Q4 2024 Lincoln Electric Holdings Inc Earnings Call
Speaker Change: You may press star 1 again. It is my pleasure to introduce your host, Amanda Butler, Vice President of Investor Relations and Communications. Thank you. Ma'am, you may begin.
Amanda Butler: Thank you Janine and good morning everyone. Welcome to Lincoln Electric's fourth quarter and full year 2024 conference calls. We released our financial results earlier today and you can find our release in this call slide presentation at LincolnElectric.com in the investor relations section.
Amanda Butler: Joining me on the call today is Steve Hedlund, Chair and Chief Executive Officer, and Gabe Bruno, our Chief Financial Officer. Following our prepared remarks, we're happy to take your questions.
Amanda Butler: Before we start our discussion though, please note that certain statements made during this call may be forward-looking and actual results may differ materially from our expectations due to a number of risk factors and uncertainties.
Amanda Butler: which are provided in our press release and in our SCC filings on Forms 10-K and 10-Q.
Amanda Butler: In addition, we discuss financial measures that do not conform to U.S. GAAP. A reconciliation of non-GAAP measures to the most comparable GAAP measure is found in the financial tables in our earnings release, which again is available in the investor relations section of our website at LincolnElectric.com.
Amanda Butler: And with that, I'll turn the call over to Steve Hedlund. Steve? Thank you, Amanda. Good morning, everyone. Turning to slide three, I am pleased to report strong full-year results across key financial metrics despite challenging demand trends.
Amanda Butler: The team did an excellent job staying focused on serving customers and accelerating innovation with one of the largest new product introductions in recent years, along with a solid 50% vitality index of new product sales and equipment.
Amanda Butler: We also successfully added three acquisitions, which expands our engineering and application expertise.
Amanda Butler: further differentiates our technology platforms and will extend our brand in under-penetrated channels in the years ahead.
Amanda Butler: Operationally, we continue to drive efficiency improvements, most notably in our automation portfolio and in Harris Products Group, where margins improved over 100 basis points each despite top-line headwinds.
Amanda Butler: These achievements would not have been possible without the focus and commitment of our global Lincoln Electric team, our distribution partners, and our customers who collaborate globally to help build a better world. So thank you.
Amanda Butler: Our automation portfolio achieved $911 million in sales and the portfolio remains on pace to hit our $1 billion 2025 sales target.
Amanda Butler: Despite the 6.5 percent decline in organic sales, we achieved record profitability with a 17.6 percent adjusted operating income margin.
Amanda Butler: Both America's Welding and Harris Products Group outperformed their 2025 Higher Standard Strategy profit margin ranges.
Amanda Butler: This reflects strong execution of our strategic initiatives, coupled with diligent cost management, with approximately $21 million from our targeted saving actions, which outperformed our expectations.
Amanda Butler: These achievements contributed to strong ROIC performance and a 23% increase in returns to shareholders through a higher dividend payout rate and $264 million in share repurchases.
Amanda Butler: Heading into 2025 we have a solid balance sheet and ample liquidity to fund growth investments and continue to return cash to shareholders as we navigate the cycle.
Amanda Butler: Turning to slide four, looking at our interim progress to our higher standard 2025 strategy goals, I am very pleased by our performance, which positions us to achieve or even exceed most targets across our financial and sustainability metrics.
Amanda Butler: Profit performance continues to improve annually and we have averaged a fifteen point seven percent adjusted operating income margin with a twenty-eight percent incremental margin from 2020 to 2024.
Amanda Butler: We are on track to achieve our 2025 16% average profit margin goal. This is a 200 basis point improvement of our average operating margin from the prior cycle.
Amanda Butler: This year's record margin performance in a down cycle reinforces how strong execution of our strategic initiatives will continue to drive margin expansion in the next growth cycle.
Amanda Butler: In addition, our working capital efficiency continues to improve as average operating working capital-to-sales performance advances closer to 15% by the end of 2025.
We are also committed to a balanced capital allocation strategy.
Amanda Butler: reinforcing our confidence in cash generation and the sustainability of the business's improved margin profile.
Moving to slide 5 for year-end demand trends.
Amanda Butler: Fourth quarter organic sales performance continued to reflect softer manufacturing activity across most end markets, predominantly driven by large OEMs who continue to curtail production levels to right size inventories in their dealer channels.
Amanda Butler: In addition, we saw ongoing deferred capital spending across large industrial customers, which impacted equipment and automation demand.
Amanda Butler: These declines were further impact by challenging prior year comparisons in automation sales and energy project activity across Asia-Pacific and the Middle East in 2023.
Consumable demand remained more resilient, aided by strength in HVAC.
Amanda Butler: From a channel perspective, retail continued to grow and our industrial distribution channel in Americas was more resilient as compared to a low double-digit percent decline in direct OEM sales in the region.
Amanda Butler: We are encouraged to see the beginning of a pickup in the longest cycle automation projects serving the automotive industry, which should result in continued momentum and capital investments starting mid-year for mid and short cycle projects needed to support upcoming model launches.
Amanda Butler: So as we look ahead to 2025, we are ready to capitalize on growth opportunities and drive margin expansion.
Speaker Change: And now I'll pass the call to Gabriel Bruno to cover fourth quarter financial results and our 2025 assumptions in more detail.
Gabriel Bruno: Thank you, Steve. Moving to slide six, our fourth quarter sales declined 3% to $1,022,000,000 primarily from 8.5% lower volumes.
Speaker Change: Pricing was 1% higher and acquisitions contributed over 5% to sales.
Foreign exchange translation had a 1% unfavorable impact.
Speaker Change: Gross profit dollars held relatively steady at 369 million dollars which included a six million dollar benefit from our savings actions and a five million dollar lifeboat benefit in the quarter.
Speaker Change: Our gross profit margin increased 100 basis points to 36.1% as effective cost management, savings actions, and operational efficiencies offset lower volumes.
Speaker Change: Our SG&A expense held relatively steady at $187 million, as higher SG&A from acquisitions was offset by $13 million in benefits from our savings actions and $7 million in lower incentive costs.
Speaker Change: SG&A as a percent of sales increased 50 basis points versus prior to 18.3% on lower sales.
Speaker Change: Reported operating income declined 13% to $177 million primarily from lower sales as well as a $5 million rationalization charge and $4 million in acquisition related items.
Speaker Change: Excluding special items, adjusted operating income increased 2% to 186 million dollars as our adjusted operating income margin increased 100 basis points to a fourth quarter record of 18.2 percent.
Speaker Change: Disciplined cost management, savings actions, lower employee costs, and strong operational execution in our automation portfolio all contributed to record performance.
Speaker Change: The strong execution in our automation portfolio resulted in a 17% EBIT margin, a 200 basis point improvement from the prior year.
Speaker Change: Interest expense net in the quarter increased 31% to 11 million dollars reflecting our refinancing completed in 2024.
Speaker Change: Our fourth quarter effective tax rate was 16.1% due to the mix of earnings and timing of discrete items, which compares to 20.5% in the prior year.
Speaker Change: Excluding special items are adjusted effective tax rate with 16.8% as compared with 19.3% in the prior year.
Speaker Change: Our full year 2024 adjusted effective tax rate was 20.8% in line with our full year assumption range.
Fourth quarter diluted earnings per share was $2.47
Speaker Change: Excluding special items, we achieved a record $2.57 adjusted diluted earnings per share in the quarter, which includes a favorable $0.10 benefit from the lower tax rate, partially offset by a $0.02 unfavorable impact from foreign exchange translation.
Speaker Change: Moving to slide 7, our cost savings actions launched in the third quarter have yielded better results than initially estimated due to higher temporary savings in America's welding.
Speaker Change: As these savings will be largely maintained until demand improves, we are now increasing our annualized savings rate to $60 to $75 million, as compared with our initial range of $40 to $50 million.
Speaker Change: This increases our quarterly savings run rate to $15 to $20 million from an initial estimate of $10 to $14 million. We expect to recognize $40 to $55 million of incremental cost savings in 2025 before fully anniversary in the fourth quarter.
Moving to our reportable segments on
Speaker Change: America's welding sales held steady versus prior year as an 8% benefit from our Red Viking and Van Eyre acquisitions and steady price offset 7% lower volumes and a 1% headwind from foreign exchange translation.
Speaker Change: Persistent weakness in North American manufacturing activity and capital spending as well as a challenging prior comparison from Forry and the pull forward of automation projects contributed to results.
Speaker Change: America's welding segment's fourth quarter adjusted EBIT increased two percent to 132 million dollars.
Speaker Change: The adjusted EBIT margin increased 30 basis points to 19.1% as effective cost management, strong execution in our automation portfolio, and higher than expected temporary cost savings fully offset lower volumes.
Speaker Change: Moving to slide 9, international welding sales declined approximately 17% and 16% lower volumes.
Speaker Change: Industrial weakness in portions of Europe, Turkey, and Asia-Pacific were amplified by challenging prior comparisons from strong project activity and automation demand in 2023. Price held steady.
Speaker Change: Adjusted EBIT compressed 24% on lower sales. Adjusted EBIT margin of 12.8% repositioned the segment back within their higher standard strategy target margin range.
Speaker Change: Effective cost management, savings actions, and operational initiatives contributed to improved margin performance.
Speaker Change: Moving to the Harris Products Group on slide 10. Fourth quarter sales increased 11% benefiting from higher price and volume growth. Continued growth in HVAC and an increase in the retail channel offset continued compression from industrial sector applications.
Adjusted EBIT increased 42% to $22 million margin at 17%.
Speaker Change: This strong performance is a culmination of effective cost management and the ongoing operational improvements which have been advancing the business.
Moving to slide 11.
Speaker Change: Cash flows from operations were 96 million dollars and 599 million dollars for the full year with a 91% cash conversion ratio of free cash flow to adjust a net income.
Speaker Change: Cash conversion is seasonally lower in the fourth quarter due to higher uses of cash for incentive compensation payments as we invested in higher levels of capital spending in the quarter.
Speaker Change: We improved our operating working capital to sales ratio to 16.9 percent.
Moving to slide 12.
Speaker Change: We invested $31 million in CapEx in the quarter, bringing full-year CapEx to $117 million.
Speaker Change: We returned $93 million to shareholders in the quarter with $53 million of share repurchases and our higher dividend payout. We continue to generate a solid return on invested capital of 21.8%.
Turning to slide 13 in our full year 2025 assumptions.
Speaker Change: The advancements we have made in the channel, our expanded innovative portfolio, and improved cost profile positions us well as we head into 2025.
Speaker Change: Our initiatives have demonstrated that we can continue to optimize the business, invest in long-term growth, and compound earnings through a down cycle.
Speaker Change: Given how early it is in the year and pending clarity on the impact of federal policies, including recent tariff actions we are assessing, we are conservatively posturing for low single-digit sales growth in 2025.
Speaker Change: This contemplates 50 to 100 basis points of positive price starting in the first quarter as we issued price actions in our Americas and international welding segments earlier this year ahead of any tariffs.
Speaker Change: We also expect approximately 200 basis points of sales growth from our 2024 acquisitions.
This cautious outlook does not contemplate volume growth.
Speaker Change: We expect first half volume performance to be more challenged versus the back half given lower production levels among heavy industry and automotive OEMs, soft manufacturing activity across key regions, and expectations for slower automation sales through the second quarter as previously discussed.
Speaker Change: This is likely to equate to a low single-digit percent decline in volumes for the full year, with America's welding and Harris being the most resilient.
Speaker Change: Despite challenging end market conditions, we expect a low 20% incremental margin rate with modest earnings growth.
Speaker Change: We will continue to benefit from diligent cost management, an incremental $40 to $55 million from our savings actions, and our business units are continuing to pursue operational improvements through local and enterprise-level initiatives.
Speaker Change: We estimate interest expense net at 45 to 50 million dollars and an effective tax rate in the low to mid 20% range.
Speaker Change: We are budgeting 100 to 120 million dollars of CapEx investments to fund growth and operational efficiencies.
Speaker Change: We are anticipating full year cash conversion at 90 plus percent of adjusted net income.
Speaker Change: Again, our full-year assumptions do not include the impact of pending tariffs.
Speaker Change: Our team is currently assessing the potential impact from trade and tariff headlines, and we will leverage our agile supply chain and issue new pricing actions to offset any margin impact, as we have done successfully in prior inflationary periods.
Speaker Change: Overall, we are very confident in our ability to successfully navigate the year ahead. Our customer-first approach, innovation pipeline, and focus on staying agile to capitalize on growth opportunities and optimize operations will continue to drive superior value as we complete the final year of our Higher Standard 2025 strategy.
Speaker Change: And now I would like to turn the call over for questions.
Speaker Change: Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad.
Speaker Change: If you would like to withdraw your question, simply press star 1 again. To ensure that everyone has an opportunity to participate, we ask that you ask one question, one follow-up, and then return to the queue.
Speaker Change: Our first question comes from the line of Angel Castillo from Morgan Stanley. Ma'am, please go ahead.
Stefan Diaz: Hello, thank you for taking my question. This is actually Stefan Diaz. I'm sending in for Angel.
Maybe to start...
Speaker Change: Can you just talk about your welding business in a bit more detail as it pertains to competitive dynamics? I believe at a high level...
Speaker Change: It looks like your organic growth in welding has lagged your biggest direct competitor for the last four quarters.
Speaker Change: which seems to be a reversal of trends seen in 2022 and 2023.
Speaker Change: You know, obviously, end market mix and geographic mix can sort of cause divergence, but basically any insight into, you know, what might be causing organic growth underperformance versus peers and, you know, whether you've seen any shifts in competitive dynamics in that business would be helpful.
Stefan Diaz: Yeah, so Stephan, let me just kind of highlight some of the key differences in our business model. So first I'd point to our automation business.
Stefan Diaz: Right, so when we talk about the mix of automation, now we're pushing billion dollars in revenues, largely invested in heavy industries and automotive and that, so you've got to consider that dynamic separate from the other large two competitors in our industry. We're pleased with the progression of our automation business, you know, I pointed to 200 basis points of improvement.
Stefan Diaz: and overall EBIT margins, while we pointed to continued softness in capital investment and our automation business was down mid-teens, but we're starting to see some strength in some of the longer-term drivers to order, so that's positive.
I'd also point to
Stefan Diaz: the mix of our business between our international and America's scope. We did mention that the distribution side in America's we held pretty well we were we were down single digits.
Stefan Diaz: So the mix of business has a relevant difference in how each of the models are structured. A large part of OEMs are tied into heavy industries and automotive investment and demand, and that's the kind of mix that you see progressively in our business.
Speaker Change: Hey Angel, I'll just echo Gabe's comments that really when we look at the business portfolio there is a significant difference in channel mix in the U.S. so we have a much stronger concentration.
of business with OEMs than some of our competitors do.
and Louise.
Speaker Change: mentioned earlier on the call that we see a disparate impact of OEM demand versus the distribution channel.
Speaker Change: So that has an impact on the business and then within international
Speaker Change: The relative mix of our business in places like Europe, where we have very challenging market conditions, versus India, the Middle East, and other places, South America, that are growing more rapidly. I think that's what presents some of the challenges for us in looking at the comps.
Speaker Change: versus the other leading competitors. I will add that we are very closely engaged with majority of our customers, both at an end-user and a distributor level, and do not believe that we're losing share. In fact, if we look at the distribution channel in the Americas, we believe we're gaining share.
Speaker Change: Great, that's very helpful. Thanks for the color. And then maybe as a follow-on, what does your guidance assume for first quarter organic sales by segment? I know you went a little bit into, you know, first half versus second half dynamics, but any additional color you could provide there would be helpful. Thanks.
Speaker Change: Yes, Stephan, so we don't provide that level of detail by segment in our comments and the assumptions that we shared, but I would point to that we would expect for the first half of the year more pressure on volumes.
Speaker Change: So I would point to low single-digit declines progressively in this first half of the year until we start to anniversary some of the dynamics that we experience, particularly in heavy industries and automotive in the back half of the year.
Speaker Change: Our next question comes from the line of Sari Boroditsky from Jeffries. Please go ahead.
James Sun: Good morning. This is James Sun for SARI. Thanks for taking the question this morning.
Speaker Change: I wanted to kind of touch on the like the Outlook, the flat organic sales growth. Can you kind of provide more color on your expectation by kind of end markets and how you're thinking about the contribution from like consumables, equipment, and automation?
We ended the year with general industries down mid-single digits.
Speaker Change: You know, we do point to, it was good to see PMI turn positive in January, but we need to see more trajectory there before we can anchor on a consistent trend.
Speaker Change: So as you know, as we've talked in general, you know, we do expect volumes to be more compressed in the first half of the year and then flattening out in the back half of the year. General industry, you can see, continue to see probably that low to mid-single-digit type perspective. On the automotive side...
Speaker Change: You know, I would expect a little bit more stability on the consumable side of the business.
and then continued pressure on.
Speaker Change: the capital investment side of automotive. So I would point to, so while broadly we were down mid-teens percent in the fourth quarter, I would look to that to moderate somewhat as we progress throughout the year.
Speaker Change: Heavy industries, you know, we were down low double-digit for the fourth quarter and that's driven by what we all read about in terms of what's going on in ag and construction. We expect that to continue in the same levels that we saw. Fourth quarter actually lined up pretty closely to the third quarter so I would continue to expect pressure in the first half of the year and then flattish type of outlook and heavy industries.
Speaker Change: Energy, energy was down low 20% in the Q4. We're bullish on energy, perspectively.
Speaker Change: But I would expect them for the full year to be into positive range for the full year.
Speaker Change: And then lastly, construction infrastructure, you know, that was down mid-teens. That's a choppy part of our business. So, again, I would expect to see some pressure in that part of the markets as we progress the year. I would look to low, maybe mid-single digit down.
and that part of the market.
Speaker Change: Great, that's a great color. It's very helpful. And I guess kind of just wanted to touch on kind of the, what is it, industrial OEM cautiousness here. I think we're kind of seeing like cautious optimism like with the new administrations, like still, but there are still many uncertainties. So can you provide like more insights?
Speaker Change: on what you're hearing from like industrial OEM customers like after the like new admin took office and when do you expect kind of OEM business to trend with the kind of distribution channel?
Speaker Change: James, it's very early for us to have a definitive position on it. I would point to the fact that the PMI recently turned positive in the U.S. market is an encouraging sign.
Speaker Change: If we do move forward with significant tariffs and we get into retaliatory tariffs between the US, Canada, and Mexico
Speaker Change: You know, that really presents a wild card that's difficult to plan around at this point in time. So, as we mentioned during our prepared marks, our watchword for the organization is agility and to respond quickly to those challenges, but it's very hard to have a crystal ball as to how this is all going to play out.
Great, thanks for taking questions.
Speaker Change: Our next question comes from the line of Nick Dobre from Baird. Please go ahead.
Speaker Change: Hey, good morning, guys. It's Joe Grabowski on for MIG this morning.
Hey, Joe.
Speaker Change: Modest organic growth for the year. I just wanted to confirm that it's true So just kind of a little more color on what you see in an automation
Speaker Change: Particularly the long cycle part of our business, which we think of as primarily 4E, but some of the organic business that we had historically is focused on very long projects, cycles that are tied to model changeovers and refreshes in the automotive industry.
Speaker Change: As we were talking about six months ago, we were starting to see some indecisiveness in our customers around which projects they wanted to move forward with and in what sequence, responding really to the changing market demand for electric vehicles.
Speaker Change: and the balance of EV versus hybrid versus ICE projects. We're now starting to see customers make those decisions and release projects to us, which is encouraging for us in terms of the long cycle nature of the business.
Speaker Change: and we expect the mid and short cycle portions to improve somewhat through the course of the year.
Speaker Change: Got it. Okay, great. Thanks for that color. And then my follow-up question, I wondered if you could tell us a little more about the $5 to $7 million of quarterly permanent cost savings. Considering you've got flat organic sales guidance for the year, kind of maybe give us a little color there and how it positions the company for the next demand upturn.
to structurally shape our business.
Speaker Change: opportunities for us to continue to develop our business model and so those
Speaker Change: are examples that we've done over the years that have yielded an improvement in our operating margin profile. So, Steve's comment is during the current strategy cycle.
Speaker Change: We've increased our operating margins, on average, by 200 basis points. So those are permanent changes in our model that give us confidence that we'll continue to build out.
Speaker Change: the operational model to the value proposition that we've consistently expanded on throughout cycles.
Speaker Change: I would think about some of the permanent savings as being things like manufacturing footprint optimization as we look to better utilize the footprint that we have.
Speaker Change: and continue some of the evolution of our European business from Western Europe to Eastern Europe manufacturing. And as we look at the automation business, being able to more effectively share work across sites so we can improve our utilization of those facilities.
Speaker Change: Those combined with looking at some of the spans and layers in our organization and trying to get leaner and more efficient, those are the things that yield.
Speaker Change: yield permanent cost savings that should not impact our ability to respond to a market rebounded demand.
Speaker Change: and then on the temporary side you have things like projects and travel and discretionary spending where we just decide we're going to take a pause. We know that some of those costs will come back into the business when demand improves but during a down cycle we go through a belt tightening process around the things that we can control.
Speaker Change: Our next question comes from the line of Nathan Jones from Stiefel. Please go ahead.
Good morning, everyone.
Nathan Jones: Good morning, I'm going to start on the tariff question and obviously nobody knows what's going to happen from here, but Lincoln and the industry have been through
Nathan Jones: Many inflationary periods before and the industry and Lincoln have a very good track record of passing increased cost to shrewd customers.
during COVID.
Nathan Jones: Lincoln not only passed the cost increases but also did it with a gross margin on top of it and talked about being gross margin neutral during that inflationary period.
Speaker Change: So I guess my question is, if we do see inflation caused by tariffs, would it be your...
Speaker Change: perspective that you'll pass that through on a dollar-for-dollar basis. You'll be able to pass it through with a margin on it. The markets are in a little bit different position than they were during COVID, obviously. So just any color you can give us on how you think the business will be able to react in terms of neutral at margins, neutral at EPS.
Speaker Change: Yeah, Nate, I'm disappointed you weren't going to give us some clarity on the tariffs. I thought given your opening preamble, I thought you were going to instruct us, but...
Speaker Change: I would say, look, Nate, our job as management is to grow the business and expand margins over the cycle. We've got many different levers for doing that.
Speaker Change: When we think about margin, there's productivity initiatives that we're driving through the business, there's innovation, and there's managing price cost, and we've got a very good track record of being diligent and managing price cost so that we protect the profitability of the business.
Speaker Change: We don't like to rely on price. It's very disruptive to our customers and to the market. One of the concerns that we have as we look forward is to the degree that tariffs get piled on tariffs and we get into a tit-for-tat situation.
Speaker Change: As widgets get more expensive, people tend to buy less widgets, so there's volume impact to it. We're not eager to jump on the price lever, but it's a lever we'll pull when we have to.
Speaker Change: Fair enough, and I have no insight into what's going to happen. I'm not that smart.
Speaker Change: I guess a question on M&A, balance sheet is obviously in pretty good shape and you talked about new acquisitions as a potential for upside.
Speaker Change: The business over the last few years has concentrated on acquisitions in automation.
Speaker Change: who maybe potentially built that business out to where you want it to be. So I guess the question is, is automation still a big focus for acquisitions or have you moved strategically to some kind of other part of the business?
Speaker Change: improve our position in the work truck channel, which we saw as a critical route to market where we were not as strong as we would like to be from a core business standpoint.
Speaker Change: We've done acquisitions in the past to support the expansion of the Harris Products Group business in HVAC so
Speaker Change: It's not that we've been solely focused on automation, it's been a more productive hunting ground for us in the last couple of years just due to the fragmented nature of that industry.
Speaker Change: And we continue to look for investment opportunities in automation so we can continue to expand The types of solutions that we provide to our customers and grow the addressable market for us So I think we'll you'll continue to see more of the same from us
Speaker Change: Just to add, Nate, you know what our long-term objectives are and we've been very much aligned to that is to drive long-term sales CAGR at three to four hundred basis points. So we have a very disciplined acquisition strategy and we'll continue to maintain that posture.
Speaker Change: Our next question comes from Diana Wolk, the tech from Seaport Research Partners. Please go ahead.
All right, thanks, good morning, guys.
Hey, let me try...
Speaker Change: Does it look like the final, you know, building, they're going to move some of these projects forward? You know, I guess what are the customers saying? And, you know, maybe around the channel inventory, too. You usually, I think, see some seasonal channel inventory built going into the, you know, the construction season.
Yeah, well what I would say is the
Speaker Change: customer leadership that I talked to is doing the same thing I'm doing which is we're glued to Twitter waiting for the next announcement of a tariff policy. The challenge for us is that it's incredibly dynamic. As you know, we announced or Trump announced
Speaker Change: 25% tariffs on Canada and Mexico a week or 10 days ago we were gearing up to have a response to that and then immediately they were paused for 30 days so it's
Speaker Change: I think everyone is really bemoaning the lack of clarity around what the trade policy is going to be. I understand it's a dynamic environment and this administration is trying to...
flex its muscle from a negotiating
Speaker Change: The watchword of the day again is agility. When we look at pre-buys, we didn't see a lot of pre-buys from our customers. Obviously we're trying to take advantage where we can on things like steel and aluminum and other things that we know are in the President's crosshairs.
Speaker Change: But it's trying to manage through the business as best we can. I would note that when you look at the automotive industry, the amount of inventory that's on dealers' lots right now is actually fairly light.
Speaker Change: So absent, you know, a catastrophic trade policy, we expect that there should be some nice demand ahead of us in 2025 from an automotive production standpoint.
Okay, great. And just switching over to the savings actions.
Speaker Change: What changed? Where did you find more annual savings? And then in, you know, I guess that range that we've got now, you know, what do you think, you know, impacts you for meeting the high end or the low end of that range?
Speaker Change: Well, Walt, I mean, entering into the fourth quarter, I mean, we were pulling the levers.
cross-discretionary spending and looking at their model.
Speaker Change: and areas that we can hold as examples and projects and things that we don't have to move immediately on. So we just had a much better impact than we anticipated and it was really across our business but largely in the Americas. So increasing those estimates almost two-fold and then increasing the going forward estimates are just.
across our team.
Speaker Change: So whether it's in the lower end or the higher end of the range, it's going to be dependent upon what happens in the level of travel or customer engagement and other activities that we want to make sure that we're focused on.
Speaker Change: But that's a fair range in how we look at the temporary cost actions that we see which are significantly higher than what we thought going into the fourth quarter.
Speaker Change: Walter, I would just add that there tends to be a little bit more discretionary spending in the fourth quarter, particularly around things like travel, as we're getting ready for planning for the following year and the budgeting season and the like. And part of our original projections assumed that there would be some ramp up in
Speaker Change: the cost savings as we went through the quarter and I just said the team did a remarkable job responding to the directive and the direction we set and in doing their best to avoid unnecessary expenditures and rely on other technologies and other vehicles to be able to communicate with each other and
Speaker Change: So I think the team just did an incredible job and.
Speaker Change: We thank them for all the hard work. We're going to continue to keep the focus on cost given the uncertain market environment we're participating in. We just think a little bit of the cost is going to start to come back up from a sequential basis as we do need to do some travel to get out and visit customers and the like.
Speaker Change: Again, should you have a question, please press star followed by the number one. Our next question comes from the line with Steve Barker from KeyBand Capital Markets.
Steve Barker: Thanks. First one for Gabe. Going back to the conversation on margin improvement.
Steve Barker: The high end of operating margin for the 2025 target range is 17.5%, and you just beat that on an almost 7% organic revenue decline. So,
Steve Barker: Is it reasonable to just run the math forward a couple of years on what an upcycle could look like at your normal incremental? I mean, it seems like the conclusion should be that there's another couple hundred basis points of expansion from here, similar to what you've done over the last four or five years.
Steve Barker: Yeah, as you know, Steve, we've been very consistent over the last 20 years in the related cycles in expanding our margins.
200 basis points, so.
Yes, we're on the higher end of the range.
Steve Barker: with the average right on top of our average of 16% which is what we plan for for this cycle. So I would expect that we would continue to develop our model.
Steve Barker: and you see the opportunity shaping across all of our segments including our targets to improve the automation profile to the corporate average so we know there's upside. You see that we're performing on the high end with compression on volumes so we're excited where the business is headed.
Steve Barker: So no reason to think that there would be any change to kind of your normal incremental as you think about an organic growth driven
Steve Barker: upcycle and the internal initiatives that you would have. Is there upside to the mid 20% or is that where you would expect to run?
Steve Barker: Now we'll talk more further as we launch our 2030 strategy but you could expect us to continue to shape our business model with expanding margins.
Great. And then one for Steve.
Speaker Change: It's really good to hear you talk about the uptick in the long-cycle automation projects. Is that primarily with customers you already had relationships with or are you getting inquiries from new customers thinking about increasing their investments in automation? And maybe can you expand that to the
to medium-sized customers as well.
Speaker Change: Yes, Steve, let me sort of unpack your question a little bit. So the comments I was making about the long cycle really are around automotive projects. They're the ones that are...
Speaker Change: typically driven by a product refresh cycle and and the nature of those projects tend to be 18 months on average a little bit more a little bit less.
Speaker Change: We were already doing business with all the customers that do those types of projects. So from that perspective on the business, it's not us getting an exposure to new customers. It's the customer base now having more confidence in their product plans to release investment.
Speaker Change: When we look at the medium and short cycle parts of the business,
Speaker Change: There the growth strategy is around serving the customers we've already got and gaining new customers and particularly through technology.
Speaker Change: making automation more applicable and more economically feasible for customers that have
Speaker Change: more of a high-mix, low-volume manufacturing model, because again, the fixed cost historically of setting up and programming a robot were very high, and so people would
Speaker Change: only use it if they had long production runs of the same.
Speaker Change: same part, and through things like software and COBOTS and other things, we're making automation much more...
Speaker Change: applicable to medium-sized companies that are more job shop nature in their production. So I think as you look forward for the automation strategy it's continuing to win and grow with the customers we've got and continuing to expand the relevant market through technology and innovation.
Speaker Change: Our last question comes from the line of Chris Dankert from Loop Capital.
Hi, good morning. Thanks for taking the question.
Speaker Change: I guess just a point of clarification on the cost savings.
Speaker Change: given the step-up in actions in the fourth quarter, is the new guide here for $40 to $55 billion of incremental savings in 2025, just given how that kind of rolls through the year? I mean, again, first half makes sense, but back half should roll off almost completely by 4Q, correct? Yes, that's right, Chris. That's incremental.
Speaker Change: and that's all built into the incremental margin assumptions that we provide as well.
Speaker Change: Got it. Thank you for the clarification there. And then just on the incentive comp impact, forgive me if I missed it, but just how did that impact 4Q here?
Speaker Change: Yeah, when you look at, for example, the incentive accruals, that was pretty consistent, $7 million in the fourth quarter. That's consistent throughout the year.
So the thing to note with Incentive Comp
Speaker Change: are objectives, and so you'll have lesser of an impact on incentives, but that's already built into the INCRE model.
Speaker Change: You just know how our objectives are set. They're based on what the budgets are for the current year, and that ends up being the driver to incentive compensation. So that will be reset, and that has already been built into the incrementals that are part of the model.
Perfect. Thanks so much, guys.
Speaker Change: This concludes our Q&A session. I will now turn the call over back to Gabriel Bruno for closing remarks.
Speaker Change: Thank you. I would like to thank you all for joining us on the call today and for your continued interest in Lincoln Electric. Thank you very much.
Gabriel Bruno: I would like to thank everyone for joining us on the call today and for your continued interest in Lincoln Electric. Thank you very much.
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