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.

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?

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…

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…

[Operator Instructions]. Your first question comes from the line of Bryan Blair with Oppenheimer.

Thank you. Good morning, everyone. It's encouraging to see you [indiscernible] how you framed the second quarter, and you noted that Americas consumables relatively steady, obviously, a key leading indicator. Just curious to get to offer a little more color on end market and regional trends entering the second quarter and what gives you confidence in the stabilization of top line trends and then the improvements going forward?

Yes. So Bryan, I'd start just giving a little color on the drivers of why we say flat-to-up for our business second quarter. So as we've been pointing to over the last quarter is the strength of orders and backlog in automation. And we know we had a pull forward in the fourth quarter that impacted first quarter, but we see that continued strength and driving the Americas profile in the second quarter and for the balance of the year. So we have confidence in the contribution for the automation business in Americas. We've also seen an inflection point on the Harris part of our business. We've been now, I think, three quarters of compression and organic trends at Harris. But we're seeing in April, a good pivot point on both retail and core business in Harris. So that gives us confidence that progression is strong there as well. We are cautious as here in our comments in Europe. If you look at the macro metrics, Europe continues to be challenged, and we continue to see that choppiness in our business. We are more optimistic when you look at the macro metrics like PMI in the U.S., which we typically lagged and that's a leading indicator, so we would lag a few months there. So it's pretty important for us to see short-cycle business in the Americas, particularly in the progression of PMI. So those are the drivers in how we think of our business.

Yes. I appreciate the detail there. RedViking seems to be pretty high fit acquisition for you. Maybe offer a little more color on the strategic fit within the automation platform, the synergies with your existing assets and capabilities. And you touched on year 1 revenue and bottom line contribution. What is the current margin profile? Where do you expect that to be? And how much could creation accelerate from the stated range for this year?

Yes, Bryan, I'll start by talking about the strategy for automation with RedViking. Our strategy is fairly simple in the sense that we're following the needs of our customers and leveraging the capabilities and competencies that we've developed to serve them and continuing to expand those competencies. One of the big problems a lot of our customers have is moving material through the factory, particularly as you're completing various steps of the fabrication and assembly process. These parts get a cumbersome large, heavy, hard to move. If you think about the Fori business we acquired a little over a year ago, their AGV platforms really function as a replacement for the assembly line. So think about very, very large parts in a fairly standard configuration of the AGV. What RedViking brings to the table is a smaller, more modular platform, if you think about the cells that might be feeding an assembly line is how do you get material from those cells to the main assembly line. So we view them as very complementary. In fact, in many customers, we see them already buying both Fori and RedViking. So we think that's a great fit for us. And it's really, again, just following the customers' needs and continuing to build and extend our competencies.

And Bryan, just to add, from a valuation standpoint, we're pretty excited of how it -- nicely it fits into our model. Initially, we're looking at a low double-digit EBIT profile, and they will just move right into our LBS system and we have the confidence they'll fit within our overall targets within automation business. It's a second quarter transaction, but expect to see purchase price in the range of $115 million. And so we're very satisfied as where we're at with this acquisition. It fits very well.

Your next question comes from the line of Saree Boroditsky.

So Americas margins were extremely strong in the quarter, I believe, the highest in recent years. You mentioned, I think, being a above or at the high end of the -- being above the end of the range, but these margins are even stronger than that. So just talk about the sustainability of margins at these levels.

Yes. So yes, you're right that we're confident we're going to be up over the higher end of the range, which is 19%. And just the mix of business, very good. Our posture in driving cost management actions, and it's just been a very good mix of business. And we also had very nice improvement in the margin profile of automation, which we expect that to continue throughout the year. So that's what gives us confidence that we're going to be over the range.

And I guess building on that comment, you talked about the operational improvements in automation. So where are margins in the automation business today? And where can they kind of go as you exit this year?

Yes. So I just remind you that we ended 2023 low-teens. We're progressing ahead of that. So our target is to be at that corporate average 16%. And so we have a very focused agenda through 2025 to hit those objectives.

Your next question comes from the line of Nathan Jones with Stifel.

I just -- Steve, wanted to ask about the creation of this Chief Transformation Officer role. Kind of just any color you can give us on what Michele's focus will be in that role, what you're looking to achieve out of having a specific leader in that role. Just any color you can give us around the creation of that?

Sure, Nate, Happy to do that. I think the important thing to note is we're not trying to change who we are or what we do, but really just to get better at the how we do it. So if you think about the opportunity for us to simplify, standardize and automate some of our core business processes to enable us to service customers much more effectively to relieve some of the administrative burden of managing those processes on our employees so they can focus on higher value-added activities. We just think there's an opportunity to help continue to accelerate our growth above market and our margin expansion by just getting better at what we do. And that's -- it may sound fairly boring to investors and shareholders. We're pretty excited about it internally because we see the opportunities in front of us just in these core business processes, the forecast to ship, the ship took a lack the buy to pay. It's the nuts and bolts of the business where we just see opportunities to get better and to leverage new technologies and new capabilities to become much more effective and efficient.

Okay. I don't think making more money is ever boring for investors. I did want to just ask about the EV charging business. Any update on the progress you're making there in terms of testing the equipment, building the commercial organization. Just an update on the progress of how that's going?

Yes, Nate, we're confident in the plan. We continue to work the plan working through the testing and validation and customer acceptance. And I think as we mentioned on the last call, we'll provide a more full update for you after the second quarter. We're getting prepared right now for -- we're going to host the CharIn Testival that we did last year, again in June. That's a great event for us to showcase our capabilities and technologies to all the key decision makers in the industry. So we're just continuing to work the plan and we'll have more updates for you in the future.

Your next question comes from the line of Mig Dobre with Baird.

I guess the thing that stood out to me in the quarter was the volume decline in Americas and International. And I'm sort of curious how that matched relative to the expectations that you had coming into the quarter? And somebody already sort of asked the question as to what gives you the confidence that you're going to see a ramp here, but essentially, what's kind of baked into your guidance is a pretty significant ramp in the back half of the year. So is that entirely predicated on automation? Or are there some other assumptions that you're making that investors and us need to sort of be aware of?

So just first address the first part of your question, Mig, about what was softer than we anticipated. I'd point to Europe in Europe, a very choppy first quarter and we saw an acceleration of softness inherently. The comparables on Asia also contributed to a little bit of the mix impact on volumes in the international markets. We expected what you saw at Harris. On the Americas side, I know we had tough comps going into the quarter. But I would say a little bit on the consumables side, we saw some accelerated softness, particularly on the heavy industries. When you look to the OEM production schedules, we saw that, we had some pressure on that as we progress throughout the first quarter. So those are some of the drivers. And then when we talk about not changing our full year assumptions, on both the sales -- organic sales assumption, as well as margins, our margins are stronger than we expected. But on the organic side, we continue to have very strong orders, backlog and automation, and that's what we pointed to into the second quarter and the back half. And so we're maintaining -- we haven't changed our assumptions, but we'll continue to monitor, as you've seen in the short-cycle activity of our business. We are optimistic. When you look at key macro measures like the PMI in the U.S., although conversely, you see that same pressure on the contraction side on industrial and PMIs in Europe, but that's what's driving the conversation.

Just a follow-up on this, if I may. The part that I struggle with is we just heard from the likes of Caterpillar. We're going to hear from the ag OEMs. It certainly seems like machinery production is going to be pressured. So this is not just a Q1 event. And in your slides here, you're even talking about construction and infrastructure being down mid-single digit, which I found that to be a little bit surprising personally. So again, as you're looking at your end markets, and I recognize the comment on automation, and I'm comfortable with that. But as you're looking at your core business, whether it's equipment or consumables, where do you see those signs of incremental stabilization, which verticals?

Well, I would just emphasize, again, capital investment is strong. And there's -- we always have the challenging comps between the timing of projects quarter-to-quarter. I think the key driver in the short term is navigating production schedules with key OEMs, and the like that you mentioned already. And that's a function of potentially some destocking in the markets. And so that drives the level of consumable activity. So still strong in terms of long-term investment in areas of productivity and the equipment automation side, but navigating production schedules are pretty important from an OEM standpoint, short term.

And Mig, I would just add that there's long cycle portions of our business and they're short-cycle portions of our business. And the long cycle that we have visibility to, we're pretty confident and comfortable in. The short cycle is choppy. There are a lot of puts and takes, right? As you note, the yellow equipment guys are likely going to take down production. We saw that starting to happen in the first quarter. We expect that to continue to happen in the second quarter. The expectation that Gabe outlined earlier, already incorporates that continued softness in that sector. We see challenges in Europe. The macroeconomic conditions there are not very favorable for us at the moment. But we see some encouraging signs in the Americas, particularly when you look at the general industry consumable portion of our business, which is probably our best canary in the coal mine, it's holding steady, and we see improving sentiment, and we're expecting that sentiment to translate into higher activity and higher orders in the second half of the year. Again, we don't have a lot of orders on the books for consumables for the second half. So those are still to come, but we're optimistic. But beyond that, we can't really control the end market conditions. We can control our strategy and our execution. We're very happy with our performance to date, very confident in our strategy and confidence in the team, and we're just going to keep driving our agenda forward.

Your next question comes from the line of Steve Barger with KeyBanc Capital Markets.

In the slides about RedViking, you mentioned new capabilities with the MES software. Can you talk about the need, if any, for software interoperability across your portfolio? And then longer term, what do you expect recurring revenue from software and service will be as a percentage of the automation business?

Yes, Steve. So if you think about an automation cell or a collection of automation cells, there's a lot of information we can take out of that system in terms of production throughput and part genealogy so we can trace which sell at which shift a given part was made and the like. That information is all available in the cell, and we have access to it. But getting that from the cell into the customer's ERP system is a challenge for a lot of customers. So they want the visibility and the traceability of that data, but they want it to be integrated and systems are already running not a separate system. And that's really with the MES software at RedViking positions us better to be able to do. As far as the percentage of the business that software I don't have a good figure for you on that, and I think it's probably a little bit down in the weeds, right? Because we do have a lot of recurring revenue as it is with existing automation cells that are not software related. So we have a lot of work we do where we come in and reprogram robots for the customers. We upgrade and update the equipment that's in the cell to help keep it operating at its peak performance. We've got a fairly good service business. So the idea of chasing after revenue and an automation system is not something that's new to us.

Is that -- can you give us some kind of gauge of that percentage? If you're at $1 billion run rate, is that recurring revenue 10%, 20%?

Yes, I'd say on the order of magnitude in the 5% to 10% range.

Okay. And then to your point about getting information out of the cell. Everybody loves an AI story. Here's your chance. Are you using AI or machine learning as a tool for automation sales or for improving test and train for the systems you're installing?

We're doing a lot, Steve, with additive in our -- sorry, AI in our additive business around how do we print parts closer to near or net shape. And we've got a lot of research activities that we're doing to try to answer what is a fundamental question most customers have, did I just make a good weld, right, without having to go through destructive testing or x-raying or the like, how do we have greater confidence that the weld I just made is good. And with a wide variety of different process parameters that affect the quality of it, it's a nontrivial task. So there's a lot of effort going into trying to improve our ability to make a predictive score, if you will, for the weld. So there's a lot of activity around AI in the business. And I can't really comment on whether the MES system RedViking has an AI-enabled component to it or not. It's just too early for me to tell, and I'll remind everybody, I'm a [indiscernible] major not an engineer. So...

And I guess just one quick follow-up. The last 2 automation acquisitions had a heavier AGV exposure. Are there more opportunities outside of core welding that you are really focused on? And should we see more AGV acquisitions? I'm just trying to get a sense of how this business is going to evolve into what is obviously a growing TAM.

Yes. See, I think the simplest way to think about it is we help customers fabricate and assemble things, right? So we're heavily rooted in our history of metal cutting and welding and then using the capabilities we've developed to hold position, rotate, manipulate those parts, while they're being welded or cutted -- welded or cut, the challenges I mentioned earlier about people moving things through their factory in and out of cells. That's really the happy hunting ground for us. So we'll continue to look for opportunities to add value to customer and to make money by doing that in places where we're helping people make things. Now whether the making process involve vending tube or deburring or grinding or welding or cutting, we're relatively agnostic on that part. In large part because we've already built up such a sizable business that's not in welding, right? That's what gives us the confidence to go into these other operations and applications within a factory is that we're not welding guys trying to figure it out. We've got a very sizable set of people that know how to do those things.

[Operator Instructions]. Your next question comes from the line of Angel Castillo with Morgan Stanley.

I think last quarter, you talked about price starting to pick up and flow through really more so in 2Q, so that was another reason why maybe 1Q was a little bit softer. Could you talk about -- as you think about the second quarter and the sales outlook that you kind of outlined of kind of flat-to-up, what the price volume kind of make up of that guidance and then also kind of for the full year, as we think about an unchanged guidance, I think last time you talked about 50-50 price volume. Is that still the right way to think about the full year guide? Or is there kind of a shift in the makeup for the organic growth?

Yes. Angel. So first, you're right. We did take pricing actions in this first quarter that will mature in the second quarter. So I would expect a price contribution in the second quarter to be in that 50 to 100 basis points of a contribution to organic growth. It is a little bit more modest than we had discussed in February. In February, we talked about a 50-50 mix between volume and price, you assume the middle of the range. I would look to maybe 1/3 more price, 2/3 volume in our current profile organic growth.

And that last comment is about the full year?

Full year, yes.

I guess just to kind of clarify that. One, what's pulling back on the price? Is it just a difficult environment, customers, negotiations? And two, that would suggest, I guess, that more bullish outlook than you had kind of laid out from a volume standpoint. Is that the right way to think about it? And I guess I didn't necessarily get the sense that there was something incrementally stronger about volumes for the full year, but if you could kind of parse that out a bit more, that would be helpful.

Yes. So, Angel, keep in mind that our full year assumptions are low- to- mid-single-digit organic growth. So that's a range. So we do expect progression, particularly on the consumable side, where you've got contract negotiations. You saw a little bit of that in the international markets in the first quarter, where pricing was down although our margins are holding up. So it is a dynamic of the mix of pricing between consumables and equipment. So that's where we get a little bit less tempered on the full year outlook on pricing. But our posture, as you know, is to be price cost neutral. You've got a very disciplined processes and managing price, and we feel very good on our progression so far this year. You saw that we're at record levels in gross profit percent, 37.5%. And so we're just in a very good positioning in the profit profile of our business. And so we'll just be very disciplined as we continue to manage price.

That's very helpful. And then maybe just on backing the automation side a bit better or a bit more. You talked about continued growth there. 1, could you clarify what organic growth you kind of anticipate for automation for the full year? And 2, could you just give us a sense, maybe a little bit more color on the kind of quoting activity you mentioned has been strong, but just what are those customer conversations like given kind of the macro environment that we are in?

Very strong activity on the automation side. They'll be pointed to orders, backlog quoting. And we just expect that to continue to progress throughout the year and that's just a long-term opportunities from our customers to improve productivity within their businesses. And that's what gives us confidence and we point to growth. So I just -- I will refresh in 2023, organic growth in automation was 8%. And what we pointed to is within that framework of operating assumptions that the automation business will drive that growth in terms of volumes. So -- and more tempered on core welding type of organic activity. But what gives us confidence is the strength of orders and backlog within the automation business.

Our final question comes of Walt Liptak with Seaport Research.

Just wanted to ask one on the international profits looked pretty good. And given the comments from the last question about contract negotiations and pricing and things like that. Is the international profit, should those continue to move up through the year as you start to get volume and pricing? Or I guess, pricing become [indiscernible] I guess volumes is a little bit of a question. But I wouldn't [indiscernible] if you can comment that on the international profits?

Yes. So, great question. I did comment in my prepared remarks that we expect the International segment EBIT profile to continue to improve into the lower end of the range, which is 12% to 14%. So first quarter 11.4%, we expect improvement from there.

Okay. Great. I got a few minutes late. But okay. And maybe a follow-on from that improvement. What are you attributing that to? Is it from the cost-cutting or efficiencies? Or is that related to volumes or price?

Yes. I would just emphasize the mix of business. I mean, we saw strength in the Middle East, Turkey in this first quarter. We expect that to continue. We also expect improvements in our Asia business and the mix there. So it's mostly mix of business, driving it. We do -- we will continue to drive opportunities to shape our business. You saw some of that already in this first quarter. But that's what gives us confidence in that margin profile.

Okay. Great. And then maybe just one last one. Were you guys asked about just the cadence of U.S. demand for equipment and consumables January, February, March, April, how -- if you saw any trends that you talked to as well.

Yes. So we did comment on that, Walt. So just consider a pretty choppy environment. The one thing we pointed to in our comments here is we did see some pressure on consumables, particularly on the heavy industry side. So while overall strength in equipment and investment automation within heavy industries, more pressure on the consumable side of our business. And we just expect on the heavy industry side to -- that would continue into the second quarter. We are more optimistic in the mix of consumables and general industries. That's a good framework when you think about PMI, that was relatively steady. So that was good in the first quarter, and we expect that to continue into the second quarter. And we look to some of the positive macros on PMI to result in strength in short-cycle orders. So that's what we're looking to.

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

Thank you, Sarah. I'd 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 very much.

This concludes today's conference call. We thank you for joining. You may now disconnect your lines.