Lincoln Electric Holdings, Inc.

Greetings, and welcome to Lincoln Electric 2020 Third 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, Howard, and good morning, everyone. Welcome to Lincoln Electric's 2020 Third Quarter Conference Call. We released our financial results earlier today, and you can find our release as an attachment to this call 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, and Gabe Bruno, our Chief Financial Officer. Chris will begin the discussion with an overview of our quarterly results and our cost reduction initiatives, and Gabe will cover our third quarter financial results in more detail. Following our prepared remarks, we are happy to take your questions. But before we start our discussion, please note that certain statements made during this call may be forward-looking, and actual results may differ materially from our expectations due to a number of risk factors. A discussion of some of the risks and uncertainties that may affect our results are provided in our press release 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 Mates. Chris?

Thank you, Amanda. Good morning, everyone. I'm pleased to report strong third quarter results as we continue to navigate the issues associated with the global pandemic. It is important, and I'd like to highlight once again, that our organization did an outstanding job operating safely in a challenging environment while servicing our customers and generating long-term value for our stakeholders. I am very proud of our entire team. As we move to slide four, our third quarter performance exceeded our expectations. Sales declined narrow to 8.5% due to strong recovery momentum and retail channel strength. We held adjusted operating income margins relatively steady versus prior year at 12.6% on improved operating leverage, price management, and $27 million of cost savings benefits. This resulted in a 12.3% decremental margin in the quarter. Adjusted earnings per share increased one cent to $1.10, and we generated top quartile returns on invested capital at 18.4%. Cash flow generation was strong at $90 million, with 117% pre-cash flow conversion. We continued to invest in the business to support our long-term strategic goals and remain focused on growth projects and operational efficiency. We returned $29 million to shareholders through our dividend. Our balance sheet remains strong with increased liquidity and reduced debt levels. And our confidence in the business model allows us to invest in the long-term growth, increase our dividend, and resume share repurchases as part of our capital allocation strategy. Moving to slide five. The business saw sequential improvement in demand trends through the third quarter across all reportable segments. While the pace of recovery has differed by geography, all geographies improved in the quarter, led by steady year-over-year performance across the broader Asia-Pacific region, mid-single-digit percent declines in Europe, and mid-teens percent declines in the Americas. By products, demand for our standard equipment systems remained the most resilient, declining at a mid-to-high single-digit percent rate while consumable and automation declines improved to a high single-digit percent rate. By end sector, approximately 45% of our revenue was exposed to growth, with general fabrication and infrastructure construction sector sales up in the quarter. Our automotive declines narrowed substantially as U.S. and Chinese auto production recovered to prior year levels in the quarter, driving higher demand for consumables. Capital spending in the sector remained challenged. Heavy industry and energy compressed further in the mid-20% range on weak capital investments and low oil prices. Additionally, increased strength in the retail channel was notable in our Harris Products Group segment in the quarter, driven by the DIY sector. As we approach the fourth quarter, we have ongoing concerns over the reemergence of COVID, OEM activity at the end of the year with their production plans, and typical seasonal slowing that we have seen in October across all segments. We expect fourth quarter organic sales to decline at a similar rate as the third quarter. Turning to slide six. Given uncertainty in the shape of the recovery, we maintained stringent temporary cost controls in third quarter and recognized increased permanent cost savings, which resulted in $27 million in savings in the quarter. This substantially exceeded our initial savings plan of $10 to $15 million. As a result, we now expect to generate $80 to $85 million of cost savings in 2020. with approximately $20 million of savings in the fourth quarter, split relatively equally between temporary cost savings and a $10 to $11 million exit run rate in permanent cost savings. We expect this will result in fourth quarter decremental margins of high teens to the low 20% range. Looking to 2021, we expect to generate $20 to $25 million of incremental permanent cost savings in 2021, substantially in the first half of the year, and an incremental $4 million of temporary cost savings in the first quarter. These actions, combined with improving markets to generate top-line growth, position us to deliver our normalized 20 to 25% incremental margins in 2021 to even with higher wage and incentive compensation costs next year. I remain confident in Lincoln's position navigating into 2021 and our ability to capture growth as regions and end markets rebound. This challenging year has demonstrated the strength of our global team, our business model, and our ability to invest in long-term value creation through a cycle while returning cash to our shareholders. It is these strengths that are the hallmark of Lincoln's 125-year legacy and brand. Before I turn the call over to Gabe, I'd like to congratulate Steve Hedlund on his expanded role as president of both Americas Welding and International Welding. Steve has been with the organization for over 12 years. During his tenure, he's been instrumental in the development and growth of our strategy. We've opted to centralize the leadership of the two welding segments under Steve to accelerate our higher standard 2025 strategy, which leverages standardized processes, consistent global customer experiences, shared back office services, and product development platforms. After several years of investments to align the regional welding strategies, we felt that we're in an excellent position to leverage a more efficient leadership structure as we execute on our 2025 higher standard strategy. And now, I'll pass the call to Gabe to review third quarter financials in more detail.