want the visibility and the traceability of that data, but they want it to be integrated with the systems they're already running, not a separate system. And that's really what the MES software at RedViking positions us better to be able to do. As far as the percentage of the business that software represents, I don't have a good figure for you on that, but I think it's probably down in the weeds since we do have a lot of recurring revenue as it is with existing automation cells that are not software-related. We do a lot of work where we come in and reprogram robots for the customers. We upgrade and update the equipment that's in the cell to help keep it operating at its peak performance. We have a fairly good service business. So the idea of chasing after revenue from an automation system is not something new to us.

Can you give us some kind of gauge of that percentage? If you're at a $1 billion run rate, is that recurring revenue 10%, 20%?

Yes, I'd say on the order of magnitude in the 5% to 10% range.

Okay. And then to your point about getting information out of the cell. Everybody loves an AI story. Here's your chance. Are you using AI or machine learning as a tool for automation sales or for improving test and train for the systems you're installing?

We're doing a lot, Steve, with AI in our additive business around how do we print parts closer to near or net shape. We've got a lot of research activities going on to answer a fundamental question most customers have: did I just make a good weld? Without having to go through destructive testing or x-raying, how do we have greater confidence that the weld I just made is good? There's a lot of effort going into trying to improve our ability to make a predictive score, if you will, for the weld. So there's a lot of activity around AI in the business. I can't comment on whether the MES system RedViking has an AI-enabled component to it or not. It's just too early for me to tell.

And I guess just one quick follow-up. The last two automation acquisitions had heavier AGV exposure. Are there more opportunities outside of core welding that you are actually focused on? Should we see more AGV acquisitions? I'm just trying to get a sense of how this business is going to evolve into what is obviously a growing TAM.

Yes. The simplest way to think about it is we help customers fabricate and assemble things. We're heavily rooted in our history of metal cutting and welding and then using the capabilities we've developed to hold position, rotate, manipulate those parts while they are being welded or cut. The challenges I mentioned earlier about people moving things through their factory in and out of cells are really the happy hunting ground for us. So we'll continue to look for opportunities to add value to customers and to generate revenue by doing that in places where we're helping people make things. Now whether the making process involves welding, deburring, grinding, or cutting, we're relatively agnostic on that part. We already built up such a sizable business that's not in welding. That gives us the confidence to operate in these other applications within a factory because we have a sizable set of people that know how to do those things.

Your next question comes from the line of Angel Castillo with Morgan Stanley.

Last quarter, you mentioned that prices began to increase and would be more evident in Q2, which could explain why Q1 was somewhat weaker. Can you discuss your sales outlook for the second quarter, which you described as flat-to-up, specifically regarding the price and volume components of that guidance? Furthermore, you previously indicated a 50-50 split between price and volume in your guidance. Is that still the correct perspective for the full year, or has there been any change in the composition of organic growth?

Yes. Angel. So first, you're right. We did take pricing actions in this first quarter that will mature in the second quarter. So I would expect a price contribution in the second quarter to be in the 50 to 100 basis points of contribution to organic growth. It is a little bit more modest than we had discussed in February. In February, we talked about a 50-50 mix between volume and price, you assume the middle of the range. I would look to maybe 1/3 more price, 2/3 volume in our current profile organic growth.

And that last comment is about the full year?

Full year, yes.

I guess just to clarify that. What's pulling back on the price? Is it just a difficult environment, customers, negotiations? And that would suggest, I guess, that more bullish outlook than you had kind of laid out from a volume standpoint. Is that the right way to think about it?

Yes. So, Angel, keep in mind that our full year assumptions are low- to-mid-single-digit organic growth. So that's a range. We do expect progression, particularly on the consumable side, where you've got contract negotiations. You saw a little bit of that in the international markets in Q1 where pricing was down, although our margins are holding up. So it is a dynamic of price mix between consumables and equipment. That's where we get a little bit less tempered on the full year outlook on pricing. But our posture, as you know, is to be price cost neutral. We've got very disciplined processes in managing price, and we feel good about our progression so far this year. You saw that we're at record levels in gross profit percent, 37.5%. We're in a very good position regarding the profit profile of our business. So we'll just be very disciplined as we continue to manage price.

That's very helpful. And then maybe just on backing the automation side a bit better or a bit more. You talked about continued growth there. First, could you clarify what organic growth you kind of anticipate for automation for the full year? And two, could you just give us a sense, maybe a little bit more color on the kind of quoting activity you mentioned has been strong, but just what are those customer conversations like given kind of the macro environment that we are in?

We are seeing very strong activity in automation. We have noted increases in orders and backlog, and we expect this trend to continue throughout the year. This presents long-term opportunities for our customers to enhance productivity in their businesses, which boosts our confidence in growth. In 2023, we achieved an organic growth rate of 8% in automation. Within this context, our operating assumptions indicate that the automation segment will drive growth in volume, while growth in core welding activities will be more moderate. Our confidence stems from the robust strength of orders and backlog in the automation sector.

Our final question comes from the line of Walt Liptak with Seaport Research.

Just wanted to ask one on the international profits that looked pretty good. And given the comments from the last question about contract negotiations and pricing and things like that. Should the international profit continue to move up through the year as you start to get volume and pricing? Or I guess, pricing becomes, and I guess volumes is a little bit of a question. But I wouldn't be surprised if you can comment on the international profits?

Yes. So, great question. I did comment in my prepared remarks that we expect the International segment EBIT profile to continue to improve into the lower end of the range, which is 12% to 14%. So first quarter 11.4%, we expect improvement from there.

Okay. Great. I got a few minutes late. But okay. And maybe a follow-on from that improvement. What are you attributing that to? Is it from the cost-cutting or efficiencies? Or is that related to volumes or price?

Yes. I would just emphasize the mix of business. I mean, we saw strength in the Middle East and Turkey in this first quarter. We expect that to continue. We also expect improvements in our Asia business and the mix there. So it's mostly a mix of business driving it. We will continue to drive opportunities to shape our business. You saw some of that already in this first quarter. But that's what gives us confidence in that margin profile.

Okay. Great. And then maybe just one last question. Were you asked about the trends in U.S. demand for equipment and consumables from January to April, and if there were any trends you could share?

Yes. So we did comment on that, Walt. So just consider a pretty choppy environment. The one thing we pointed to in our comments here is we did see some pressure on consumables, particularly on the heavy industry side. Overall strength in equipment and investment automation within heavy industries, but more pressure on the consumable side of our business. We expect that to continue into the second quarter. We are more optimistic about the mix of consumables and general industries. That's a good framework when you think about PMI that was relatively steady. So that was good in the first quarter, and we expect that to continue into the second quarter. We look forward to some positive macros on PMI translating into strength in short-cycle orders as well.

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

Thank you, Sarah. 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.

This concludes today's conference call. We thank you for joining. You may now disconnect your lines.