Greetings and welcome to the Lincoln Electric 2018 Fourth Quarter and Full Year Financial Results Conference Call. At this time all participants are in a listen-only mode, and this call is being recorded. It is now my pleasure to introduce your host, Amanda Butler, Vice President of Investor Relations and Communications. Thank you. You may begin.

Thank you, Lauren, and good morning everyone. Welcome to Lincoln Electric's 2018 Fourth Quarter 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 lincolnelectric.com in the Investor Relations section. Joining me on the call today is Chris Mapes, Lincoln's Chairman President and Chief Executive Officer; as well as our Chief Financial Officer Vince Petrella. Chris will begin the discussion with an overview of full year results and Vince will cover the quarter performance in more detail. Following our prepared remarks we are happy to take your questions. But before we start our discussion please note that certain statements made during this call may be forward looking and actual results may differ materially from our expectations due to a number of risk factors. A discussion of some of the risks and uncertainties that may affect our results are provided in our press release as well as in our SEC filings on Forms 10-K and 10-Q. 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 found in the financial tables in our earnings release which again is available in the Investor Relations section of our website at lincolnelectric.com. And with that I'll turn the call over to Chris Mapes.

Thank you Amanda. Good morning everyone. I'm pleased to report that we achieved solid performance in 2018. We leveraged our leading product portfolio, our differentiated automation offering and our global team of industry application experts to capitalize on greater industrial demand. Combined with strong operational execution we advanced our 2020 Vision strategy financially and environmentally for our goals. And in many cases exceeded our 2020 targets. We did this while successfully navigating inflationary pressures and dynamic trading tariff uncertainties to deliver value for all of our stakeholders. Looking at 2018 full year results on Slide 3. Sales increased 15.4% to a record $3 billion. We achieved 6.7% organic sales growth and 9.1% growth from a combination of the Air Liquide Welding acquisition in the first half of the year and three new acquisitions we closed in the fourth quarter. These three businesses are expected to contribute $85 million to $90 million of revenue in 2019. We focused on originating our portfolio mix productivity and mitigating inflation to drive margin growth. We generated 5.6% of prized offset broad inflationary pressures and recover U.S. tariffs to surcharges. These efforts resulted in a 14.7% increase in adjusted operating income to $405 million and we're able to maintain one full year adjusted operating income margin relatively steady at 13.4% versus the prior year. Reported diluted earnings per share was $4.37 excluding special items adjusted EPS increased 27% to a record $4.82. We generated solid cash flow from operations with full year operating cash flows largely consistent with prior year amounts. We returned $304 million to our shareholders through $202 million of share repurchases and over $100 million in dividend payments. Our Board recently approved a 21% increase in our dividend payout rate for 2019. ROIC performance improved 450 basis points to 20.7% maintaining our…

Thank you, Chris. Looking at our fourth quarter income statement highlights on Slide 5 our consolidated fourth quarter sales declined 40 basis points to $743.8 million 5.9% higher price and a 40 basis point benefit from fourth quarter acquisitions were offset by 4.3% lower volumes and a 2.3% unfavorable impact from foreign exchange translation. Our fourth quarter gross profit increased 5% to $250.3 million. Gross profit margin increased 180 basis points to 33.7% from improved mix operational initiatives and price cost management which remained favorable to margin by 30 basis points in the fourth quarter. We incurred a $1.3 million LIFO charge in the Americas Welding segment due to raw material inflation and the estimated impact of U.S. trade tariffs. Our SG&A expense excluding special items increased $3.8 million to $153.6 million as favorable foreign exchange was primarily offset by higher compensation costs and professional fees. As a percentage of sales SG&A excluding special items increased 70 basis points to 20.7%. We do expect our 2019 SG&A spending level to remain at these higher run rates as we continue to invest in growth initiatives such as our additive services business. Reported operating income increased 24.4% to $94.9 million or 12.8% of sales as the prior year included a $14.4 million special item charges primarily related to the ALW acquisition. Excluding special items charges operating income margin increased 90 basis points to 13% of sales. Margin improvement reflected a favorable mix, pricing management and operational initiatives. Our fourth quarter effective tax rate was 8.1% due to favorable adjustments related to the U.S. tax act and discrete items. This compares with the prior year tax rate of 67.2% which included a $28.6 million charge from the U.S. Tax Act. Excluding special items our fourth quarter 2018 tax rate was 14.7% due to…

[Operator Instructions]. Our first question comes from Joe O'Dea with Vertical Research.

First question on the Americas adjusted EBIT margin in the quarter. I think most of the commentary about some tailwinds related to price cost and mix. I think if you go back to fourth quarter of 2017 there was some higher-than-normal incentive comp and if we were to adjust for that year-over-year margins look more flattish. And so I wanted to understand some of the other puts and takes may be in the most recent quarter? Anything that you saw is some margin headwinds there?

Well. I think we've covered the price cost dynamics in the business Joe. We've done a good job in driving pricing into the market and stemming the headwinds of the inflationary environment. We did have a little bit of a compression in our price cost achievement in the quarter compared to our run rates with our biggest business unit in the Americas, having some slower production volumes and some higher conversion that our margin performance a little bit. But I would tell you from an incremental margin perspective 28% incremental out of the Americas in the fourth quarter of 2018 we view as a good result.

And related to that as you think about 2019 at the segment level how should we think about incremental margins there? And any impact that we should anticipate from the recent deals?

Right. As far as the recent deals are concerned I don't think that will have a significant impact on our incrementals in the Americas or The Harris Products Group in 2019. From an incremental perspective on growth we would anticipate a similar guidance of 20% to 25% on a consolidated basis for our group of companies.

Okay. And then you talked a little bit about back half of the year flat to maybe down price some factors as some offsets to tariffs could you talk about where you are on the cost side of things in terms of steel costs today relative to where they were a year ago where they were when they peaked during 2018? Just try to get a little bit of perspective on the cost dynamic and things that might be improving for you as you go through 2019?

Right. So we see pricing in the fourth quarter of roughly 6% continuing at a similar rate in the first quarter. As tariffs in the U.S. peel back to some extent we would expect that that pricing environment would be reduced by a couple 200 basis points 300 basis points. And I would tell you that from a cost perspective we did have more LIFO charges and inflationary impact to our raw material input cost in the fourth quarter of 2018. So we think the big driver toward price cost management and where our steel costs will be will surround the timing and extent of tariff reductions in the U.S. Outside of that we are anticipating globally a more modest moderate raw material input environment during the course of 2019.

Our next question comes from Saree Boroditsky with Jefferies.

I was wondering if you could update us on how you're thinking about capital allocation this year given the recent debt filing and particularly as it relates to buybacks as it looks like you continued on a strong pace in the quarter?

Yes. So we in my prepared comments I highlighted the conditions that we look at to determine how much we might devote to share buyback and we felt that it was an opportunistic time and second half of 2018 to step up our share buyback activity. I would tell you Saree that the extent of buybacks in 2019 will be somewhat dependent upon those same factors including what we see from a opportunity set in the M& A and acquisition side of the business. But I would say that based on our strong cash flows in 2019 and the expectation for another good strong year of cash flows in 2019, we will continue to purchase at elevated levels from what we have defined as our maintenance mode prior to 2018.

Great. Thanks. And then just a modeling question. Was there anything particular that your corporate expenses to be a little higher in the quarter? And do you expect it to stay at this level going into 2019?

Yes. So there is some higher spending that I also addressed some prepared comments around SG&A. So we are building some capabilities around new product development and growth initiatives and I would expect that that growth will continue in the first half of the year and then moderate in the second half of 2019. But I do expect an elevated level of both corporate in SG&A spending in 2019.

Our next question comes from Mircea Dobre with Baird.

Just starting with a quick housekeeping question. Can you comment a little on shipping days in the fourth quarter? And as we are looking at 2019 based on the calendar, where are you seeing may be some year-over-year shipping date discrepancies?

Yes. So we did have an extra day in the fourth quarter of billing days and I don't have in front of me Mircea the billing days in 2019 but I can certainly get back to you on that.

Okay I appreciate that. Then I want to go back to Joe's question on incentive comp. Vince can you give us a sense for the full year 2018 how incentive comp has tracked versus 2017? I presume it was up and then I'm also sort of wondering how this incentive comp has accrued because I'm presuming that the pace of accrual has been different than it's been in 2017?

It was if you focus on the fourth quarter we did take a greater provision as a percentage of EBIT this year than in the prior year. So if you look at what our incentive compensation accruals were in the fourth quarter they were at a higher rate compared to 2017.

Right. You are up year-over-year but I'm wondering if incentive comp was a moderating headwind on a year-over-year basis meaning you had more than you accrued earlier in 2018 than later in 2018 on a year-over-year basis. That was the issue of my question.

I don't think so. But clearly I would emphasize on the fourth quarter we did have a bigger drag on incentive compensation accruals than the prior year.

Understood. And then I have one more question on, I'm looking to understand Chris's comments on January and the way you're starting the year. As I heard them this was his comments were organic growth rather than price versus volume. Please correct me if I'm wrong. I mean you gave us a sense of how you're expecting pricing early in 2019. I'm looking to make sure that we have our volume assumptions properly tagged as well.

Yes, Mig. Look as we were -- we saw some shallowness as we were exiting Q4 and as we looked at the first few weeks of 2019 we've had a nice step back up from that trend data that we saw in December and have seen a nice recovery on the organic growth side as I stated in the remarks.

Organic growth not volume so?

Yes. Organics. Yes.

Our next question comes from Seth Weber with RBC Capital Markets.

This is Brendan on for Seth. If I could just kind of keep going on this international volume you noted that Europe was a bit weaker you also have the integration portion that showed anniversary after the first half. I guess what are you seeing specifically in the weaker European market? And what do you think you need to see their in order to see a turnaround?

Look as we've been sharing with the execution of the integration of the Air Liquide Welding business that we brought into the portfolio we knew that there will be challenges associated with us addressing that particular restructuring as we stated we believe strongly that we'll begin to turn that in the back half of 2019 and begin to have that into a structure we begin we can grow from that. We certainly have had product areas that we have been able to grow from that portfolio but we've not able to see that as we've been doing the broader restructuring. I will tell you that I'm optimistic, continue to see the improvements that we're looking for in that business. We decided that we wanted to integrate it at a more aggressive pace. As I look at the first few weeks of 2019 which I do caution that it's only the first few weeks but certainly we are seeing some improvements relative to the rate of that revenue impact in our European business but feel confident that we are making the right decisions associated with long-term value that we saw within that business and still confident that our teams are going to execute on that and we'll be able to begin to see improvements in the back half of 2019. Now as you've seen in the marketplace there has been some broad data that would share or would show quite frankly the European market might be slowest we have seen the consumer and producer price index is coming out of Germany and France that are more challenged. So we believe that there is a little more of a headwind associated with accomplishing that in the European market today but certainly feel confident that we're still going to be able to move that toward a growth platform within the back half of 2019.

Okay. And then one more if I may. Any additional color you can give us on what you're seeing specifically in your energy end market?

Well, energy was actually a bright spot in January. Oil and gas was strong.

Our next question comes from Nathan Jones with Stifel.

I wanted to start with some questions around these growth investments. I think what you said the capabilities around product development and some other growth investments. Can you maybe talk I mean, I guess, posted out what the level of these investments are? And how they phase through the year? And then a little longer term maybe you can talk about what it is that you're looking to develop in terms of these investments? I know you mentioned something about additive I think previously we talked about that being a pretty small opportunity. Maybe any color you can give us on what you're doing there?

Well look I really think about the growth investments we've been making in the portfolio here really within two distinct groups. So I would tell you as we are executing on our 2020 Vision and Strategy we had identified within the broad global welding and cutting space four or five vertical markets within that areas like fume and others where we didn't think we were participating at the level that we should be participating and we developed SBUs and developed some structures and engineering capabilities within 4 or 5 of those vertical areas to try to grow at an accelerated pace to the marketplace and gained part of the profit pools and opportunities that we thought were available within the core welding space. The second piece that you mentioned is the movement that we are making into the additive space. And additive is a natural progression for Lincoln Electric especially additive as it relates to the development and manufacture of larger parts competencies required for that are really centered around metallurgy robotics software engineering all things Lincoln Electric that we believe we have expertise and competencies in today. We have built an organization. We have a facility we're bringing in equipment and we expect to be starting to Greenfield productive assets from that in the back half of the year. I will tell you that as I think about all of those initiatives within the business I think that those initiatives are probably creating a drag somewhere between a $6 million to $8 million a year from a cost basis. We'll start to see growth from some of those core initiatives more quickly the additive initiative although we will start doing some productive asset but certainly don't expect it to be providing us much benefit in 2019. But I do believe as you see us start to roll out our longer-term strategy for Lincoln Electric our new 2025 strategy that we'll be bringing toward the market toward the middle of the year. You will see that additive services business can be a more material part of our global portfolio through the duration of the strategy.

I look forward to hear more about that later in the year then. I'm going to ask one on Harris. I know that's a more challenging business to get price given the channel and structure that you've got there. Do you guys anticipate being able to push more price through in that business to recover your increased cost in 2019? How far are you behind on price cost Harris at the moment?

Look I believe there is an opportunity for us to move some price within the marketplace on Harris as we move through 2019 then just actually completed a global review with that leadership team. We also continue to want to try to drive improved margin enhancement within the broad portfolio. So it's not just price it's also trying to accelerate some productivity activities and other actions that we have within the business. So I do believe we're slightly behind on price with the nature of that product category and the multitude of channels that's hard to see exactly what that specific number might be. We're slightly behind. We'll be instituting some actions as we move into 2019 and again trying to really focus also on driving some broad productivity initiatives to try to enhance the broader margin portfolio.

Do you think just on straight price cost you can get to neutral in 2019 or price cost and productivity you could get to neutral in 2019?

I certainly think with price cost and productivity we can certainly achieve that result.

Our next question comes from Chris Dankert with Longbow Research.

I guess looking at the Americas and you highlighted auto energy infrastructure a lot of things growing very nicely in the quarter. I guess could you just kind of call out where were some of the more friction points in some of the markets that we are holding back a little bit in 4Q?

As far as the Americans are concerned maybe the softest area was one quarter was power generation was a negative for us. It was probably the greatest end market segment that was down on a year-over-year basis.

Got it. That was the biggest kind of back toward that flattish volume number?

Right.

Okay. And then thinking about International as we move into 2019 here I think from the pruning actions you guys have been quite successful particularly on the margin. I guess how much more pruning do we have to go? Like kind of breakout what the fixed bucket us versus kind of the optimized bucket at this point?

I think we've done a good portion of what we're going to need to do at this point in time and we are now in a phase of stabilizing the business after a multitude of facility consolidations and organizational moments and product line adjustments and implementations of software systems. So I think we are in the mode of stabilization and then growth in the second half of the year. I would say that it's likely to be one or two or handful of other actions that will be necessary over the next couple of years but the most significant wave is behind us now. And we will be fine tuning the integrated assets as the 2019 and 2020 unfolds.

[Operator Instructions]. Our next question is a follow-up from Mircea Dobre with Baird.

Just looking at kind of clarify couple of things on pricing. At this point are you contemplating additional pricing action for 2019? Or is the color that you provided in terms of how pricing is progressing simply a factor of price increases that we have already sort of put through in 2018 hearing over into 2019?

Right, Mig, good question. Right now the guidance that have provided in terms of pricing as it unfolds during the course of the year assumes that we do not put additional price increases into the market. At this point in time I would tell you that we'll probably be very specific narrow geographic and product line actions that are taken in our book of business that will not result in a material change at this point to the outline that I provided earlier in the call. But again just to emphasize we are looking at an environment of a flat pricing from an action perspective with some exceptions and anticipating the declines on a year-over-year basis caused by rolling back of some portion of the tariffs that have been put on our business from a steel and aluminum perspective in 2018.

Okay. And then on this very last point when you're saying rolling back I mean you're not essentially assuming that the tariffs go away. You're just reflecting a lower input cost for yourself right?

No, no. We're assuming that some of the tariffs will be rolled back.

If you think about the way at Lincoln Electric we executed on that strategy as we were forced to impose the tariffs because of the increase in the raw material cost that we have we applied surcharges to those activities. If we were to receive an exemption from that tariff or the tariffs are rolled back then we will be rolling back those tariff costs as it relates to the way we are providing those products to our customers.

Okay. And then in International I mean this is a question that I often get discrepancy in pricing international versus the Americas. If you were kind of isolating the effect of tariffs in the Americas is it fair to say that the pricing is relatively consistent International versus Americas? Or is there a delta there that we should know about?

From a product from a market phasing product pricing question you're asking? Or from raw inputs?

However, you want to tackle it really.

Both there are differences in pricing globally market-by-market region-by-region. And there are as well differences in raw input costs on a market-by-market basis as well. So each organized in a way that the business unit leaders can manage these costs and manage their pricing environment based on the local conditions that they might be faced with and there are differences in pricing and costs from a global perspective.

Okay. Then last question in terms of the 30 basis point of price cost benefit in the fourth quarter is there a way to maybe quantify this for the Americas region specifically?

Well. I think the Americas region led the way in terms of price cost achievement.

So better than that? Better than the third?

Yes. If you look at The Harris and you look at International yes the Americas did better than that.

Our next question comes from Steve Barger with KeyBanc Capital Markets.

Just a follow-up question on price. The last two quarters Americas price has run well ahead of volume especially this quarter. Any thought that you run ahead of competitors that's maybe resulted in some customer push back or share shifts? And would you be able to tell that in within a quarter or 2?

I think it is a fairly narrow period of time to look at one quarter but we don't think there has been a meaningful share shift in the last 2 3 four quarters as we see it. And we also believe that our key competitors in major markets are moving price up and similar ways that we are.

Okay. And then on free cash flow you said you expect good free cash flow in 2019. From 2014 and 2017 conversion from net income was 100% or better step down 82% in 2018. You've talked about some growth initiatives that you will spend on in 2019. Can we get back on track to conversion more toward a 100% given your revenue outlook? And how you see spending for the year?

Yes. I think so. One of the drivers behind the extraordinary long run of more than 100% cash conversion was the steep improvements in working capital management Steve that we've achieved. Now that's flattened out, it actually working capital bumped up on a year-over-year basis in 2018 but we expect to have a renewed focus on and improvement in working capital management as we move forward. There is still more to be done there and we're confident that our cash conversion will migrate back up toward historical achievement that we had over that period of time.

Historical achievement meaning 2014 and 2017 was extraordinary and that's a real stretch goal or are -- you think you can hit ...

I think we will do better than what we did in 2018. I think that was a bit of a down year although still a good year from a cash flow perspective. I think we're going to migrate back up somewhere in between what we did this year and what we were able to achieve in those three or four areas that you cited.

The next question comes from Nathan Jones with Stifel.

Just a follow-up on the tariff stuff there and I apologize if I missed you discussing this before. But it didn't sound like you think the tariffs are going to get rolled back but do you think you're going to be out to get an exemption from the tariffs?

The way we've approached it is that look we are not trying to forecast whether that tariffs will or won't be formerly rolled back. That's outside the control Lincoln Electric and we are trying to educate our customers on the impacts that we have and the challenges in the marketplace. But as those tariffs have come on especially here in the U.S. market there is a process where you can seek out an exemption relative to those tariffs. We have been active in trying to accomplish that. And if we can't accomplish that then we can work with our customers and talk about that mitigation, but we're not forecasting any formal overall rollback of the tariffs but we are working through the exemption process to see if we can mitigate the impact on Lincoln Electric and our customers.

Got it. Thanks for the clarification there. And then if we take out the tariffs and the surcharges that you've used to offset tariffs. We have a you guys have a good record at being able to hold on to pricing deflationary environment. So if we take the tariff and surcharge out of the equation can you maybe talk a little bit about how you think how well you think and hold on to pricing in a deflationary environment, deflationary steel environment that we've seen over the last couple of quarters?

Nathan, so that's dependent upon a number of variables as you know. But aside from trying to predict those variables at this point in time I would tell you that I would rely on Lincoln's history of managing through both deflationary and inflationary raw material environments. So again the extent of our ability to maintain margin and perhaps expand margin is largely dependent upon what the volume line might do as well as what the pricing changes might do in terms of their magnitude and timing but we are confident that we'll manage the way we always have in these types of environments and protect and maintain margins.

Okay. And then just on the acquisitions that you made in the fourth quarter there, you had this plenty of color on what the revenue additions in 2019 are going to be. Can you maybe talk a little bit more strategically about those? And how they advance the strategic goals rather than just the financial impacts?

Yes. That's a great question. Actually that's a rationale basis behind all of it. So we had the opportunity to pick up an additional robotic plasma cutting technology with a Canadian acquisition that we're very excited about fits in with the portfolio of products there that we already produced for the global marketplace that we will be able to take that product and provide it to our trained sales people on a global basis and assist that firm in taking that technology from really a regional play to global play. The other acquisition that we made is the acquisition in our automation space Coldwater engineering. We actually have two locations, very excited about that acquisition. I was actually at that facility and met with all those employees last week. They're very very excited about their ability to assist us in having even further penetration into the appliance marketplace. So we have some appliance automation competencies across our portfolio. They have some in-depth capabilities there that are very interesting. They also bring us some competencies and capabilities that we think will assist us on the additive side of the buildout of that portion of our portfolio. And they have a secondary location that's in the Midwest that actually has done more focused automation competencies centered around plastics and plastic composites. And we don't do a lot of automation in that space today but we are interested in that area and excited to have those two pieces and those two teams into our portfolio. And then the final acquisition the product enhancement for The Harris business we've been actively engaged in looking at expanding the product competencies for our Harris business bringing in these really what we believe to be a best-in-class brand from as it relates to soldering competencies that will move through the wholesale and retail marketplace is a great addition for our Harris' business as well as as Vince mentioned in picking up some additional manufacturing assets as we expand our brazing alloys business here in the Americas. So I love their strategic competencies of those businesses. And as I mentioned earlier as material as those are our investment and our new additive services business is going to be exciting for Lincoln Electric. And again we'll be more forward as we move into 2019 and present our longer-term strategy and providing you with some details on those investments and the strategies behind those investments.

It sounds like these are more revenue synergy place and cost synergy place?

These are absolutely revenue synergy place. They are bringing us competencies and capabilities that we can enhance or bring to Lincoln Electric and I see these as growth investments. And the additive players is 100% growth investment for us. So I would agree strongly these are growth investments.

Our next question comes from Jason Rodgers with Great Lakes Review.

Did want to ask about the organic forecast for 2019. I think you said low to mid-single-digits could you break that up by segment?

Well I would tell you that the Americas will probably be at the high end of that and we are still see the compression going on in the International segments. So I think we'll see a similar type of distribution in that group wide roll up as we saw finishing 2018. So better result in Harris and Americas from an organic perspective and a slower or greater compression relative to the group number in international.

And looking at the automation business do you expect that to allow me just ask, how do you expect that to perform for the year? And are you seeing any change in the competitive dynamics in that market?

No real change in the competitive dynamic. So we got very solid backlog as we move into the year. As you would expect the automotive capital spending cycle has been a little softer in 2018. We expect that to probably continue for the first couple of quarters. Although that's one of the reasons why as I mentioned earlier on the call I like the acquisition that we just made at Coldwater engineering which broadens the industry segment base that we have within the portfolio which minimizes some of the cyclicality around any one particular segment. So we're still very excited about investments in our automation strategy and believe that it can continue to be a growing piece of our broad global portfolio.

This concludes our question-and-answer session. I would like to turn the call back over to Vincent Petrella for closing remarks.

Thank you, Lauren. And I do have a one cleanup question on that came in on the shipping days billing days in 2019. So we anticipate the first quarter to be the same. We anticipate second quarter will lose a day. Third quarter will be the same year-over-year between 2019 and 2018. And then finally the fourth quarter we should pick up a day which would make our total billing shipping days in 2019 equivalent to 2018. And with that I would like to thank everyone for joining us on the call today and for your continued interest in Lincoln Electric. We very much look forward to discussing our progression and execution of our strategic programs during the course of the first quarter. And thank you very much again and have a good day.

Ladies and gentlemen thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.