Greetings, and welcome to the Lincoln Electric 2021 First 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, Stefanie and good morning everyone. Welcome to Lincoln Electric's first 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's website at lincolnelectric.com in the Investor Relations section.

Thank you, Amanda. Good morning, everyone. I'm pleased to report that the first quarter results exceeded our expectations as demand accelerated through the quarter reinforcing solid recovered momentum. We globally operated as an essential business and remain focused on safety and servicing our customers while still navigating a challenging COVID environment. Our team's execution yielded very strong results. Turning to Slide 4, we returned to growth in the first quarter. Sales increased 7.8% led by a 6.4% growth in organic sales, exceeding our assumption of flat to slightly positive performance. Diligent price management and operational initiatives generated an approximate 24% increase in adjusted operating income. Our adjusted operating income margin improved 180 basis points to 14.4% with a 37.8% incremental margin, very strong performance. Adjusted earnings per share increased 37% to $1.37, a record first quarter performance. Return on invested capital remained strong at 18.9% and cash flow from operations and free cash flow performed above prior year levels. We returned approximately $16 million to shareholders with $28 million in share repurchases and paid out $31 million in dividends. Looking at the first quarter demand on Slide 5, organic sales increased 6.4% with 2.7% volume growth. Demand improved through the quarter with heightened acceleration in March in several areas of the business. In the quarter, all reportable segments, geographic regions and main product families achieved improved performance sequentially.

Thank you, Chris. Moving to Slide 7, our consolidated first quarter sales increased 7.8% due to a 3.7% benefit from price, 2.7% higher volumes and a 1.4% favorable impact from foreign exchange. Our gross profit margin decreased 30 basis points to 33.5% as benefits from volumes and cost reduction actions were offset by higher raw material and freight costs including a $3.9 million LIFO charge. Price cost was slightly negative in the quarter, but we continued to expect price cost to be neutral on a full year basis. Our SG&A expense declined 2.7% or $4 million reflecting savings from cost reduction actions, which was partially offset by approximately $2 million in higher incentive compensation and employee cost as well as approximately $3 million in unfavorable foreign exchange. SG&A as a percent of sales decreased 210 basis points to 19.2%. We expect 2021 SG&A expense to increase due to higher wage and incentive compensation. Reported operating income increased 28.2% to 103.9 million or 13.7% of sales. Operating income results included $4.2 million of rationalization charges and $1.1 million of acquisition transaction costs. Excluding special items adjusted operating income increased 23.5% to 109.2 million or 14.4% of sales, a 180 basis point increase versus the prior year. Adjusted operating income benefited from improved volumes and diligent price and cost management which generated a 37.8% incremental margin. Our first quarter effective tax rate was 23.7% or 22.9% on an adjusted basis, due to our mix of earnings in discrete items. This compares with 26.8% in the prior year period. We continue to expect our full year 2021 effective tax rate to be in the low to mid 20% range, subject to the mix of earnings and anticipated extent of discrete tax items. First Quarter diluted earnings per share increased 35.2% to $1.23 compared with $0.91 in the prior year. Excluding special items adjusted diluted earnings per share increase 37% to $1.37. Now moving to our reportable segments on Slide 8, Americas Welding segment's first quarter adjusted EBIT increased 8.4% to 76.6 million. The adjusted EBIT margin increased 80 basis points to 16.7% from benefits of cost reduction actions and lower discretionary spending. America's welding organic sales increased 1.3% led by a 2.2% benefit from pricing actions implemented to mitigate inflation. This was partially offset by a 90 basis point decline in volumes, which exceeded our expectations as most regional markets grew in the quarter, with the exception of energy which appears to be in the early stages of recovery.

Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. And our first question is from the line of Rob Wertheimer with Melius.

Hey, good morning, everybody. So thanks for the clarification on the LIFO charge. It does seem like that - you were maybe up 20 or 30 basis points of gross margin excluding that, but I'm just curious, is there significant pampering in COVID in the gross margin line? Do you expect to get a little bit more leverage on that throughout the year it's going to decrease? Thanks.

Rob, I just want to make sure I heard your question clearly. You mentioned LIFO and you mentioned gross profit, excluding LIFO, so as we've talked price cost was slightly negative. And we continue to be positive in the progression of our profile of gross profit. We expect a neutral impact on price costs throughout the year. So I think I covered your question, but I want to make sure I covered all of that, Rob.

Yeah. Just any COVID disruption on the gross margin line and should you expect to see that kind of rebound as you grow into strong organic growth later in the year?

Yeah. Rob, this is Chris. Look, I'm confident that globally we've got still some drag associated with COVID. But when I think about the business and its entirety, I really don't think that's material because we're still probably having some benefits associated to travel and other things, which are still mitigated as we're beginning to ramp up in these economies around the world. So there probably is a drag, but I'm certain that that drag is probably offset by other activities that may be on the expense line we're not participating in today, so I don't view it as material.

Okay, Thanks, Chris.

Your next question is from the line of Ryan Blair with Oppenheimer.

Thanks. Good morning, everyone.

Good morning.

Good morning Ryan.

I was hoping you could add some color on the order cadence through the first quarter and into early second, how that compares to normal seasonality. Obviously, year-on-year comps get quite easy over the near term, just trying to get a sense of - a better sense of and frame the underlying demand acceleration into the second quarter.

Yeah, look, that's a great question, Brian. And this is Chris. And look, I would tell you that I have to put it in context that because there's so many, inflationary and then the pricing actions that are needed to be able to recover those in the marketplace, you've obviously got some choppiness associated with potential order patterns. But I will tell you the acceleration in the order pattern, and the breadth of the order pattern moving through the quarter was significant. We saw great momentum, as we were exiting Q1 and March was very, very strong, and probably most importantly, was the breadth of the strength. You saw that we said that 80% of those exposed revenues now are in our in positive momentum, industry segments. And it's really not in any one particular region, we're seeing that breadth across and very happy to see our automation business actually stabilize and actually seeing it perform at that prior year level on a revenue basis. So the momentum was strong exiting the quarter. And that's what gives us such confidence about really improving upon what we think the full year performance will be for the company at the top line.

That's great to hear. And any notable collapse by geography. Sticking with the same topic, recovering Asia Pacific demand is obviously been solidly ahead of Americas in Europe for the last few quarters. Just curious if you're seeing any shift there entering the second quarter or if that dynamic is expected to change during the quarter?

No, no real shift obviously. You see the continued exceptional performance from our Harris business and quite frankly, you see quite frankly, the improvements that were driving in that international business and quite frankly, the demand we were seeing in the European market. So we really like the performance of those operations and again, the breadth of the improvement. And quite frankly, that volume, and the strength of that momentum, certainly will be a catalyst to us continuing to make the improvements that we're looking for in some of those markets.

Understood, thanks again.

Your next question is from line of Nathan Jones with Stifel.

Good morning, everyone.

Good morning.

Good morning.

Wanted to start on supply chain, hearing from a lot of companies out there that supply chains are tight in a lot of areas, product shortages, material shortages, those kinds of things, I know Gabe you mentioned having some elevated inventory, which is protecting you a bit from that. Can you talk about where the pressure points are in your supply chain? Where if any way you're seeing any shortages and if that is inhibiting your ability to satisfy demand at all anyway?

Yeah, Nathan, I would say that certainly our decision that we've talked about while we've been operating in the pandemic now over the last 14 months or so to quite frankly, ensure that we were going to provide products and solutions to our customers and put the inventory on the shelf has turned out to be a very good decision for the business because we did enter into 2021 with three or four days globally of additional inventory than historically what we've had. I've also got to share with you that quite frankly our teams are just doing an amazing job of managing the supply chain issues within Lincoln Electric. And the flexibility that we built into some of our systems, the interchangeability of some of our components, it's those little pieces of work, that then when you have these difficult times provide you with a little bit more resiliency. And the challenges are there. Quite frankly, if you're thinking about a piece of welding equipment, or welding solutions, quite frankly, that's power electronics, that's chips. That's the things that we're all reading about, and the challenges that some of our customers are having in being able to have the supply chain necessarily to meet some of their demands. So we're managing those issues. As you saw in q1, I think we managed them exceptionally well. And we believe those challenges will remain through most of the rest of the year. But our teams are continuing to address those challenges and believe we'll be able to meet and exceed our customers' expectations.

Do you feel like that inventory has led to you being able to gain share in the first quarter? Or do you think there will be opportunities for you to gain share using that inventory over the next two, three quarters?

Well we've, we've traditionally said that we really don't think about share transactionally within a quarter. We believe that shares actually taken from the market and quite frankly, that we believe our solutions certainly provide us with that opportunity. But it has placed us in a good position to service our customers. That's what's the most important thing for us at Lincoln Electric. And we do believe that long-term that positioning can allow us to be the supplier of choice with some of those customers. And I like the positioning, but I'm probably not willing to say that necessarily I believe that I can point towards a shift in share as you've presented the question.

Thanks for taking my questions.

Thanks. Have a good day.

Your next question is from the line of Mig Dobre of RW Baird.

Good morning, everyone. It's Joe Grabowski on for Mig this morning.

Good morning.

Good morning.

Good morning. Hey, good morning. So I wanted to start off by asking about the auto transport end market, I'm wondering if your business has been impacted by any of the production disruptions in the automotive end market and how do you see that business progressing sequentially through the year?

Yeah. So we see the challenges that we're reading about in the marketplace with supply chain challenges around power electronics and chips. And in talking to our teams internally, we did have some areas of the business where quite frankly, we saw some delays in some shipments and we saw some assembly plants that were shut down. And we could see some element of that. But quite frankly, it was kind of mitigated by the strong strength that we had in that segment when we looked at the growth in the auto transport, and we saw really strong growth in Q1. So as much as we saw a couple of mitigating factors. We did see really strong growth in the quarter, and we're expecting continued momentum from that group. Obviously, I believe the supply chain challenges are going to stay in the marketplace through the rest of the year. I don't believe these electronic supply chain challenges will be eliminated. But we've been managing them well and are expecting continued momentum in that auto transport group as we're moving through the rest of the year.

Good. Thank you for that. Good to hear. And then my follow up question is around automation. It was relatively steady in the quarter. I think you might have mentioned record backlogs in the prepared remarks. I'm not sure if that was specific for automation, but are you still expecting automation deliveries to rebound in the second half?

Yes, we are. And I'll tell you the record backlog was across the equipment portfolio for us, but great to see our automation business, stabilize, meet prior your expectations on a revenue basis, saw some improvement in the operating performance in the business and we're expecting that capital spending will continue to accelerate. So our discussions that we've had about continued improvement in the automation business as we're moving through 2021, certainly, our first quarter gives me great confidence in our ability to execute on that.

Great, okay, thanks for taking my question.

Your next question is from the line of Chris Dankert of Longbow Research.

I know you guys typically don't provide guidance on the quarter, but given some of the comp stores maybe you could level those as a bit just any comments on second quarter sales growth versus typical seasonality here?

Not really, I mean, we provide the recognition that we do have some seasonality associated with it. As we said, we really liked the momentum as we're moving from Q1 to Q2, but we just don't provide that level of detail on the Q2 performance.

Yeah. Fair enough. I've to try there. And pretty much I missed it. But looking at the new organic sales guide assumption for the year, any comments on what portion of that is pricing versus volume at this point?

Yeah, as you can imagine only being here on the first quarter. It's hard to be exacting with that. But I'd say a good rule of thumb is that about half of that is on the volume side, and about half of that would be on the pricing side associated with it. That's probably a good guide at this point in the year.

Got it, thanks so much guys.

Great, thank you.

Your next question is from the line of Saree Boroditsky with Jefferies.

Hi, congratulations on the strong quarter. I know you've talked about capital deployment in the past both cash effectively earning negative rates, does this change how you're thinking about your balance sheet? And when you think about increasing leverage to buy back shares, and then just an update on what you're seeing in the M&A market?

Saree, thanks for the question. We continue to be focused on growth, right. So we look at the acquisition we just completed, we'll look at continued our primary agenda of looking at internal investments, and acquisitions. And keep a pretty balanced view in how we look at share repurchases opportunistically as well as returning cash to shareholders broadly. So we're focused on that kind of profile in our capital allocation strategy.

And Saree, I'll just add that, look, the M&A pipeline is very strong right now. Again, we just completed that acquisition in Europe. I really, really liked that acquisition. It's a perfect fit into our structural steel portfolio. It's an area of the marketplace that we've already shown great success with automated solutions. And I also believe that at least in the North American market where there's some discussions around potential changes in the tax structure around capital gains, that there may be some private enterprises and quite frankly, in the fragmented automation space, we see a lot of players like that, that might be evaluating whether they want to determine they want to exit before the end of the year, so a strong pipeline. We certainly got the capital to be able to execute on acquisitions. And we know it's a critical piece of our long-term strategy to continue to bold in those solutions to the Lincoln Electric portfolio.

Thanks and then Harris posted another really strong quarter, and you can call that HVAC in retail as some key drivers of that. It gets easier comps in the second quarter, but then it gets much more challenging. So how do you see the growth in those particular markets in the back half of the year?

Well, look, I was just at our Harris business and really excited that the work that the team is doing there, and quite frankly, the success we've had in the retail space continues and we believe that we can continue to provide products and solutions into that marketplace to generate growth. So what we're seeing is a strong momentum in Harris, it's been a great product category for us. We'd love to be able to identify some acquisitions that we can bring into that portfolio also. A couple years ago, we brought that solder business into there, the acquisition that we had from an industrial company here in the US and that's gone very well. So great execution by the team and we realize we've got stronger comps in the back half of the year, but driving strategies and growth strategies to be able to continue to show improvement in the business.

And if I can squeeze one more, in Americas could you just break out how exports performed? And what drove that performance?

Yeah, Saree, exports were flat year-over-year.

Great, thanks for taking the questions.

Great. Thank you, Saree.

And your next question is from the line of Dillon Cumming with Morgan Stanley.

Great, good morning, guys. Thanks for the question. Sort of the kind of ask the margin question another way, I guess, you're still kind of guiding incrementals in the high 20% range. But keeping in mind that you just did kind of close to a 40% incremental margin in the quarter, I guess what should we think about is kind of changing the balance of the year, because I would think you're kind of getting the highest degree of volume leverage over the next few quarters. So that's just kind of a question of temporary cost coming back and wage inflation just wanted to better understand the dynamics there.

Yeah, Dillon, I would say, look, the dynamics - you're right, we will see some of those costs beginning to migrate back into the business as we're moving through the rest of the year. But when I think about our incremental margin profile, we've always said that this business should be able to perform at the higher end of our range in those high 20% ranges when we get volume on the business. And the change between our last discussion and now is that we're seeing stronger momentum and volume on the business. So we believe those margins will perform better. Certainly Q1 was an exceptional performance relative to the incremental margins, we also should see some favorability in mix because as our international business continues to make the improvements we're seeking, we've said all along that we should have improved incremental margin from that business as we play some volume upon it. So I really think those are the drivers relative to us wanting to signal that we believe we'll be operating at even a higher performance level than what we had expected for the year, certainly Q1 outstanding result for the business.

Okay, I've got it and very fair. Thank you. And then maybe just to wrap it up, you made a comment Chris, saying that renewable energy and infrastructure investments accounted for close to 15% to 20% of revenue at this point, maybe this is an entirely apples to apples last year without calling that exposure closer to 7% on the renewable side. So maybe you kind of broaden the definition a bit. But it's kind of wanted to understand what kind of growth rates we're seeing from that part of the portfolio.

I think potentially that there could be a disconnect there between the renewables discussion and abroad industry exposure. We're trying to provide guidance to everyone on what we would see on the infrastructure side as there's so much discussion around infrastructure here in the US marketplace. Obviously, with infrastructure, not only exposure, but then it comes down to how those dollars are actually brought in. So when I look at infrastructure and renewables then we're really looking at that 15% to 20% range relative to exposed markets for Lincoln Electric.

Okay, got it, very helpful. Thank you.

Great. Thanks.

And your last question will come from the line of Steve Barger of KeyBanc Capital Markets.

Hi, good morning.

Good morning, Steve.

As I look back at my model, peak operating margin was 15% in 2015. If organic growth comes through the way you expect this year, is that achievable in '21?

Steve when we look at the business at this point. And obviously, it's - we're at the end of Q1, but those volume levels I think that is an achievable target for us to be talking about for the business. We need to execute as we're moving through the rest of year. We need to see that volume. But I certainly see that as an achievable target.

And as you think - I know you don't give guidance, but just thinking about going forward if you put up mid teen organic growth with a high 20% incremental, what can we expect for a longer term, let's say just if we get a really strong cycle and we're talking about mid to high single digit growth, what kind of incremental can you put up against that comp?

Yeah, I believe that if we had those types of volume Steve, we'd be putting in that was high 20s. So again, I think when we start to see that that type of growth, the ability to drive leverage across the portfolio, the restructuring and the improvements we've made in the core business over the last couple of years, I just believe that we would be targeting then those high 20% incrementals on that volume leverage.

Okay. And I know it's hard to predict the cycle beyond a near term window. But when you think about longer term trends, do you expect stronger growth from the Americas or the international incoming years because obviously that's going to affect mix?

Yeah, I'm not sure that I'm confident in saying at this point Steve. I mean there's things about our Americas business from a growth perspective that I really like. We've got some of our SBUs that are operating very effectively, we're making improvements in accessories, we've got some areas of the business that are showing some nice growth catalysts, but it's obviously a much larger business. So we've got to be able to find real growth to be able to drive that. And yet, I will also tell you that, especially in our international business, and when I look at some growth markets like India and the improvements we've made in Europe, I believe that we can grow outside the markets in those areas very competently. I'm seeing those businesses start to make real improvement. So I really see both of them as growth opportunities. I'm not sure that I've targeted one or the other for a higher ratio of growth.

Understood and since I'm last, I'll squeeze one more in. Part of the higher standard 25 strategy is to enhance software solutions for IoT and AI. Can you just talk about where you are in those initiatives? Are the commercial efforts fully formed? And how are they being accepted by the market?

Absolutely, I'm glad you asked the question because it's one of those things that we've been investing in for a long period of time. And, quite frankly, we've got a platform that's already designed, we've got solutions that we're building off of that platform. And as you would expect, we have some users who, quite frankly, are very adopted and already utilizing the technologies. And then we have some that are looking at the technologies. But whether it's IoT that we'd be providing and technologies like checkpoint or other ways to assist our customers in advancing their welding solutions, whether it's machine learning that we'd be utilizing in our automation processes, whether it's even the initial work that we're doing on the additive side, which utilizes a lot of technologies to drive innovation, we're continuing to invest in those and see that as a critical differentiator for Lincoln Electric over the longer term.

And I know every company has their own version of this kind of strategy. But you pointed out in your in your comment there that it's a differentiator. Are you - can you provide any detail on how this is truly differentiated versus other competitors in the marketplace?

Well, I'll tell you Steve, I think one easy way for you to get your arms around it, as you're thinking about Lincoln Electric is that many of those technologies are centric to the equipment portfolio. What have you seen in the Lincoln Electric equipment portfolio over the last several quarters and what did we talk about today, as it relates to momentum around equipment? That's where those technologies are embedded in many cases. And quite frankly, that's where we're winning in the marketplace. So there are certainly a hosts of innovations with our consumable products that would be the HyperFill technology and the software that's required to drive that. I could go on and on about also other areas of innovation. But specifically, when you're talking about those IoT innovative areas, those are really a catalyst of our equipment portfolio. And that is growing exceptionally well.

Thanks for the time.

And we do have one additional question in queue from the line of Saree Boroditsky with Jefferies.

Thanks for taking my follow up. I just wanted to ask on the 15% margin comment, it seems that international and Harris are structurally higher since 2015. So maybe you could give us some color on when North America can get back to prior piece levels? And what is the right margin target for Lincoln as we are potentially in the early stages of industrial recovery, plus upside from infrastructure investment?

Well, Saree, I would tell you that - thanks for the comment relative to the Harris business and the international business. You're right. We've seen some structural improvements there. And we're still looking for further improvements on the international side of the business. I would tell you that I think the largest catalyst to make improvements in our Americas segment is the operational improvements that we're looking for in our automation business. As we talked about that automation business has been a slight drag for us. We like the fact that we believe it's troughed. We love the fact that quite frankly, it was at prior year levels as we were at Q1 and now we need to continue to grow that business and get those margins back up to the level that we're looking for from that particular strategy. So I see that as the biggest catalyst for us as it relates to making improvements in the Americas business. We certainly have a host of other growth strategies within Americas. I mentioned earlier that we have a host of SBUs that we're trying to drive enhancement and revenue growth in those specific targeted areas. Those targeted areas tend to be areas that are more favorable margin mix for us as it relates to the portfolio. And then I'll have to go back to equipment and our success in equipment over the last few quarters and what we're seeing I believe is still an opportunity for us as we're moving forward. A lot of those IoT applications and other service offerings that we have are really at the very early stages and it creates an opportunity for Lincoln Electric to continue to drive growth in that portion of the category.

Thanks. Congratulations again on the quarter.

Thank you.

This concludes our Q&A session. I will now turn the call back over to Gabe Bruno for any closing remarks.

Thank you, Stephanie. I would like to thank everyone for joining us on the call today and for your continued interest in Lincoln Electric. We look forward to discussing the progression of our strategic initiatives in the future. Thank you again.

Thank you. This does conclude today's conference call. You may now disconnect.