Q2 2020 Lincoln Electric Holdings Inc Earnings Call

Just how about just consider listen only mode and this call is being recorded its my pleasure true introduce restrict your host Amanda Butler, Vice President of Investor Relations and communications. Thank you you may begin.

Thank you Catherine and good morning, everyone welcome to Lincoln Electric's, 2022nd quarter Conference calls, we released our financial results earlier today, and you can find or release as an attachment to this called slide presentation as well was on the Lincoln Electric website at <unk> Lincoln Electric Dot Com and the Investor Relations section.

Joining me on the call today's Christmas Lincoln's Chairman, President and Chief Executive Officer, as well as gate Bruno Our Chief Financial Officer, Chris will begin the discussion with an overview of our second quarter results and our cost reduction initiatives.

I will cover our second quarter financial performance in more detail.

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 expectations due to a number of risk factors.

Gosh enough some of the risks and uncertainties that may affect our results are provided in our press release and then our FCC filings on forms 10-K and 10-Q.

In addition, we discuss financial measures that do not conform to U.S. GAAP.

Reconciliation of non-GAAP measures to the most comparable GAAP measures found in the financial tables in our earnings release, which again is available in the Investor Relations section of our website at Lincoln Electric Dot Com.

And with that I'll turn the call over the Christmas.

Thank you Amanda good morning, everyone.

As you saw on our earnings release issued earlier today, we continued to successfully operate as an essential infrastructure sector business due to the dedication of all of our global employees. So first and foremost. Thank you for your perseverance and commitment to operating safely.

Our regional teams are now highly adept at operating productively with heightened safety protocols.

And our customers are engaged with us on product Webinars are experiencing high service levels and are seeing continued innovation with the launch of six new products in the quarter.

We're also focused on long term initiatives that advanced our 2025 higher standard strategy goals.

Our higher inventory build and new product investments will allow us to capitalize on the next growth cycle.

Our work on enterprise initiatives that leverage shared services and further standardized processes and systems will also generate long term value and differentiation in our business.

Moving to slide four in an overview of our second quarter financial results. We successfully navigated what we believe was the economic trough of Cobot 19.

Despite second quarter organic sales declines up 24.8%, we achieved solid profitability strong returns and cash generation.

Our focused execution of cost reduction initiatives generated $27 million in savings, which exceeded our plan and contributed to an adjusted operating profit margin of 10.7% in a 23% decremental margin.

Adjusted earnings per share decreased 37.5% 80 cents and returns on invested capital remained solid at 18.6%.

Cash flow generation improved sequentially to $104 million in the second quarter with 189% free cash flow conversion.

We returned approximately $29 million to shareholders through our 4% higher debit <unk> dividend payout rate and continue to invest in internal capital programs focused on growth and operational efficiency.

We continued to maintain a strong balance sheet and increased available liquidity by reducing short term debt.

Our capital allocation strategy positions us well to successfully navigate the conditions ahead.

And generate value for all of our stakeholders.

Moving to slide five.

We experienced broad regional end market decline as industrial activity slowed due to customer shutdowns and project deferrals.

Demand Troughed in April and improved sequentially in May and June across all segments as activity resumed.

In Asia Pacific and in our Harris products Group segment June organic sales were positive.

My in sector automotive and heavy industries remain the most challenged while general fabrication and energy compressed at low teens percent and infrastructure construction was relatively steady versus prior year.

Looking at product demand trends, our consumables and standard equipment systems compressed a comparable rate to our consolidated organic sales results.

Given commercial success of new solutions, our equipment sales have been more resilient than in prior downturns.

Our automation solutions remain challenged at a mid teens rate.

July month to date orders have continued to improve at a slower rate in are trending down high teens to low 20%.

Eric segments July order rates have remained relatively steady with the prior year, while early in the quarter, we remain cautious due to deferring regional recovery rates and risks of secondary shutdowns.

Turning to slide six.

Our team did and then an outstanding job curtailing costs in the second quarter, we achieved $27 million in savings would substantially exceeded our plan. It was largely driven by an outperformance of temporary cost savings such as lower discretionary spending and reduced work hours.

Given ongoing macro uncertainties and limited visibility do cobot 19, we're maintaining diligent cost control measures.

We have increased our 2020 cost savings targets due to the accelerated pace of temporary cost savings year to date and an increase in permanent cost savings in Americas welding.

We now expect to recognize $55 million to $65 million of savings in 2020.

This range compares with our first quarter estimate of $40 million to $45 million.

Approximately 35% of the consolidated benefits will be permanent.

We expect to exit 2020 at $8 million to $9 million in permanent cost savings in the fourth quarter.

We anticipate temporary cost savings to moderate in the third quarter as markets solar recover in our organization resume some spending to support growth.

Looking ahead I'm confident that organization will continue to operate safely prioritize our customers' needs and maximize cost savings to align the business to demand.

Our disciplined execution of our higher standard 2025 strategy and prudent uses of cash will deliver superior results for our stakeholders long term.

And now I'll turn the call over to game to review second quarter financials in more detail.

Thank you Chris.

Moving to slide seven our consolidated second quarter sales declined 24% as a 2% benefit from acquisitions was offset by 24.5% lower volumes 30 basis points of lower price and a 1.1% unfavorable impact from foreign exchange.

Gross profit margin decreased 260 basis points to 32.1% as benefits from cost reduction actions and price management were offset by the unfavorable impact of lower volumes.

Are you have seen a expense declined 22.7% or $37 million, reflecting savings from our cost reduction actions and 13 million in lower incentive compensation.

As soon as a percentage of sales increased 40 basis points to 21.4%.

We expect a decline in year over year incentive compensation will narrow in the second half of 2020.

Reported operating income decreased 62.2% to 39.8 million or 6.7% of sales operating income results included 23.2 million of rationalization in asset impairment charges substantially all of these charges were non cash charges in Americas welding.

And include a 3.3 million pension settlement charge also in the Americas segment, excluding special items adjusted operating income declined 40.5% to 63 million or 10.7% of sales a 290 basis points declined versus the prior year.

Adjusted operating income benefited from 27 million in cost savings lower wage and incentive compensation expenses are decremental adjusted operating income margin was 23% in the quarter.

Our second quarter effective tax rate was 19.8% compared with 17.4% in the prior year period, excluding special item charges, our second quarter tax rate was 20.3% due to the mix of earnings and discrete items. This compares to 22%.

In the prior year period, we expect our full year 2020 effective tax rate to be in the low to mid 20% range subject to the mix of earnings in anticipated extent of discrete tax items.

Second quarter diluted earnings per share decreased 66.9% to 45 cents compared with $1.36 in the prior year.

Excluding 35 cents of S.

Adjusted diluted earnings per share decreased 37.5% to 80 cents.

Now moving to the geographical segments on slide eight.

Americas welding segment second quarter, adjusted EBIT dollars declined 45% to 46.7 million. The adjusted EBIT margin decline 370 basis points to 12.9% as benefits from cost reduction activities lower discretionary spending and lower in.

And if compensation expense were offset by the impact of lower volumes.

Looking at the topline America's welding reported a 29.5% decline inorganic sales primarily from comparable declines in consumables and in our standard equipment offering.

Automation remain challenged from lower capital spending in automotive and heavy industries. The segments 30 basis point decline in price primarily reflects the impact of the removal of U.S. tariff surcharges, which anniversaried in late Q2.

Moving to slide nine the international welding segments, adjusted EBIT decreased 36.2% to 9.7 million and the adjusted EBIT margin declined 170 basis points to 5.3%.

Benefits from cost reduction activities, lower discretionary spending and a net 2.5 million dollar benefit from public paid leave programs helped mitigate the impact of lower volumes.

Organic sales decreased 21.5%, primarily from lower volumes in Europe and to a lesser extent in Asia Pacific We achieved an increase in organic sales in China. Following a strong second quarter rebound.

Moving to the Harris products group on Slide 10 second quarter, adjusted EBIT decreased 13.2% to 11.7 million adjusted EBIT margin decreased 70 basis points to 14.3% versus a record 15% in the prior year period cost reduction.

Actions and operational efficiencies drove solid margin performance.

Harris reported a 7.8% decline in volumes as growth in the retail channel was offset by industrial sector weakness.

Moving to slide 11.

We generated 104 million in cash flows from operations in a 189% cash conversion ratio from higher free cash flow versus the prior year working capital increased on higher inventory levels as we have strategically been building inventory to support their recovery, we expect our.

Working capital ratio to improve sequentially in the second half of the year.

We strengthened our liquidity position and maintained a strong balance sheet profile in the second quarter as highlighted on slide 12, we have an investment grade profile balance sheet with no near term debt maturities, we reduced our short term debt by 83 million in the quarter, increasing liquidity to 545 million.

Our strong cash flow generation and lower use of working capital in the second half of the year will deliver continued strong cash conversion performance.

Moving to slide 13.

We are prudently maintaining our capital allocation strategy, we deployed 45 million in the quarter across internal investments in the return of cash to shareholders through our dividend program, we repurchased 3.2 million shares at an average share price of $70.25. We continue to estimate full year capital spending to be.

In the range of 55 to 65 million as we prioritize growth and cost efficiency projects. At this point of the cycle were continuing to evaluate M&A opportunities and expect to resume share buyback activity. Once business continues conditions have further improves.

As we look ahead to the third quarter, while the shape of their recovery remains uncertain. We are confident in our commercial and operational initiatives and the strength of our business model continued strong cash flow generation increased liquidity and conservative disciplined management of the balance sheet enable us to continue to navigate.

This challenging environment, while delivering solid returns to shareholders.

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

Thank you ladies and gentlemen at this time will be conducting a question and answer session to ask a question press the star than the one key on your Touchtone telephone.

Ensure that everyone has the opportunity to participate we ask that you ask one question and one follow up then returned to the Q.

And our first question comes from Joe O'dea with vertical research your line is open.

Hi, good morning, everyone.

First just a quick one on cadence you've previously talked about April that was down in the low Fortys may in the low Thirtys just what did you come in.

ER volumes were down for the quarter at 24.5%.

For the okay.

But but the June would've been down I don't know center 15.

I would do attracted a little over 20.

Yes, we see no we've seen a nice progression down from that trough in April of that we believe is the trough of what we believe what we'll see from the from the pandemic and the recession that looks like it's coming from the pandemic.

Obviously that rate has slowed as we're exiting a june and moving into July, but we're still seeing improvements in that and as we stated some positive areas around the world positive with the Harris business almost at prior year as well as China, performing well and I would say our U.S. businesses, our Americas businesses are slightly.

Behind that pacing that we're seeing in our international businesses, but we really look at that end view that as just the migration of the impact of cobot across that business and again. It's also seeing a seeing a rate of improvement I. Just think that we're going to continue to be challenged by seeing a gradual improvement as we're moving through the rest of this year and end.

The 2021.

Got it.

And then can you expand on the cost savings a little bit I think back toward the end of April you were talking about second quarter cost savings that would approximate the 7 million that you did in the first quarter and then said it comes in at 27 million. So.

Can you can you bridge that at all and can you talk about how those savings evolve over the course of the quarter in terms of what you are able to identify actions you were able to take.

Hi, Joe so to speak about our communications and back in April you're right. We were that range of $40 million to $45 million in total savings and 45% of that was permanent that's what we're tracking we're still in that same range and we talked about permanent savings at 35%, but it's in that $20 million to $22 million range.

The key difference there, though is a bit of shifting between what we expected on the international side with a little bit more of the delay in just working through the dynamics and in our international regions versus the Americas and you saw some of the actions.

Taken in the second quarter on the Americas side, but the big change is really a temporary dynamic and we did see progressively the impact of all the discretionary spending coming more quickly as we progressed the quarter.

So that's where we ended up at 27 in sort of which 22 of that would be in the temporary now going forward. We do expect temporary savings to decline and I would expect.

Temporary same is the decline in half that say into Q3, and then the half again in Q4, so that progression that we saw is going to be tempered as we progress throughout the year in our business.

Reengages.

I do see the permanent side to begin to increase in the third quarter and then as we exit the fourth quarter to have permanent structural savings and an $8 million to $9 million range per quarter as we exit the year.

And last one is just the cost savings trajectory when we think forward.

If you're going to be close to 40 million in temporary cost savings this year.

Based on what you know today.

How much of that persists into next year.

Well I mean, our trajectory is said.

We are hopeful that Oh, how the business engaged and how that responds to volume levels starts to temper as we end the year and really our focus as we exit the year is on the permanent structural changes that we have introduced at will.

Impact to fix cost structure of our business on a go forward basis. So we have the temporary savings trajectory coming to.

Almost a breakeven by the end of the year.

Okay got it thanks very much.

Thank you. Our next question comes from Nathan Jones with Stifel. Your line is open.

Good morning, everyone.

Good morning learning.

I'll just follow up a little bit on on that.

The cost savings that it sounds like that the threeq huge cost savings number is going to be a.

A little bit less than 27 million that you saw in Twoq here.

That will then I assume translate into you know you decrementals at the segment level were really really good this quarter and about 23%. We should assume that does you're going to come in at a high up decremental quota as the temporary cost.

I fall off and the permanent cost ramp up.

So Nathan I would just assume that our decrementals follow the range of what we saw in Q2 and and think about the projection or.

Injector he of savings dropping into that $10 million to $15 million range per quarter of which the mix begins to evolve to more of a permanent structures of outline I love. The other thing to think about Nathan is.

We've disclosed the incentive comp reduction in Q2, being 13 million year over year, and if you recall last year's third quarter in fourth quarter, we had significant adjustments incentive comp and so I would expect in the third quarter based on where we're seeing now.

That's a that change aggressively is less than half of what we saw in the second quarter and about even in the fourth quarter. So we'll have a dynamic of incentive comp compensation plays out into our decrementals as well, but using a range of decrementals that similar Toby so in the second quarters fair.

Okay, so kind of low twentys decrementals your expectation.

And then.

Just discuss a little bit see the inventory level, you talked about wanting to carry some more inventory.

To take advantage of growth opportunities as we come out of there are those recession here you also talked about.

Your working capital level in the second half coming down a bit maybe you could just talk about what kinds of opportunities you see out there.

If you're prepared and ready with inventory, where you can take some market share there and how that plays off with the comment that you expect working capital to come down in second half.

Yeah, Nathan when we were entering the the endemic back in mid January early February we were seeing the start to permeate across our operations around the world. We just said down as a leadership team and recognize that with our with our balance sheet strength in our financial profile that we were going.

And to assume that if we had our employees available and we had the raw materials that we were going to make our high running products in place them into inventory the uncertainty associated with weather facilities would be able to operate or the resiliency of the supply chains were just two opaque at that time and we felt that was the best decision for our business and our customers longer.

Term and quite frankly, I'm I'm very glad that we made those decisions now that we sit here today is we're entering into the third quarter those supply chains have been stressed as I mentioned in my opening comments, we've got more confidence in our ability to be able to operate our facilities effectively.

With the appropriate protocols that are required to keep our employees safe. So now we believe we can bring down some of those inventory levels and still obviously meet if not exceed.

All of the customer expectations that we have around the world from a demand perspective as some of those start to continue to make improvements in their business. So we've talked to our operating teams globally about slowly starting to address some of that inventory build that we put in place to ensure that we'd be able to service those customers. During this cycle.

So it kind of fair to characterize that as you had some strategic inventory and safety stock and now you're going to take the strategic inventory and take out the safety. So.

Absolutely absolutely I mean, I think I think that theres still challenges out there in the marketplace certainly a lot of uncertainty as we're all moving through the back half a 2020, we are not going to place ourselves in a position that would put.

Our ability to service at a very high level at risk, but theres certainly some safety stock that we put in place that we can minimize at this point.

Excellent thanks for taking my questions.

Thank you. Our next question comes from Big Sobering with Baird. Your line is open.

Yes. Thank you good morning, everyone.

Hi, My first question on the Americas segment.

Can you give us a little bit of color as to how the export business has progressed through the quarter what is looking like in.

In July and a quick reminder of the of the size of this business at this point as well.

And related to this as we're watching the dollar we can pretty quickly here.

Can you give us a sense as to how you're thinking about competitive dynamics more broadly and what the impact of a weaker dollar will be to your segment margin.

Omega I started off just give you the picture perspective of export. So we had a experts had progressed nicely in the first quarter and but have come off a bit from first quarter trend. So we're about overall trends are about half the decrease that we saw on the overall business and exports represents about.

It's a little over 5% over overall business.

So historically you know with a weakening U.S. dollar we would see some potential leverage opportunity on exports.

It's really difficult to see on on a go forward basis, depending really on the mix of investment in many of the end markets are.

We're tracking it in the overall impact on exchanges is not is not significant as you saw in the second quarter. It was a little over 1%, but we we are tracking the progression and how exchange rates are impacting their business and we do expect their exports.

Well positioned for growth.

Make the other thing I would add is that when I think about our export strategy a lot of that strategy centers around our equipment profile and our equipment solutions.

So as we are continuing to advance equipment and you see equipment holding up slightly better than it has in previous cycles and now this is really where it's done that for a few quarters.

I believe that can be another catalyst for us to at least to make improvements in that export performance as we're moving forward.

HM Okay. Thanks, Thank you for that.

Maybe switching gears to international.

I just think that I'm wondering here given that you're you're calling out maybe some slightly better trends there than in the Americas business and.

I don't know maybe there is a chance that that those end markets. Those geographies. We cover quicker how do you think about the long term margin profile here Gabe I mean, what sort of revenue or volume do you need in order to get back to that trajectory of attaining double digit barge and in the segment do you think that's still achievable at this point is.

Thats still a target you guys are operating with internally.

Yes, definitely we're still anchored on that double digit EBIT margin profile and.

The actions, we're taking and with a little bit of help of growth we should be in a position to achieve that we've been.

Where we discussed at quite often internally, we've got lots of.

Actions to continue to develop the fixed cost structure of our business that we're pretty confident.

I think around that target.

And as far as the.

What is little bit of growth me can you can can you help us there.

Got it right there.

Firstly I look at 2019 is kind of the baseline so little bit of growth is looking at macros begin to improve as we know macros in 2019 on particularly in Europe, where software down and so we do look to a little bit of stabilization in the in the macroeconomic environment.

You are particularly in and with a little bit of growth and I think we'll have a pretty strong platform for achieving a double digit EBIT margin.

Okay, and if I may one last one just.

Just about I'm clear in terms of this incentive comp dynamic.

13 million dollar benefit in.

In the second quarter, you said, you're gonna do probably another six to 7 million benefit in in the third quarter was there any benefit in the first and.

As we think about 2021.

I'm presuming that this number sort of gets reset and all these benefits become an automatic headwind.

I think about a correctly.

Yes, thats difficult to think about it a mix of first quarter was essentially flat.

In terms of year over year comparison, so the second quarter reflects.

The results that we achieve profitability wise in the impact in Q2, and yes, you're right as I mentioned little bit less than half in Q3, and then flat in Q4, and that's reflective of how 2019 progressed and as we look to to reset objectives in that for 2021, then that will potentially create a headwind, but thats still TBD.

Agreement.

Okay. Thank you.

Thank you. Our next question comes from Walter Liptak with Seaport. Your line is open.

Hi, Thanks, Good morning, guys.

Oh.

Hi, I wanted to ask about.

Hey, I know you went through the Decrementals and what was going on international but the profitability, but it looked.

Much better than I was expecting can you run through.

Those.

Items that impact profitability international.

Yes. It just give you a couple of drivers there. So we didnt mentioned that two and a half million dollar.

Impact of that.

The paid lead programs that we were able to leverage in Europe.

That largely we expect to go away as we progress into the third quarter and then we did have some improvement as I highlighted in volumes in China. So that was also a favorable progression and how that resulted in our EBIT profile for international.

But outside of that we continue to drive.

The cost initiatives in the region and look for opportunities to grow so progressing in the international really is depending on our continued execution and are in improving our business model as well as a expectations and growth.

Well I would tell you I was pleased with our broad operating performance. Yeah. We had a couple of elements there that were favorable.

What I'm seeing the kinds of actions and improvements in the broader international business on the European business that we're looking for I think Q3 will be a challenging quarter relative to the uncertainty around August in the European markets.

Traditionally a month, where we've seen broad vacations and shutdowns from employers and with a varying.

Market dynamics from Spain to France to Germany, and whether they have that same dynamic in 2020 is just a very difficult for us to measure at this point. So I do think that August as a little bit of a wildcard as it relates to what kind of activity, we'll see in Europe, but broadly I believe we're on the right path.

South and believe that quite frankly, the businesses moving in the right direction and I think Thats why we had started some of those structural cost savings in our international business prior to the pandemic, it's given us an opportunity to get ahead of some of those issues, but certainly believe that it's on the right path and as Gabe stated earlier that with some.

Growth in that broad region, we're confident that we can get to that 10% operating profit number that were that we're targeting.

Okay sounds good and.

Speaking of wild cards, and there's a lot of macro wildcards out there I wonder if.

Chris you wouldn't mind.

Commenting on your thoughts that you know with these virus cases going up again.

Do you see any kind of moderation is thats, maybe some of the reopening slowed.

Does that have any impact on how you're thinking about the back half from here.

While it is it is very uncertain as to what that shape of that recovery. It looks like I'm like everyone. I suppose we read a host of materials and looked at a lot of data points and the only thing I can assure you is that we're not managing with an expectation that theres going to be a view like recovery.

I personally believe that we're going to be managing through a gradual recovery into 2021 now Fortunately for US we've got a very resilient balance sheet. Our teams are shown an ability to do this well and I do believe we'll continue to see gradual recovery.

But I think that that's our perspective on the business today and then you have the risks associated with if there was a broader.

Secondary challenge out there and the global economic markets because of the pandemic, which we couldn't see today.

There are couple of other variables that I view as slightly more positive than when we were together in April that we havent talked about I do like the fact that we've at least seeing some improvement in the energy markets as it relates to crude WT I now above 40, it's kind of stabilized about 40, that's better than where we were in April and all.

No thats going to be a challenge segment for us at least theyve gotten some stability and then we've seen the broad recovery and slow recovery and in many of the segments and I still believe that automotive will continue to make improvements throughout the year and we'll begin to see some improvements in those heavy industry segments as we migrate through the rest of 2020.

So I think we're managing towards and through a very gradual recovery that will take us into 2021.

Okay, Great sounds good thanks, guys.

Thank you. Our next question comes from Chris Dankert.

With Longbow Research your line is open.

Hey, good morning, guys.

Uh huh.

It's a it's also had been a very tough 12 months in the automation business and Chris. Thanks, So much for probably the end market break down, but I guess could we can you give us any color on automation, specifically July bidding activity backlog in that business just any comments on how you kind of view that into the back half of the year here would be great.

Well one of the challenges with the automation business as you're well aware is that the the or the beginning of those conversations towards when we generate in order to actually delivering those solutions to the marketplaces elongated versus the other solutions that we have within the portfolio. So I'm actually expecting in front of us, especially in the.

Q3, and maybe early Q4 that we'll have some other challenges for us relative to that business.

We love the long term perspective of automation I still believe that if anyone's going to talk about re shoring that you're not going to be talking about re shoring from a manufacturing perspective without talking about automation. So we like the structural dynamics around that we have had some challenges, but I believe our teams have got or arm.

I was around that business and I would tell you that from the.

The data that I've seen within our Salesforce tool that we utilized to track those automation opportunities and orders across that business our opportunity set still looks relatively strong now the challenges some of those opportunities get pushed out, but we're still engage with a lot of large customers relative to those opportunity.

It is certainly a portion of the segments that are very strong within our automation business is heavy industry general industries, and automotive and a little slower in that piece of the business at this point.

Got it got yeah, yeah, thanks for the color there.

And then just any comments you know the surcharge roll off we're through that that headache, now steel prices are starting to rebound a little bit I think my expectation was pricing in the Americas pretty flattish in the back half of the year is there an opportunity to do some increases once you get some positive price in the back half or not quite at this point.

You know I don't believe so we move forward or some equipment pricing that occurred in early April at this point in time, we don't have any of that planned I would expect us to be flattish to slightly positive, but I think that we've shown an ability to manage that element of our business very well and if obviously the economics around that were to change materially than we'd.

I have to go out and address that in our markets around the world.

Understood well, thanks, so much guys and best of luck.

Thank you.

Thank you and our final question comes from Dillon comes with Morgan Stanley. Your line is open.

Great. Good morning, guys. Thanks for the question.

Morning.

Wanted to ask what kind of channel inventories more broadly I guess as Margaret customers have kind of come back on line here over the past few months.

Yeah, what our customers telling you in terms of production rates kind of reaching precocious bubbles and are you kind of getting a sense that customers have been reducing inventory and the console side as part of your production and earn more production at the customer levels and cutting back on line.

Well you know at one of the favorable elements of the business model, especially on the consumable side that portion of our business that's going through the OEM channels is there's not a lot of inventory in that channel between our manufacturing.

Capacities and the consumption of the OEM. So that's a relatively tight supply chain, so still and I, usually I'm not worried about there being a draw down in that inventory or someone actually bringing that inventory forward by stockpiling. Some inventory there probably was a little bit of that in in the end of March individuals that maybe like us.

We're just worried about what the supply chains would look like it might have brought in a little bit immaterial, but it was diminimus as it relates to the way I think about our supply chain metrics with our global Oems. So I'm not worried that we have.

A supply gilad are there some sort of inventory there that needs to be worked off at the OEM level now I will tell you that we have to be very cautious because you'll read in the paper that industries are employers are backup and operating and we're still hearing that some of those facilities, maybe backup and operating but prior to the cobot or the band.

They were operating at two or three shifts and now they're operating at one shift. So we are seeing some of those dynamics back and forth. It's difficult for me to give you a.

Characterization across all customers are all segments, because obviously, that's very different depending upon the region as well as the industry segment that we would be working with.

We're very cautious internally when we have those conversations about okay, what's that OEM doing how many shifts what do we really view their consumption level to be at the positive Dillon would be that we are seeing that gradual improvement in the business favorable trend throughout the quarter in Q2, leading into Q3, where we believe July high teens.

Means low twentys as it relates to that order pattern and expecting to see that gradual improvement as we move through the rest of 2020.

Okay got it that's super helpful color. Thanks, Chris and then maybe that's the last one I. Appreciate the comment you kind of gave around the shape of the recovery being unknown and I guess, Chris who that's kind of alluded to this earlier, but I guess to date have you seen any tangible evidence of that dynamic PCV factory shutdowns or customer shutdowns or would you just still characterize that as more general caution.

No I would probably characterizes more general caution, especially when I think about our business on a global basis and the and then looking at the data look the data tells me that that longer term gradual recovery is certainly what we've seen to date now the caution becomes what happens if we have a very difficult.

Business economic scenario because of a second wave from the pandemic or something else that were to occur that would create those challenges that we just can't see today, but we are managing our business for the long play the long return, we're going to continue to invest in our capital to generate new products and cost reductions, we're going to continue to use our cap.

The allocation strategy, if there are opportunities for us in the marketplace to do that and and we're assuming that we have to be managing through this recovery for a few more quarters and that's what we're we're driving our teams to do here at Lincoln Electric.

Got it for years appreciate the time guys.

Thank you.

Pardon me, we have a question from Steve Barger with Keybanc capital. Your line is open.

Thanks, Good morning.

Thanks, Dave.

Gabe I just wanted to make sure I understood. The comments on June sales. If April was down 40 present, and presumably may wasn't that much better. It seems like June had to be down low to mid double digit to get to the 24% as.

Is there some dynamic I'm not catching there.

Yes, Steve I know if you recall, but may in May we had talked about our trajectory being the low thirtys. So I think that may be an issue and how your model modeling this quarter's volumes.

Megan volumes for the quarter were were down 24.5%.

Right all right.

Chris going back to your comments on August being tough to call I mean, I totally get that but normally revenue steps down in Threeq you for all the reasons we know.

What does the big Twoq, you drop make that look more flat to up this year and three Q or do some of the tougher end markets make that unlikely.

That's a good observation, Steve I think that would be I think that would be accurate.

The way that you'd be flat or up this year, yeah, yeah that it would be flat or up because of the other dynamics I think that will probably mitigate what normally would be the cyclical trend in the business.

Okay, and then just a quick question on the incentive comp number that you talked about does that include profit sharing from the factory floor or is that separate from the broad leeco profit share or incentive that debt that does include the profit sharing from from a U.S. business.

Understood. Okay. Thanks for the time.

Thanks, Dave.

Thank you. This concludes our question and answer session I'd like to turn the call back to gave Bruno for closing remarks.

Thank you I would like to thank everyone for joining us on the call today and for your continued interest in Lincoln Electric we look forward to discussing that progression of our strategic initiatives and cost reduction programs in the future. Thank you very much.

Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

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