Q4 2019 Earnings Call
19 financial results conference call at this time, all participants are in listen only mode and this call is being recorded it is now my pleasure to introduce your host Amanda Butler, Vice President Investor Relations and communications. Thank you you may begin.
Thank you Carmen and good morning, everyone. We released our financial results earlier today, 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 Christmas Lincoln's Chairman, President and Chief Executive Officer, as well with our Chief financial officers and Switzerland.
Chris will begin the discussion with an overview of full year results.
And this will cover the quarter performance in more detail following our prepared remarks, we're happy to take your question.
Before we start or 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 form 10-K and Q.
In addition, we discuss financial measures that you're 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 any investor Relations section of our web site at Lincoln Electric Dot Com.
And with that I'll turn the call over Christmas Chris. Thank you Amanda good morning, everyone.
Our for your results demonstrate the business resilience in a challenging portion of the cycle.
We remain focused on serving customers executing our strategic initiatives and investing in long term growth the deliver value to our shareholders.
As we celebrate our hundred 25th anniversary and 2020, we're confident that this balanced approach continues to position the business for long term growth and value generation for all of our stakeholders.
In 29 chain, we generated record cash flows hundred 13% cash conversion top cortile returns and returned $411 million to shareholders to $118 million in dividends and $293 million or share repurchases.
We did this while working to mitigate the impact of decelerate in global industrial production trends and weak capital spending.
Our net sales declined 80 basis points to $3 billion with 3.5% lower organic sales largely driven by softer demand for consumables and automation systems.
We successfully offset the impact of lower volumes in our core business by aligning operations to demand through reduced hours lower incentive compensation and discretionary spending.
Acquisitions unfavorably impacted our consolidated financial results.
We reported a 50 basis point decline in our full year adjusted operating income margin to 12.9% with 69% decremental margin.
If excluding acquisitions, our adjusted operating income margin would have held relatively steady with a 10 basis point declined to 13.3% in the remainder of our business, which represents an approximate 15% decremental margin.
Moving to slide four.
Fourth quarter organic sales trends weaken through the quarter driven by a 5.7% decline in volumes to persistent key factors impacted demand.
Abroad reduction in global industrial production rates across most of our in sectors lower demand for consumables and a slowdown in capital spending and project deferrals reduced orders for our automated systems.
This has resulted in four quarters of an industrial downturn in our sector.
On a global product line basis, we occurred at a high single digit percent volume declined in both consumables and automation systems.
Equipment volumes were relatively steady in the quarter.
Investments in commercial initiatives to accelerate new product launches, a 100 basis point improvement in our equipment vitality index of new products and expansions in our global network of Tech centers to 38 are all driving our equipment demand despite challenging market conditions.
Looking at end market trends, the incremental slowdown in global industrial production accelerated decline to demand in key in sectors, such as automotive heavy industries energy and construction infrastructure in the quarter.
General fabrication and the oil and gas poor solar energy were flat to up in the quarter was strongest performance from international customers.
Moving to slide five given the deceleration in fourth quarter sales and continuing similar year over year decline through January we're cautious on any topline earnings growth in the first half of the year.
We are maintaining the cost reduction measures, we implemented last year given these current macro uncertainties.
In addition headwind from higher expected incentive compensation and a projected higher tax rate in 2020 will reduce earnings.
As we have done during previous challenging cycles, we're now freezing senior management wages.
Also implementing additional cost actions across our platform to achieve greater productivity.
We expect these actions will contribute approximately $15 million to $18 million of annualized cost savings beginning in the second quarter of 2020.
But substantially all the benefits are expected to be realized in the second half of the year.
We will be monitoring conditions through the year and are evaluating additional contingency measures, which we can implement if conditions merit.
In 2020, we will continue to prioritize capital for both organic and inorganic growth.
We expect to invest $65 million to $75 million in capital expenditures in line with our 2019 spend.
The board recently increased the dividend payout rate by 4.3%, marking our 24th consecutive increase.
We will also continue to execute share repurchases to achieve our 1.75 to two times gross debt to EBITDA target.
While challenging environment, we're well positioned with a strong balance sheet and cash flows to invest in the long term growth innovation and productivity improvements to generate value for our stakeholders.
On a final note on 2019, it was a record year for our safety performance across our company and we exceeded each of our sustainability goals in the year.
This could not be accomplished without the dedication of our employees to building a safe and sustainable company.
And now I will pass the called events to cover the quarter in more detail.
Thank you Chris.
Moving to slide six our consolidated fourth quarter sales declined 1% as a 5.9% benefit from acquisitions was offset by 5.7% lower volumes.
And 80 basis point decline in price and a 30 basis point unfavorable impact from foreign exchange.
Our fourth quarter gross profit margin decreased 100 basis points to 32.7% as positive price cost, including a 1.8 million dollar LIFO credit was offset by weaker operating leverage and unfavorable mix, primarily from automation systems and acquisitions.
Excluding acquisitions the gross profit margin would have decreased approximately 10 basis points.
Our SGN expense declined 3.3% in dollar terms as lower incentive compensation expense.
And lower discretionary spending offset added SGN a from acquisitions.
As soon as a percent of sales decreased 50 basis points to 20.3%.
Reported operating income decreased 12.9% to 82.7 million or 11.2% of sales operating income results included approximately $8.9 million and special item noncash charges, primarily related to rationalization and asset impairments in our international.
Holding segment.
Excluding special items, adjusted operating income declined 5.3% to 91.6 million or 12.4% of sales 60 basis point decline versus the prior year.
Excluding the unfavorable impact from acquisitions, our adjusted operating income margin would've been flat year over year at 13%.
Our fourth quarter effective tax rate was 20.6% compared with 8.1% in the prior year period.
Excluding special items, our fourth quarter tax rate was 20.4%.
This compares with 14.7% in the prior year period.
We expect our average full year 2020 effective tax rate to be in the low to mid 20% range subject to the future mix of earnings and the timing and extent of discrete tax items.
Fourth quarter diluted earnings per share decreased 23.7% to one dollar three cents compared with $1.35 cents in the prior year period.
Excluding special items adjusted diluted earnings per share decreased 10.9% to $1.15, reflecting the impact of lower organic sales.
Now moving to the geographical segments on slide seven.
Americas was playing segment's fourth quarter adjusted EBIT dollars declined 12.7% to $75 million.
The adjusted EBIT margin declined 160 basis points to 16.1% as lower incentive compensation positive price cost and cost management actions were offset by lower volumes.
Excluding the weakness in our automation business. The segment's adjusted EBIT margins would have held steady versus the prior year with a 17% decremental margin.
Looking at the top line America's welding reported an 8.2% decline in organic sales against a challenging prior year comparison.
America's welding volumes declined 6.5% largely due to a high single digit percent decline in consumables, reflecting abroad decline in industrial production across our primary end market sectors.
Automation demand remained challenged due to weak capital spending, but the rate narrowed to a low double digit percent decline in the quarter.
We achieved modest volume growth and equipment on continued demand for our new solutions.
So, let's 1.7% lower price reflects the removal of surcharges in the U.S. business.
We expect similar pricing performance through the first half of 2020 until we anniversary the surcharges.
Americas welding sales also benefited 4.3% from the three automation additive acquisitions.
Moving to slide eight.
The international Thanks, segment's adjusted EBIT decreased 5.9% to 11.6 million and the adjusted EBIT margin declined 30 basis points to 5.2%.
Improve European mix and benefits from rationalization the integration activities helped to mitigate the impact of lower volumes.
Organic sales decreased 8.1%, primarily volume declines in Europe, due to weaker macroeconomic conditions in France, and Germany and softness in the middle East.
Moving to the Harris products group fourth quarter, adjusted EBIT increased 25.3% to $10.7 million.
Adjusted EBIT margin increased 110 basis points of 13.1% unfavorable mix accretive acquisitions and productivity improvements.
Liam's increased 5.7% on continued solid demand and the OEM channel and aluminum products and in the retail channel Paris also recognize a 7% sales improvement from an acquisition in late 2018.
Moving to slide 10.
Cash flows from operations increased 23.3% to $123 million, reflecting improved working capital and lower tax payments, which helped generate a 150% cash conversion ratio.
Our working capital ratio increase due to the lower sales volumes.
Moving to slide 11, and our capital allocation.
We deployed $118 million in the quarter.
Paying $29 million and dividends, reflecting the 21% higher dividend payout rate and we purchased $71 million in shares. We also invested in the business was $16 million and capital expenditures.
As noted in our press release, our board approved a new share repurchase program, which authorizes the company to repurchase up to 10 million of additional outstanding common stock.
This authorization in addition to the 2.8 million shares remaining from the prior program has no expiration date.
With that I would like to turn the call over for questions. Carmen. Thank you, ladies and gentlemen that his time will be conducting the question and answer session to get into Q Just press star one on your telephone keypad to withdraw your question press the pound key.
Please stand by what we compile that Q and a roster.
And our first question is from so we borrowed the ski with Jefferies.
Thank you good morning, and you're right that you highlighted the improved demand in Asia Pac could you provide any color on what you saw by end market, there and any indication if you expect to the impacted by some of the factory shutdowns and supply chain issues occurring in China during the first quarter.
Oh.
Certainly, we're we're watching and concerned about the impact that we may see from the Corona virus.
Relative to our business as well as as our customers businesses as we're migrating through the first couple of quarters of the year to provide you with an update on the Lincoln electric businesses. So our facilities. There we were intending to start our facilities back up on February 10th.
As you may be aware that requires not only a governmental approval, but also our provincial approval.
We have been working with the government to receive those approvals.
Although at this time, we've been unable to operate all of our facilities. There at this point, we have one facility, that's operating but only at about 25% capacity.
So some of those facilities have been close because of the Chinese new year for nearly a month.
We'll continue to work with the government as as and our ability to be able to get those up and operating and then I think we'll have to see what the visibility as to our supply chains and our ability to continue to operate as well as our customer supply chains and their ability to get their facilities up and operating so I certainly believe it'll be an impact for us.
In Q1, and probably trend into Q2 as they work through those supply chain issues.
But confident that we'll be able to work through those issues.
On a more important note I'm unaware of any of our employees that have been countries that have contracted the virus and we did not have any operations and that broad will Han area.
As it relates to the demand side in that Southeast Asia area. As you may be aware, we had placed tighten call centers in that region over the last couple of years I was actually in our Singapore office.
In the January window talking to the team they just to add some very good execution of some customers. They came through that particular region.
We actually had some nice offshore activity that I know was executed on in that particular marketplace as well as seeing some benefits from offshore wind that are actually moving through that area of the world and then we had several.
Equipment wins that occurred there in that marketplace throughout.
2019, so it was broad, but I would also say sorry that I wouldn't necessarily say that those wins, maybe representative of those segments on the global market basis other than certainly we see offshore wind and when continuing to be while those markets. We where you think there could be some opportunities for us as we move into 2020.
I appreciate the color.
Then just in light of the new share repurchase authorization in place could you talk a little bit more about how you're thinking about capital deployment in the cadence and share buybacks.
Actually given I think but then you authorization it represents around 20% to your share count.
Right so.
I would say that our priorities haven't.
Changed in this market or or experienced in 2019. This area we're still.
Focused on growing the business reinvesting in our own capital stock and identifying those opportunities around M&A that.
That may be attractive that fit our strategy and our priced appropriately.
And so I would tell you that our outlook for 2020 2020 is that continue our share buyback activities at least.
Maintenance level.
And be opportunistic depending upon those factors as well as our share price to take our.
Our share repurchase activity and drive our.
Total.
Gross debt to EBITDA to within the range that we've established.
Our capital allocation planning.
Thank you I appreciate the color guys.
You're welcome.
Thank you. Our next question comes from Joe O'dea with vertical research.
Hi, good morning.
With respect to the additional cost actions planned for 2020.
Just now that we're we're four quarters into volume declines in the Americas segment, and so why why the cost actions now why not earlier as a matter of as you assess the outlook. It's more about persistent pressure that you're anticipating just sort of timing around some of these.
Additional cost actions.
Yes look my perspective on it would be that we're actually accelerating the cost actions. If you take a look at some of our ratios as we migrated through the year you saw some slight improvements in our SGN a ratios within the business that with some of the cost actions that were we were taking in 2019 as we were trying to understand the extent.
The.
The challenges that we were experiencing in the marketplace and especially in the Americas side of the market. You also had the headwind associated with the acquisitions overcome again and some of the SDMA associated with that piece.
The announcements that we've made today, we are things that we have been working on for a few months. So it wasnt as if this was just a response to the end of the year.
The activities that were that we're doing here internationally I have reviewed and seen over the last couple of months, but we wanted to get them in front of the market today, so that they could see the next step of activities, but what I really think of.
Of our approach to this we view that quite frankly, we made some cost initiatives to try to mitigate some of the volume impacts those volume impacts of continued to.
Accelerate some as we move through 2019, and we really went and wanted to bring further forward.
Other productivity measures to mitigate some of that volume challenge that we're seeing in the marketplace.
Expecting to mitigate that and also expecting that we would see a more favorable potential environment as we were migrating to the back half of 2020.
Can you just talked about how the 15 to 18 flows through at the segment level and are these costs that come back if volumes get better.
I could start by saying Joe that the.
Split is relatively equal between the Americas and and the international segment. So our expectation is that it would be it'd be well balanced between those two and then you'll Harris has very modest.
Amount so associated with it so it would be fairly equally distributed between Americas and international.
And then as far as the restoration of.
These costs just certainly.
Volume turns at that point in time some of these.
Cost reductions will be restored, but I I will stress that particularly in international segment.
These actions are.
Some of them related to.
Improving our manufacturing utilization and compressing.
Some of our.
People and facilities that will likely be more permanent so I'd say the in the Americas could be restored with improved volumes.
Much of the international improvements are likely part of our permanent cost structure going forward.
Thanks very much.
Welcome.
Thank you and our next question comes from mix over with R.W. Baird.
Hi, Good morning, everyone is Joe Grabowski on for make this morning.
Okay, great. Good morning, So last quarter, you mentioned, an acceleration in the volume compression within automotive I think it was partly due to the GM strike, but also from just broad global weakness how did the automotive end market trend in the fourth quarter.
I would tell you Joe it's similar.
To what we experienced in.
In the previous quarter, we've have mid teens type of.
Volume decline compression cross the automotive and transportation segment. So.
On its own automotive is one of the most significant year over year declines.
And our business simply because of its size and the magnitude of the year over year declines.
And then that's followed by heavy industries, but automotive is certainly weak both in the Americas and internationally.
Got it okay. Thanks, Thanks for that color I guess switching the international.
As you guys know volumes have been down.
Quarter quarter for the last couple of years why does that it's been self inflicted after the air and liquid acquisition is as we sit here now and maybe going forward into 2020 are most of the decline now due to the challenging Matt challenging macro or are there some still still some impacts from rightsizing the business.
So I think that most of the declines that.
We've been experiencing it will experience if those markets don't become more favorable moving into 2020 or more market driven.
We put a strong focus on being able to align our business model in Europe to be able to meet customer expectations from a supply chain in a service perspective those service metrics.
Rebounded and quite frankly, our outstanding the for me to look at the business, especially over the last.
What I'd say four to six months.
So thinking about the business as we move into 2020 my concerns with the business are really the underlying economic environment and the challenges that we've seen from some of the industrial production numbers not only across Europe, but from a couple of those specific larger countries, but I believe that the revenue outlook is much.
More impacted by that versus me thinking about this is further information integration work that we've done.
Got it and if I could just squeeze in one more you don't get a lot of questions on Harris products group, but they had a very strong quarter, both volume and pricing, maybe just a little more color on what what drove the strength during the quarter.
Look the air esteem had not only a strong quarter, but an outstanding 2019, and all time record for the business and it just comes from execution, they're very focused on their customers they've had some new product introductions, we made some investments in that business over the last couple of years for them to launch a new product line.
That was targeted towards the HIV AC marketplace in the wholesale in marketplace in the aluminum product category. They conducted an acquisition at the end of 2018 that migrated into 2019 that the team did a very very good job of integrating and executing on those products and.
Through our portfolio and.
And and quite frankly, we expect them to continue to be able to grow and look to make continued investments within that portion of the business.
Okay, great. Thanks for taking my question.
You're welcome.
Thank you.
Our next question comes from Brian Blair with Oppenheimer.
Good morning, everyone. Thanks for taking my question.
Yeah.
I just mentioned the continued auto weakness, which obviously impacts your automation portfolio.
Based on what you can see today.
And understanding that there.
Is your comps going forward.
Is there a realistic chance that the autonation and additive strategy.
Growth rate Reaccelerates during 2020.
Well I'd say a couple of things one is I don't think about automation and additive when I think about the growth rates.
As I as a combined entity. So our additive strategy is is a long term investment strategy that we have we're certainly investing in that technology. We're excited about that technology, but thats really incubating, a new business inside the company and and there are other elements within that strategy that we're working on as I think about additive.
As it relates to automation.
Certainly expect that our automation business is going to stay challenged in thinking about our performance in Q1.
It may have some challenges as we're migrating into Q2.
As we think about the backlog that we're looking at and the order activity that we've seen we're expecting improvements in that business as we move into the rest of 2020.
As I look at capital spending dynamics within the industrial space. Some of the larger companies have come out instead, they're increasing capital spend in their 2020 business plan I believe part of that will be towards productivity and productivity in the welding space certainly lead you right towards automation, so again expecting some challenges.
Still in Q1.
Expecting us to start to migrate out of those challenges in Q2, and then expecting improvements in that business as we're looking at the back half of the year.
Got it appreciate the color there.
Obviously good contribution this year from from your new products helped to offset some of the underlying market weakness on the equipment side.
I was wondering if you could parse that out for us and.
And maybe the expected impacts you continue to run rate weakness on the market level in the first half.
Well I think it's awfully difficult for us to parse it out because when I look at our new product.
Introductions, there were a host of them and we saw that come across our vitality index across the equipment portfolio. So it's not any one application. It's a multitude of applications. However, I will bring up our new hyper filled technology, which is is growing globally and as a technology that quite frankly.
The allows users to be able to take twin wire technology to improve deposition rates and improve the productivity in the welding process.
During my travels.
In the first part of the year I saw that application in a couple of international applications and believe that it can continue to provide a nice growth vector for us as we're moving into 2020, but even that application.
Can be utilized across a multitude of the segments. So it's very difficult for us to point towards that towards any one segment I've got confidence in the investments that we've made and the new products that we've launched even in late 2019, and what we have coming in our portfolio in 2020 that we should be able to continue.
So to drive improvements in our equipment portfolio across those segments as we're moving through the year.
Okay. Thank you for that and then one last one Vince you touched on capital deployment strategy, how that's unchanged at a high level.
If you had the right opportunities come along particularly on the M&A side.
What do you see is deployment capacity over the near term.
So we can certainly for the right acquisition that we'd be comfortable taking our.
Debt to EBITDA up to three and above.
Between three and four times for the REIT transaction.
Okay. Thank you again.
Thank you.
Our next question.
Comes from Steve Barger with Keybanc capital. Please go ahead.
Hey, good morning, guys.
Thanks, Dave.
Chris you made a comment about how it end market conditions and a higher tax rate are going to bring earnings down in 2020 is that comment for one Q1 half for full year.
Look I would tell you that that's a full year.
But certainly the first half of the year is where we're focused that.
That we have our.
Best visibility of the headwinds facing us, but I think.
Even if we do have a turn.
Even the second half of the year, we're going to be very challenged based on sort of the run rates that were experiencing and in the early part of the first quarter and knowing that.
Our tax rate will likely be higher than what we experienced in 2019, So I would.
I'd tell you that those comments apply to the full year.
So really the first half being the most challenging.
Got it and so just thinking about organic decline rates in one key will that mirror what you saw in Fourq you it.
Got it down high single digit in Americas in international or or is that what will it get kind of sequentially better on a year over year rate.
That's what we see right now based on our order trends and our experience and sales for the first month of the year, we're tracking at that mid.
Mid single digit year over year decline that we experienced in in the fourth quarter. So our expectations are with what's going on in the.
In China, and the knock on effect that that might have on global economies that.
First and then probably second quarter of the year will likely be tracking at those kinds of year over year declines.
Second half of the year little too early that make those kinds of prediction predictions, but certainly first half similar kind of performance from a top line perspective.
Okay, and then just one more I guess it.
If the Americas run is running down at that level or is that similar level, how sustainable are margins.
Versus where we came in at Fourq, you or how should we think about decremental margin that segment given the headwinds.
Yeah.
So I think where we've got.
Not only those headwinds from the year over year declines in the topline, but were have incentive pay headline headwinds as we reset our objectives for the year and and part of the need for these cost savings initiatives that we're driving through our Americas segment as well as international is to hope.
To offset.
Those.
Those costs that we will incur from incentive management systems, We're also seeing a little bit of.
Input cost inflation as we enter 2020, we did have some declines as we.
Finished 2019 that will likely be another headwind, we will have in the first quarter and perhaps first half of the year. So we.
We believe that the cost savings initiatives should largely mitigate.
Some of these headwinds that we know our in front of us, but we do have I believe at this point some downside risks to maintaining those types of margins and certainly the first quarter in the first half of the year.
Understood. Thanks.
You're welcome.
Thank you and this concludes that came in a session I would like to turn the call back to the in some petrella for his closing remarks.
Thanks, Carmen and thanks, everyone for joining us today on the call and for your continued interest in Lincoln Electric we look forward to discussing our progression of our results as we move into the first quarter 2000 2020. Thank you again.
And with that ladies and gentlemen, we thank you for participating and you may now disconnect.
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