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LINCOLN ELECTRIC HOLDINGS, INC.

(LECO)
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Lincoln Electric : Q2 2021 Lincoln Electric Holdings Inc Earnings Conference Call Transcript

07/27/2021 | 02:00pm EDT

REFINITIV STREETEVENTS

EDITED TRANSCRIPT

LECO.OQ - Q2 2021 Lincoln Electric Holdings Inc Earnings Call

EVENT DATE/TIME: JULY 27, 2021 / 2:00PM GMT

OVERVIEW:

Co. reported that 2Q21 YoverY consolidated sales growth was 39.9% and reported operating income was $121.8m.

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JULY 27, 2021 / 2:00PM, LECO.OQ - Q2 2021 Lincoln Electric Holdings Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Amanda H. Butler Lincoln Electric Holdings, Inc. - VP of IR & Communications

Christopher L. Mapes Lincoln Electric Holdings, Inc. - Chairman, President & CEO

Gabriel Bruno Lincoln Electric Holdings, Inc. - Executive VP, CFO & Treasurer

C O N F E R E N C E C A L L P A R T I C I P A N T S

Adam Michael Farley Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

Bryan Francis Blair Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst

Dillon Gerard Cumming Morgan Stanley, Research Division - Research Associate

Mircea Dobre Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

Robert Stephen Barger KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

Walter Scott Liptak Seaport Research Partners - MD & Senior Industrials Analyst

P R E S E N T A T I O N

Operator

Greetings, and welcome to the Lincoln Electric 2021 Second Quarter Financial Results Conference Call. (Operator Instructions) 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.

Amanda H. Butler - Lincoln Electric Holdings, Inc. - VP of IR & Communications

Good morning, Cara, and good morning, everyone. Welcome to Lincoln Electric's Second Quarter 2021 Conference. 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; and Gabe Bruno, our Chief Financial Officer. Chris will begin the discussion with an overview of our results and business trends, and Gabe will cover our second quarter financial performance in more detail. Following our prepared remarks, we're happy to take your questions.

Before we start our discussion, though, 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 discuss 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?

2

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JULY 27, 2021 / 2:00PM, LECO.OQ - Q2 2021 Lincoln Electric Holdings Inc Earnings Call

Christopher L. Mapes - Lincoln Electric Holdings, Inc. - Chairman, President & CEO

Thank you, Amanda. Good morning, everyone. Turning to Slide 3. The second quarter marks the 1-year anniversary of COVID's significant impact across our business, and our team has done a tremendous job persevering through this challenge. Many of the regions we operate in are starting to return to more normalized business activity. However, we remain vigilant on rising global COVID cases and are continuing to operate under stringent best practice health and wellness protocols to ensure our employees' safety.

Turning to Slide 4 for second quarter highlights. I'm pleased to report that we achieved record earnings in the quarter driven by record sales, diligent price/cost management, increased productivity and the benefits of our prior cost reduction actions. I would like to thank our employees, our customers and our partners who continue to excel in such a challenging operating environment.

Sales increased approximately 40% in the quarter or 36% on an organic basis on broad recovery momentum from the prior year trough. Consolidated sales as well as International Welding and Harris Products Group sales trended above 2019 levels, and we expect Americas Welding to inflect positively in the third quarter.

Our team did an outstanding job addressing supply chain constraints and inflationary headwinds in the quarter. We leveraged our elevated inventory levels and supply chain partners to maintain product availability across substantially all of our portfolio, reaffirming Lincoln as a trusted and reliable supplier during this challenging period.

We also effectively managed raw material inflation through pricing actions and improved productivity, which resulted in neutral price/cost year-to-date. We will continue to monitor inflationary pressures in the business as we move forward.

Higher productivity, structural cost savings and disciplined management of discretionary spending offset higher employee costs which resulted in a near doubling of our adjusted operating income to $125 million and a 440 basis point increase to our adjusted operating income margin to 15.1%. I'm pleased to report that the International Welding segment achieved their double-digit EBIT margin goal in the quarter with an 11.6% adjusted EBIT margin.

Adjusted earnings per share increased approximately 109% to $1.67, a record second quarter performance. Return on invested capital improved 280 basis points to 21.4%, and cash flow from operations remained strong. We returned approximately $55 million to shareholders with $25 million in share repurchases and paid out $30 million in dividends.

Looking at the second quarter demand in more detail on Slide 5, trends remained strong through the quarter, ending with backlogs above 2019 levels. Organic sales increased 36% and all reportable segments, geographic regions and main product families achieved improved performance year-over-year and sequentially.

Equipment and consumable organic sales increased by approximately 40%, and are trending above 2019 levels. Automation organic sales inflected a high-teens percent growth as customers begin to reinvest in capital equipment.

With 80% of our revenue driven by growing end markets, we believe we are in the early stages of an industrial expansion. In the second quarter, we achieved a near doubling of organic sales in automotive transportation and strong double-digit percent growth in heavy industries, general industries and construction infrastructure. Energy remained challenged, but declines continue to narrow, and we achieved modest growth in downstream applications.

Moving to Slide 6. We're entering the third quarter, expecting continued year-over-year growth in our Welding segments with high backlog levels. Our Harris segment faces more challenging comparisons in the second half of the year due to a spike in prior year retail channel sales and higher price levels. But we expect continued momentum in the second half based on current order levels.

Overall, customer sentiment continues to be positive, yet cautious on supply chain, labor constraints and COVID-related disruptions, which may impact the timing of orders and deliveries. We remain focused on safety at Lincoln Electric and servicing customers with ample supply which positions us well to capitalize on near-term growth opportunities in this early stage of an industrial growth cycle.

3

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JULY 27, 2021 / 2:00PM, LECO.OQ - Q2 2021 Lincoln Electric Holdings Inc Earnings Call

Given the demand trends and the incremental pricing actions we have taken, we are adjusting our full year top line organic sales assumption to now be in the high teens percent range as compared with the previous low to mid-teens percent range. As stated before, this range does not include any future pricing actions, which may be warranted.

We are still assuming standard seasonality in the business for volume performance, with third quarter sales generally flat to slightly lower than second quarter results. We're also still expecting a full year incremental adjusted operating income margin in the high 20% range.

As we manage the business, we're focused on growth, innovation and acquisitions that are core tenets of our higher standard 2025 strategy. We're currently integrating our recent Zeman automation acquisition, maintain a full M&A pipeline and are looking forward to a series of product launches in the second half of the year, including yesterday's launch of our industry-leading enhanced IoT solution, CheckPoint.

And now I'll pass the call to Gabe to cover second quarter financials in more detail.

Gabriel Bruno - Lincoln Electric Holdings, Inc. - Executive VP, CFO & Treasurer

Thank you, Chris. Moving to Slide 7. Our consolidated second quarter sales increased 39.9% due to 26% higher volumes, a 10% benefit from price, and a 3.3% favorable impact from foreign exchange, and a 60 basis point benefit from the Zeman acquisition.

Our gross profit margin increased 110 basis points to 33.2% as benefits from volumes and cost reduction actions were offset by higher raw material and freight costs, including a $9.5 million LIFO charge. LIFO charges for the first 6 months were approximately $13 million, and we expect an equivalent charge in the second half of the year.

Price/cost in the quarter was slightly positive and neutral year-to-date. We continue to target neutral price/cost on a full year basis as we work to mitigate inflation, including LIFO charges.

Our SG&A expense increased 19.9% or $25 million to $152 million in the quarter. Higher incentive compensation and employee costs represented substantially all of the increase, and we incurred $3 million in unfavorable foreign exchange. We expect 2021 SG&A expense to remain at this level through the balance of the year due to higher wage and incentive compensation. SG&A as a percent of sales decreased 310 basis points to 18.3% due to higher sales.

Reported operating income increased 206.4% to $121.8 million or 14.7% of sales. Operating income included approximately $3.3 million of special items. Excluding special items, adjusted operating income increased 98.6% to $125.1 million or 15.1% of sales, a 440 basis point increase versus the prior year.

Adjusted operating income benefited from improved volumes, cost reduction benefits and diligent price/cost management, which generated a 26.3% incremental margin. For the 6 months, incremental margins were 28.5%.

Our second quarter effective tax rate was 18.3% or 17.9% on an adjusted basis due to our mix of earnings and discrete items. This compares with a 19.8% effective tax rate or 20.3% on an adjusted basis in the prior year period. We expect our full year 2021 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 255.6% to $1.60 compared with $0.45 in the prior year. Excluding special items, adjusted diluted earnings per share increased 108.8% to a record $1.67 in the quarter.

Now moving to our reportable segments on Slide 8. Americas Welding segment second quarter adjusted EBIT increased 80.2% to $84.1 million. The adjusted EBIT margin increased 400 basis points to 16.9% from benefits of higher volumes, price/cost management and price cost -- prior cost reduction actions.

4

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JULY 27, 2021 / 2:00PM, LECO.OQ - Q2 2021 Lincoln Electric Holdings Inc Earnings Call

Americas Welding organic sales increased 35.3% led by 27.1% higher volumes and an 8.2% benefit from pricing actions implemented to mitigate inflation. End market recovery remains strong across the Americas, led by growth in automotive transportation, heavy industries and general industries. Demand drove growth in all product areas, including automation. Energy remained challenged, but we believe is in the early stages of a recovery.

Moving to Slide 9. The International Welding segment's adjusted EBIT increased 209.8% to $30 million. The adjusted EBIT margin increased 630 basis points to 11.6% on higher volumes, the benefits of operational improvement initiatives and price/cost management.

Organic sales increased 33.8%, reflecting strong volume growth across Europe and the Asia Pacific region on accelerating regional demand. An increase in automotive transportation, heavy industry and general industrial demand were the primary growth drivers in the segment. The segment also benefited 2% from the April 1 Zeman acquisition, which we expect will generate approximately $10 million of sales per quarter. Second quarter from -- second quarter sales from Zeman were lower due to the timing of revenue recognition.

Moving to the Harris Products Group on Slide 10. Second quarter adjusted EBIT increased 55.5% to $18.2 million. Adjusted EBIT margin increased 100 basis points to 15.3% due to higher volumes, which were partially offset by higher employee costs. Organic sales increased 44% with 22.9% higher volumes, primarily from broad strength in Harris' end markets, led by HVAC and the North American retail channel as well as a 21.1% benefit from pricing actions taken to recover rising commodity costs, such as silver and copper in their consumable products.

Moving to Slide 11. We generated approximately $100 million in cash flows from operations, which was impacted by $25 million in higher tax payments. Cash conversion for the quarter was approximately 82%, and we continue to expect our full year cash conversion in excess of 90%. Working capital remains intentionally elevated to support the recovery and mitigate supply chain constraints.

Moving to Slide 12. Given strong execution, 21.4% ROIC performance and continued strength in cash flows, we continued to invest in growth in the quarter. We invested $17.8 million in internal capital expenditures, and a net $83.7 million, for the April 1 Zeman acquisition. We also returned approximately $55 million to shareholders through share repurchases in our dividend program.

Looking ahead, we continue to expect our annual CapEx program to be $65 million to $75 million, and we will continue to repurchase shares opportunistically. We maintained ample liquidity with $767 million in the second quarter. With no near-term debt maturities and expectations of cash conversion in excess of 90%, we are focused on further investing in growth and returning cash to shareholders.

With that, I would like to turn the call over for questions. Cara?

Q U E S T I O N S A N D A N S W E R S

Operator

(Operator Instructions)

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

Bryan Francis Blair - Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst

Very solid quarter. Chris, you seem to really emphasize that we're in the early stage of an industrial expansion. We're on the same page with that. But it has been a while since we've had a healthy industrial cycle. Hoping you could offer a little more color on what drives your team's confidence in having some real demand runway.

5

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This is an excerpt of the original content. To continue reading it, access the original document here.

Disclaimer

Lincoln Electric Holdings Inc. published this content on 27 July 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 27 July 2021 17:59:04 UTC.


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Sales 2021 3 210 M - -
Net income 2021 355 M - -
Net Debt 2021 414 M - -
P/E ratio 2021 22,5x
Yield 2021 1,54%
Capitalization 7 869 M 7 869 M -
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Christopher Lee Mapes Chairman, President & Chief Executive Officer
Gabriel Bruno Chief Financial Officer, Treasurer & Executive VP
Thomas Matthews Senior VP-Technology, Research & Development
Anthony K. Battle Chief Compliance Officer & SVP-Internal Audit
G. Russell Lincoln Independent Director
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