Q3 2019 Earnings Call
At this time, all participants are any listen only mode and this call is being recorded.
And it's now my pleasure to introduce your host.
The Butler, Vice President Investor Relations and communications. Thank you you may begin.
Thank you would teeth and good morning, everyone. Welcome to Lincoln Electric's 2019 third quarter Conference call. We released our financial results earlier today and you can find our release as an attachment to this cold slide presentation as well as on the Lincoln Electric Web site at Lincoln Electric Dotcom in the Investor Relations section.
Joining me on the call today, It's Chris Me, Lincoln's Chairman, President and Chief Executive Officer, as well as our Chief Financial Officer, Vince Petrella.
Chris will be getting the discussion with an overview of third quarter results and Vince will cover the quarter performance in more detail.
Following our prepared remarks, we're happy to take your questions before we start or discussion. Please note that certain statements made during this call maybe forward looking and actual results may differ materially from marks 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 <unk>.
SEC filings on forms 10-K and 10-Q.
In addition, we discuss financial measures I 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 on Lincoln Electric Dotcom and with that I'll turn the call over the Christmas.
Thank you Amanda good morning, everyone.
As we move to slide three we continue to generate strong cash flows solid cash conversion and top quartile returns despite weaker market conditions in the third quarter.
Lower capital spending and slowing global industrial production rates challenged volumes. This was most pronounced in our automation portfolio, where lower sales an unfavorable product line mix significantly impacted profitability decremental margin and earnings performance.
Excluding automation and acquisitions, we generated a low 20% decremental margin in the remainder of the business as positive price cost and cost management actions helped mitigate the unfavorable impact.
Automotive sector weakness and a broader deceleration in global industrial production.
Moving to slide four.
Third quarter results were below our expectations due to weakening organic sales broad global deceleration demand resulted in a 4.1% reduction in volumes. This decline was from three primary areas.
First incremental compression in capital spending along with some challenging projects impacted our automation portfolio and acquisitions.
Second ongoing manufacturing weakness in international welding led by declines in Asia Pacific and Europe .
As well as a broad reduction in global industrial production impacted consumable demand in our welding segments.
While price declined 60 basis points in the quarter price cost was positive in all segments and Americas welding, 1.2% lower price reflected the removal of U.S. tariff surcharges.
On a global product basis, we incurred low single digit percent volume declines in both consumables ban standard equipment and automation declined at a low double digit percent rate in the quarter.
Looking at end market trends, the incremental slowdown in global industrial production in the quarter shifted approximately 60% of our revenue exposure to end markets that are compressing.
This compares to approximately a third of our revenue exposed to headwinds in the second quarter.
The automate the automotive transportation sector compressed at a double digit percent rate, which was a significant deceleration.
General fabrication declined mid single digits. Its first declined this year.
Heavy industry in energy demand continued to grow as shipbuilding and maintenance and repair activity rose substantially in the quarter and all energy end applications accelerated except pipeline, which has been primarily hampered by project delays and interruptions.
Moving to slide five.
Although automation order rates improve sequentially in Q2 from Q2, we expect fourth quarter demand to remain below prior year levels.
Given the weak global manufacturing data uncertainty in the market outlook and cautious customer sentiment, we're expecting continued softness through the fourth quarter.
We will also continue to face challenging price comparisons in Americas welding through the first half of 2020 until we anniversary the removal of the U.S. tariff surcharges.
We have operated successfully through economic cycles with strong cash flow generation cash conversion and returns and we've already implemented further cost reduction actions to mitigate the impact of the cycle.
Standard, we're continuing to invest in our capital projects on our growth initiatives to ensure that we remain well positioned to capture growth as we move through this cycle.
For customers and analyst visiting us at the upcoming Fabtech trade show, you'll see a number of new solutions that we're launching their including two that were released a few days ago, such as our new power make 360 multi process light industrial walder, which we view as the industry's new best in class all in one performance welder.
We also launched our new pipe fab solution for pipeline and vessel applications, having a redesign just new solution from the ground up we view this as a game changer.
They have uses our latest technologies to improve well performance quality and customer productivity.
These two equipment solutions reinforce our 52% equipment vitality index, a measure of the percentage of sales from new products launched in the last five years.
Additionally, we just launched our new state of the Art Advanced Technology solution Center in Germany, which gives us an unprecedented commercial presence and the European market.
This new Tech Center allows us to feature our latest technologies in Walden consumables equipment and automation and how they work together to deliver world class solutions to customers and now I'll pass the call to Vince to cover the quarter in more detail Vince.
Thank you Chris.
Moving to slide six our consolidated third quarter sales declined 90 basis points as a 5.4% benefit from acquisitions was offset by 4.1% lower volumes, a 60 basis point decline in price and a 1.6% unfavorable impact from foreign exchange Arthur.
Third quarter gross profit margin decreased 150 basis points to 32.6% as positive price cost, including a 1.6 million dollar LIFO credit was offset by weaker operating leverage and unfavorable mix.
Automation products and acquisitions represented the bulk of the year over year margin decline.
Our assuming a expense was essentially flat in dollar terms as lower incentive compensation expense and favorable foreign exchange offset added SGN a from acquisitions.
As soon as a percent of sales increased 20 basis points to 20.3%.
Reported operating income decreased 12.1% to $88.5 million or 12.1% of sales.
Operating income results included approximately $43.1 million and special item charges related to rationalization, an asset impairments from our international welding integration activities and amortization of step up of acquired inventories.
Excluding these special items, adjusted operating income declined 12.2% to $91.6 million or 12.5% of sales.
170 basis point decline versus the prior year.
Acquisitions, and the automation businesses had a 150 basis points unfavorable impact to the adjusted operating profit margin.
Excluding acquisitions, and our automation product lines, the third quarter decremental margin would've been 23%.
Our third quarter effective tax rate was 21.1% compared with 26.3% in the prior year period.
Excluding special items, our third quarter tax rate was 22.4%.
This compares with 23.3% than the prior year period.
We now expect our fourth quarter 2019 effective tax rate to be in the low to mid 20% range subject to the future mix of earnings and the timing of the extent of discrete tax items.
Third quarter diluted earnings per share increased 9.3% to dollar 17, compared with the dollar and seven cents in the prior year.
Excluding special items adjusted diluted earnings per share decreased 9.9% to one dollar nine reflecting the impact of lower organic sales.
Unfavorable foreign exchange translation reduced EPS by two cents per share.
Now moving to the geographical segments on slide seven.
America's welding segments third quarter adjusted EBIT dollars.
Percent to $74.1 million, the adjusted EBIT margin declined 280 basis points to 15.6% as positive price cost LIFO benefits and cost management actions were offset by lower volumes, primarily in the automation portfolio.
Excluding the weakness and our automation business. The segment's adjusted EBIT margins would have decreased 80 basis points versus the prior year or 39% decremental margin.
Looking at the top line.
Americas welding reported a 5.7% decline and organic sales against a challenging prior year comparison of 14.9% organic sales growth.
Eric as welding volumes declined 4.5% largely due to a mid teens percent decline in the automation portfolio.
Additionally, broader weakness in general industrial production impact of consumable volumes at a low single digit percent rate.
Our standard equipment volumes increased modestly on demand for our new product solutions.
The segments, 1.2% lower price reflects the removal of surcharges in the U.S. business, we do expect pricing to be lower through the remainder of the year and through the first half of 2020 until we anniversary the surcharges.
America welding sales also benefited 3.8% from the three automation acquisitions that had been previously announced.
Moving to slide eight.
The international welding segments, adjusted EBIT decreased 5% to $10.2 million and the adjusted EBIT margin declined 10 basis points to 4.9%.
Price cost management and benefits from rationalization integration activities helped mitigate the impact of lower volumes.
Organic sales decreased 5.9% as a 6.2% decline in volumes was partially offset by 30 basis points of positive price.
Volume weakness was predominantly in Asia Pacific from slowing regional automotive and heavy fabrication sector demand.
European volumes are largely flat in the quarter, despite weakening macroeconomic conditions in France, and Germany on easier prior year comparisons.
Moving to the Harris products group third quarter, adjusted EBIT increased 27.2% to $11 million.
Adjusted EBIT margin increased 160 basis points to 13.2% unfavorable mix accretive acquisitions and productivity improvements.
Volumes increased 4.7% on continued solid demand and the OEM channel and in aluminum products.
Harris also recognize a 6.5% sales improvement from the acquisition of Worthington industries Soldering business.
Moving to slide 10.
Cash flows from operations increased 21% to $129 million, reflecting improved working capital and lower tax payments, which helped to generate a 165% cash conversion ratio.
Our working capital ratio increase due to lower sales.
Moving to slide 11.
We maintained a balanced approach to capital allocation deploying $136 million in the quarter, we paid a $29 million dividend to shareholders, reflecting the 21% higher dividend payout rate and we also repurchased $61 million of shares.
We invested in the business was $17 million and capital expenditures and $29 million in acquisitions for the balance of the year, we continue to prioritize growth investments and the return of cash to shareholders through a higher dividend payout rate and share repurchases.
And with that I'd like to turn the call over for questions.
The teeth.
Yes.
Ladies and gentlemen at this time, we would be conducting a question answer session to ask a question press star one on your Touchtone telephone to remove yourself from the Q an acute press the pound key to ensure that everyone has an opportunity to participate we ask that you. Please ask one question and one follow up question and then returned to the Q.
First question comes from the line of Rob Wertheimer Wertheimer Familiarise Research your line is open.
Hey, it's Rob Wertheimer good morning, everyone.
I just wanted to chat about incremental margins for a second I mean, obviously you have one of the more flexible operating systems out there and then incrementals weren't great this quarter and just be.
Decline catch you by surprise or is it just normal I mean, obviously quarters only a quarter this normal.
You know time to sort of accelerate changes.
Rob I'd start by saying that that's why we provided some.
Detrimental information X automation, because the automation performance was.
Certainly distortive to our normal decremental margin performance without that I would tell you that the Americas was a little higher than than what our historical performance has been in that segment and overall businesses.
It is more in line with our decremental experience X automation.
So automations performance was particularly weak in the quarter.
The.
A slowdown in order activity and the deferral of projects and the and the and most importantly.
The mix of what we've delivered in the quarter really.
Impacted our consolidated results and certainly the Americas.
Okay, and then if I can just on pricing, you're giving back some of the surcharges much I guess, we've long known was kind of happened when you sort of look cycle. The cycle did you keep as much pricing through the surcharge as you think Chris pricing, perhaps eroding a little bit more than you would've Jeff and I'll stop there. Thanks.
Thanks, Rob.
The pricing impact is really.
In almost totality of the surcharge removal. So I would tell you that our pricing in the business ex surcharge is relatively stable and we actually took a little bit of price in some of our business segments outside of the.
America. So the that that whole decline is really associated with the removal of those tariffs and that we havent put in.
A significant additional price increases in the Americas so it.
Really that flow through that you see on the surcharges, yeah, Rob and I would just add that.
Our application of those surcharges, where most of them are occurring here Ed at our Americas segment, we were very transparent with our customers as to the cost of the surcharge and they would be able to see that very clearly in our our communications and our transaction with them. So the removal of that once we once those that either been exempted or drop to.
It.
Is something that's very clear and transparent with our customer base.
So again just to finish this off Rob we took.
30 basis points of price in international.
On declining volumes of over 6% and we took a 100 basis points and in the Harris products group and so you know the Americas, because a surcharge came down a 120 basis points.
Okay. Thank you.
You're welcome.
Thank you. Our next question comes from a line of sorry for a discussion of Jefferies. Your line is open.
Thank you good morning, good morning, sorry.
So you previously previously expected volumes.
Flat to low single digits in the second half of the year could you just have any more color on what end markets. The region have really deteriorated since your previous commentary.
Well you know that is that's really the challenge that occurred for us in the in looking at our third quarter performance as we exited Q2, we thought that we had seen some signals from the market that we were going to see a flattening marketplace in Q3 and.
Unfortunately, we continued to see the compression within the business part of the acceleration of that compression as I mentioned in the earlier comments, we had a portion of that the came from Europe a portion of that the came from China and on an industry segment basis, we saw an acceleration in the compression in the automotive segment.
Portion of that certainly could be aligned with some of the challenges in the U.S market relative to the strike that occurred but that would only be one of those elements.
The compression across that segment was much more abroad.
Automotive was certainly the other segment that we saw that compression and then my final comment sorry on the segment side would be for the first time. This year, we actually saw general fabrication compressed for us in the marketplace. So those two industry segments, and then globally certainly the compression that.
We saw in China and in Europe would be the areas that I would focus on.
That's helpful. Thank you and then you had the reason is have you seen APAC and international as wondering if you could comment on what you saw on exploration American segment and any color by end market.
Yes, so the exports were flat on a year over year basis, which was very encouraging.
And our export business is largely equipment and so we do think that some of our newer product introductions.
Taken well in the international markets. So we were flattish in exports.
Out of the U.S.
I appreciate the time thinking.
You're welcome.
Thank you. My next question comes from Nathan Jones of Stifel. Your question. Please.
Good morning, everyone.
Good morning.
Chris I think when you in your prepared comments that you talked about a difficult a problematic automation project was there was there any payment to the margin on a project there or something it didn't ship in the quarter that made automation.
Weaker than it otherwise would've been.
Well look I'd say first of all a couple of quick comments on automation first I going to tell you I have great I've got great confidence in the long term secular trends and the strategy. We're deploying in our automation business. We absolutely are confident that globally, the challenge and finding the qualified welder and the desire to drive productivity that.
Our approach automation is the right approach and we're going to continue to drive that business and seek acquisitions to continue to expand upon that business.
But in the quarter.
Certainly beyond coming off very challenging comp for prior year. We certainly had a couple of projects that were more difficult for us and those projects did materialize in Q3, and we recognize some of those challenges there, but I'm cautious because we could certainly have a challenging project in our future and as I said in my prepared remarks.
Although our automation business as sequentially improved from Q2 into Q3 I don't believe our Q4 results will meet our prior year results, we still expect to see a challenge situation on a year over year basis for our automation business in Q4.
But we'll we'll work through those issues and have great competence in our strategy there as we continue to build out our automation portfolio.
Okay, but so that does challenging project or a few projects did impact the automation margins are the automation shipments during the quarter say kind of fundamentally the demand is is maybe not as bad as their results indicate.
Well no demand is down year over year mid teens.
So so from a revenue perspective ex acquisitions the the order.
Or the orders that translated into sales in the quarter were down significantly but.
Just piling on we've had some unusually.
A large.
Underperforming projects in the quarter that also contributed to a.
Poor result in our automation portfolio so.
Okay. So the top line and then finally just to pile on some more we had our core mix as well. So we are highest margin part of the portfolio as well as a good part of the decline on a year over year basis. So the them. The the the richness of the mix was weak on top of being down.
Now in mid teens.
Sales volume so we had.
A week.
Quarter in automation for sure.
Perfect storm, there and automation.
You guys talked about really the price down in the Americas being only the removal of this charges.
And and Lincoln's got a very good record historically of hanging on to price in deflationary environment.
And what is your outlook going forward for the pricing environment. Do you think you can you you can hold pricing here anything that moves around retire some things like that or do you think that the market is going to require you to give some pricing back.
Yes.
I think where we sit today.
Because of the requirement to anniversary the tariffs you will continue to see in the fourth quarter some pricing declines in in the Americas.
I don't believe that we're in an environment now where a lot of price can be taken when we have mid mid to high single digit volume pressure on the business and with a little bit of softening in our major input costs being steel as we've talked about we did take some life.
Credits that will likely continue into the fourth quarter. So we get a little bit of assistance there.
But I don't think we're in an environment.
Enough of a strong volume environment and inflation to be pushing through a whole lot of price here in the next quarter. So.
But it sounds like you did I think you're going to have to give any back a that outside of what you've already done on the such items. No. I think this kind of of volume environment. You know it's not mid.
Mid may be.
The trending into high single digits wont be enough for the market to lose a lot of disciplined.
Great. Thanks very much.
Thank you. Your next question comes on line up Mig Dobre of Baird. Your line is open.
Good morning, everyone they've already made.
So.
To be honest with you guys. This quarter is a bit of head scratcher for me, especially as it pertains to automation.
And maybe you can kind of set me straight on a few items here my understanding is always been that.
The automation business.
Carry a little bit lower margin than the overall.
Segment.
So maybe maybe you can set me straight on that I'm also.
Sorry as to how you think about incremental decremental margin normal incremental and decremental on on dollars of volumes.
In automation.
Right.
So the first one.
You know last year's third quarter, we actually achieved and automation a mid teens operating profit margins. So we were a little we had a particularly good quarter last year's third quarter rich in the.
The mix of the total corporation and then than this year Mig that that operating profit margins essentially been cut in half because the factors that we've talked about earlier. So we went from mid teens to.
Mid.
Single digits on a year over year basis, and that certainly exasperate SAR comparisons and we've talked about those.
Response to the previous question again volumes down mid teens.
Mix week, some lost projects and so we certainly don't expect to continue to perform in the automation portfolio at a single digit type of operating profit margin and we would expect to migrate back up.
Over the longer term to something that approximates the group average, but we do have a tough.
Year over year comparison in the third quarter related to a very strong outperformance in the prior year versus a strong underperformance in the courier.
As far as.
Decrementals are concerned I think this business will likely have.
Over the longer term.
A little bit more of a detrimental.
Margin.
Impact on the downside because the costs are largely more fixed.
Than some of our other businesses, it's mostly.
DNA type of.
Engineering and.
White collar workforce that can't be flex as easily as the rest of our.
Businesses in in the U.S., and so I think you're going to see.
Little bit more.
Decremental on on the downside in this business.
Thank you have that.
That will move around depending upon the mix.
But it'd be higher than what we've experienced traditionally as a corporation and as a as an Americas segment, which is roughly bed in the mid Twentys type of region.
Okay. So the Decrementals and I'm presuming incrementally for automation are going to be higher than the 25%.
To be a little bit more volatility.
And what our core businesses.
With that I am still trying to understand what was.
Extraordinary or onetime however, you want to call it impact in this automation business in the quarter.
I mean, if you're sort of looking at what would have been normal versus these these project that we're talking 4 million 5 million can you quantify that.
I really can't I would tell you though that.
And expect us to replicate this quarter.
Often.
Like I said and some pretty detailed comments about it there are lot of headwinds in this quarter that I do not expect to.
Occur sequence.
As we roll through the rest of 2000 and.
19 and 2020.
Well I.
I'm, sorry, I'm still unclear because you said that the fourth quarter is challenging as well so have we kind of taken our pain in the third quarter or are we setting up for a.
Considering omega what we're saying is that we're still going to be down year over year in the automation.
Business, we're down mid teens we.
Believe based on our order rates, we see Chris pointed out that they are improving sequentially, but still not enough to wipe out that 15% type of year over year.
Decline I don't expect these projects to be replicated in the fourth quarter and I also expect that our mix should improve a bit so as far as automations concern. This should be a trough and we should see some improvement.
And then we have the rest of the business to to worry about obviously make as you as you know with the automation business with us sequentially improving from Q2 to Q3 and as Vince said, we expect improvement from Q3 to Q4, although not operating at prior year levels, but when we have those sequential improvements. It also makes that.
Called for us to be more aggressive and necessarily addressing some areas of the cost structure. So that is that is part of that conflict that we had that certainly materialized in Q3 and has been said.
Where.
We are hopeful that quite frankly, we're seeing a troughing of the automation business as it relates to our Q3 performance and we'll continue to drive that strategy within the business as we move through the rest of the year.
I see then my follow up I want to ask a question on international.
Yes.
If I understand correctly.
Europe volumes were flat.
Which is good I am looking at flat margins as well.
Maybe down a little bit on a year over year basis.
And I guess my question is that if.
We're finally to the point that we're seeing some stability in Europe overall, given everything that you've done with Lockheed and your business over there.
One point in time should we start seeing some real margin expansion.
Basically as we think about your framework for double digit.
Margin for this segment.
Yes, so it was.
It was a very encouraging to see that the topline did stabilize in the face of what we would describe as an accelerating softness in the industrial environment in Europe . So.
I think it's going to be.
Challenging Megan as the softness continues in our major markets in Europe to see.
A margin expansion at at this time, so we really.
From my perspective need to see.
Stabilization in the macro environment, there and start to see some growth.
In the topline aided by those Tailwinds when they do come I think we are continuing though on the cost side to compress out costs in that region, that's not completely.
Behind us so you will or will have some opportunity as we move through.
2022, even with challenging top line environment start to see some leverage come through that business provided again that we don't have another step down in macros and industrial activity in the European.
Region.
All right. Thank you.
You're welcome Mick.
Thank you. Your next question comes from Walter Liptak.
Seaport Global your line is open.
Hi, Thanks.
Let me start with.
Just some follow ons from the last discussion with Mig.
You said that the he was flat.
Ill.
But the market is deteriorating why do you think you guys were flat was that market share when back.
Or was there look at channel fill that has to happen why why is it stabilized.
Well certainly one of the things that we've been focused on in our business in Europe is that as we've been moving through the integration we've been very focused on ensuring that our customer delivery metrics and our ability to serve the marketplace, we're improving and we've been managing and tracking those expectations and that data for the last several months matter of fact.
We actually had a communication with our customers in the marketplace.
In the third quarter sharing with them the improvements we've made in the competence that we have walden our ability to serve the marketplace. There in Europe . So I certainly believe that as a catalyst for some of that improvement I don't want to go as far as to say that flattening. Although we know the market has deteriorated there, especially the automotive market.
As is a market share. When you you know, we don't think about market share from a quarter to quarter basis, but certainly the stabilization is a positive sign and we're going to continue to work at making the improvements and finding growth in that market. There in Europe . It certainly was a positive to be there for the grand opening of our new technical.
Center outside of Frankfurt.
We launched that last week and believe that also can be a way for us to bring our solutions and technology is closer to our customers there in the region.
Okay. Okay. Thanks for them and it sounds like based on Vinces comments that theres more restructuring that's still needs to be done with are lucky welding.
What's what do you think of the costs and timing for them.
But.
Not in a position at this point to make any kind of estimates on what we might have in terms of actions or cost but.
We are continuing to look at opportunities to compress the.
The head count down there to to match, our our new volume levels at this present time.
Okay, Alright, and then.
Your prepared remarks, you guys talked about.
Cost cutting but then it was more kind of variable costs lower work hours lives over time watching spending.
Are you.
Are you guys contemplating some bigger cost actions that maybe outside of their acute welding business.
To mitigate or.
Since that is it more variable costs coming out.
Well I think as we look at what we're going to be able to actually impact through the rest of 2019 that we're really looking strongly at these variable cost actions that we can go out and addressed with the lack of clarity we see for the business moving into Q4 and expecting Q4 to look a lot like Q3.
Certainly if if were not troughing and not seeing the improvements that we expect to see in the business moving into 2020 than we'd be looking at taking broader actions to try to mitigate some of the negative impacts from the marketplace, but as it relates to the rest of 2019 I think the actions we've talked about as the path that we will go and.
Then again once we get more clarity into what type of demand market. We think will be participating in moving into 2020 will determine whether we need to take further actions to be able to mitigate the impact.
Okay, all right in the last one for me.
He is on the Decrementals.
So the I wasn't sure I understood is the 23%.
It sounds like that was worse than expected because of North America.
No and the outsize Decrementals there like is 23%, we should be thinking about kind of into the future until revenue stabilizes or.
Are you going to be able to to improve that and get.
Lower decrementals.
Yes, so the 23% is what is.
In line with what we have historically experienced through.
Downturns and volumes wall and that is that.
X.
Our automation.
Businesses an acquisition. So obviously was a lot higher but we wanted to give.
You a.
A read through on our core business said it is in this soft environment inline with our historical performance from a detrimental perspective.
And we wanted to take out the one very poor quarter from a performance perspective in the automation business were C.
How that shakes out in the fourth quarter, but it was just a with and without a calculation that give you an idea of the of the core business performance from a decremental perspective and that is again in line with our historical performance from that perspective.
Okay got it okay. Thank you.
Okay.
Thank you. Our next question comes from Chris Dankert of Longbow Research. Your question. Please.
Good morning, this is Brian on for Chris.
Good morning, Brian right.
Just around the Europe sales I know you guys identified about 100 to 110 million in some pruning.
We've been able to identify any further there or is that still kind of the rate we're looking at.
Now that's that's up that's about what we're looking at it around those numbers.
And then kind of jumping over to.
China growth rates for those kind of inline with the Asia down double digits and.
Stabilization.
During fourq or does that change macro uncertainty caused the softness to kind of spill over into early 2020.
Look I think that softness is going to continue into 2020 until we start to get more clarity around trade and a couple of the other tariff issues that are impacting imported equipment into that marketplace and.
And those are the China.
Declines would have been greater than the average declines for international or Asia Pac. It certainly was a very challenging quarter for them and we expect another challenging quarter for them in Q4.
Ryan just as a reminder, we had our big step down in China in the second quarter. So now we've had a third quarter that was around the same sort of a year over year declines and so I would think we've got as long as the environment is consistent with what we've seen the last two quarters, we're going to have difficult compare.
Since for a couple of more quarters.
Where we're going to see in the fourth quarter in the first quarter of next year. Some some big declines because of the tough comparisons based on the current trends and operating environment that we see now.
All right got it thank you.
You're welcome.
Thank you again, ladies and gentlemen to ask a question. Please press Star then one on your touched on telephone again, that's star one and you touched on telephone task question.
Next question comes from the line of Joe O'dea vertical research your line is open.
Hi, good morning.
Related to some.
Comments on that last question and just kind of interested in your perspective on kind of the demand transition that's underway and I think you're seeing maybe a little bit of flattening in Europe , you talking about China, a couple of quarters, but if that stabilizing at current demand levels you get a couple more North America maybe.
Recent trends in terms of Downshift can you talk about general Fab and just curious if you are putting that altogether kind of what your views of the demand transition and kind of how you can.
Put any perspective on.
How that's likely to continue maybe into 2020 by by regions.
When we can you expect some some overall stabilization across leeco.
Yeah look I think thats, a really tough.
Read through a when we look at what happened in the third quarter, we did see some greater deterioration as the quarter unfolded.
I think youll based on what we've seen in October we are going to likely see.
The same kind of.
Trending and environment that we experienced certainly in the third quarter I think 2020 is just.
For at least me is just too far off based on the kind of dynamics that we see going on in the marketplace right now and there's just too much uncertainty at least from our perspective on that outlook, but the most I could give from what we're seeing in the trends throughout our businesses were going to see more of the same in the fourth.
Quarter, then 2020 is.
Something we're gonna have to have a updated view on once we get through the fourth quarter. When we talk to you again in February .
Okay and then on.
Cost since you touched on a little bit was some steel cost coming down but can you frame it at all in terms of.
What kind of steel inflation you saw.
Subsequent to tariffs and then to what to what degree Thats come off and I guess.
Any any sort of insight on.
Are there further opportunities that you have your negotiations to drive that lower.
So look.
Look we recognize that when the demands are compressing out in the broad industrial marketplace out there.
Our teams will continue to work with our supply base, but we don't see that as an enormous opportunity as we're moving through the rest of the fourth quarter or certainly a visibility that we have right now moving into Q1 I think our teams have done an excellent job in the past of managing that price cost dynamic here within Lincoln Electric will continue to manage it very closely but I certainly don't see.
That as any greater opportunity for us as I think about Q4 as we're moving into 2020.
I'd also just like to amplify Vince's comments I look at especially coming out of Q2, where we thought we were going to see a more favorable volume environment in Q3, and then that Didnt materialize and we saw.
With that volume compression again in the quarter and are expecting that volume compression in the fourth quarter. It's just very challenging for US right now to give competence and where we think we might be moving as it relates to 2020, we'll certainly be working with our customers and looking at industry and macro data and trying to determine what that will be in certainly will provide.
An update when we're back together in February .
I appreciate it thanks very much.
Welcome to.
Thank you. Our next question comes from Steve Barger of Keybanc capital markets. Your line is open.
Hey, good morning, guys I was on and off the call, but I just wanted to go back to the conversation that I heard on the automation I.
I know that there was there were impaction three Q and order inquiry came down but what is the general view towards how people are our thinking about investing in automation as we go into an environment where.
Organic growth is down in the back half and maybe into 2020 for your customers.
So look I still believe Steve very strongly in the long term secular trends. So thats the long term piece the need to too.
Identify ways to mitigate the challenges and finding the qualified while they're in the productivity that can be advance to the automation and the quality that can be advanced to the automation. So the long term secular trends.
I'm very confident with.
I think we are going to see some challenges associated with customer behavior as we're exiting Q4.
We might see that in our automation business and we might see that in our core business because I can't imagine that they have much greater clarity than what we have today here at Lincoln Electric which means they may pause associated with looking at some of those projects are looking at how they may bring some of their demands into their business as they exit 2019.
Positive.
That quite frankly automation was improved sequentially Q2 to Q3 and.
And and likely Q3 to Q4, although Q4 will still be materially down from where we saw it participate off of a record 2018 quarter for us and automation.
But I think we're going to continue to see some challenges around the capital spend I'd like to see more clarity and certainty in the marketplace and we'll just have to manage through this portion of the automation cycle here over the next couple of quarters.
Yes, I wasn't sure I would just describe it Steve is.
A little bit.
Sense of greater sense of cautiousness.
And certainly.
In the capital equipment spending arena.
Amongst our customers.
In in the most recent quarter.
Yes, and you guys have been I think.
Foreshadowing a tougher for Q in the first part of 2020, but just to that point thinking about what we've heard from various machinery names through earnings. So far orders are down year over year backlogs are contracting so.
Without getting too far into guidance, we should be thinking that Americas and international revenue will be down similar to what we're expecting in the back half here into the first part of 2020 is that a fair statement.
Bye bye.
I must not than on the call when I.
The answer that one, but I think it's too early for us to.
To comment on.
2020, I think we're comfortable that we're going to see a replication or a continuing softness on a year over year basis in the.
In the fourth quarter I think it's safe to say, Steve that the company based on the order levels and the trends that we have today that our comparisons in the first half are going to obviously be a lot more difficult.
Yes.
Okay understood. Thanks.
Yes.
And this concludes our question and answer session I would like to turn the call back to Vincent Petrella for closing remarks.
And thank you thanks, everyone for joining us on the call today look forward to discussing our fourth quarter with you and February and also the progression of our strategic programs for the future. So thank you very much again have a nice day.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
Yes.