Yahoo Finance Lincoln Electric Holdings, Inc. (NASDAQ:LECO) Q1 2024 Earnings Call Transcript
Lincoln Electric Holdings, Inc. (NASDAQ:LECO) Q1 2024 Earnings Call Transcript April 25, 2024
Lincoln Electric Holdings, Inc. beats earnings expectations. Reported EPS is $2.23, expectations were $2.15. LECO isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Lincoln Electric 2024 First Quarter Financial Results Conference Call [Operator Instructions]. 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.
Amanda Butler: Thank you, Sarah, and good morning, everyone. Welcome to Lincoln Electric's First Quarter 2024 Conference Call. We released our financial results earlier today and you can find our release in this call's slide presentation at lincolnelectric.com in the investor relations section. Joining me on the call today is Steve Hedlund, President and Chief Executive Officer; and Gabe Bruno, our Chief Financial Officer. Following our prepared remarks, we're 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 and uncertainties, which are provided in our press release and 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 and a reconciliation of non-GAAP measures to the most comparable GAAP measure is found in the financial tables in our earnings release, which again is available in the Investor Relations section of our website at lincolnelectric.com. And with that, I'll turn the call over to Steve Hedlund. Steve?
Steven Hedlund: Thank you, Amanda. Good morning, everyone. Turning to Slide 3. I am pleased to report that we continue to demonstrate solid execution in the quarter. We achieved record gross profit margin performance, a 120 basis point increase in our adjusted operating income margin and record earnings and cash flows. ROIC remained top quartile, and we doubled returns to shareholders, led by $110 million in share repurchases, all while navigating a challenging portion of the cycle was slower than expected sales start to the year. In this environment, we are staying focused on serving our customers and investing for a long-term growth. We are diligently managing costs and working to accelerate productivity gains from our higher standard 2025 strategies operational initiatives.
This positions us well to continue to drive profit and earning expansion in 2024 despite softer end market conditions. Turning to slide 4, organic sales declined approximately 6% in the quarter, challenging prior-year comparisons in equipment, project timing and automation along with slow industrial activity in automotive, heavy industries and HVAC all contributed to choppy organic sales performance through the quarter. Areas of strength continue to be in the Middle East and Turkey on strong project activity. By end sector, energy remained resilient against challenging prior year comparisons with notable strength in up and midstream oil and gas projects. We are also pleased to see Americas Welding consumables organic sales steady versus prior year in the general industry sector.
This suggests early stages of an underlying recovery in regional industrial production activity and aligns with macroeconomic data, which tends to lead orders by a few months. On the capital equipment side, we are maintaining a strong automation backlog from solid order activity through the quarter and current quoting activity remains elevated as customers continue to seek solutions that deliver higher productivity consistent quality and help address the acute shortage of skilled welders. Moving to Slide 5. As part of our long-term investment for sales and earnings growth, I would like to highlight a few of our recent developments. First, we announced our acquisition of RedViking, an automation system integrator based in Michigan, specializing in automated material handling solutions such as AGVs. They also add new capabilities to our portfolio, including dynamic testing and a proprietary MES software solution that offers enhanced connectivity between customers' automated production solutions and their ERP systems.
The addition of RedViking brings our global automation sales run rate to over $1 billion, marking a key higher standard strategy milestone a year ahead of schedule. Their addition along with our extensive range of nonwelding automation capabilities brings our global automation sales mix to approximately 55% welding-related and 45% non-welding. The non-welding portion includes automated cutting, material handling, assembly systems, testing, additive manufacturing and high precision machining. I'm also proud to announce that we celebrated the sale of our 1,000th Cobot during the first quarter. This is a key milestone, since the launch of this solution in mid-2021 and we believe this reaffirms our position as the leading welding Cobot provider in the industry.
Many of you may have seen our recent announcement outlining the creation of a new Chief Transformation Officer role at the company, which will be led by Michele Kuhrt. We felt the time was appropriate to dedicate a senior executive to accelerate the impact of a range of enterprise-wide productivity initiatives currently underway that bolster long-term margin and earnings growth. In addition, I am pleased to welcome Susan Edwards to the company who succeeds Michele as our new Chief Human Resources Officer, and brings extensive HR leadership and expertise to the company. To conclude before passing the call to Gabe, I'm confident in the progress we have made to date. We have a strong team that continues to execute on our strategic initiatives to strengthen our market position, improve margins and accelerate growth via industry-leading innovations in a full and active M&A pipeline, all of which contribute to attractive long-term value creation for our stakeholders.
And now I will pass the call to Gabe Bruno to cover first quarter financials in more detail.
Gabriel Bruno: Thank you, Steve. Moving to Slide 6. Our first quarter sales declined 6% to $981 million, primarily from 6.1% lower volumes. We maintained price at prior levels and benefited 60 basis points from a combination of acquisitions and favorable foreign exchange. Gross profit dollars increased approximately 4% to $368 million to a record 37.5% gross profit margin. Effective cost management and operational improvements drove strong profit performance. Our SG&A expense increased 4.5%, primarily due to $6 million of higher employee-related costs including approximately $3 million of incentive compensation associated with our CEO transition, which will not progress in the second quarter. SG&A as a percent of sales increased 200 basis points to 20.3% on lower sales.
Reported operating income was relatively steady versus prior year at $165 million and includes approximately $6 million of special items, including rationalization and asset charges from plans initiated with an International Welding and the Harris Products Group as well as acquisition transaction costs. Excluding special items, adjusted operating income increased 1% to $171 million, and our adjusted operating income margin increased 120 basis points to 17.5%. Interest expense net in the quarter declined 34% to $8.8 million, which is more consistent with our expected quarterly run rate. Our first quarter effective tax rate as reported and adjusted was approximately 22%. We continue to expect our full year 2024 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 was $2.14. Excluding special items, adjusted diluted earnings per share was a record $2.23. Moving to our reportable segments on Slide 7. Americas Welding sales decreased 5% in the quarter, primarily due to 6.5% lower volumes with compression across all 3 product areas. Price and the benefits of our Powermig acquisition contributed approximately 1% of sales growth. We expect acquisition contributions to increase in the second quarter, reflecting the RedViking acquisition. Americas Welding segment's first quarter adjusted EBIT increased approximately 3% to $136 million. The adjusted EBIT margin increased 160 basis points to 20.8% on effective cost management and operational improvements in the automation portfolio as the team recognizes benefits from the Fori integration.
We expect Americas Welding to continue to operate above their 17% to 19% EBIT margin target for the remainder of the year. Moving to Slide 8. The International Welding segment sales declined approximately 7% on 5% lower volumes. Strong project activity in the Middle East and Turkey was offset by weak industrial activity in Europe and challenging prior year comparisons in Asia Pacific. While price declined 1.6%, disciplined cost management held International Welding segment's EBIT margin steady year-over-year. We expect their margin performance to improve sequentially to the lower end of their 12% to 14% target EBIT range. Moving to the Harris Products Group on Slide 9. First quarter sales declined approximately 5%, with 7% lower volumes. Volume softness was primarily from weak residential sector trends impacting the HVAC industry.
Price increased 1% on higher metal costs. Adjusted EBIT increased approximately 5% to $20 million. The adjusted EBIT margin increased 150 basis points to a strong 16%, reflecting effective cost management and structural improvements to the business. We expect the team to continue to operate at this higher level in 2024. Moving to Slide 10. We generated a record $133 million in cash flows from operations in the quarter, resulting in 83% cash conversion. Average operating working capital decreased 80 basis points to 18.8% versus the comparable prior year period on improved inventory levels. Moving to Slide 11. We invested $26 million in CapEx spending and more than double our returns to shareholders at $152 million in the quarter through a higher dividend payout and approximately $110 million of share repurchases.
We maintained a solid adjusted return on invested capital of 24.1%. We will continue to repurchase shares opportunistically for the balance of the year, but expect to prioritize acquisitions in the quarters ahead due to a strong M&A pipeline as seen by our recent RedViking acquisition. Turning to Slide 12. We have not changed our initial full year assumptions despite a slower start to the year and stronger margin performance. We will continue to monitor economic conditions and the progression of order trends, including any recovery in Europe, the continued strength in automation investment and improvements in automotive and general industries sectors. We're expecting second quarter organic sales to trend flat to up on a consolidated basis primarily from improved performance in the Americas Welding and Harris Products Group segment.
We also anticipate continued strong margin and EPS performance on a consolidated basis through the balance of the year. In addition, we expect a sales contribution of approximately $45 million to $55 million and an estimated $0.05 to $0.07 adjusted EPS contribution in 2024 from our April 1 acquisition of RedViking. During this portion of the cycle, we are staying focused on our customers, driving innovation and executing on our strategic initiatives, which will continue to generate superior value for all of our stakeholders. And now I would like to turn the call over for questions.
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