Greetings and welcome to the Lincoln Electric 2019 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 now my pleasure to introduce your host, Amanda Butler, Vice President of Investor Relations and Communications. Thank you, and you may begin.

Thank you, Carmen, and good morning everyone. Welcome to Lincoln Electric's 2019 First 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. 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, 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. 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 Chris Mapes.

Thank you Amanda. Good morning everyone. I am pleased to report that we achieved good earnings growth in the quarter by successfully mitigating inflation pressures and executing on our growth investments. First quarter sales held steady on a year-over-year basis at $759.2 million, a 90 basis point improvement in organic sales growth and a 2.4% benefit from recent acquisitions were largely offset by unfavorable foreign exchange translations volume declines narrowed sequentially to 3.6% in the quarter and substantially represented the impact of our integration activities in International Welding, as well as declines in U.S. exports and a slower pace of growth in automation, primarily in the Automotive segment. We successfully mitigated lower volumes, inflation and higher growth investments with good price managements and favorable mix in our business. This resulted in a 20 basis point improvement in our adjusted operating income to 13%. Moving to earnings, adjusted net income increased 2.3% and adjusted earnings per share increased 6.4% to $1.17. Returns remains strong with ROIC up 450 basis points to 21.2%. We also returned $106 million to shareholders through a combination of our 21% higher dividend payout rates and $76 million in share repurchases in the quarter. This elevated rate reflects our confidence in the business, strong cash flow generation and its track record of superior returns. Moving to Slide 4. Looking at organic sales trends in the first quarter, both the Americas Welding and Harris Products Group segments outperformed our International Welding segment. International Welding’s organic sales declines narrowed in the quarter but continued to reflect integration activities, as well as softening European macroeconomic conditions, notably in key industrial economies such as Italy and France. China also continued to weaken in the quarter. Looking at products, both consumables and automation organic sales increased at a low-single-digit percent rate. Both…

Thank you, Chris. Moving to Slide 6. Our consolidated first quarter sales increased 20 basis points on 4.5% higher price and a 2.4% benefit from acquisitions, offset by 3.6% lower volumes, and a 3.2% unfavorable impact from foreign exchange. First quarter gross profit margin increased 10 basis points to 34% due to positive price cost and favorable mix. Our SG&A expense was relatively flat in dollar terms, but decreased 20 basis points to 21.1% of sales. As we implement annual merit wage increases in April, we expect the business to incur an additional $3 million in salary and wage cost per quarter for the balance of 2019. Reported operating income increased 10.9% to $94.5 million or 12.4% of sales. Operating income results included approximately $4.3 million of special item charges related to rationalization in asset impairments and acquisition, transaction and integration costs, primarily from our International Welding integration activities. Excluding special items, adjusted operating income increased 1.6% to $98.8 million or 13% of sales, a 20 basis point improvement versus the prior year. Unfavorable foreign exchange reduced adjusted operating income by $1.9 million. Our first quarter effective tax rate was 23.1%, compared with 27.8% in the prior year period. Excluding special items, our first quarter tax rate was 22.9%. This compares with a 24.5% rate in the prior year period. The lower current year tax rate was due to the benefit of discrete tax items. We continue to expect our full year average 2019 effective tax rate to be in the mid-20% range subject to the future mix of earnings and the timing and extent of discrete tax items including stock option exercises. First quarter diluted earnings per share increased 21.7% to $1.12, compared with $0.92 in the prior year. On an adjusted basis, diluted earnings per share increased 6.4%…

[Operator Instructions] And our first question is from Rob Wertheimer with Melius Research. Your line is open.

Hey, good morning. I actually wanted to start with the some of the starting announcements on additive. I know you’ve been putting together assets and technologies for a long time. But maybe can you give us anymore color on what the initial obligations maybe that’s cost-effective for a wide range of prototyping or only a few narrow things if people considering it for out of stock or out of production parts right now or that few years in advance? I mean, it’s an exciting sort of up – in your capability gives you any more detail about what the initial stage is like?

Yes, well, look. Thanks. Look, we are very excited about the growth opportunities and the long-term opportunity that we think that we can have at this present Lincoln Electric. Again as we stated, it’s a natural expansion of competencies that we have within the business within robotics and metallurgical technologies to be able to make these products. But the real area that Lincoln Electric is focused on is making larger parts. Those larger parts maybe for production parts. Those larger parts maybe for replacement parts. Those larger parts maybe for prototype parts. We have seen and are having conversations with a multitude of industry participants across aerospace, general industrial automotive that believe that this technology can be something that can be very interesting for them relative to creating value for their business and that value is generally created in a couple of ways. One of the ways that the value is created is through speed to market, and ability to potentially manufacture and machine a part for an application that might be completed in days that the day might take months or several weeks for them to be able to get from the external marketplace. Another great example to begin to help to give you context relative to the types of applications, you might have a part today that is machined from a solid material. The example I think of is that, when I was at our Baker Industries business, I saw where they were machining a very large block of aluminum, a block that was probably three feet wide and three feet high and 20 feet long and they were probably taking out 85% of the metal and to manufacture that particular part. We believe that with these technologies long-term, we can manufacture that part that didn’t maybe only machine out 3% to 5% of the material creating a much greater value proposition both for the OEM as well as from an ability to manufacture that part more quickly. So we have seen a host of opportunistic applications for us. Again very focused on large parts, large process applications and as we stated, we are launching that business in mid-2019. We already have a couple of orders for some applications and believe that it can be a larger portion of our growth profile as we build that out over the next several years.

Great. That’s fantastic. I’ll get back in line, Chris for regular questions. Thanks.

Thank you. Our next question is from Saree Boroditsky with Jefferies. Your line is open.

Good morning. I appreciate, the end-market color earlier but I believe a lot of the commentary was geared towards organic growth which includes positive price. So could you just help us understand what end-markets you are seeing higher or lower volume activity? And then there has been lot of talk so far this earning season about the negative impact from weather. So is this something that you also saw?

Yes, Saree. I would tell you from a volume perspective, we still saw strong growth year-over-year in heavy fabrication, in structural, and in oil and gas. I mean, those – all of those categories are up double-digits and reflect strong volume growth. On the weather question, we wouldn’t cite weather as a contributing factor to the performance in the quarter. We actually saw our biggest monthly challenge was in March when we had very challenging comparisons on a year-over-year basis. We just had a very strong March of 2018 and that strength was moderated in March of 2019.

Okay. And then, going on the additive question, so on the $1 billion in sales from additive and automation by 2025 could you just help with that out between the two categories?

Yes, at this point, we are not splitting out the two. Obviously, the Baker Industries acquisition is an acquisition which really is a scale up of just the additive portion of the business. It will really depend on how successful we are between now and 2025 in building out those businesses and the acquisitions that we will continue to try to identify between automation and additive. But we are going to actually view those businesses as one entity as we talk about them and continue to build them out internally.

Okay. Thanks. That was helpful.

Thank you. Our next question is from Joe O'Dea with Vertical Research. Your line is now open.

Hi, good morning.

Good morning, Joe.

Could you talk about the export turns in the quarter? The degree to which that’s concentrated in China? And then, just any color specifically on China, end-markets where you might be seeing some of the softness concentrated whether or not, I mean, you see your performance in that market is being kind of in line with your competitors or you are seeing other turns that might be just a little bit of underperformance?

Yes, Joe. So, from an export perspective, we were down over $7 million, close to $8 million on exports, about a 19% decline over the prior year and China was one of the leading reasons for the decline. It was – Asia in general and China in particular were down significantly on a year-over-year basis. I would attribute much of that slowdown in China to the trade issues that have been discussed for some time now. And as far as understanding how our performance compares to our competitors, I wouldn’t be able to comment on that other than I think they are probably also affected by the same macroeconomic conditions that face Lincoln from a trade perspective. So, I wouldn’t be surprised if other U.S. industrial companies are facing the same kind of export challenges into China.

Got it. That’s helpful. And then, if you could just talk about kind of the organic growth cadence set up for the remainder of the year and specifically, really in the Americas segment, I think the second quarter has a pretty similar comp to the first quarter. I don’t know if you are seeing anything to suggest 2Q volume trends or the better than what we saw in the first quarter but then also just what’s embedded in your full year expectations. Is there the expectation for underlying activity to improve as we get into the back half of the year? Or is it more a matter of first half comps are just really tough?

No, it’s a good observation, Joe. And I - we see it that way, the second quarter again will have a challenging comparison. When you look at the growth in the prior year, it was significant although it did moderate slightly off of the first quarter. So, we see the second quarter unfolding largely in line with what we experienced in the first quarter. We hope to narrow that decline a little bit, but we wouldn’t be surprised if we see something similar or a slight decline in volumes but a slight improvement in organics as we finish off the first half of the year. And then the second half will be a little bit easier from a comparison perspective. We will see in the Americas those comparisons to become a little bit easier. We will have challenges we think in Europe if the macroeconomic environment continues to soften and weaken as we have seen at the outset of the first quarter now starting into the second quarter of 2019. But I think we are going to have challenging comparisons certainly in the second quarter.

I appreciate the details. Thanks.

Thank you. Our next question is from Nathan Jones with Stifel. Your line is now open.

Good morning everyone.

Good morning.

Good morning, Nathan.

Vince, just following up on one of those last comments there on Europe. Maybe you could talk in a little bit more detail about what you guys are seeing on the ground there in terms of, maybe daily order rates on the consumables side? Obviously, the macro data out of Europe is not very good at this point, just any color you can give us on what you guys are seeing on the ground over there?

Right. Thanks, Nathan. So, we do have some – we have some headwinds from the macroeconomic activity there. We did see meaningful decline year-over-year in a couple of countries in France and Italy. There are some smaller declines in some other economies including the big engine of Europe being Germany. But certainly those three countries are the biggest contributors. We have some tailwinds from the perspective of easier comparisons though, Nathan. As I have said, I think we will see a narrowing of the international year-over-year performance as we continue to anniversary the heavy integration activities that we’ve been executing on in Europe with Air Liquide Welding acquisition. So we – that’s 7% plus volume decline in the first quarter we think will narrow in the second quarter and continue to narrow as we finish off the second half of the year. But what’s pushing the headwind against that though it’s clearly the trends that we’ve been seeing in the last few months from a macro perspective. The purchasing manager index continues to soften and industrial activity is softening in Europe. So we are growing more concerned about how we finish off from that perspective in the second half of the year and then our own internal initiatives to continue to integrate the businesses.

Is it possible for you to split what you think the volume decline is voluntarily related to the acquisition/integration versus softening underlying markets?

Yes, it’s an interesting question. I would have said last year that the markets, the macros were relatively flattish if not growing slightly and the bulk of our declines were because of the integration activity. I think this year, some of the declines that I would attribute to the overall softness in the markets. I’d be hesitant to give you a split at this time, but I think the welding markets and the steel markets in Europe are showing some volume declines as we exit the first quarter.

And then one quick one as a follow-up to a previous question regarding volume in the Americas, you gave us three markets there that were strong that were off double-digits. Can you give us some – any color on the markets that were less strong, maybe down?

You know the markets that were down were only down in modest terms. So, general fabrication was one of those. A very modest amount to hundreds of thousands of dollars. So, I am reluctant to say that’s a meaningful trend there. Couple other areas that were subcategories of oil and gas including powergen and shipbuilding were down. But again, nothing that was significant. And then, lastly, offshore was down. But those – all of those categories collectively don’t outweigh for example heavy fabrication that was up significantly in the quarter in the Americas. So they were modest year-over-year declines but not meaningful.

Great. Thanks for taking my questions.

You are welcome.

Thank you. Our next question is from Mircea Dobre with Baird. Your line is open.

Thank you. Good morning. Good morning guys.

Good morning. Mircea.

Good morning. Couple of margin questions from me. So, I think I heard you say that starting with April, you are looking at another round of salary and wage increases, $3 million per quarter. Am I to sort of – does that imply that Q1 2019 was not really impacted by the wage inflations that you kind of pulled out going forward?

No, there was underlying wage inflation in the first quarter as well. But that was instituted in almost a year ago. So we are highlighting the incremental increases in SG&A that will be affecting us as the year unfolds. So, those prior year increases are certainly in our cost base in 2019’s first quarter.

Okay. So, I am asking because, when I am looking at the incremental margin in the Americas, right, I mean, we are talking something like 17% and going forward, and in the quarter, you also had the benefit from mix and from price cost. So, going forward, if we are talking about an additional drag from wages, how should folks think about your incremental margins, for the year, or quarter, however you want to frame it?

Yes, so incremental margins, I would expect to be in the same range that we’ve been disclosing heretofore, Mig, we were about 18%, 19% I believe in the Americas and our expectations are to be somewhere in the 20% to 25% range as a group-wide number mainly driven by that Americas segment. So, we are going to have to continue to drive productivity through the business and hope to offset those escalating wage cost. You have to see some improvements in input cost outside of wage inflation. But certainly we will have the headwinds from the higher wage cost affecting our business for the rest of 2019 and the offsets will have to come again through productivity improvements or an easing in input costs outside of wages which is primarily raws.

Understood. And then, shifting to international, again on margins, I understand the volume decline comment and obviously that has an impact on profitability as well. But we are not really seeing a lot of margin improvement still on a year-over-year basis here. So, I guess, I am wondering, can you maybe separate what’s going on to ALW versus your core business? And then put maybe looking out to 2020 is it still fair for us to think that a double-digit target for this segment is appropriate margin-wise?

That’s a great question. I can tell you, Mig that we are focused on our phase one of our integration process which we believe that we will complete by the time we get to the back half of 2019 really positioning that business at that point to be able to grow from the completion of phase one. We still got a couple more systems integrations to complete before that period of time as well as a host of other strategic projects. I can share with you that we are not moving off our current targets that we set up for the integration of that business. Our margin profile has not moved as quickly as I would have liked to have seen it. But I do like the work that the team is doing in positioning the business. We do have a little bit of a headwind now from the macroeconomics that are going on there within Europe. And we’ll certainly have to see how that impacts our ability to execute on that target as we are moving forward. But we are holding to the target of 10% operating profit that we had set out for that business as we entered into the integration work in bringing that business into Lincoln Electric now 18 months ago or so.

I appreciate it. Thank you, Chris.

Thank you. And our next question is from Matt Trusz with G. Research. Your line is open.

Good morning and thank you for taking my question.

Good morning, Matt.

Can you discuss the additive business model in greater detail? Do you plan that this is going to stay additive with the service or do you anticipate selling equipment systems too looking into the mid-2020s? And can you provide any early take on how you would compare this to equipment sales as far as margins go? Thank you.

Well, first I’d say that, as we are executing on this piece of the strategy, our intention is to be a service provider of this innovation technology into the marketplace. Our experience in building out the global automation portfolio and certainly having the largest welding automation portfolio here in the United States has given us experience in recognizing that bringing those technologies to the marketplace to quickly can create other challenges within the business model. And I think that would only be enhanced as we are talking about the additive strategy that Lincoln is deploying because, we are really at the front end of this innovation. There are only a handful of people around the world who are utilizing this type of technology as it relates to making these types of parts and building out those business models. So our intention is that this would be a service model. We may very well have a handful of units that are in R&D centers or technical centers around the world. But our intention again is for it to be a service model for us. I would expect that as we are building that model out that the margins associated with this would be at or slightly favorable to our overall margins in the portfolio. At this point in time we just really need to see exactly what types of opportunities are coming towards us. But we see the value that can be created when you are creating that type of value, you should be able to extract really a substantial portion of that profit pool. So we are excited about what the margin profile can look for this business longer term. But probably too early for us to determine exactly what that might be for our additive business as we are building it out.

Thank you. And just a follow-up on that. How robust is the patent protection there? And I guess that this is better than laser and powder, but for competitors who might have laser hot wire, would you be out as being able to compete with this?

Oh, yes. We believe, first of all, we were one of the early innovators in laser hot wire. So we understand that technology very well. We believe that we will not only be able to compete, but quite frankly it could be a component within our broad additive strategy. So, and I think what’s important to think about the value proposition and the mode that we are building this technology is that, look there are some proprietary IP that we have that we will be able to leverage. But as importantly is the competencies that we bring to this. The competencies in understanding utilization of robotics with metallurgy, the building out of the software capabilities around that. And so, we are very confident that although there may be other participants who can be in the marketplace, that this is a challenging innovation tool and that quite frankly, we believe will be able to deliver and develop capabilities that will be very difficult for others to be able to match in the marketplace as we build out this business.

Thank you. I appreciate it.

Thank you. Our next question comes from Walter Liptak with Seaport Global. Your line is open.

Hi, thanks. Good morning guys.

Hey, good morning, Walt.

I wanted to ask a follow-up on the international operating margin question, especially with regard to Air Liquide Welding. In your comments I understand the macro may have gotten a little bit worse, but is there a step-up that can happen – are there costs from these systems upgrades or are there integration costs that go away from the P&L and help that margin step-up later on this year?

Yes, look, I think we can get an improvement in the operating profit margins, actually confident that we can. As the restructuring and integration processes unfolded Walt, what’s happened is that the sales declines are leading the cost declines. So we are chasing the sales and cost down and so, those sales declines will – in my opinion begin to moderate and stabilize and restore themselves while cost will continue to decline after the top-line stabilizes. So we are continuing to spend on integration activities and new systems implementations and restructuring the manufacturing and SG&A footprint and activity and I think that will catch up to the top-line and expand margins as we exit this first half of the year.

Okay. As the sales stabilize, do you think we will see growth as it stabilize or do you think we’ll continue to see declines through the back half of the year?

Well, as we have stated getting to that back half of the year where we get to a stable business environment in preparing ourselves for growth. The only caution I have is that, obviously, not understanding what our macroeconomic position will be there in that particular market as we are in the back half of the year. If we were to see a broad headwind across Europe, then it would be difficult for us to say that we would drive the level of growth that we are looking for. But I do believe that if we get to a stable business model and business structure there late in the back half of 2019 we will position that business for growth and even with that, we will be able to drive some of our solutions and technologies into that marketplace. So – and still expecting that then we will have executed on what we were looking for from the integration and then we will have to determine what those macros look like as we are moving into the back half of 2019.

Okay. Great. All right. Thank you.

You are welcome.

Thank you. [Operator Instructions] Our next question is from Rob Wertheimer with Melius Research. Your line is open.

Hello again. Thanks for the follow-up. My question is just on pricing and your perception of how it was absorbed by customers? Were there was any hesitation in ordering or buying as we are waiting to see if it would stick or not? And then, even though you’ve kind of addressed this just more generally whether you deal some of the weakness that you saw, was any of that related to lack of confidence or do you think it was genuinely end-market weakness? Thank you.

So on the first one, I don’t think we observed any significant movements in order patterns as a result of pricing changes, particularly in the first quarter of 2019 and I don’t view – there weren’t really significant pricing changes across our portfolio of companies both geographically and on a product-line basis. So, I don’t see that there was a big impact from that.

And then, just more generally on, whether you can tell by customer-by-customer on flow versus equipment or any other way? Whether you felt like there was just an air pocket from hesitation or whether it was really just that’s where the end-markets are?

No, I think it’s where the end-markets are and I can emphasize enough what an unusually strong March of 2018 that we had. March is generally the strongest month of the quarter and one of the stronger of the year and we had a bump up in March of 2018 and I think part of that was to your question on pricing dynamics, if there was an impact on order patterns and sales and in any particular period that would have been in the prior year, because the prior year had price increases coming out in April. We raised prices in February in 2018 as well as in April and there were escalating raw material prices and tariff discussions. So, if anything in the prior year might have had a little bit extra bump in it over and above what a strong March might look like. And then this year, I think doesn’t have any of that as well as maybe a few markets including automotive being a little bit softer for us. But I don’t think the current year certainly has any meaningful order pattern changes from pricing.

Okay. Thank you very much.

You are welcome.

Thank you. And our next question is from Steve Barger with KeyBanc Capital. Your line is open.

Hey, thanks. Good morning.

Good morning, Steve.

Good morning, Steve.

Just a follow-up to the conversation around becoming a service provider in additive, is there any thought to pushing more into helping customers with other non-welding automation applications like material handling or machine tending to leverage the investments you’ve made there?

Yes, Steve. Look, that’s something that I would tell you we’ve been doing. So, when we’ve been acquiring these automation businesses across our portfolio, rarely are these automation businesses, 100% welding and cutting automation systems. And if one of those businesses already has a competency or a capability around material handling or press transfer units or something else that they’ve already got within their portfolio, we’ve not moved that business outside of the automation business. We’ve kept that business. So we have competencies and capabilities in those other areas. I would share with you that our focus is still welding and cutting. But where we find complementary skillsets or capabilities within the portfolio, we’ve been willing to continue to utilize those capabilities and at times expand those capabilities. So, some of those competencies already exist inside of our automation business and we would accept those opportunities and working with our customers as we are doing that. Now what we have not done at this point is necessarily say that we would target unique opportunities outside of our portfolio that are 100% focused on those types of capabilities. We might. We have looked at some acquisition opportunities in that area. But it’s just finding the right ones if we view that that’s a skillset that we want to bring in or if they bring some unique value proposition that we think would add to our overall automation and additive business.

So, when you think about growing automation in additive to $1 billion in 2025, two questions, one, do you – is that going to look like the current portfolio in your mind? And how much of that is driven by M&A versus organic?

Well, I don’t think it’s going to look like the current portfolio, because, quite frankly the additive portfolio needs to be a significant piece of that $1 billion and that’s a new business model for us. So – and it is clearly going to have some uniqueness. So that in itself, Steve, I think creates it looking like a different portfolio. There needs to be an M&A component to that, but as – when we see the growth opportunities within these marketplaces both in the automation piece and the additive piece, there also needs to be a very significant growth perspective just because of those markets. So, I think we will see a complement of both. Obviously, if we were successful in bringing in a multitude of acquisitions in that space, then we might come back out and adjust that number. But today we are seeing that and believing that can be accomplished with some minor M&A and more material organic growth within those businesses.

Got it. And then just one last one. In the press release, you called this a cautious period of the cycle and are you saying that around the trends we’ve already discussed on the call today in Europe and China where are you seeing customers in North America express caution about demand trends?

No, I think as Vince said earlier, we are not seeing any necessary broad caution between our customers here in the Americas piece. So I think it’s just our perspective on this point in the cycle for Lincoln Electric and where we see the business.

Understood. Thanks.

Thank you. Our next question is from Nathan Jones with Stifel. Your line is open.

Good morning again. I hope you can give us some color on the growth investments. You pointed that as a drag to margins. Can you maybe tell us how much more are you putting into growth investments this year? And then, any color you can give us on where it's going? Sure, you know Additive and automation are some of those places. And then, I think you took the CapEx guidance down 5 million bucks, just what's behind that? Thanks.

Yes, Nathan. So, the growth investments are really primarily around the additive conversation that we’ve been having this morning and that’s the bulk of the increase in cost .And we estimate that to be around a runrate of $2 million per quarter during the course of 2019.

All right. And our last question is coming from Jason Rodgers with Great Lakes Review. Your line is open.

My questions are already asked. Thanks.

Thank you. And I am not showing any questions in the queue. This concludes our Q&A session. I would like to turn the call back to Vincent Petrella for closing remarks.

Thank you, Carmen, and 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 programs at the end of the second quarter of 2019. Thank you very much.

And with that, ladies and gentlemen, we thank you for participating in today’s conference. This concludes the program and you may all disconnect. Have a wonderful day.