Q3 2021 Lincoln Electric Holdings Inc Earnings Call
Greetings and welcome to the Lincoln Electric 2021 third quarter financial results Conference call.
At this time all participants are in a listen only mode and this call is being recorded it is my pleasure to introduce your host Amanda Butler, Vice President of Investor Relations and communications. Thank you you may begin.
Thank you Angelica and good morning, everyone welcome to Lincoln Electric's third quarter 2021 Conference call. We released our financial results earlier today and you can find our release as an attachment to this call's slide presentation as well as on the Lincoln Electric website at Lincoln Electric Dot Com in the Investor Relations section joining me on the call today is Chris.
Mace Lincolns, Chairman, President and Chief Executive Officer, and Gabe Bruno our Chief Financial Officer, Chris will begin the discussion with an overview of our results and business trends and Gabe will cover our third quarter financial performance in more detail.
Following our prepared remarks, we're happy to take your questions, but before we started discussion. Please note that certain statements made during this call may be forward looking and actual results may differ materially from our expectations due to a number of risk factors and 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.
Fillings on forms 10-K and 10-Q. In addition, we discuss financial measures that do not conform to U S. GAAP and a reconciliation of non-GAAP measures to the most comparable GAAP measure is found in the financial tables in our earnings release, which again is available in the Investor Relations section of our website at Lincoln Electric Dot Com and what.
With that I'll turn the call over to Chris Mapes, Chris.
Amanda good morning, everyone.
Turning to slide three I'm pleased to report that we generated record sales and earnings in the third quarter. Our team continues to do an excellent job servicing strong underlying demand from our global customers, while navigating a challenging operating environment and advancing our long term strategic commercial and operational initiatives.
Our third quarter sales increased 21% led by 18% organic growth prop.
Profitability increased on a year over year basis, and sequentially with a 15, 2% adjusted operating margin and a strong 28% incremental margin.
Volume growth price management expense control and benefits of our structural cost reduction actions delivered strong results.
We also improved our return on invested capital up 440 basis points to 22, 8%.
Cash flow generation remained strong up 23% to $110 million with a 97% cash conversion.
Capital allocation was balanced in the quarter with approximately $94 million invested in growth led by $75 million in the Harris business.
We returned approximately $80 million to our shareholders, including $50 million in share repurchases and a $30 million in dividends.
As previously announced the board approved a near 10% increase in our dividend payout, marking our 27th our 26th consecutive annual increase.
So despite near term headwinds the business is performing at or near record levels across key metrics and we're focused on capitalizing on an industrial expansion and our higher standard strategy.
Turning to slide four.
Cover underlying growth trends in more detail.
Third quarter organic growth of approximately 18% remained solid across all product areas and regions, both consumables and equipment system organic sales increased approximately 20% and our automation portfolio increased at a high single digit percent pace.
With a portion of automation revenue pushed out into late fourth quarter or early 2020 to do two robotic arms supply delays.
With customers accelerating capital spending in this space, we continue to see strong order activity and backlog levels in automation.
Geographically growth rate slowed internationally due to challenging prior year comparisons as that region rebounded faster than Americas last year.
Looking at end markets underlying demand remained strong across all of our in sectors with organic sales now flat to growing in the third quarter. Despite challenges automotive production levels and a slow recovery in energy.
Heavy industry sector growth accelerated in the third quarter by a low to mid 30% rate, while automotive general industries, and construction and infrastructure organic sales increased in the mid teens to 20% rate.
Energy was steady with the prior year as comparisons eased oil and gas fundamentals improved and customers cautiously began to reinvest in the sector.
This segment should trend positive as we move into 2022.
While there are some choppiness in our end markets due to supply conditions, we see healthy underlying demand in backlog.
In our operations, we expect inflation in tight supply chain conditions to persist through mid 2022 and are managing the business accordingly with elevated inventory levels were.
We're leveraging our international footprint and supply network for increased agility to maintain ample product availability, our customer first approach has positioned us well in the market.
We're also continuing to operate safely given COVID-19 risks and launched a vaccine incentive program in the quarter across our U S operations to encourage employees to be fully vaccinated.
We believe this is a good investment in our business employees and for our communities.
Our operations around the world have managed through and migrated to a more flexible work environment.
As an example, we rolled out our work appropriately program across our headquarters campus, which provides managers and employees with a more flexible work approach at Lincoln Electric.
I believe programs like these.
Commitment to our employees and our strong culture are why Lincoln Electric was recognized again this month by Forbes as one of the world's best employers in 2021.
So as we finished the year, we continue to expect growth in our business with standard volumes seasonality in our segments as well as accelerated contributions from our acquisitions. We also expect pricing to remain elevated due to additional actions that we've announced to recover rising raw material costs and achieve neutral price cost by year end.
As we look into 2022, we expect continued favorable demand trends as the industrial cycle remains positive where we.
Well positioned to excel in this environment.
And now I'll pass the call to Gabe to cover the third quarter financials in more detail.
Thank you, Chris moving to slide five our consolidated third quarter sales increased approximately 21% driven by 11% higher price and a 7% increase in volumes, a 2% contribution from acquisitions and a 30.
Basis points favorable impact from foreign exchange, our gross profit margin increased 110 basis points to 33, 3% as benefits from volumes pricing and cost reduction actions offset higher input cost, including raw material and freight costs.
An 11 million dollar LIFO charge LIFO charges for the first nine months were approximately $24 million and we expect an additional $8 million charge in the fourth quarter. Due to continued inflation price cost is slightly positive year to date, and we anticipate it will be neutral for the full year.
Due to inflation in LIFO charges are.
Our SG&A expense increased approximately 14% or $18 million to $149 million in the quarter higher incentive compensation and acquisitions represented substantially all of the increase.
SG&A as a percentage of sales decreased 110 basis points to 18.5% due to higher sales.
Reported operating income increased approximately 49% to $116 million or 14, 3% of sales.
Operating income included approximately $7 million of special items, excluding special items, adjusted operating income increased 46% to $123 million or 15, 2% of sales a 260 basis point increase versus the prior year on improved volumes.
Cost reduction benefits and diligent price cost management, which generated a 28, 1% incremental margin. We continue to expect our full year incremental margin in the high 20% range with an expected fourth quarter incremental margin in the mid 20% range.
We incurred a $71 million expense and other income substantially related to a $74 million settlement charge associated with the termination of our frozen U S defined benefit pension plan.
We expect an additional noncash settlement charge of approximately $35 million to $45 million in the fourth quarter.
Our third quarter effective tax rate was 17, 3% or 21, 3% on an adjusted basis due to our mix of earnings and discrete items. We continue to expect our full year 2021 effective tax rate to be in the low 20% range subject to the mix of earnings than anticipated.
Stent of discrete items.
Third quarter diluted earnings per share decreased 45% to 53 cents compared with 97 cents in the prior year, excluding special items adjusted diluted earnings per share increased approximately 42% to a record $1.56 in the quarter.
Now moving to our reportable segments on slide six.
Americas welding segment's third quarter, adjusted EBIT increased 43% to approximately $85 million.
The adjusted EBIT margin increased 220 basis points to 16, 9% from benefits of higher volumes and price cost management, which offset higher inflation and an $11 million LIFO charge.
Americas welding organic sales increased approximately 24% led by 11% higher volumes and a 12% and benefit from pricing actions organic sales increased across all product areas and end markets in the quarter led by an acceleration in heavy industry demand.
Moving to slide seven the international welding segment's adjusted EBIT increased 116% to $29 million. The adjusted EBIT margin increased 570 basis points to 12, 4% on higher volumes the benefits of structural cost.
Cost saving initiatives and price cost management.
Organic sales increased approximately 15%, reflecting continued price management to mitigate inflation and volume growth, notably in equipment systems, approximately 80% of international welding end markets grew in the third quarter led by heavy industries and automotive while <unk>.
Energy compressed slightly due to tough prior year comparisons in the power generation sector.
The segment also benefited approximately 2% from the Zeman acquisition.
Moving to the Harris products group on slide eight third quarter, adjusted EBIT decreased approximately 9% to $16 million.
Adjusted EBIT margin decreased 390 basis points to 13, 3% and a challenging prior year record margin and less favorable mix lower retail volumes and acquisition integration costs.
We expect similar margin performance in the fourth quarter with margins increasing in 2022 once our acquisition is fully integrated.
Organic sales increased approximately 7% led by pricing actions to mitigate raw material costs volumes compressed slightly on lower retail channels.
Channel sales due to challenging prior year comparisons excluding retail Harris volumes increased in the quarter on continued growth in HVAC and industrial applications.
Moving to slide nine.
We generated approximately $110 million in cash flows from operations and achieved 97% cash conversion working capital remains intentionally elevated to support the recovery and mitigate supply chain constraints as we expect to maintain that posture into 'twenty 'twenty.
Two.
Moving to slide 10.
We invested approximately $94 million in growth, including $75 million for the Harris acquisition and approximately $19 million in capital expenditures, we now expect to spend approximately 65 million to $70 million in Capex. This year.
We returned $80 million to shareholders in the quarter, including $50 million in share repurchases for the first nine months, we repurchased approximately $104 million and shares.
Return on invested capital remains strong up 440 basis points to 22, 8%.
We maintained ample liquidity with $718 million in the third quarter and remain within our target leverage range with no near term debt maturities and strong cash flows we will remain focused on growth investments and returning cash to shareholders with that I would like to turn the call over for questions.
Ladies and gentlemen at this time, we will be conducting a question and answer session to ask a question press, Taiwan on your telephone to ensure that everyone has an opportunity to participate.
Did you ask one question and one follow up question and then return to the queue.
Our first question comes from the line of Bryan Blair from Oppenheimer. Your line is now open.
Thank you good morning, everyone.
Bryan Bryan.
Chris you've sounded pretty bullish on industrial demand runway in recent quarters with some understandable callouts today about the unique operating environment.
Just curious if you can provide some more color how you're thinking about the impact of supply chain dynamics and weather.
Any real sphere that inflation and price response.
Lead to demand destruction and take away some of that attractive runway that we've talked about in recent past.
Yeah, well I'd say a couple of things around that Brian one is that I think that our decision as a leadership team to have confidence that this is a positive industrial cycle that we made very early in the year and then investing in the business behind that from a supply chain.
As well as from a strategic standpoint has has well positioned us as we've seen this demand to move into the marketplace.
I think what's important is that look our teams I think are executing very well, it's not that we don't have supply chain challenges you saw some of that supply chain challenge that we called out relative to some of the concerns around the availability of robotic arms in the marketplace that had an impact in our automation business in the quarter.
So I don't want to signal that those challenges aren't there. It's just that our teams have done a very good job of managing them and I've got confidence that we'll be able to manage them as we move forward.
We've seen real strong demand within the business.
And we're seeing that in our backlog and we certainly havent had any indication to date that inflation or or any other variable is impacting that backlog negatively and we're beginning to see those backlogs out there in those various segments in those major customers that we have within those segments as they are starting to talk about their business. So.
It just accelerated confidence and the industrial cycle and the demand model that we see in front of us and as I stated in my comments I think we're well positioned to execute on that as we move through the rest of the year and into 2022.
Okay.
That's all great to hear.
And international margin was again, a highlight in the third quarter.
If we look at the <unk>.
Second third quarter.
Margin range is there anything that you know.
Structurally speaking would withdraw.
It would drive margin lower on a go forward basis or is 12 plus percent.
Kind of.
Structural jumping off point as we think about volume incrementals going forward.
It certainly was exciting to see the performance of our international business in Q3, which traditionally has had some cyclicality associated with it especially in the European businesses, where you have.
Usually some shutdowns and we saw some shutdowns during this past quarter.
Our teams there have executed on our higher standard strategy and our higher standards strategy. We said, we wanted to get that business to double digit margins in show consistency in those double digit margins and and and Dave achieve that and I think what youll see from <unk>.
Lincoln Electric and myself is that as we're migrating into 2022, you will see us updating our higher standard targets for this business on a couple of other areas of the business as we look at then what we can achieve in that area of our business.
In executing our longer term strategy, but it was a very positive result for us in in Q2, and we need to be able to show we can execute on that through the cycle, but it certainly was a very positive sign what we achieved there in the market in in Q2 and Q3.
Yeah.
I certainly agree thanks again.
Yeah.
Again as I wanted to ask a question. Please press star one on your telephone. Our next question comes from the line of Mr. Gillani. Tommy Your line is now open.
Great and then one of those thanks for the question.
I Wonder if you can start talking about the old integration quickly for you know for a second obviously coming off of a bit of a heavier M&A quarter for you guys and it sounds like that was partially driving a bit of margin dilution in the Harris segment.
Curious if you can kind of talk to how those recent deals have been progressing when you would expect any margin most of the part of businesses.
Turning back towards it looks like when Abbvie.
Yeah. So look great question not necessarily unexpected for us when we are when we acquired that business, we'd identified that they were.
They were having some supply chain challenges multiple locations probably didn't have the process strength that we would like to see to be able to support that business longer term or Harris teams just been doing an exceptional job of getting in and assisting those businesses. We've found some really good talent. We found people that are.
That have really want to be part of the larger business longer term. So as it relates to the integration I think on path, but certainly not surprised by the fact that we've had some challenges with the integration portion of that as Gabe mentioned I think we'll see that moving into.
Q4, and then we would expect more favorability of that as we're moving into 2022 and look I think that's probably been a drag for us somewhere between 50 and 100 basis points just in that business.
With the noise around supply chain, it's hard to feel exact thing relative to that target, but kind of as we had expected we love. The we love the strategy, we love the products. We found some great people will continue to work hard on that integration as we're exiting 'twenty, one and get that positioned well for us as we're moving.
Into 'twenty two.
Okay. Yeah, certainly makes sense and then maybe we can switch over to automation for it but I can't obviously your tone. There is still very much up be it sounds like there's some modest push outs in the fourth quarter into next year, but I'm just.
And more broadly to what extent do you feel like the conversations there and you know kind of associated quoting activity or becoming more need based versus what base. I mean, I think we're all reading the same pub lines about labor challenges in the market. So just curious to what extent your customers or you know.
The thing that paint on the labor side and the automation of the solution.
It's interesting.
That need versus want at the end at the end of the day I believe that most of the automation has always been need based.
Look at <unk>, when I think about the customers that I'm talking to and when I go through our operations on the automation side and talked to our employees and about the interactions they are having.
When I think about productivity when I think about process improvement when I think about quality enhancement when I think about labor mitigation those have always been need based for manufacturers.
So I'm seeing people continue to be energized around those discussions there may have been a window that we experienced.
Certainly in 2020, where you might say, even though they wanted it because it was need based they didn't want to go down that path because of challenges associated with working through their employee groups in a COVID-19 environment and how could they do some of that activity.
But we've seen a really strong engagement really strong early order.
<unk> activity as we're migrating into Q4, so just a lot of confidence in the business, but we do see some choppiness on the supply chain there specifically about the robotic arm supply chain, we're working very close with our key strategic partners.
But that is the one area that there.
We need to continue to make improvements in but you are right I still very confident in the demand profile in and again, what I think about that I see that is need based decision, making there is a lot of challenge over productivity they've got challenges over demand is going to continue to drive people towards more automated some.
<unk> in the marketplace and I believe those individuals', we'll look to Lincoln electric.
Okay.
Really helpful color and then maybe if I can sneak in one last one here gave us on your comments on the price cost side. I think you said that you were still playing in that kind of a new.
A year at price cost neutral versus kind of positive year to date, I guess that would kind of imply that you are planning to run slightly negative in the fourth quarter I guess, what does that kind of imply about the exit rate kind of going into next into next year like would that still imply that youre planning to take another round of price increases entering 'twenty two to still maintain that level of neutrality or okay.
Can you kind of reconcile the comments in terms of like the implied fourth quarter.
The price cost versus you wanted to maintain the neutrality into next year, yes.
Yes, that's a great question and it's one of the anchor and our consistent discussions around how we've migrated the year around that is to maintain our price cost neutral position. We started the year a little bit negative we progressed the positive or slightly positive over the next nine months, but that's our strategy right to maintain a neutral position and be very <unk>.
Responsive to how we see input.
Input costs, and we enter the fourth quarter with another round of price increases because we see some additional material cost and freight challenges and that's how we manage the price cost management.
Okay got it thanks for the time guys.
Yep.
Our next question comes from the line of Mr. Nathan Jones from Stifel. Your line is now open.
Mr. Jones Your line is now open.
Mr Jones.
Maybe we can pass the next Q the person in queue.
Yes, Ma'am. Our next question comes from the line of Mr. Steve Barger. Your line is now open.
Hey, good morning, everyone, Hey, good morning, Steve and Steve.
I know, it's really tough to make predictions about next year given the environment.
Chris given the order strength in the backlog that you see are you preparing for double digit growth next year.
Youre right, Steve it's awfully hard to make that prediction I mean at the end of the day.
All foundational I go back to what we've had a lot of confidence and confidence in our business confidence that we're in a positive industrial cycle confidence that we're seeing very strong the order demand and.
And reaction from our industry segments. The fact that now all the industry segments that we are we believe are critical to our business are trending positively.
Seeing energy start to turn a little bit all of those things.
Create a very good environment for us, but probably not willing to say that necessarily or set a target as to what that rate will be as we're moving into 2022, but certainly believe 'twenty two is setting up as a favorable demand environment for Lincoln electric.
Got it.
Gave you a prediction for incremental margin for the year was right on does inflation or supply chain make you think differently about incrementals going forward, whether it's high single or low double digit growth next year.
Yeah, that's a great point I would I would just anchor in our model right. So we're tracking higher at the high Twenty's.
Beyond that when we're talking about mid single digit to high single digit type growth our traditional models in that mid to high twenties.
That's how I think about it and we're going to manage supply chain execute as you've seen and will managing we'll manage pricing and material cost inflation as we've done. So we have a very disciplined as you know and and being able to navigate in those.
Challenging operating environment.
Got it and if I could just ask a short one Chris are you getting any pushback on price where buyers just basically price insensitive right now based on end market optimism the same kind of optimism.
Your comments.
Yes.
They're never insensitive to the pricing.
So.
It just takes us continuing to work with those customers very closely and making sure that they recognize what we're trying to accomplish and and I think look we also have very we have very educated customers.
Our large OEM base is seeing a lot of the similar issues that we are challenged with so there might not have to be as much of a discussion centered around what's going on within the market, but I assure you that those conversations still need to happen and quite frankly, we're working with those customers, but I think as you've seen for us throughout.
The year.
We've been able to effectively manage those conversations and move that through our business and one of the things that we're talking to our customers about Steve which I think is very important is that we're telling them that we're taking a customer first approach to our business, we're going to bring in the inventories on the supply chain side, and we're going to make the expenditures that we need to make.
In managing the supply chain to support them and I think that's a great way for us to utilize our balance sheet in this market.
It will probably impact us some and it has impacted us some on I'm not sure that will make the cash targets that I'm looking for out of the business as we're exiting 2021, but I absolutely believe it's the right investment in the business and the utilization of our balance sheet to support our customers in this in this market at this point in time.
I do believe that our customers appreciate the efforts that we're making and the decisions, we're making around supporting them. So that they can support their demand.
Understood Thanks very much.
Okay.
Yeah.
This concludes our question and answer session I would like to turn the call back to <unk> for closing remarks.
Thank you Angelica I'd like to thank everyone for joining us on the call today and for your continued interest in Lincoln Electric we look forward to discussing the progression of our strategic initiatives in the future again, thank you very much.
This concludes today's conference call you may now disconnect.
Yeah.
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